MonsterBankAccount.com

by: Matthew Trainer

Failing to Plan is Planning to Fail

Real estate investment is an excellent choice for those who want to slowly build up their personal wealth over a number of years. The return on investment (ROI) is so much better than stocks and bonds, and the tangible asset of owning property means that you always have liquidity when you need it.

But, and this is a BIG but, you have to have a strategy. That strategy involves a well-thought-out plan that must be adhered to. There is never a week that goes by anymore without me hearing from a real estate investor that jumped out there and bought a property, paid too much, had no exit strategy, etc., etc., etc. Now they are stuck and the pie-in-the-sky “guru” promises of overnight riches crashed headfirst into the real world. You MUST have a plan and it MUST be written.

No idea how to get started? Here’s a very quick rundown of a basic real estate investing plan.

Start with a single investment property: This can be either commercial or rental. You can use the equity of your current home to finance the new purchase. Starting with one property is a good way to test your real estate savvy and get comfortable with the process. If you are considering a rental property, start small with a 2-3 unit property. Do not purchase an apartment complex on your first one. You will be totally overwhelmed.

Do a few flips to boost your cash position: If you want to jumpstart your real estate investment plan, purchase one or two rundown houses, hire a contractor that you trust to renovate and remodel the property and then flip it quickly for a profit. This will leave you with accessible cash to use for other real estate investments. (More about this in Part 3 of this series.)

Diversify your real estate portfolio: Once you are at ease with your real estate dealings, diversify your portfolio. Perhaps add a commercial property like a small community strip mall with half a dozen rental stores, or perhaps a small office building. Keeping your portfolio diversified protects your investments overall. At certain times, one area will do better than others. Diversification allows you to have the luxury of selling off dogs that are not performing and using that cash to purchase new real estate investments.

Watch the market – know when to sell: As a savvy investor, you must watch the real estate market so that you know when to buy and when to sell. Ideally, you want to buy when interest rates are low and the market is soft. You want to sell when both the market is hot and you can realize top dollar when you sell a property or when you feel there is going to be a significant downturn in the market. If that occurs, it will be more difficult to sell a property.

There is much more to planning than this but this will at least give you a start. Think of how you want to progress your real estate investments. How much property (in either number of properties or total dollar value) do you want to have at one time, or ultimately acquire.

What is your exit strategy? You must have one! If you don’t you may get caught in a bind if you encounter financial problems and need to liquidate assets for cash. Make sure that all of your mortgages are based on different terms such as fixed rate loans, adjustable rate loans, balloon mortgages and bridge financing. This means that at any given time, you have at least one mortgage that you can close out without penalty. This gives you the opportunity to pay for your properties outright once you have the cash, and the interest goes into your pocket instead of the banks.

The old saying goes, “If you fail to plan then you are planning to fail.” It’s not the fun part of real estate investing but you have to do it. Even if you don’t need outside financing, a written business plan will do wonders for your success.

Plan to succeed!

Yours in profits,

Matt

In Part 3 of this series we will discuss common but deadly mistakes made with contractors.

By: Matthew Trainer

Take a moment to answer the following questions:

Are you waiting to invest? Are you scared of something? Are you paralyzed by fear?

The main reason many people never become real estate investors is fear. Fear takes many forms but the three most common forms are the fear of failure, fear of success, and fear of the unknown.

Fear of Failure

When I first thought of investing, my grandmother asked me how I would feel if I lit a $100 bill on fire. She said that anyone that invests has to be able to feel nothing when money is lost. (My grandmother, bless her heart, never made more than $30,000 a year and never bought more than her permanent residence.) As a matter of fact, most of the people that I shared my dream with warned me about real estate investing.

Of course none of them had done it themselves, and all of them were willing to share their horror stories of a “friend” who tried to invest in real estate. They filled my head with “what ifs”.

What if you cannot resell it after you buy it? What if you cannot do the repairs? What if someone gets hurt on your property and you get sued? What if you cannot make the mortgage payment?

Fortunately, I don’t listen very well. I tend to be on the opposite end of the “mistake spectrum” which I will discuss in a future part of this series.

The quickest way to overcome fear of failure is to fail! After that you realize it’s not such a big deal. It may sting. It may even hurt. But I GUARANTEE you one thing. You will learn. You will overcome it and you know what, you just may succeed!

Fear of Success

It sounds silly but the fear of success is a very common fear. Many people have this fear and don’t even realize it. There are many reasons and almost all of them deal with the past. The fear of success haunts many people because they feel undeserving of the success.

If you suffer from the fear of success, it’s time to face whatever problem you had in your past, understand what it is, and why it happened. Come to terms with it so it doesn’t continue to affect your future.

Forgive me; this will start to sound a little “preachy”.

Each and every one of us has had struggles in our past. What we have to realize is that the past is the past. It’s extremely counter-productive to continue to re-live something you can’t change anyway. To allow the past to continue to haunt your future is like suffering a slow death. The most powerful thing you can do for yourself is forgive.

Whether it is yourself or someone else, all of your power is in your ability to forgive. Forgive and move on. Forgive today and enjoy your success tomorrow.

I had to do this very thing. I had to forgive myself first of all and then I had to forgive others that had caused me pain. Once I did that, a huge weight was lifted off my shoulders and success came much easier. It’s worth it, believe me!

Fear of the Unknown

This is by far, THE most common fear. Everyone everywhere has this fear at some level. If someone tells you they are not afraid of the unknown they are probably either crazy or lying.

