A Primer on Reverse Mortgages

Today the concept has gained widespread acceptance as seniors have found it to be a great solution to rising expenses and fixed incomes.

 

Unless you have been living on Mars or some other distant planet, by now you must have heard about Reverse Mortgages. Wherever you go in this country or even abroad, you can see Reverse Mortgages discussed on television, hear about it on radio, or read about it in a newspaper. Just turn on your television now and see what I mean.
The topic is frequently written about in local and national news media. As often as not, the authors of these stories project themselves to be authorities on the topic but don’t have a clear understanding themselves. They haven’t done their homework, or they simply took uninformed comments made by someone else and treated those comments as fact.

Their lack of knowledge does not stop them from spreading misinformation with no remorse.

Last summer, a major news network personal finance commentator announced that a reverse mortgage was a way for senior citizen to receive money by selling their home to the bank, who then took the house from them when they died. We immediately emailed the commentator to make the correction but to no avail.

Today, let’s try to help you have a better understanding of this wonderful retirement funding tool that all this hoopla is about.

Simply put, Reverse Mortgages date all the way back to the 19th century France where it is said the first Reverse Mortgages were done. In England, back in 1940, the story goes that a resourceful lady came up with an idea to buy homes, and rather than pay cash for them she allowed the homeowner to remain in the home, for an agreed lifetime rent. However, Instead of collecting rent, she deducted it from the purchase price of the home. Then, at a later date when the sale was completed she would deduct the unpaid rent from the proceeds of the sale. She was able to buy five homes this way, where the people died before they used up their rental arrangement. She was then able to resell the homes, to someone else, and in some cases the same home several times.

“This could have been the first Lease Option!”
In Modern times the Reverse Mortgage concept had a resurgence in Portland, Maine when Nellie Young and Deering Savings and Loan Bank collaborated on a Reverse Mortgage in 1961. In 1977 the RAM (Reverse Annuity Mortgage) was introduced by a savings and loan firm in Ohio.

Today the concept has gained widespread acceptance as seniors have found it to be a great solution to rising expenses and fixed incomes. Some folks are using Reverse Mortgages for increased monthly income. Many seniors are using Reverse Mortgages to pay off a mortgage with undesirable terms. Some folks are taking advantage of the cash option and using the large sums of available cash for a variety of other purposes, while others simply leave the funds in a line of credit with the lending institution that allows them to access the money whenever they need it.

A Reverse Mortgage is a retirement funding solution that helps seniors remain independent thru their golden years with safety and security not offered by any other mortgage product.
The advantage of a reverse mortgage can be endless, but different, so have your questions answered by an expert, not the news media.

Case in point, we were working with the Founder of an investment club who is in his 70’s and has a home worth $1,500,000. Due to the fact he could not prove income and there was some credit issues on his credit he was receiving a high interest rate on his loan. By securing a Reverse Mortgage he was able to pay off the existing mortgage and received cash in excess of $300,000.00.

He then was able to lend out money and receive a high interest rate. Which allowed him to earn more money then it cost him. By not making payments on the old mortgage he had money to spend on other items. I have found many seniors working with their family in this way and are able to invest in investment properties. Some have even been able to secure foreclosure properties since they had the funds to pursue them and cash to rehab them.

With the increase of foreclosure properties and having cash available this can open many opportunities for people.
“I know that I know what know, I know what I don’t know, and I know what I need to know”

How to Explode your Wealth in Emerging Markets in the US

Emerging real estate markets are truly virginal opportunities for profit, provided you get in there early and make your mark.
Everyone who is involved in real estate knows that an emerging market is like a goldmine. It creates a pressure-cooker environment of development where all the normal conditions of the real estate market are compressed in a tight space of time.

Demand for real estate properties goes through the roof, prices are adjusted upwards to reflect an insufficient supply and profitable deals can be made fast.

If you are in real estate you want to make money as well as help the local and national economy and in an emerging market there is plenty of scope to do all of this. Money can be made fast because properties appreciate quickly and buyers are eager for the properties that are on the market. The local economy begins to boom as properties sold become cash cows as their owners update them, renovate them and furnish them, helping to revitalise, in this manner, the local economy.

Any local economy doing well has a positive contribution to make in the national economy and the country as a whole.

This is a lot of good you actually do all round not to mention the benefit you can reap for yourself.

It does beg the question however how exactly do you recognize an emerging market and how do you strike it rich when you do?

 

Well, if we take things in reverse order the secret to making money from an emerging market is to get in there at the beginning, capitalize on the upward pressures and sudden growth spurt and get out before it begins to run out of steam, get crowded with other investors and suffer from slimming profit margins. Over the past 3 years, I have closely been analyzing emerging markets around the US. During this period I have acquired over 5,000 units!
To locate an emerging market successfully, you need to be in the market before the masses are. Signing up for the local government newsletters, becoming aware of large industries moving into new areas and local regeneration schemes backed by hefty government subsidies and investments are always good signs of the beginning of an emerging market.

Where your skill will have to come in is exactly in the way you develop all these alerts and then work to analyse them so you can make an assessment ahead of everyone else. The good news is that these skills are easy to learn and easy to apply.

