Learn To Be Rich

I am a night owl and tend to stay up very late. Occasionally I watch some television during the wee hours and many of the infomercials for real estate courses are completely shocking to me.

Come on folks, do you really think you can make a million dollars a year doing no work, with no money, no credit and no risk? Give me a break!

Can you make a million dollars per year investing in real estate? Probably. I haven’t… yet.

Can you do it with no work? Nope.

Can you do it with no money? Yes, but you need to be creative. You need to be working with partners that have money or credit, or you need to have credit yourself. Or you need to find a seller motivated enough to offer some type of owner financing.

Can you do it with no credit? Yes, but again, you might need to be creative or use partners. Or both.

Can you do it with no risk? Well, maybe. There is risk in everything, but you can significantly limit your risk, by either sharing it, or putting it entirely on someone else. For example, if you got an option on a property, you are putting the risk on the seller. If you brought in a money partner, they are taking on part, or all, of the risk.

So, before you get too excited about putting up three easy payments of $49 plus $19 shipping and handling, realize that while you can make money in real estate like I have and hundreds of thousands of others have over the years, it does take hard work, determination and realistic expectations.

Until my next post,

James

I have a reputation for beginning most conversations about real estate with an easy to remember acronym that describes the many benefits of investing: IDEAL.

Each letter in IDEAL stands for a one of the advantages of investing in real estate: income, depreciation, equity buildup, appreciation and leverage. Actually, I usually add in control as another benefit, but I digress.

While most investors really emphasize income, leverage and appreciation, today I wanted to narrow in and focus on equity buildup.

If you have seen any of my very detailed, deal analysis blog posts (and it is hard to miss them because I analyze deals for over 50 US markets and market the heck out of them), you know that I actually calculate and include the financial benefit of equity buildup.

So, what is equity buildup? Simply, it is paying down the loan on your property. The less you owe the more equity you have (assuming the property value stays the same). So, as you pay down more and more of your loan over time, you build up more and more equity because you have decreased what you owe.

One great thing about the equity that accumulates from paying down your loan is that it is a guaranteed return: if you pay your mortgage payments, you get the return. Plus, your return increases over time. Why? Because you are actually paying down your loan faster and faster with each passing year.

Let me explain: in the first year of a 30 year amortized loan, your payment is mostly interest. In fact, from all of your payments for the entire first year you end up paying off about .9% (less than 1%) of the total loan balance. In the second year, your principal pay-down grows slightly so that you pay off about 1%. In the third year, you end up paying off 1.1% of the loan and each year it increases until, in the last year, you end up paying off about 8% of the original loan amount.

Here’s another way of looking at equity buildup that I personally use. I have a spreadsheet with all my rental properties listed down one side and columns that match each of the benefits from IDEAL listed across the top. I look at the column for equity buildup like I am actually putting that money into a savings account (called equity in my house). With one or two houses it may not seem like that much… a hundred dollars here, a hundred dollars there per month, but get a portfolio of investment property like I have and you’re putting away serious money each and every month. For example, if you had $1,000,000 worth of real estate loans (whether that’s five $200,000 houses or ten $100,000 houses), you could be gaining over $800 per month from equity buildup.

What’s great about this is that, as I mentioned above, this amount grows each year since you end up paying more and more toward principal with each payment. So, the next year you might be saving $850 per month.

It’s kind of like a forced savings plan, because it happens automatically every month that you pay your mortgage, whether you intend to save money or not.

So, when you do your own real estate investing analysis don’t overlook the powerful benefit of equity buildup in your calculations.

Until my next post,

James

Hard money loans are available from a variety of sources.First, check with your local real estate investor group. This is a great place to network with other investors and find out where they get their hard money loans.

You can also look in your local newspaper under the “money to lend” section.

Additionally, your mortgage broker may be able to put you in touch with some hard money lenders, or, he may even broker hard money himself.

You might also consider another source for your hard money needs: Yourself.

That’s right. You probably have access to money that you never thought about using to finance your real estate investments. Here are two possibilities:

Credit cards - If you have a substantial amount of untapped credit, chances are that you regularly receive offers for three to six month long teaser rates. This could be a great way to get the money that you need at a substantially better interest rate than a hard money lender would give you. But remember, as with all hard money loans, it’s a short-term proposition. You need to get in and out and pay off your credit cards before the teaser period ends and the interest rate spikes.

Home equity loan or line of credit – Do you own your own home? If yes, and you have some equity in it, you might consider borrowing against it to do your hard money deal. Again, it will probably be at a lower interest rate than a hard money lender would give you. If you get a line of credit, this can be an ongoing source of money to finance deals. Once you finish a deal, pay back the money and it’s ready for the next time.

Remember too, that just like private investor loans, you can always encounter new sources for hard money by talking to lots of people about what you are doing. Put the word out that you are in the market for hard money, and you are bound to find some lenders.

Until my next post,

James