Who wants to go into a dark alley late at night? Who wants to go to a party where you don’t know anyone? Who is not nervous about buying their first investment property? Whenever the outcome is uncertain, fear rears its ugly head. The great thing is that it’s the easiest fear to overcome

In real estate investing and in much of life, the way to conquer fear is through knowledge. The way to get knowledge is to read books, listen to tapes and network with people who are already doing what you want to do. Prepare yourself for battle and you will be victorious.

In all fears there is some lack of knowledge that is causing the fear. In fear of failure it’s the lack of expertise in solving problems when they arise. In fear of success it’s the lack of understanding that the past doesn’t really affect you now. In fear of the unknown it’s a very clear case of lack of knowledge.

Think of it this way. When you started your very first job when you were a young kid you didn’t know what to do and I’m sure that first day caused some level of fear. But after a few weeks or months you got the hang of it and the fears went away. Real estate investing is no different and education is the key.

These fears cause many would-be investors to have stuttering starts if a start at all. Of the few that do start and move forward through their fears often have regrets that they didn’t start earlier. The reason that they consider their delay a mistake is universal. If they had started earlier they realize that they would be much wealthier today.

They realized that after they took action, their fears melted away. They found out what they needed to learn to successfully invest and became wealthy as a result. If they had started earlier, their lives would have been easier faster.

This leads me to one of my favorite quotes. It’s by Thomas Edison. He failed in over 10,000 attempts to make the first light bulb. When asked how he felt about all the failures he said, “Those were successes not failures. We found 10,000 excellent ways to not make a light bulb.” He saw failure as one step closer to success.

Step outside your comfort zone and fail fast!

Have a great day!
Matt
Part 2 of this series deals with the mistake of not having a plan.

by: Matthew Trainer
Appreciation can kill…if it’s negative or flat like today’s market. So many investors these days are getting burned by the appreciation monster. That was the driving force behind me starting MonsterBankAccount.com. I get so sick of reading other sites that have old, out-of-date real estate investing information. I only focus on strategies that work in the CURRENT market.

As you know, the nationwide real estate market is in a period of transition. This transition is rendering some real estate investing strategies useless. For example, the old “buy at any price because it will be worth 20% more next year” is blowing up in people’s faces! Now you have to be smarter about your investing. You have to remove the idea of appreciation from the equation. You REALLY have to buy right these days.

Many people out there that consider themselves savvy real estate investors are finding that maybe they didn’t know as much as they thought when appreciation levels off and they have no positive cash-flow. This is especially true in impossible-to-cash-flow states like California.

I know of one guy that was buying every property that had a sign in the yard. He did great, for two years. Now he has lost almost all the money he made and is sitting on a bunch of properties that he can’t sell and has a NEGATIVE cash-flow of $10,000 every month! So much for buying right.

So, what works now? Simple, old-fashioned buying at a discount. If you buy a house at 70% of current market ARV (After Repaired Value for the uninitiated) it’s really, really hard to not make money. At that level you have many options open to you. You aren’t stuck with just one.

If you buy right you really do, as the old saying goes, “make money when you buy”. Buying right really is like buying an insurance policy on profits. If you buy at a discount you give yourself breathing room and what I call a “fire sale exit” opportunity. This just means that you can dump the property fast if you have some sort of emergency come up and you won’t get hurt.
Think about it this way. Say you find a house worth $200,000 that you can get for $125,000. Let’s say that after some rehab you have $140,000 in the property. (This could easily be done with no money out of your pocket by the way.) Now you are at 70% ARV. Now what?

Well, because you bought it right you have many strategies to choose from. You could rent it out and have some positive cash flow coming in. With that strategy you can expect to average about $200-$300 positive cash flow even if you hire a management company to handle all the tenant headaches. This is a decent strategy because of the positive cash flow but being a landlord is not the most exciting thing in the world to do. Some of you are smiling about that sentence!

You could also just flip or wholesale it. This simply means that you mark it up a bit ($5k-$10k) and sell it to another investor. This is great if you are just starting out or you are in need of some quick cash. Some people make whole careers out of this strategy alone. The only real downside is that you don’t make the big money that the buy-and-hold investor does.

You could also do a lease/option strategy for a tenant. This involves basically the same thing as the rental strategy except that you give the concept of home ownership to your tenant. You usually get a large (3-5%), non-refundable down payment from the tenant and you get much higher positive cash flow each month. This is because you will typically mark up the property to 105% of the market value. This locks in your appreciation and profit and also can be very good for the tenant if the market does appreciate decently.

This strategy is a WIN-WIN. You get positive cash flow, a nice upfront down payment, and a locked in price. The tenant gets a chance to buy a home even if they have bad credit and they can benefit from the locked in price on the option to buy of the market does appreciate. Now that the tenant has the sense of home ownership, many, if not all, of the landlord headaches disappear. I like this strategy most of all in case you can’t tell.

One thing I do additionally is to get the lease/option tenant into a credit repair program and some financial literacy classes. I have an in-house education director that handles all that for me but you can do the same by checking out your local community college and by going to Lexington Law Firm for a great credit repair program.

These programs are cheap to implement and you should pay for the whole cost out of your pocket. This not only is a great way to help people but will also COMPLETELY prepare the tenant to exercise their option to buy at the end of the lease term. You will be their hero believe me!

This all sounds great right? The reason it sounds great is that buying right is the ONLY way to ever invest in real estate. Don’t EVER count on appreciation to make money for you in real estate. Consider it icing on the cake if it does happen. If you treat all your real estate investing this way you will do very, very well in any economy.

So buy right or get killed by the (lack of) appreciation monster!

Regards,
Matt