Real Estate

Real Estate vs. Stocks: Part 2 – Average Returns for Average Investors

by Brandon · 7 comments

(This article is part two in a two-part series on stocks versus real estate)

Last time, I discussed the idea of the “hero stock” and why the idea of “just picking that one special stock” is absurd and dangerous to your money.

In an answer to this gamble, many financial advisers recommend a diversified (spread out) portfolio, using mutual funds to spread out risk over dozens or hundreds of large companies. This definitely spreads out the risk of losing all one’s money on a company that goes out of business.  The stock market on average over the past 40 years has provided an average return of around 10% per year. Stock salesmen love to point to this number and tell you that this return is better than anything you could get in real estate. Just give them all your money, plus their commissions, and they will provide for your future.

The problem is – with stocks and mutual funds, you are giving up the most important part of your ability to make money – your brain. You are completely dependent upon forces out of your control to make money. Yes, the stock market has traditionally provided a generally stable return, but this return is miniscule to what you could earn in real estate.  Are mutual funds better than nothing? Yes!  Anything is better than burying your money in the ground (or a checking account). An average return of 10% is better than losing money to inflation. However, average returns are for average investors.

By reading articles like this one – it is clear you are not a typical “bury in the ground” or average investor. You want more.  Real estate investing will give you more. Why? One word: leverage. Leverage is the ability to use borrowed money make you money. When you buy a stock, $20,000 lets you buy $20,000 worth of stock. With real estate, however, $20,000 will let you purchase $100,000 or more worth of property (or $500,000 if it is your personal home).

Lets look at an example.

You have $20,000 this year to invest. You want to decide between buying diversified stocks or real estate. Let’s look at both:

  1. $20,000 invested for 10 years and receiving an annual interest rate of 10% could be worth $54,140.86 – a gain of about $34,000. Not to bad. This equates to an average annual gain of almost 17%.
  2. You purchase a newer three-bedroom, two bathroom home in a family neighborhood for $100,000.  You put a down payment of $20,000 (the sellers pay closing costs). Total mortgage payment (on the resulting $80,000 at a 5% bank loan) is $430 per month. The home rents for $1200 per month.  After paying taxes, insurance, a maintenance guy to fix stuff when it breaks, and a other incidentals, you cashflow about $450 per month or $5400 per year. Putting this money back into the loan (not that you would have to, but to compare apples to apples from the stock scenario above), after ten years you will owe nothing on the loan.  Zip. Zero. Additionally, property in the US has appreciated at an average of 3% per year. So, you now own a property that is worth $135,000. Even taking out your initial investment and the cost it would take to sell, you have over $100,000 in equity, equating to a 50% return on investment – three times higher than that of the mutual funds. This 100,000 can now be used to invest in something bigger, better, and with more value.

At the risk of sounding too biased, there are drawbacks to real estate investing.  For one, the money is not liquid. This means that if you suddenly wanted to pull out all your money, it would take time.  Stocks are much easier to get in and out with.  Additionally, stocks do not require any extra leg work. You don’t need to drive by the stock, get phone calls from the stock, or evict a stock.  However, personally I could not invest in something that I couldn’t materially participate in. Perhaps its a lack of trust in others, but I want to have complete control over the destiny of my money. When I make or lose money, I want to make it or lose it by something I did or didn’t do.

This scenario is not a once in a lifetime deal or even a great deal. It is a very conservative look at investing. I believe in maximizing return by purchasing properties well below their value, adding tens of thousands of dollars in equity before even closing on the deal. In the house scenario above, I would have paid $60,000 for it instead, adding hundreds to monthly cashflow and tens of thousands in immediate equity. That is true real estate hacking.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

Real Estate vs. Stocks: Part 1- The “Hero Stock” Myth

by Brandon · 0 comments

(This article is part one in a two part series on the battle between stocks and real estate.)

“If only I had bought Apple stock when I had the chance! It was $X per share and now look at it! I would be so rich by now”.

No doubt this story sounds familiar to you. I’ve heard it dozens of times about dozens of stocks. “If only”. It is this story that drives millions of Americans to faithfully throw thousands of their hard earned dollars into the hands of stockbrokers with the hopes that they can pick the right stock and they too can be rich. It is completely absurd. The stock market is the worlds largest lottery, and as Dave Ramsey says, a lottery is just a “tax on the poor”.

