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”

Updated 13 Shortsale Property Package ~Great Income Producers

I just got some hot deals and I wanted to let you know as soon as possible I’ll get these properties or available find some other investors and go in and take all these properties of my hands. Check out these numbers subtract the renovation figures if you can do better. But you can’t beat these numbers. Drive by take a look at it, and submit your offers.

4090 Old Spanish Trail, Boynton, FL

$49,900

3 Bed, 1.5 Bath Home

Potential Rental Income $1,000 month

Currently Vacant

 

Sales Price	$59,900.00
Taxes	$1,000.00
Insurance	$1,500.00
Management Fee	$1,200.00
Maintenance	$1,200.00
Utilities	$0.00
HOA	$0.00
Vacancy	$600.00
Total Expense	$5,500.00
Rental Income	$12,000.00
NOI	$6,500.00
Net Yield	10.85%
Gross NOI	20.03%

All figures approximate. Great house in good area with central a/c. Price includes $10,000 renovation credit.

1377 7^th Street, West Palm Beach, FL

$39,500

3 Bed, 1 Bath Home

Potential Rental Income $1,000 month

Sales Price	$58,000.00
Taxes	$1,430.00
Insurance	$1,500.00
Management Fee	$1,200.00
Maintenance	$1,200.00
Utilities	$0.00
HOA	$0.00
Vacancy	$600.00
Total Expense	$5,930.00
Rental Income	$12,000.00
NOI	$6,070.00
Net Yield	10.47%
Gross NOI	20.69%

All figures approximate. Price includes $10,000 renovation credit.

1441 8^th Street, West Palm Beach, FL

$39,500

3 Bed, 1 Bath Home

Potential Rental Income $1,000 month

Currently Vacant

Sales Price	$58,000.00
Taxes	$1,501.00
Insurance	$1,500.00
Management Fee	$1,200.00
Maintenance	$1,200.00
Utilities	$0.00
HOA	$0.00
Vacancy	$600.00
Total Expense	$6,001.00
Rental Income	$12,000.00
NOI	$5,999.00
Net Yield	10.34%
Gross NOI	20.69%

All figures approximate. Price includes $15,000 renovation credit

 

619 8^th Street, West Palm Beach, FL

$259,000

2 Bed, 1 Bath Home

10 UNIT APARTMENT BUILDING

2 Bedroom, 1 Bathroom Units

Potential Rental Income $7,500 month

Currently Vacant

 

Sales Price	$349,900.00
Taxes	$3,000.00
Insurance	$3,000.00
Management Fee	$9,000.00
Maintenance	$9,000.00
Utilities	$0.00
HOA	$0.00
Vacancy	$4,500.00
Total Expense	$28,500.00
Rental Income	$90,000.00
NOI	$61,500.00
Net Yield	17.58%
Gross NOI	25.72%

All figures approximate. Price includes renovation credit.

1621 Tropical Drivee, Lake Worth, FL

$35,000

2 Bed, 1 Bath Home

Potential Rental Income $850 month

Currently Vacant

Sales Price	$39,900.00
Taxes	$1,137.00
Insurance	$1,500.00
Management Fee	$1,200.00
Maintenance	$1,020.00
Utilities	$0.00
HOA	$0.00
Vacancy	$510.00
Total Expense	$5,36700
Rental Income	$10,200.00
NOI	$4,833.00
Net Yield	12.11%
Gross NOI	25.55%

All figures approximate.

619 59^th Street, West Palm Beach, FL

$39,900

2 Bed, 2 Bath Home

Potential Rental Income $900 month

Currently Vacant

Sales Price	$42,000.00
Taxes	$1,305.00
Insurance	$1,500.00
Management Fee	$1,200.00
Maintenance	$1,080.00
Utilities	$0.00
HOA	$0.00
Vacancy	$540.00
Total Expense	$5,625.00
Rental Income	$10,800.00
NOI	$5,175.00
Net Yield	12.32%
Gross NOI	25.71%

All figures approximate. Solid home in good rental area with central a/c. Price includes $10,000 renovation credit.

