Been Borrowing All Your Life? Retire as a Lender

Been Borrowing All Your Life? Retire as a Lender
Let’s face it, we’re a consumer society, and much of our consumption over the past decades has been financed with debt. Our interest payments have financed some nice lifestyles and created fortunes for banks and conglomerates. If you’re in or nearing retirement, you may still be paying a mortgage, a car note or two, and maybe even some consumer debt payments. Even if you’ve managed to get free of much of that debt, your income from investments can’t be looking all that great right now.

A recent check of the “safest” bond investments, Treasuries, showed yields under 2% on 5-year bonds. If you’re more daring, junk bonds pay significantly higher yields. But, they’ve broken down through 5% now, and there’s a lot of fear when even the most risky yields are that low. A half million dollars in a retirement account yielding a safe 1.80% is throwing off only $ 750/month before taxes. There are plenty of articles out there about rental property investing, and it’s a great way to go if you’re up to the hassle and moving your assets into a self-directed account.

After all, if you owned five $ 100,000 rental homes with that half million dollars, each could be renting out at around $ 750/month, five times the return before taxes of those bonds. Rental properties aren’t hands-off investments, and it’s easy to get really sick of late night tenant plumbing problems and unexpected maintenance expenses. The good news is that rental property isn’t the only way you can profit from real estate in a self-directed retirement account.

There aren’t as many choices for IRA and 401k custodians for self-directed accounts. And there are even fewer if you want to pursue different strategies. It can be well worth the search however. It’s not widely advertised, but you can lend money under the right circumstances and collect interest in your self-directed retirement account. You can turn the tables and become a collector of interest instead of a borrower.

You can issue short term mortgages, but there are other higher yield opportunities out there. Funding real estate investor deals can be really lucrative. There are companies that specialize in what is known as “transactional funding.” They loan money to real estate investors who are wholesaling or flipping properties. These loans can be for a few months while a home is in the rehab process before a flip, or they can be for a few days or even hours. Let’s see how it works:

• A real estate investor who is wholesaling properties locates deep discount deals and flips them to rental investors if the homes are in livable condition.
• If the home needs work first, they can flip it to a rehab “fix & flip” investor.
• In both of these cases, they may seek funding to close on their purchase of the home from the distressed seller until their flip to the other investor closes.
• In some cases these deals close the same day, or often in just a few days or sooner.
• The funding is secured by the real estate.
• There’s a lot of money to be made in a very short period of time with these deals, and the investors consider it a cost of doing business and factor it into their deals.

How much money are these lenders making? Rates and fees are varied, but one example quote from a transactional lender website shows: a minimum $ 1,000 for small deals, or 2% up to $ 250,000 and 3% over that, plus $ 495 per deal. Remember that we’re not talking about annual interest rates here. It’s a fee, and it is paid at the closing of the second deal, which means that the principal and the ROI are back in the account within a day or so in many cases. A chart from another lender shows fees for deal amounts like this:

Amount Loaned Fees

$ 80,000 $ 1,200
$ 150,000 $ 2,250
$ 350,000 $ 4,375
$ 1,000,000 $ 10,000

Even if you’re funding rehab and fix & flip deals, you can do quite well over a longer time frame, as the fees and interest rates increase to cover your risk. As with any other investment, there are risks, but you do have the security of the value of the real estate, and most of these lenders will only advance up to around 60% of the value of the property. This way they hope to recover their money if they must sell the home due to default. Of course, there is some really important due diligence that must happen:

• Work only with seasoned investors, and check their track records. A series of profitable deals indicate a successful business plan.
• You want to see both contracts: the purchase contract for the property, and the contract with the investor’s buyer showing everyone’s profit in the deal and covering your investment.
• Work only through reputable title companies or closing attorneys.
• And, if it’s through a retirement account, you have a whole new set of IRS hoops and rules, so make sure your custodian is experienced and ALL funds move through the account.

There are some nice rewards from short term lending like this, but there is a great deal of preparation before the first dollar moves. You may want to join a local real estate investment club and get to know some of the investors. There will be investors in these clubs seeking funding.
Dean Graziosi

Is Renting Really That Bad?