As a real estate investor discovering an emerging real estate market a few times in your career can give you enough of a cash boost to really push you well on your way to total financial independence.

Ok, stop me if you have read this one before: the US is one of the world’s biggest developing countries. That’s right! I know we are considered to be a fully developed rather than a developing nation with a market that has, in many places, reached its peak and is now in a state of differentiation but that’s only the larger picture.

Within that there are a lot of micro-economically controlled areas where the picture is no different to an emerging market like we see in Eastern Europe.

As a real estate investor who has managed to get in first in an emerging real estate market in the US and make big money, fast, I know that the reason we are so blessed in terms of local economics is the size of our great nation.
By the same token, this very size creates specific pockets of real estate development which, to the savvy investor represent an opportunity that simply must not be allowed to pass by.

The reasons an emerging market is so important to a real estate investor are simple: money, money and more money.

 

Emerging real estate markets, as the name suggests, are free from the constraints of the more developed, rarefied, matured markets where the only way to make your mark is through the far more difficult method of service differentiation and market segmentation.
In an emerging real estate market it is possible to experience the heady feeling of being, again, a pioneer, moving forward into new territories and developing new markets ahead of the pack. I know, from direct experience, that there are certain signs that you can learn to be on the look out for which are a dead giveaway of an emerging market.

The best news, of course, is that almost anyone can learn how to do it, provided they are prepared to put in the time and effort.

Emerging real estate markets, for example, are almost always marked by a total employment boom and an expanding zone of out-of-towners looking to move in.

These demographics are readily available if you know where to look and, when analysed correctly, will give you the indicators you are looking for.
Emerging real estate markets are truly virginal opportunities for profit, provided you get in there early and make your mark. To the savvy real estate investor they represent areas of development which simply cannot be overlooked.

Foreign Investing Fun

Put your plan in writing. Plans equal profit when well thought out and properly implemented.

To stay on top of your game, you must stay on top of the market. It’s current major news that investors from foreign lands are coming in droves to take advantage of the low home prices in America. For them, the exchange on money is nearly equal and our home prices are far lower than theirs, earning them a nice return on their investment.

What do you think when you hear this news? Do you think good for them, or do you think about how you can help them and earn a living yourself? If you are a smart investor, then I hope it’s the latter.

Why not become the go-to person in your area to provide the deals foreign investors are seeking? Simply find out what they are looking for, how much they are spending and for what return, and put together that package for a fee.

Obviously they want properties with tenants that cash flow, they need property management in place and they seek a certain rate of return on their investment. There are attorneys, real estate agents, accountants and others who specialize in catering to foreign investors. Why not make them a part of your team and learn this market.
Build your network with the team players these investors need. You’re already in the real estate business so making these contacts is easy. Marketing is the next step. You’ll need to study online sites that cater to foreign investors to get an understanding of the lingo they use and learn how to advertise to them.

You’ll need to be sure to offer online information and online communication portals since they are sleeping while you are working and vice versa.

Be sure to put the plan together as you think through the entire process. You must be ready for opportunity when it arrives. Imagine marketing to foreign investors and the first contact wants 5 properties within the next 30 days. Would you be ready to handle that?

This should be your minimum goal when putting together the plan. Our plan entails buying the property, fixing it up, renting it out and then offering it as a performing property along with property management. When it meets their criteria, then you make it simple for the buyer to make a quick decision.
Catering to a new client that makes a decision quickly and then wires cash has been fun to say the least. We love what we do and have changed our business model to add catering to foreign investors as a huge niche in our current market.

We’ve even started a property management division and have put the team players in place to offer effective and efficient management. When these buyers are happy and the return keeps on coming in, they will buy more properties, tell their friends and family to buy properties from you and well…you get the picture.

Remember to be the best at what you do and as I always harp in every article, regardless of the subject, put your plan in writing. Plans equal profit when well thought out and properly implemented. Have fun with your foreign investor clients!

Private Money – Where is it?

There is no time like now to take advantage of all of the real estate opportunity available so take what you learn and go for it.

It seems we have to start all over again with regard to this subject since so many of the hard money lenders went out of business just like the big banks did. Large loan amounts collateralized by investor owned property that many investors just walked away from since these lenders weren’t keen on short sales but I’m sure they changed their tunes quickly.

Hard money a/k/a private money is money loaned by private individuals either licensed as lenders or arranged through mortgage brokers to collateralize investor purchased property.

They are high interest – interest only, short term loans designed to offer investors the opportunity for easy access to money based on a properties equity, regardless of its’ condition and with less consideration on the borrower’s credit, employment or assets.

With the brand new laws regarding mortgage licensing, it will only get tougher before it gets easier.
For investors, relationships is where it’s at when it comes to obtaining private money to use to invest in real estate.
With folks losing so much in the stock market and with their retirement funds, people are eager to invest their money into real estate but they either don’t know how or don’t have the time. These are your private lenders – they just don’t know it yet.