 254 Lytton Court, West Palm Beach, FL

$79,900

3 Bed, 2 Bath Home

Potential Rental Income $2,000 month

Currently Vacant

Sales Price	$115,000.00
Taxes	$3,000.00
Insurance	$1,700.00
Management Fee	$2,400.00
Maintenance	$2,400.00
Utilities	$0.00
HOA	$0.00
Vacancy	$1,200.00
Total Expense	$10,700.00
Rental Income	$24,000.00
NOI	$13,300.00
Net Yield	11.57%
Gross NOI	20.87%

All figures approximate. Home with cottage in Historic area of WPB. Price includes $XXX renovation credit.

5344 Bosque Lane, #104, WPB

$39,900

2 Bed, 1 Bath Home

Potential Rental Income $900 month

Currently Vacant

Sales Price	$42,000.00
Taxes	$200.00
Insurance	$0.00
Management Fee	$1,200.00
Maintenance	$1,080.00
Utilities	$0.00
HOA	$3,120.00
Vacancy	$540.00
Total Expense	$6,140.00
Rental Income	$10,800.00
NOI	$4,660.00
Net Yield	11.10%
Gross NOI	25.71%

All figures approximate. Beautifully renovated townhome in desirable rental/owner area. Price includes $2,000 renovation credit.

 3850 Orange Street, Lantana, FL.

$45,000

3 Bed, 1 Bath Home

Current Rental Income $900 month

Currently Occupied

Sales Price	$59,000.00
Taxes	$863.00
Insurance	$1,500.00
Management Fee	$1,200.00
Maintenance	$1,080.00
Utilities	$0.00
HOA	$0.00
Vacancy	$0.00
Total Expense	$4,643.00
Rental Income	$10,800.00
NOI	$6,157.00
Net Yield	10.44%
Gross NOI	18.31%

All figures approximate. Price includes $6,150 renovation credit.

 

4001 San Castle Blvd. Lantana, FL

$39,900

3 Bed, 2 Bath Home

Potential Rental Income $1,000 month

Currently Vacant

Taxes	$808.00
Insurance	$1,500.00
Management Fee	$1,200.00
Maintenance	$1,200.00
Utilities	$0.00
HOA	$0.00
Vacancy	$600.00
Total Expense	$5,308.00
Rental Income	$12,000.00
NOI	$6,692.00
Net Yield	11.17%
Gross NOI	20.03%

All figures approximate. Great house in good area on huge corner lot. Price includes $15,000 renovation credit.

 

125 South F Street, Lake Worth, FL

$97,700

DUPLEX – 2 Apartments

Current Rental Income $1,650 month

Currently Occupied

Sales Price	$97,700.00
Taxes	$2,033.00
Insurance	$1,650.00
Management Fee	$1,980.00
Maintenance	$2,040.00
Utilities	$0.00
HOA	$0.00
Vacancy	$0.00
Total Expense	$7,703.00
Rental Income	$20,400.00
NOI	$12,697.00
Net Yield	13.00%
Gross NOI	20.88%

All figures approximate. CBS Duplex: 2/1 & 1/1. Needs less than $2K in light repairs/paint

Tenants pay own utilities; owner pays lawn.

 

510 South F Street, Lake Worth, FL

$77,000

TRIPLEX – 3 Apartments

Potential Rental Income $2,000 month

Currently Vacant

Sales Price	$129,900.00
Taxes	$2,940.00
Insurance	$1,900.00
Management Fee	$1,200.00
Maintenance	$2,400.00
Utilities	$0.00
HOA	$0.00
Vacancy	$1,200.00
Total Expense	$9,640.00
Rental Income	$24,000.00
NOI	$14,360.00
Net Yield	11.05%
Gross NOI	18.48%

All figures approximate. CBS Triplex 2/1, 1/1 & 1/1. Price includes $32,000 renovation credit

 

For more information about this property and others like this one visit www.southfloridareinvestments.com

Cash or Hard Money

561.670.3297

edays@rocketmail.com

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.

Buying Class C Properties

Has the ongoing recession and the subsequent lack of development capital left you waiting on the sidelines to begin your next project? With over 124 bank failures this year alone (as of the date of this article) and more expected to come throughout the balance of 2010, many developers have been scratching their heads and contemplating their next move. The self storage builders in my area are literally begging for projects and practically doing them at cost just to keep afloat and to avoid anymore layoffs.

Well one strategy that some developers and investors are beginning to consider is investing in Class C Properties.