Is Renting Really That Bad?
Just over the last year, the phrase “nation of renters” has been used in dozens of articles and blog posts on major websites and housing portals. The press and many real estate market analysts are lamenting the dearth of home buyers and the disappearance of most of the first time buyers.

Articles are everywhere with statistics showing the Millennial generation staying in their parents’ homes longer and generally uninterested in buying a home now. Some of this is economy and job oriented. Many younger generation would-be home buyers are hesitant when they read about “the five year rule.” This new “rule” about buying a home states that you shouldn’t do so unless you’re sure you can stay in it for five years or longer. At current market appreciation rates, and considering the uncertainty of many younger buyers that they’ll stay in their current job for five years, it’s no wonder they aren’t excited about getting locked into a mortgage.

But, it’s cheaper to buy than to rent! There are plenty of articles out there with rent-versus-buy affordability statistics. Mortgage interest rates are still historically low, home prices are reasonable in many markets, and rents have been rising due to increasing demand. In many areas of the country it is indeed cheaper to buy than to rent if you restrict your comparison to considering mortgage payments, property taxes, and the mortgage interest deduction with a monthly rent amount.

There aren’t any published studies of the numbers of recent home sellers who barely got out from under their mortgage, taking little or no equity away from the closing table. Factor in those who actually had to throw in some cash to get free of a home with good credit, and it does begin to influence perceptions. Buying a home is no longer a retirement savings vehicle, making it more difficult to dismiss renting as “throwing money down a hole.”

There are many less obvious factors that can change our perspectives about rent-vs-buy. What if you end up having to sell at a loss, or worse, you lose the home because you have to move for a job and can’t sell. Maybe you do a short sale, but that can still hurt your credit and you can’t take money away from the closing table. All that sounds logical, but what if you have a choice between two identical homes, one you buy with a $ 1,200 monthly payment (taxes and insurance escrow included), and the other you would have to rent for $ 1,450?

If the home was purchased for $ 150,000 with 20 percent down, you’re out of pocket $ 30,000 plus closing costs at move-in. If you’re thinking of the “five year rule,” you’re concerned with staying long enough to get back that cash investment, and you probably have little expectation of a big profit when you sell. If you took out a second mortgage for part or all of that down payment, it’s just more debt and a higher payment. If you had a low down payment, you start with less equity and have a lower expectation of any profit at sale unless you stay in the home a long time. It’s a little stressful if you’re not happy and secure in your job. How about another job-related factor; having to turn down a better job because it’s too early to sell?

If you are considering buying that home and you do have the $ 30,000+, what will it earn in interest over five years? Savings interest rates are pretty low now, but you’ll still have around $ 1,500 more in five years at 1 percent interest compounded annually. It’s not much, but it’s better than leaving the closing table with less than that $ 30k you invested upfront.

There’s something we can’t put a dollar value on in this discussion; freedom to move for lower rent or higher income. If you stay with one year or shorter leases, you can shop rents and move if you can cut your rent for the same value home. If you bought that home with the $ 1,200 monthly payment and have to turn down a job with a $ 500/month pay increase, it’s no longer a flat rent-vs-buy monthly expense comparison.

It is not an easy decision in the best of economies, and these days buying or renting decisions are even more complicated than in the past. Weigh all of the financial, job-related, and personal preference factors. Above all, remember that renting doesn’t make you a second-class American. You’re in the good company of a very large group. Watch and wait for opportunity if buying is your goal.
Dean Graziosi

It’s Not Real Estate — It’s the Economy Stupid

It’s Not Real Estate — It’s the Economy Stupid
Whether you’re a real estate investor, a homeowner, or you’re just interested in how home prices are doing these days, it’s easy to find media coverage to support just about whatever attitude or bias you may have. News was very consistent from 2007 through 2010, as the crashing market kept everybody in a bad mood. However, from around 2011 to the present, news about the “recovery” has been all over the map.

A recent article on a website for mortgage professionals tell us that California cities hold the top five spots for home price and market improvements recently. The same report states that Ohio, Florida and Missouri are sharing the bottom of the list for improvement. Headlines are confusing, telling us that:

• 30 percent of all home purchases have been by investors with cash.
• The millennial generation is moving back in with their parents, not buying homes.
• First time homebuyers are just nowhere to be found.
• Some markets around the country are recovering to the point of bidding wars.
• The median price for a home is now $ 191,600, up 9 percent year over year.
• The U.S. is becoming a nation of renters.

