Asset Protection Category
I know, what a strange topic right? In reality though I wanted to talk about something that has come up quite a bit lately in the news. Donald Trump is being sued by the State of New York for offering real estate education and having people pay for it and I’m not sure at all what he did wrong.
I’ve read the complaints where people claim that they paid for things that didn’t happen or didn’t take place. People complained about paying for services that never happened. I get that and I agree with them. If you pay for a service that isn’t provided then you have every right. Where I get a little bothered is where people pay for the service and the service is fulfilled and then they ask for a refund. This falls under the classification of education. If I attend college and I study criminal justice but I decide not to do anything with that degree then is that my fault or the schools fault. Do I get a refund? NO. Of course you don’t get a refund at all. When a company makes an agreement with an individual it goes 2 ways. One is the company promising to provide and educational service with the other party doing what they are supposed to do. If I charge someone 500 dollars to attend a real estate seminar and they attend and learn then I’ve done my part. That person has no right to a refund unless I do not fulfill my part of the obligation. But once the education is taught the responsibility falls to the person who received it. While, in theory, I could make a real estate transaction for someone it simply doesn’t fall into my responsibility as an educator. That’s where Trump is coming in. If people were told they would make specific amounts of money or anything outside of the area of education then Trump has to fulfill that but if people were sold education then it is that specific persons job to turn that education into action.
Would I pay for real estate education? Of course I would. I would pay for any type of education that can benefit me in my life. Some of the best and brightest minds have paid for educational services that have served them very well. Real estate is an area of life where people can make or lose a lot of money so it is best to know what you are talking about. Think about it, if you paid 5k for an educational experience and you learned something that saved you 15k on your current housing situation you would be very glad wouldn’t you?
I love watching shows about flipping houses. People that go in and buy distressed properties, then fix them up and sell them. Problem is that I’ve never seen a show turn out bad for the homeowner and that isn’t always the case. TV can make the process seem easy and quick while they don’t mention some of the issues that come along with it.
1. Holding the property: Some homes just don’t sell right away once they are fixed up and beautiful. In reality, you will be making a payment on that house until it sells and that has to be taken into account. It is important to really study and know the real estate market in your area. If you know how long it will take to sell the home, on average, then just budget amount into your calculations.
2. Unplanned Expenses: Not every home that you are wanting to flip will give you the ability to know of every problem upfront. Meaning some people buy homes sight unseen in hopes that the ‘good location’ will make up for it. Sure, that can be the case sometimes but you are going to have to go into this with a budget and the reality that you will have some expenses that are now 100% your responsibility. These may include termites, water damage, electrical problems, plumbing problems or structural issues. Once you purchase the home you have to take the attitude that you will see the project through or you will just waste even more money on the process.
I owned several properties in Arizona when I was first getting started in real estate. One of the first homes I bought had a swimming pool and I thought that was so great. I didn’t know anything about pools or maintaining pools. Once I bought the home I found out the pool had a major issue with holding the water. Somewhere and somehow the integrity of the pool was compromised and couldn’t really hold water. I learned a valuable(and expensive) lesson that day in that when you are flipping homes you need to really understand what the average homeowner wants and can have, not what you want. The pool ended up costing us thousands of dollars and made that property a loss when we finally sold it.
In September of 2011 the Phoenix market was considered one of the worst in the country. The low point hit when the median price for a house fell to 118k. When the market was at its peak the area got a value of around 266k per home and things were great.
Today an article was posted on the MSN MONEY page about the Phoenix market that I think everyone should read. I’ll post the link here. PHOENIX REAL ESTATE.
In case you haven’t noticed, rates are slowly slowly starting to climb up. What exactly does this mean for the average homeowner? In fact, homes are actually starting to sell again in our country and building is taking place again. In our local community here we are seeing a big increase in commercial business that is actually very exciting to see. What happens when homes start to move again?
Let’s look at question 2 first and then answer question 1 because they have a direct tie on one another. When homes start to move again it creates less supply. When you have less supply the demand becomes automatically greater and the prices start to go up. Scarcity creates more demand for something in almost every case and that drives pricing. For example, a home near us sold for around 500k last week. It was a very nice home and the neighborhood is considered very good so people want to live there. When a house goes on the market in our area it is automatically generating interest and people bid up the prices on the homes. That should make perfect sense to everyone reading this and should be pretty basic.