Class C Self Storage Facilities are generally defined as older properties in need of repair or updating, often first generation, single-level sites that may be unfenced, and they typically lack in security features and amenities commonly found in Class B or Class A Properties.
They may also possess a less desirable unit max and orientation with regard to door operation, upper levels, and lack of temperature control. They may also suffer from having poor access and limited visibility and subsequently, rental rates are lower than Class A or Class B Properties.

This may not sound so appealing to the masses, but don’t discount the potential for the savvy investor who is willing to put forth the effort in turning these Cinderella facilities into the belle of the ball. Some investors and small companies have made a small fortune focusing only on investing in Class C Facilities and improving them to a solid Class B contender. And it’s not as tough as you may think.

Though the leap from a Class B property to a Class A property is difficult, you’ll find that the jump from a Class C property to a Class B property is quite simple, and with a very small amount of work and capital investment.
Which leads us to the question of how to go about finding these diamonds in the rough? Uncovering these gems is no more difficult than finding a good piece of development property, and in most cases, it’s even easier. First, there are a number of these facilities listed with Commercial real estate brokers, business brokers, on commercial and self storage websites. You can also get a comprehensive listing of all facilities in a given market by purchasing directly from the numerous list brokers who have the names and addresses of all the facilities in a geographic area.

You may begin the process by creating a relationship with the brokers to assist in finding properties that meet your buying criteria while simultaneously contacting the owners directly with a mailing campaign, or just by cold calling the facilities in person or by phone after “Googling” all the facilities in your targeted market(s) for acquisition.

“Sounds appealing – but in today’s lending environment, where do I find capital and funding to purchase these Class C properties” you ask. Well contrary to popular belief, banks are still making loans on Self Storage Facilities.

Historically, Self Storage has the lowest loan default rate of all commercial real estate when compared to apartments, office buildings, and retail strip centers. And banks are taking notice.
Especially the Community Banks, Credit Unions, and Savings & Loans banks that are located in the communities where these facilities are located. Banks are in the business of making loans and due to the strong performance in the Self Storage sector, many investors are being welcomed with open arms when presenting a loan request for their Self Storage projects and at favorable rates and terms. Banks have increasingly moved away from making “speculative” loans on development projects in favor of making loans on income producing assets with a historical track record of measurable performance. And with a solid business plan and thorough due diligence to back it up, you may be pleasantly surprised how easy it is to acquire funding for this asset class from the local lenders where these facilities are found.

When thinking of ways to upgrade Class C Facilities to a Class B facility, remember that the changes that you put in don’t necessarily have to be major.

The First place to start is on Curb appeal. What are the colors compared to the newer facilities in the area? Are all of the buildings weathered to the point where the roof, walls, and doors have all faded to 1 shade of “gray” or “tan”? A color change by one of the many painting contractors specializing in Steel buildings and doors can do wonders for the appearance of your new acquisition. Similarly, the addition of a new sign, or replacement of the existing one along with color coded flags, banners, and “bandit” signs will draw attention to your paint job and raise awareness of the changes you have made.

The next point to consider which has the most impact on forcing the appreciation and value of the facility has to do with the land. The smart investor will immediately assess the highest and best use of any vacant land at the site or any adjacent land that may be available for purchase. Hopefully, once you’ve improved the look of the facility and made some management improvements, you will be rewarded with higher occupancy and the possibility of constructing additional buildings/units at the site. Don’t forget to look at the existing boat/RV lot as the return on constructing additional buildings on that land generally outweighs the ROI of leasing out parking spaces. And if you’re out of room, contact the neighbors to assess whether there may be an opportunity to purchase additional land/buildings for expansion.

This is probably the greatest way to increase the value of your facility while simultaneously “scratching your development itch”.
Now it’s time to turn our attention to the multiple profit centers that can be added to your facility. Adding a small retail center to your site is probably the simplest and least costly way to improve the bottom line. Next, you may want to consider if it’s feasible to offer truck rental services through a 3rd party provider or by purchasing or leasing your own truck and offering it to your clients for free or at a reduced rate. Can you add a pack & Ship Center, Bill Boards, Vending Machines, a Business Center, perhaps temperature control units, propane cylinder exchange, Records Storage or any combination of the 40+ Ancillary income streams that can be added to your facility? Class C Facilities will vary by site and by market, so there is some research into the feasibility of adding each, but the increase in income and the return on investment may be surprisingly rewarding.

