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What Will You Do about Money If You Live to Be 100?

Experts think that any of us living today, who reaches age 65, healthy and vibrant, will easily make it to age 100.  Whoa! That will change things financially, to say the least.  In the “old days,” between 1960 and 1980, people who reached retirement age lived just four to eight years past retirement to about 69 for men, and 72 for women. It wasn’t too big of a stretch to have between five and 10 years of retirement income saved . But consider working 35 years, then retiring for 35 years instead of just 5 to 10.  I read an article in 1983 that said by the year 2000, many people would be retired as long as they worked. At the time I balked at that idea — NO WAY! I thought. But the fact is, those numbers are a reality now and that longer retirement period is presenting some very challenging problems we all need to think about:

  1. How will you afford to live 35 years into retirement? 
  2. Will you need to work more years than you had originally planned, until age 75, for instance? What if you can’t because of poor health?
  3. Will you have to reduce your living costs drastically to make ends meet?
  4. What about inflation? If the inflation rate keeps averaging 5 percent screen-shot-2016-09-16-at-2-31-17-pmper year as it has been doing, living on a fixed income for 35 years is not going to work very well.
  5. People may be living longer, but especially in the United States, where the standard American diet is so poor, you won’t be living to
    a ripe old age in good health. What if you’re one in four people who will require long-term care? This is expensive at between $2,500 and $6,000 per month.
  6. Social Security will be bankrupt in 2034, according to the Social Security Administration’s annual report, so what do you do if you can’t count on even that income in retirement?
  7. If you are one of the many retired persons who is divorced, what will you do to live on just one retirement income instead of two?

The old way of looking at retirement planning may not work for you anymore. Trying to save using a basic 401(k) is passe. It’s time to get creative and look at real estate, life insurance, annuities, and leasable resources as other options for creating a predictable retirement you can’t outlive. I suggest you read the book MONEY, What Financial Experts Will Never Tell You Full of case stories and practical, holistic approaches to financial planning and retirement that are easy to apply, this book is a BookCovermust-read. Get it in time for Christmas and give it to your kids as well. They will for sure be living longer than you, in most cases, and will have to be ready for a long retirement period. Why not prepare them for that now?  Get going, as time will keep marching forward. Will you be pleasantly surprised when you reach retirement age, or will you be horrified and shocked at what you have done to yourself financially by not taking things seriously today?

More Leverage Ideas to Help Your Money Make More for You

In my last post, 5 Ways to Make More Money You Probably Never Thought About, I noted how wealthy people use their money and resources to make more money for them, rather than squandering them or sitting on them. In this post I wanted to give you some additional ways in which you can get your existing money and financial resources to do more than one thing at a time for you.

  1. Apply savings to debt. Rather than “parking” money in passbook savings that will make very little interest, why not deposit that money in a HELOC (home equity line of credit)? This puts the saved interest expense in your pocket (which is usually always going to be more than what you’d earn in passbook savings) while still keeping that money available for those emergency and emotional spending events that are sure to happen.
  2. Turn a non-producing (or low-producing) asset into a high-producing asset. Money that you have deposited into a 401(k) or IRA, for example, is sitting their earning a modest amount of interest, or it may even be losing money, so it’s probably not wise to put all your long-term savings into such “stagnant” programs. Investing some of your money into real estate or equipment that can be leased out is a better way to get your assets to produce more money for you.
  3. Spread out your investments. Consider various investment options based on how they are taxed, risk risk level, capital appreciation, and so forth.
  4. Increase your return on investment. While it’s important for people with large debt loads and little savings to be quite conservative early on with their savings habits, as you get spending and debt more under control you will see a little cash accumulate. When this occurs it is foolish to leave the money in a low-return program such as a CD. Consider, instead, what savings should be converted to higher yielding investment plans.
  5. Examine ways you can make your current investments more valuable. Like I mentioned in my last post, can you convert real estate space into rental income Do you need to study the market and trade investments in more lucrative fields? Can you use the equity in your current real estate to purchase additional properties to begin a “rolling” real estate investment?