Now how does the rising interest rates effect that? This is the most important thing to really discuss today and why I tell people that this is probably the ending of one of the best times to buy a house in the last 50 years. The rates at which you can borrow money are so so so low right now that everyone needs to take advantage. Let me give a real life example: If you were to buy a 300k home right now the interest rate you would get would be around 4.6%. Very good rate, not as good as a year ago but still very good. If you put 20% down you would have a payment of around 1233 dollars. That’s a 240k loan basically. Now, if you took the same loan amount but had a 6% interest rate (great for my earlier days), you would have a payment of 1424 dollars. 200 dollar increase a month for the same house. You don’t want to add that up over a 30 year period do you?
These scenarios are very real. To get the most bang for your buck today you want to buy as soon as you can before the rates start to climb up even more AND THEY WILL. Historically speaking we just can’t sustain interest rates this low for this long of a period of time. If you have the chance to buy then buy while you can get the most house for the least amount of money because really, this won’t last much longer.
Does anyone know the average price of a property inspection? I called around and in reality the average price of a property inspection is under $500. In reality, is that a lot of money in comparison to purchasing something for hundreds of thousands of dollars?
The most common issue found during an inspection is improper surface grading and drainage. That means that in some homes water drainage runs too close to the foundation. When that happens it can cause obvious damage to the integrity of the home itself. This can be very expensive to fix but is better to fix than to ruin the home altogether. Home inspectors can identify that issue for you that you wouldn’t find without. If you are able to identify the problem prior to purchasing a home it can save you THOUSANDS in repairs.
What about a roof? Same thing applies. For a minimum fee prior to purchasing, your inspector can and should identify any issues with the roofing system that would/could result in a lot of money for repairs.
Obviously you’ve heard of several stories of issues with termites or the structural integrity of a house. An inspector can/should identify any issues along these lines that you’d want to find out PRIOR to purchasing your home. If not you are looking at thousands in repairs that you may not have budgeted but also you can’t live in a home with unresolved structural issues.
One thing that I always suggest is that the heating and cooling systems are really looked at. Both are a major monthly expense that you want working at their peak at all times. By not having those things inspected you may be costing yourself money each day that could’ve been identified and fixed rather inexpensively if caught early enough.
Anyway, if you are looking at a rental property to purchase then make sure you get a quality inspection done. It will save you so much money and headache. Sure you may find that the house is 100% fine, but that piece of mind is great to have.
At Renting Authority, we have so many customers who accidentally have a rental property. What I mean by that is that we have customers who bought a house and couldn’t sell it so they decided to make it a rental. These are average every day people who are building wealth and don’t even know it. Here’s a scenario:
Bob Johnson lives in a basic 3 bedroom/2 bath home when the real estate market is going great. He buys another property when the market is going well and plans on selling his other house after the fact. Well, once he buys the 2nd house he can’t sell the 1st house for whatever reason and you have an accidental real estate investor.
Like I said, we have customers like Bob Johnson by the dozen and they are great people who are doing a great service for our country. See, not everyone has a 20% down payment and can buy a home. Not everyone has perfect credit. These people need good solid places to live and with the interest rates where they are now, these people can rent these homes under affordable circumstances.
One of the most important things someone can do when in this situation is to setup as a business entity first. If you have a rental property you should keep that property separate from everything else you have. When you rent a home you don’t want the liability of that property to effect you personally should something happen and that means to create a basic entity like and LLC and put that property under that umbrella.
Next, when you decide to rent the absolute most important thing about the rental property is who you rent it to. This is a marriage in a sense so it is key that you are comfortable with that person and that the rent is being paid and able to be paid. Let me be very clear, don’t rent a house to your friend if you friend has no job and a history of drug abuse. Unless you want to make 2 mortgage payments every month, be very picky about who you rent to. It is better that the home has a lapse in a renter than getting the wrong one.
Good renters: pay on time, treat the home like their own, have good communication with you about the property. Can fix things themselves if necessary.
Bad renters: Don’t pay on time, break rental/lease agreements, damage the property or don’t care about the property and are high maintenance.