And last but certainly not least, is to develop a detailed marketing plan and thorough operations manual for leasing up and managing your facility. Attention to these 2 critical areas will determine your success in both improving cash flow while simultaneously increasing the value and forcing the appreciation of the asset. Furthermore, it never ceases to amaze me that when occupancy is low, and traffic is down, some operators decide to actually decrease their marketing efforts; the very thing that brings customers in the door! The most successful operators I have encountered use their marketing plan to guide their daily activities. It has specific daily tasks that all center around the daily, weekly, and monthly goals laid out by the organization. Results are usually measured on a monthly basis and then compared to the prior month’s activity to gauge the success of the most recent campaign. And of course none of this can be attained without the efforts of a well trained and motivated facility manager.

The laws for success in the self storage industry are always changing and buying Class C Facilities has quickly become a very viable addition to a successful investing strategy – especially in this time where development has slowed to a crawl.
The merits of this strategy have proven to be very profitable to many operators who have chosen this path rather than focusing solely on development. And being one of those investors myself, this author couldn’t agree more.

Investing Outside Of Your Area

Depending on your game plan, you can invest anywhere! So my question to you is… what’s your game plan?  

As an investor and broker, I sell wholesale priced homes to other investors who live both locally and abroad. As the market continues to correct itself, I’m noticing buyers coming from as far as Australia to take advantage of the return on investment in our local real estate market.

Since investing is an “each-to-his-own” sport, every investor has their own criteria for what makes an investment worthwhile. That means that some are satisfied with a 5% return while others will only purchase something offering a 10% return or greater.

Provided there is reliable property management in place (someone to collect the rent and manage repairs), these cash buyers are good-to-go, never even conducting a physical inspection in some cases.

If you want to sell more properties and sell them faster, be sure to network with and build relationships with property management companies that you can refer buyers to.
As an agent or investor offering properties for sale with positive cash-flow and a reliable property management company in place, you’ve created a one-stop-shop, especially if a tenant is already in place. What an ideal opportunity for investors.

When investing outside your area, you must gather all of the necessary information to make a wise decision. You must also create your “team” players list in that area.

When researching the necessary information to decide if an area meets your investing criteria, start with the local Chamber of Commerce.
Seek information on area businesses and demographics; economics of the area; owners versus renters; population and income range, and desire for the type of property you will be offering for sale or rent. The Realtor Association for that state will typically offer a breakdown of great information online. Some of the reports must be bought but can be worth a fortune if it can be used to help make a great investment decision.

As for building your team, imagine the team you have in your own backyard and duplicate it elsewhere. You must find reliable closing attorneys, real estate agents, property management, contractors, insurance companies, and the like. As always, it’s best to find team players by referral. Locate the local REIA (real estate investment association) and visit or at the very least, contact them for referrals and to get on their email list.

Become a “local” of the area even if you aren’t and here’s a tip: don’t let your tenants know that you are not local, whether you hire a property management firm or not.
From a best return on investment standpoint, many investors would share with you that the more you buy, the better of you are – meaning that it doesn’t make sense to buy a rental house here and another there, and so forth. The cost to own and manage one property here and there doesn’t make sense when you add it up. You are better to acquire several properties in one area or even multi-unit projects. The costs to own more in one area drops as the number of units increases.

Regardless of where you invest, one thing is for sure and that is…the time to invest is now. Whatever you do and wherever you do it, just do it.

Real Estate Investors… Can An LLC Create and Support Tax Deductions?

Properly structured, with the appropriate documents, an LLC can support expenses as tax deductions

Yes! But first, if you have not done so, set up a limited liability company (LLC). Then elect the LLC to be taxed as a partnership (with at least two members) so you have an LLC-Partnership which is both a legal and tax entity (with a low IRS audit profile) and the best entity for real estate. If you operate as one person, another member (to create the partnership) can be your spouse, other family member or even another entity you own such as a C-corporation. These can be minority low-percentage members so you can still have total control.

Now to the topic at hand. Properly structured, with the appropriate documents, an LLC can support expenses as tax deductions, many of which are IRS hot spots (discussed shortly) and typically would be more aggressive if taken as a non-entity sole proprietor (which is also very prone to IRS audits).