More ideas in coming posts. Hope these are some you will take into real consideration as they could be resources you already have that you are not using to their full potential.

Key People You Need to Help Manage Your Real Estate Business

As a follow-on to the last several posts I have done on real estate investing as a means to fund retirement, following is some helpful information on keeping your real estate business activities organized.

My first advice is to surround yourself with a team of competent professionals. To have a good real estate experience, with a high probability of profit, then you will need to contract at some point or another with the following:

A Financial Coach
This is an financial expert that will help fit all the pieces of the financialTime and Money puzzle together; this is not the same as a financial adviser or financial planner. A financial coach is one that can show you how to put principles (not products) in place to manage your own money successfully. This financial coach must know what all the pieces of the financial puzzle are and how to put them together in the right order so they can work together at the same time. Go to www.moneymastery.com to learn more.
A Real Estate Agent
Consider using both a residential and commercial agent; besides assisting you in searching for properties, they are an additional resource in keeping  information about the various properties you are researching organized.
An Attorney
Use an attorney for both contract law and/or sound feedback.Appraiser
The difference between various appraisers can be night and day, but finding a good one that can help you determine accurate value is crucial.
Invest in Real EstateA Construction Contractor
This person should be someone you trust to do both large and small jobs.
An Accountant
Pick one with expertise in real estate tax law; this will help you be confident in your real estate activities and can help you stay organized when tax time rolls around.An Insurance Agent
It is vital that you select an experienced agent who knows the rules about real estate and how changes in the marketplace can affect insurance coverage.
A Stager
A stager or designer provides furniture and décor that can help you favorably present and sell private and/or commercial real estate properties.

Understanding Ways to Buy Real Estate

Okay, more posts on the value of owning real estate as a way to fund retirement. In this post, I want to share important info on how real property is traditionally bought and sold to facilitate the transfer of legal title (ownership). Each has its own positives and negatives. Research some of these ideas for yourself to see what works best for you.

  • All cash
  • Cash down payment and traditional (conventional) mortgage
  • Borrowed down payment and traditional mortgage
  • Buyer assumes existing debt and seller holds note
  • Institutional financing
  • Seller finances the purchase price
  • Wrap existing debt and seller holds the note
  • Combination of any of the above

 

All Cash

This is the most simple and direct way to purchase real estate, for obvious reasons.  Of Real Estate Investing: buy one property or multiple?course, for most people it is also cost prohibitive.  Most professional investors have built up a large enough cash reserve where they can afford to buy using “all cash” should they so choose. An important question to ask is:

“Should I spend all my own capital to buy one property or split it up and use it as a down payment to buy multiple properties?” 

This is not always an easy question to answer. The answer should be based on your individual and business goals as a real estate investor, your risk tolerance, your family’s needs, your current stage in life, and your social needs. The “all cash” option has benefits for some and can be a problem for others. Following are some of the pros and cons to consider:

Pros

  • Simplified purchasing and operation
  • More secure return on investment
  • In the early years of the investment, the cash flow is sheltered from taxes
  • There is no risk of mortgage default
  • Operational risk is greatly reduced

Cons

  • Generally yields a lower percentage on return
  • Limited market penetration
  • Lack of diversification
  • Ties up cash, making it less available for other acquisitions or to cover other expenses that may come up.

 

Cash Down and Traditional Mortgage

The most common way to finance a real estate deal is through a cash down payment and obtaining a traditional mortgage. Obviously the residential owner-occupied market uses this method of financing the most, and it therefore mirrors the commercial marketplace in terms of financing options. This method is generally the most flexible form of financing.