When I say ‘high maintenance’ I’m talking about the renter that is always calling you for something. It might be a squeaky floor board or a light bulb issue. Maybe the water pressure isn’t exactly up to that persons expectations. You don’t want that person.
People ask me how I can tell if I’m getting a good renter and I ask them to always do a solid background check on the renter and then ALWAYS call past landlords. Find out about their history and take the extra 5 minutes to get it done right.
Here are some common expenses that you can expect and prepare for when owning either apartment units or rental properties.
* Carpet: Carpet is something that always needs being cared for. Think about it. You need to get the carpets cleaned when someone moves out and moves in. The carpet might get stained or ruined as a result of use or overuse. Carpet may just be old and out of style. When carpet goes out of style it is something that can keep someone from renting the property. Many property owners simply put in high wear carpet that is neutral in color because it doesn’t wear out easily and it matches everything for a long time. Its the way to go if you ask me. Other people will allow renters to do what they want with the carpet. When I owned my properties I would do ‘lease to own’. When someone signs a lease to own it gives them the ability to do what they want to the property which gave me a chance to make a little extra money by getting specific carpet guys or paint guys into the property.
* Paint: Things happen. Unless you are doing a lease to own, never let a renter paint the property. People have unique ideas on color and it rarely turns out right. Also, when someone moves in and out they are inevitably going to do some damage to the walls. Once that happens you will have to paint. Keep gallons of generic paint colors around that you can touch up with that has already been matched to the existing colors. Use basic colors that don’t go out of style and blend easily. You want it to look nice but also you have to think about making money on the property. Money is made by not coming out of pocket for unnecessary things.
* Plumbing: One of the most important things to always check when buying a rental is to look at the plumbing. Look for signs of water damage on the walls and ceilings. Check to see how old the pipes are and if the water is soft water or not. All these things matter because the most expensive type of damage to a home is water damage. We’ve lived in several different places over the last few years. In one home we were using the shower and the water was draining to the garage. It sounded and looked like a rainstorm in there. Water damage almost always causes mold and that can cause health problems for everyone.
I’ve talked to several people lately about different real estate strategies to use and the one that has been the most popular among smart real estate investors has been the buy and hold. NOT THE FLIP. People flip homes when the market is moving at a pace that allows them to get a house quickly and turn it for a profit. But the investors that are absolutely cleaning up right now are the ones who are buying homes and holding them. Why is that?
First, the interest rates have been low enough for so long that if people have money to put down they can get these low rates on properties. A man I work with in Las Vegas has been buying up plenty of 100k houses and getting them rented while having extremely low payments on those houses. Why is this a good idea? Plainly, even if the interest rates go up in the area he is in a spot where renters will always be able to afford his payment and if the area goes up in value with the economy then he is sure to really increase the equity in each property. It’s a win across the board for him now.
Second, interest rates have started to go back up. When interest rates go back up something interesting will happen that the country isn’t prepared for at the moment. The housing values will have to stay still or even drop. I say this because the average person owns a 3 bed/2 bath house in our country and if they can’t afford an average payment at a 6% interest rate or higher then the market will have to adjust so they can. By getting these homes now at low rates you are setting yourself up for the best long term success because you can afford the payment at the low rate and it isn’t going to adjust on you like it did during the serious downswing we had a couple years ago.
Real estate is a great way to make long term wealth. Each day I deal with great owners of homes or apartments and they really see things for how they are when it comes to our market. I get great advice from them daily and I love to pass it on to you.
My wife watches all sorts of TV shows with one of her favorites being with Scott McGillvray. He has a great show about cash flowing properties and at the end of each one he shows how much money the person will be pocketing each month and I just have to laugh. That number is always assuming that nothing goes wrong.
Lets look at our own housing situation. How many months have you had nothing go wrong with your house? Just last month we had a broken door, broken door handle, broken garbage disposal and some plumbing problems as a result. Other months it is always something else and we are no different. When you buy a cash flow property you are buying the good and the bad so sure you will have some months when you make money, but you’ll also have months where you lose money. In the end you are banking on the appreciation of the home while having good renters or leasers who take care of the place. It just isn’t as easy as a half hour show makes it out to be.