Investors are paying as much as 18% interest and 3 points (minimum) for the use of hard money when they can find it, so why not offer folks who want a place to park their money a better than bank return and at the same time, obtain a huge savings from the normal 18% usually being paid.

Investors aren’t just the ones buying real estate; they are folks with money to invest into an investment vehicle that will give them a return greater than they are currently earning. The level of risk taken will be different based on the investor. Real estate mortgage investments can be designed to offer lower risk, higher return investment vehicles.

The real estate investor can determine a loan amount based on a percentage of a property’s value. The lower the loan amount in comparison to the value of the property makes the investment appear more attractive. Offering first mortgage positions gives the financial investor’s loan a priority position if a foreclosure suit must be used to collect the debt. High interest and/or points can be offered to attract financial investment partners.

To avoid falling into securities legal red-tape, keep all investor money separate and do not combine investor money into the same mortgage.

For example, if two investors make a loan to you and both loans are for $50,000 and you buy a property for $70,000, do not combine the money to purchase the home. Give one investor a first mortgage for their loan amount and the other investor a second mortgage for his/her loan amount. You can make these two equal amounts or divide them whichever way is agreed. You may offer investors a slightly higher interest rate for taking a second position but all of that is negotiable.

In the relationship building stage, you will want to take the investor out for lunch or dinner to discuss the process and give them any sample documentation they can expect to receive once they are working with you as well as an outline of a sample investment along with disclosures galore.

As soon as one of your investors earns a nice return, what will they do? That’s right, they will begin sharing their new found fortune with their friends. It’s that word of mouth that helps you grow your private money tree.

Here are a few tips to create a rewarding relationship that your investors will appreciate:

• Once you have investor money in your stewardship, keep them informed of what is happening with each penny (we email them spreadsheets that show their investment amount, how much is being used and what it is earning, as well as the address of the collateral and photos).

• Give them the proper documentation that confirms that their investment is secured within 24-48 hours of the investment being made.

• Do not conduct any process such as this without the help of your savvy attorney who will bring proper disclosures to the table to protect you, correct documentation to protect your lender-investor, and a sense of security to your prospective investor that you do everything legally and properly.

• Confirm with your investor that the financial relationship between you and he/her will be strictly confidential.

• After conducting business and solidifying your relationship with your investor, ask for a letter of recommendation for your portfolio to share with future potential investors.

One final tip: don’t be so quick to offer the usual hard money rates of return this industry is known for to investors who aren’t familiar with those rates. Why? Something that sounds too good to be true will scare them away. Instead, offer rates better than banks are offering but lower than real estate industry rates commonly offered. Perhaps 7% to 8% for example. These rates are higher than mortgage rates being offered, better than bank rates for CDs, etc. but much lower than what you could get anywhere in the real estate investment industry scene.

You can also offer the investor a piece of the action if you will. If they are willing to allow you to use their money for a long-term hold at a low rate, then you may want to offer them a percentage of the future sale or cash flow. This would change the relationship between you and the investor as far as the documentation is concerned and that’s why it’s vital to use the right attorney to help you put these relationships together legally so everyone wins as they expect.

So there may be a forest of dead private money trees out there, but you can begin planting new seeds and bringing in the harvest of the many investors out there who aren’t hard money lenders but aren’t happy with the returns they are currently earning elsewhere.

There is no time like now to take advantage of all of the real estate opportunity available so take what you learn and go for it.

Deducting Real Estate Education – Yes or No?

“Al, my CPA says I cannot deduct my real estate education courses and events because I only own one rental property and therefore am not in a business. Is this true?” 

Here is a question I recently got from one of my students, “Al, my CPA says I cannot deduct my real estate education courses and events because I only own one rental property and therefore am not in a business. Is this true?” This is a very frequent Q that I get.

Many of you know the power of education, so you astutely attend real estate conferences, boot camps as well as invest in home study courses and coaching programs. The cost of which can add up to substantial amounts. Naturally you want to deduct the education (and any related travel) so the tax savings can offset the costs (at least in part).

But even before the IRS, many CPA’s will say > NO deduction! Even if you own investment property!! Why? One reason is that many CPA’s are just plain overly conservative and only will allow obvious “safe” deductions such as real estate taxes and mortgage interest. Please don’t shock them with education or travel!

Another reason is that many take the position that real estate is an “investment” and not a “business”. (We know it’s really both, but here I am talking tax terminology). Education deductions for “investments” (such as stocks) are very limited, but for a “business” they are not. So from a tax viewpoint, is real estate an “investment” or a “business”?

Most tax law authority says it’s a business, even one rental property. But such tax law authority requires you essentially to do 8 things to document your real estate as a business.

Here are 3 of them: 1. Run it like a business (having a business plan helps). 2. Keep good separate business records 3. Use a separate business checking account, which should not be used for personal expenditures (no commingling).

You should also use an entity such as an LLC, especially if you do not yet own any properties. Reason:

An LLC, as a separate entity from you, with the proper documents (esp. the operating agreement) can give you legal authorization to take real estate education courses as a requirement to maintain the business purpose of the LLC entity. This is excellent support for your real estate education.