 

Borrowed Down & Traditional Mortgage
Real Estate Investing:Cash Down Also called a “No Money Down” mortgage, this type of loan can be problematic. If you borrow money and claim the debt on your loan application for the new property, it may cause the application to fail. And if the money  you borrow is through a credit card, for example, it’s going to cost big in terms of interest expense.  When the payment on the down payment loan is added to the payment on the traditional mortgage usually the amount will become so large that it can’t be covered by the operations of the property and can often lead to foreclosure. Real Estate Investing: What's more profitable?Sometimes it is just more profitable for you to join forces with a partner or two to get the down payment, thereby avoiding higher payments. This is not a method for acquiring real estate that I can really endorse.

 

Buyer Assumes Existing Debt & Seller Holds

This is another “No Money Down” purchasing technique. To determine if this is a financing method appropriate for you, consider the following:

  • The liability you will assume with the existing debt
  • The quality of the underlying debt
  • Seller motivation
  • Your relationship with the seller
  • The legal validity of the seller documentation
  • Seller junior liens
  • Availability of title insurance
  • Terms and conditions of the seller’s financing

100 Percent Institutional Financing

One of the “No Money Down” options, this technique carries certain risks. One critical issue is the quality of the underlying title of the property. You have to ask yourself why the seller would be willing to sell under these conditions. Possible answers include that he/she couldn’t sell any other way. Maybe they are charging a high interest rate to produce revenue for themselves. Perhaps they know that no one else will make the loan. They may know that the title isn’t clean. If you are wise, whatever the reason, you will research the status of the title andReal Estate Investing: Check the Title make sure legal documents are in order.

If you choose to use this form of financing, ensure the following:

  • The price is fair
  • The interest rate is reasonable (compare with market rates)
  • The title is clean
  • You understand the terms and conditions of the debt
  • You are willing to deal with the risk of high leverage
  • You can buy title insurance for the property
  • Documents are legally sound
  • Legal filings are done to notice your transaction

Wrap Existing Debt & Seller Holds the Note

This is another “No Money Down” option that wraps the existing debt of the property into a new loan. The buyer pays on the  new loan with a portion of the payment going towards the original loan’s payments.
If you choose this form of financing, ensure the following:

  • A clean title
  • Record your interest in the property
  • Use an escrow company to receive the payments from you so they can pay the original debt payment then distribute the difference to the seller
  • Draw up sound legal documents that ensure the seller will make their debt payments

NoteWatch for a “due-on-sale” clause in the seller’s debt documents. (If such a clause exists, the seller’s lender may call the loan due and payable when the sale to you occurs; this may cause you serious problems if a lender should enforce the clause and the seller is unable to make payment in full). The rules that govern whether you will be held personally responsible for paying off the property or whether the proeprty itself can be relied upon to satisfy real estate debt vary from state to state. Be sure you know your state’s laws regarding this issue.

How Real Estate Holdings Can Help Eliminate Debt

Here’s another way real estate can be a great way to get in control financially and help you have more money for retirement:
If you structure your real estate deals appropriately, they will be lucrative enough to allow you to take a  portion of your profits on a monthly basis and draw off as business income to accelerate down either personal or business debt.
Additionally, when you increase the value of your real estate holdings, you
shutterstock_250088392 decrease the “loan-to-value” ratio, which suggests you can then possibly refinance the  property to provide cash needed to reinvest in additional properties or improve existing ones.
This cycle of improvement/debt reduction facilitates the elimination of debt and helps accelerate the speed with which you can increase net worth.  Be sure to use the Money Mastery Power Down technique to create a plan for using real estate income to eliminate personal consumer debt much quicker and/or restructure good investment debt in various properties to acquire more net worth.
For more information on the power down approach, contact me: alan@moneymastery.com, 801-292-1099.