What to do: Use a properly worded comprehensive LLC Operating Agreement (OA). There are several important LLC legal documents. But the OA is the most important one. It is the nuclear, governing instrument… mandating LLC business operations. Simply put, it is the heart of the LLC. It also is a private document, not exposed to the public such as the articles of organization. The OA used, should be a “Real Estate OA”, specifically designed for real estate investment operations.

A properly worded OA will contain legal provisions that document the LLC as a separate entity where the LLC affairs are separate from the affairs of the members. These legal provisions (along with entity formalities) will give its members limited liability protection, therefore making it difficult for a court to pierce the LLC entity veil (which would expose member personal assets to attachment). This is because the LLC would be separate and distinct from its members. Standard boiler-plate OA’s (which most are) do not do this, as well as below.

Tax Deduction Support: A properly worded Real Estate OA also supports the multitude of tax saving expense/deductions (and strategies) that are available for the absolute best tax shelter – real estate.

How Is This So? Because having the correct legal provisions in the OA (per the above) separates the LLC entity from its members, as a separate legal person. So given this, the statutory LLC entity (separate from its members) via this legal document (the OA), formally authorizes LLC members to incur expenses necessary to attain the specific business purpose of the LLC as provided in the OA (which purpose is: High-return, low-risk real estate investing). This is summarized below.

__The LLC Entity__		You as LLC Member
Gives legal authorization to incur expenses necessary to attain the LLC business purpose	S e p e r a t e	With the LLC authorization, you incur the authorized deductible expenses, carrying out the LLC bus. purpose

This is powerful! You will feel much more assured and comfortable that your tax deductions are legally supported by this legal entity (LLC) via this legal document (OA).

IRS Hot Spots: This is especially so with IRS hot spots such as deductions for auto, home-office, entertainment, meals, travel to find property; especially, real estate education (seminars, home study courses, coaching programs) along with related travel to the educational event. With the proper LLC documents, you can legally and fully claim such deductions, even if you do not yet own any investment properties. This could be a very troublesome area with the IRS…but now can be resolved with a properly structured LLC entity with complete, correct documentation!

Conclusion-Summary: Such proper documentation can therefore be an effective defense against any IRS attacks; or CPA’s trying to deny you of valuable deductions. Reason: This statutory LLC entity (separate from its members) via this legal document (the OA), formally authorizes these deductible expenses necessary to attain the LLC business purpose. You end up with legal tax-saving deductions and a more successful real estate operation…The best of both worlds.

Real Estate Strategies with Infinite Banking

What we do is show the holes in your bucket that are leaking dollars that you are already spending and plug the holes by redirecting the flow of cash to stay in your bucket, growing tax free.

Last month’s article in REIP focused on the personal side of the Infinite Banking Strategy which was created back in the 1970’s.

This month the focus will be using the banking strategy with a real estate business. The goal is to create another profit center by keeping your money that is already being spent as an investor.

Creating another profit center with your real estate business is really important RIGHT NOW

because at the beginning of 2011 the capital gains tax is going to be raised to 20%, taxes on dividends will be tripling, and the estate tax is going from 0 to 55%. This strategy, when set up correctly, will have you pay zero on the above just mentioned.

So how do we create another profit center?

Everyone should be in two businesses- the one in which you make your living and the other should be the banking business that finances whatever you do for a living.

This is where the folks who pay cash for everything stop reading because they feel it doesn’t apply to them since they don’t pay finance charges. IT DOES APPLY TO THEM. Why? You finance EVERYTHING you buy. PERIOD. You either pay interest to someone else or you give up interest you could have earned otherwise. Investors who use this strategy have their money working double time regardless of cash or finance which we will explain later on.

As real estate investors, you can use this strategy to recapture all the interest you pay out with your mortgage and have it grow tax-free in your capitalized account.

You can also pull the money out of your own “bank” to make a purchase and the money you used is still growing in your account (bank) even though it is being used for the purchase!

You could take the income tax you pay on rental income and put that money in your account instead of the government’s account and have it grow tax free.