When it comes to housing news, it’s a new movie title: “The Good, the Bad, and the Mediocre.” We can continue to analyze the housing market and home prices till the cows come home, but it really isn’t just about homes and whether the American Dream is still intact. It’s just logic that as long as people have the financial ability to own a home, they’ll prefer that to renting. We all want to own our little piece of the planet.

When it comes to the financial ability to purchase a home, make the mortgage payments, support other debt, and to feed, clothe and protect our families, we’re not in a good place on average. Right now, more than half of Americans surveyed believe that the economy is “getting worse,” while 41 percent think it’s improving.

The Organization for Economic Cooperation Development reports study results for 2001 through 2011 related to household net disposable income in the U.S. Net disposable income is the maximum amount people can afford to spend without having to take on debt or tap their savings. The study shows that this amount has risen on average only 2 percent per year over the ten year period. With inflation over the same 10-year period averaging 2.4 percent, it’s not a pretty picture. In March, the median family income was $ 53,000, lower by 6 percent than the $ 56,271 number in December of 2007. The average non-farm worker’s income in April was $ 24.31 per hour, up only 1.9 percent from a year ago.

There are arguments about whether the massive increase in student debt is a major contributor to a drop in home purchases by the younger generations. It really doesn’t matter as much as the lack of high paying jobs available to these indebted graduates. Another set of statistics shows that first-time homebuyers have dropped from 40% of the market to 30%. This statistic comes from the National Association of Realtors report: Realtors’ Confidence Index. However, the same association has a long standing report titled Profile of Home Buyers and Sellers that tells us just the opposite. The latest report states that the percentage of the market made up by first-time buyers is holding steady. The discrepancy is in part aggravated by the spurt of buying due to the first-time homebuyer tax credit in 2009 and 2010.

A lot of people are employed in tracking the real estate market, mortgages, foreclosures and home prices. They need their jobs, so they should keep up the good work. However, I’m solidly in the camp believing that “It’s the economy stupid.”
Dean Graziosi

Tax & Spend Is About to Hit Real Estate Investment Hard

Tax & Spend Is About to Hit Real Estate Investment Hard
This is a great country, and most of us are fine with paying our fair share to keep it that way. We like our nice highways, and we enjoy the protection afforded by our police forces and the military. It takes money, and taxes are how these amenities are funded. However, it seems that for quite a few years now, and in both Republican and Democratic administrations, there are always multiple proposals being discussed to increase revenues. What is missing is pretty much any discussion of cutting costs, or reducing government waste and fiscal irresponsibility.

This year there are some alarming discussions in Congress directly targeting the 1031 Exchange used by real estate investors to postpone capital gains taxes on real estate transaction profits. If you sell a stock market investment for more than you paid, you’re happy, and you’re going to pay capital gains taxes, normally in the year the gain is realized. Real estate investments enjoy a special tax advantage provided by IRC Code 1031. There are a whole lot of rules and deadlines involved, but the highlights of the 1031 Like-Kind Exchange include:

• Real estate acquired for investment purposes normally qualifies.
• Like-kind is liberally applied, so selling a piece of land at a profit, you can use the 1031 Exchange to buy a rental home. The key is that they’re both “real estate” used as an income-producing investment.
• When you do this within the rules, your profit from the sale is not subject to capital gains taxes at that time. They’re deferred until later, whenever you liquidate your investment completely.
• This means that you can continue to roll your profits up into more valuable properties over time, never paying the capital gains taxes until you sell out of the assets. You’re getting Uncle Sam to participate in the growth of your nest egg.
• If you die and leave your property portfolio to your heirs, they receive it at the “stepped-up” value. That’s the value at the time of inheritance. This means that all of those capital gains just disappear, and they can sell the property if they want without liability for them. Yes, you can take it with you… kind of.