Understanding the “Law of the Harvest” in Real Estate Investing

Asset accumulation and building up greater and greater cash reserves is an important part of any wealth accumulation strategy. Understanding the cycle of wealth accumulation through the “Law of the Harvest” can more readily help you have available money that you can use to invest in real estate ventures that will help you make even more money.  In this post I want to take a closer look at the “Law of the Harvest”:

1. A landlord purchases a duplex and charges rent.  He pays the mortgage and improves the duplex to keep it up (represented by the “create surplus & invest” box below).

2. He manages his property wisely, improves the property where needed, and increases rents when appropriate (as represented by the “make a profit” box below).

3. When the real estate market is in a prime position to help him meet his goal for achieving a specified return from his real estate holdings, I’ll say 10% in this example, the property owner determines that it’s a good time to harvest some of his  “crop.”  The landlord sells the duplex (represented by the “harvest money” box below).

4. Cash is now in the property owner’s hand. He can use some of that money to reinvest in another real estate venture (subject to real estate rules) to make more, but he should also harvest some of that money (say 10% to 15% depending on his particular situation) by locking it down in some secure place, such as debt-free real estate, or FDIC-insured savings, so that all of his income is not being cycled back into his business ventures (represented by the “protect money” box).

Real Estate Investing Circle

The important thing to remember in this example is that the property owner does not defer protecting a portion of his harvest until “retirement” but rather engages in protecting and locking down chunks of it all along the way. If he continues to wait to spin off a certain amount to protect, he risks losing it all.
Remember, don’t wait to spin off assets — make a plan to harvest and protect them along the way.

For more information, contact me: alan@moneymastery.com, 801-292-1099.

Plan Your Real Estate Investment Activities

If you are serious about real estate investing as a way to create a more successful financial outcome in your life, I suggest you approach it in the same way you should be approaching your daily spending activities — with a plan! Create a basic plan that includes the following:

  • How many hours each week you will spend researching opportunities.
  • How many properties you plan to research each month.
  • How much money you plan to invest each year in real estate.
  • What the minimum return on investment you will require from each property.
  • What type of properties you plan to research and invest in.
  • What type of funding you will need to pursue in order to purchase these properties.

Once you have a plan for what you want to accomplish then use the following tools and techniques to track your activities according to that plan.  I suggest my clients use these techniques as a way to ensure greater success.

1. Use Property Tracking Form to Keep Track of Stats on Each Property. One of the best ways you can learn to put your money in motion is by recording detailed information  about  each of the properties you have investigated. Forms such as a property analysis, buyer’s property inspection report, and property renovation analysis are available free of charge by contacting me directly: alan@moneymastery.com. These forms should be used for each property you are researching.

2. Use the property research formula to track properties:

"Property Research" Formula

Remember, the deal of a lifetime only comes along once a week!

This means that if a particular property doesn’t look like it will provide the return on investment you require based on your real estate investment plan, don’t be fooled into thinking another great deal won’t come along for another year or so. Just move on to the next opportunity as quickly as possible, tracking property statistics, return on investment opportunity, and cash flow potential. The more you work at and practice applying the formula for tracking the properties you are researching, the quicker the really terrific deals will present themselves and you will be less likely to jump at the first offer that “feels” promising.

3. Track all necessary variables. One of the most important things to evaluate is the location of a particular property.  What determines a great location?  High demand created by a number of different variables.  Following is a list of basic variables you should be tracking to determine the best areas in which to be looking for lucrative real estate opportunities:

  • Rate of construction
  • Industrial relocation incentives
  • Job growth
  • Suburban sprawl
  • Quality of housing
  • Quality of area services
  • Government/politics
  • High demand (or migration):  the real estate market moves in cycles; watch these  cycles to see where people are migrating to take advantage of jobs and other economic factors that affect demand.

4. Use proper cost basis accounting procedures to track activities. Because your real estate activities should be treated as a business, it is advisable to use basic accounting procedures to track those activities.   Be sure to create a cash flow statement, balance sheet, and income statement for your real Tracking Activitiesestate business to help  track each property’s return on investment. In addition, remember to document and deduct all your real estate research and finding activities to take advantage of the most tax savings.  This will include:

  • Business mileage
  • Phone and Internet costs in researching properties
  • Overnight travel, food, and lodging (as part of legitimate real estate business activity)
  • Meals and entertainment (as part of legitimate real estate business activity).