So let’s get into more detail of what was just shared. Here is a great scenario where you don’t have to pay capital gains tax with the Infinite Banking Strategy. There is a great real estate deal where you can buy a condo for a steal at $50k and flip it and make a quick $10k. Under normal circumstances, you would pull the cash out of your savings account and purchase the property. The $50k is no longer earning interest in that savings account. When you flip the condo for $60k, you will owe capital gains tax on the 10K profit from the sale. The rate of return for your investment is excellent even after paying the capital gains tax.

Now let’s use the Infinite Banking strategy with the same real estate transaction as above. First you capitalize your “bank” so you can withdraw $50k at a moments notice. You lend your LLC $50k with an interest rate of 20%.

Even though the $50k is not in your account anymore, the account continues to grow as if the $50k was there. Major difference #1.

The LLC purchases the condo for $50k and then flips it for $60k making a $10k profit. The LLC repays the $50k loan back to your “bank” including the 20% interest which is $10k. If the interest expense is $10k and the profit is $10k, what do you owe for taxes? It should be zero. Major difference #2
(Please consult your tax attorney/accountant or financial advisor)

Using this strategy, the $10k interest is going to grow tax free. This will dramatically affect the rate of return. The more you self finance, it will turbo charge both the growth of the balance and the dividend you get on the account which is also tax free.

Here is another real estate scenario we mentioned earlier using the Infinite Banking Strategy that is very powerful. We are going to keep the details and numbers simple to make the point. You purchase a property for $100k using funds from your own” bank” and the interest rate is 12% ($12k/yr). You receive $1000/mo for rent which equals $12k/yr of taxable income. If the interest expense ($12k) equals the amount of rent received for the year ($12k), what is the amount of income tax owed? Zero. You had an expense of $12k but the major difference is that our clients put the $12k into their bank account as a profit which will grow tax free versus everyone else who owed tax on the 12K of rental income!

Another way to create more profit with your business is how you pay for your repairs and maintenance. There is always something that needs to be repaired, especially the buy and hold investor. There is a long list of rehab projects but here a just a few of the common ones:

*replacing roof
*replacing a/c compressor/handler,
*updating the kitchen and bathroom,
*new flooring,
*painting,
*appliances,
*electrical,
*doors and windows,
*landscaping
*termite tenting

If you could finance these common projects without worrying about qualifying and recapture the interest you would pay the finance company and keep interest charges in your account, would this affect your bottom line in a positive way? The common sense answer is yes. Would you pay cash for these projects and lose out on the opportunity costs? Hopefully not. The strategy allows you to have your money working in 2 areas and not one. It simply adds up to A LOT of money over the course of time when you pay cash the old way.

If you didn’t read last months article on this subject, we need to pause a moment and briefly explain the vehicle that does all the above mentioned and more.

The Infinite Banking Strategy uses permanent life insurance to accomplish some of the things that are being written. It’s not about buying insurance but using a vehicle that can mimic the power of being your own banker.

The insurance coverage is just a side benefit. Some of you have some information about permanent insurance that was taught to you years ago that isn’t true with this strategy. Most think they understand and unfortunately this financial product is perhaps the most misunderstood and poorly explained product on the market. Ignorance is not bliss; it is expensive. This is not a get rich quick scheme. It requires discipline and it takes commitment.

You may find this fact the most surprising but most insurance agents are not aware of this strategy or wouldn’t honestly admit that they don’t know it if asked. This is a specific product, using a specific company with certain critical riders that must be in place. Most agents may not want to offer this product because the commission is SUBSTANTIALLY less because you have access to the majority of your cash right from the start. You see, this strategy is not what’s best for us but what is best for you. Most folks are not aware that back in the 80’s the federal government limited how much money you can put into this account. Why? Because of the HUGE tax advantage. The wealthy were pouring millions of their money into these accounts. The government wants your money for obvious reasons.

In conclusion, this strategy is not limited to real estate.

Businesses have many different types of capital expenditures. Dentists buy dental equipment while trucking buys vehicles. Families finance cars, college educations, vacations, and things that are purchased on a credit card.

Folks are looking for ways to come up with more money to save for retirement. What we do is show the holes in your bucket that are leaking dollars that you are already spending and plug the holes by redirecting the flow of cash to stay in your bucket, growing tax free.

For more information on how this strategy can work for your situation, please contact Rick Hainey at 561-502-7572.

(We are not giving financial advice and any information that has been stated in this article should be consulted with your tax attorney/accountant/financial advisor)