It can be easy for someone to think it’s unfair for investors to avoid capital gains throughout a long life, as it may seem like they’re not paying their fair share. However, what gets lost in the discussion a lot is the fact that this single tax provision has spurred residential and major commercial real estate sales and development since its inception.

IRC Section 1031 has created a huge buyer demand over the years for everything from rental homes to shopping centers and office buildings. It allows the investor, in fact requires it for maximum tax advantage, to roll most or all of the proceeds of the sale into the new purchase, and within a specified period of time. There’s no way to quantify it, but I’m relatively certain that a major chunk of investor real estate purchases over the past few decades would not have happened if this advantage were not in place.

At the very least, new commercial real estate development would have been slowed significantly. You may not have that fancy new shopping mall nearby without the 1031 Exchange. Definitely there would be far fewer apartments out there today. With rental demand increasing, rents would be through the roof if a large number of those big apartment projects didn’t exist.

Congress has no fewer than three different proposals being discussed right now, and all of them either completely do away with the 1031 Exchange or do enough damage to it that real estate investment activities will plummet in the future. The news is full of the waste and inefficiency of the Veterans Administration and other government agencies, including the U.S. Postal Service. Private business can’t continue to exist if it’s consistently unprofitable, but the government doesn’t suffer from efficiency requirements.

I think that it will be extremely harmful to the already fragile economy if the 1031 Like-Kind Exchange is dismantled or severely limited. This isn’t a time to be inflicting more blows to the economy and jobs. It’s a time for more discussions of how to cut the cost of big government instead of how to fuel the spending fire.
Dean Graziosi

Millennials, Jobs and Home Buying

Millennials, Jobs and Home Buying
The great thing about the Internet is that there are so many ways to seek out information and research trends and the news. The problem with it is that it’s easy and free to publish information, which tends to fragment information into lots of smaller bites. This is especially true with SEO, Search Engine Optimization, as a goal. Writing an article with a single topic focus is usually better for search engine exposure.

In my news feeds and resources about housing, I also have to watch employment and economic trends. This week it’s been interesting reading about the Millennial Generation and their time in jobs and even their home buying plans. It took four different recent articles to piece together my impressions for this one. Two of them deal with the time today’s younger generation stays in a job before moving to another, one deals with their plans for buying a home, and the last addresses what some call the “five-year rule for buying a home.”

It’s obvious that there is a lot of attention on this younger generation, as the first time home buyer market has been depressed for a while now. As first-timers were a significant force in home price appreciation, their lack of participation is considered a big damper on an improving market and economy. So, what’s the story?

Stan Humphries, the chief economist at Zillow, has been tweeting about the Millennial Generation and their future home buying plans. One graph published shows the results of a survey showing a whopping 85 percent of respondents expect the median age of first time home buyers to rise in the coming years. More of them are expected to stay at home with their parents longer, while there will be a corresponding decrease in new household formation in this age group.

Another article over at speaks to advice received by a first time buyer. The major point family and friends made was that you shouldn’t buy unless you stay in the home for five years or longer. They called it the “five-year rule.” This isn’t a new concern, as the closing costs and commissions involved in selling a home to buy another have always been high enough to require some time in the home to build equity and enjoy appreciation.

The advice to offset these limitations hasn’t changed either. Avoiding buying the most home you can afford is first. This way you may be able to pay extra payments toward your mortgage to get to break-even sooner. Another newer trend relates to our current housing situation. Some buyers are buying a home with a plan to move in less than five years, but moving without selling. They intend to rent out the home for income rather than selling at a loss.

Two other articles about changing jobs are only slightly different in the number of years their data says today’s Millennials stay in a job. One states 4.6 years, while the other says 4.4 years. Surprisingly, this is actually longer than in the past, up from 3.5 years in 2002. One survey says that 91 percent of Millennials expect to stay in their current jobs for less than three years. If this group adheres to the five-year rule, there’s not going to be a lot of home buying going on.

From a real estate investor’s point of view, I see some good years ahead for rental property owners. They’ll need to be selective, as this generation knows what they want. Buying the right homes which appeal to their lifestyles and where they will be employed should keep occupancy and rents high. I’m not wishing for continued bad news for home prices and overall purchase numbers, but I can certainly take advantage of the situation.
Dean Graziosi