 

Love the Deal, Not the Property…

As I have mentioned in other posts, real estate investing can be a good way to fund retirement but to become successful in it you need to track and control your activities. In other words, you need to treat real estate investing as a business.

Many people when considering a real estate investment are concentrating too heavily on how the property appeals to them emotionally. Deciding to invest in a property should not be based on how pretty the garden is, how much you love the location, etc. Instead, decide to fall in love with its potential for providing an adequate return on your investment. The best way to do this is to see real estate investing as a business — this allows you to assess the actual value of the property and its potential for return on investment.

Money Mastery: Don't waste any timeStart by devoting the right amount of time. Take the time to research a property and take a hard look at the numbers to make sure it’s a good deal. This is way more important than trusting your gut instincts on what you think its potential might be. Take the time to independently verify acreage, average utility costs, how well the property stays rented, etc. In addition, you will need to look at more than just two or three properties to find a lucrative deal that will provide an adequate return on investment. The following “Property Research Formula” provides a good guideline for ensuring that you are researching enough properties to be successful:

Money Mastery: The success formula in Real Estate Investing

The more you work at and practice applying this formula, the more good deals will present themselves and you will be less likely to jump at the first offer that “feels” promising. The formula will take the guess-work and emotion out of putting together a real estate deal and help you find the properties that are right for you.

Remember, the deal of a lifetime only comes along once a week!

This means that if a particular deal doesn’t look like a promising investment, don’t be fooled into thinking another great deal won’t come along again for a long while — the more properties you research, the quicker the right deal will come your way!

Know what you want to accomplish before you structure the deal. Remember, real estate investing is a business that can help you put your money in motion to make more. Think of yourself as a business owner, not just a land owner. If you go into a deal thinking of it as a business opportunity with a set percentage you want to make on the investment, you will be less likely to disregard disappointing Money Mastery: have a structure before investing in real estatecash flow numbers and more likely to deal well emotionally and psychologically with what those numbers tell you. With a clear cut number in mind you can move on more easily should you find the property cannot produce an adequate return. This empowers you to move quickly from one prospect to the next until you find what you’re looking for. If you’re in love with the way the place “looks” and “feels” but can’t fall in love with its return on investment, it’s time to “break up” and move on to more promising prospects. A good match isn’t just a pretty face, but the ability to “provide” for you as well.

For more information on real estate as a means to fund retirement, contact me: alan@moneymastery.com, (801) 292-1099.

Do You Have What It Takes to Be a Real Estate Investor?

Do you have what it takes to participate in the real estate investment market? 

Real estate investing requires the three C’s: Cash, Credit, and Capacity:

Cash:  The Money Mastery Principles teach how to get spending under control and eliminate debt so that you can  have a cash reserve on hand when opportunities present themselves to put your money in motion. Most often, real estate investing is one of those activities that requires liquid funds to that when a good deal presents itself, you will be ready to put up your own money (or a combination of your money and other investors’ funds) for the required down payment on a rental property.  Liquid cash is also needed for a minimum investment amount for a REIT or Tenants in Common deal that may present itself. This is surplus you can invest without jeopardizing yourself or family.

Credit: Not in all cases, but in most, you will need to have excellent credit in order to qualify for the financing you may need to purchase the property. You may also need to be an accredited investor, owning at least $1 million in assets net of your home, and have an annual income of $200,000 or more in order to participate in REITs and TICs.

Capacity: This is the ability to show that you can cover the payment on the property. Of course, the best property will show the ability to generate cash flow itself in order to cover payments, but you  should also be able to personally demonstrate that you can cover the payments. A banker who sees your Spending Plan in balance with a 20 percent personal savings rate, for example, and a property that can show a return on investment is going to have confidence in you that you have the capacity to pay for the property.

Temperament: In addition to the three C’s, your success in the real estate market may be determined by your temperament. You might want to ask yourself questions like the following:

  • What attracts me to real estate?
  • What are my specific plans to get educated about the real estate market?
  • Why am I personally interested in real estate and what do I want to accomplish by investing in it?
  • How much time am I willing to devote to learning the rules associated with real estate investing?
  • How financially stable am I at this point in my life?
  • How willing am I to research many, many different properties in order to make a good deal?

 

Real Estate Investment Opportunities: Real Estate Defined

As noted in some of my other posts, real estate investing can be a great way to fund retirement or just create more cash flow so you can get in control financially much quicker.

In my post, Why You Should Consider Real Estate Investing, I noted that real estate investing can be a very powerful way to build wealth and often has more benefits than any other type of investing. But to be successful at this type of venture, you need to approach real estate investing as a buisness.  It should be treated like one and operated like one. In its most simple form, a real property should produce income (rent, percentage rents, etc.) sufficient to pay taxes, insurance, management fees, reserves, lines of credit, mortgage payments, etc., and provide a reasonable profit to you on top of that!

Following are the basic types of real estate in which you could invest:

Land:  Improved & Unimproved

  • Unimproved: raw land with no structures or services; these could include vacant lots, farm land, pasture land, etc.
  • Improved: As the name suggests, this is land that could include some services such as water and sewer, buildings, and other features.

 

Residential

  • Single family dwellings
  • Multi-family dwellings
  • Apartments
  • Condominiums
  • Revenue-producing dwellings wherein rent is collected

Commercial

  • Rental properties leased to businesses
  • Hotels/motels
  • Businesses
  • Office buildings
  • Shopping centers

Industrial

  • Plants and factories
  • Power plants
  • Warehouses
  • Industrial parks

Here are the many ways you can invest in these different types of real estate:

Private, Direct Ownership

An individual buys a property and rents it out to a tenant. The owner, or landlord, Real Estate Investingis responsible for paying the mortgage, taxes, and costs of maintaining the property. Ideally, the landlord charges enough rent to cover all of the aforementioned costs. Drawbacks include bad tenants who damage the property or not being able to get tenants at all. Managing the property and collecting rent are other considerations in private ownership. When the furnace stops working in the middle of the night, the landlord gets the phone call.

Tenants in Common (TIC)

This is a group or pooled ownership of a piece of property; each tenant is on the title and may be entitled to a dividend along the way and their share oReal Estate Investing: Joint Tenancyf the equity when the property is sold, but has no rights of survivorship.

Joint Tenancy

Typically this ia a husband and wife arrangement where when one of the spouses dies, the other spouse inherits the deceased spouse’s equity in the property (called rights of survivorship).

Syndication

A syndicator puts a real estate deal together by finding a property, running the numbers to be sure of its return on investment, and finds an investor willing to fund the deal, then takes a percentage of the profits. He or she may or may not help fund the deal with their own money, but should be prepared to manage the property if necessary.

Real Estate Investment Trust (REIT)

A REIT is created when a corporation uses investors’ money to purchase and operate income properties. Shares can be bought and sold privately or traded publicly. Typically, a corporation must pay out 90 percent of its taxable profits in the form of dividends to keep its status as a REIT. By doing this, REITs avoid paying corporate income tax. Exposure to real estate via REITs can be done via individual stocks that represent companies that do either residential and commercial property investing, or through mutual funds and ETFs as well.

Stock Ownership

Investors buy a certain number of shares in a real estate company; a REIT is an example of real estate stock ownership.

 

If you are interested in real estate as a way to fund retirement, this overview should give you a pretty good idea of the many different options you could investigate. If you need more information, contact me: alan@moneymastery.com, (801) 292-1099.