For every one “hero story” of a stock soaring from bottom to the top there are hundred or thousands that disappear from the stock market entirely, giving investors a loss. In fact, in 1988 the Wall Street Journal did an experiment which pitted professional stock brokers against someone blindly throwing darts at a newspaper stock sheet. The results? The professionals only slightly beat out the darts, embarrassing the brokers and confirming that picking the right stock is a gamble even for those who’s whole life is dedicated to it.

When people look back and say “If only I had purchased X stock in X year, I’d be rich” it might be true. However, cheap stocks are cheap for a reason – they might not go anywhere. The vast majority do not.  Clearly, if we could hop in our Delorean and fly with Marty back to the past we could tell our old selves what we should invest in. This just isn’t plausible in our world, so we must find another way to invest and secure our future.

Next time I will look at a favorite among personal finance gurus called the mutual fund and why average returns are for average investors.

 

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

New to “Real Estate In Your Twenties.com”? Start Here!

by Brandon · 4 comments

Welcome to Real Estate In Your Twenties!

Thank you for taking time to check out Real Estate In Your Twenties!  My name is Brandon and I am an active real estate investor, musician, globetrotter, entrepreneur, and hopeless romantic. I don’t like jobs, bosses, careers, or depending entirely on a business I can’t control to tell me how I should run my life. Along with my gorgeous wife Heather, I have spent the past five years discovering ways to “hack” the real estate investing game to allow me to live life on my terms.  In the process, I have discovered hundreds of tips, tricks, techniques, and pitfalls that I now want to share with you.

This blog is designed to help you avoid those mistakes and help train and encourage young people like myself to jump into the world’s largest game and play to win.

Do you have to be in your twenties to learn from this site?  Of course not!  Whether you are twenty-one or sixty-one, this site is designed to teach anyone principles, tips, tricks, and techniques to get into real estate investing without years of financial backing and experience.

Make sure to add your email in the subscription box to the right to subscribe to my blog via email. And don’t worry – I hate spam as much as the next guy. I promise I won’t sell, trade, transfer, or give your email to anyone else. And if you really like something, please share it on your Twitter or Facebook Wall! Just click the little icon above the search bar immediately to the right of this post!

Thank you for taking time to read.  Happy Investing!

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

Hard Money Lenders: Loan Sharks of the Real Estate Industry

by Brandon · 12 comments

Imagine a world where you have all the money you need, all the credit you could get, and banks pounding down your door to give you large sums of money for low interest. Nice isn’t it? However, the real world is a much darker place. In reality, trying to get financing from a bank is often like trying to shave Chuck Norris’ beard while he sleeps. It’s just not possible.  As they say, necessity is the mother of invention and Hard Money is the invention birthed by the need for financing.

What is Hard Money?

Hard Money is money that is obtained from private individuals or businesses for the purpose of real estate investments. While terms and styles change often, Hard Money has several defining characteristics :

  • Based on the value of the property
  • Short Term (6 – 36 months)
  • High Interest (8-15%)
  • High loan “points” (cost to get the loan)
  • Often do not require income verification
  • Often do not require credit references
  • Quick ability to fund
  • O.K. with property in poor condition

How Hard Money Is Used:

Compared to typical bank financing, Hard Money is ridiculously expensive!  Why would anyone use Hard Money? As I mentioned early: necessity. It may be an expensive way to do business, but if those costs are factored into the equation, it just might work for some people.  When investors cannot obtain normal bank financing, we will often use hard money as a “bridge” between purchasing and the resale or refinance.

Often times, house “flippers” will use hard money (as I have) to buy a property, fix it up, and sell it again. When it works, it works well. The lender may charge 4 points (4% of the loan) and a 12% interest rate, but if those costs are figured into the cost of the project this number is inconsequential.

How Do I Find Hard Money Lenders?

Hard Money Lenders can be difficult to track down, but there are several easy ways to find them.

  1. Look online. Many hard money lenders (both national and local) have websites and they need you as much as you need them. Search Google for Hard Money Lenders in your state to find some.
  2. Ask a Mortgage Broker – Some, not all, mortgage brokers can connect you with hard money lenders – for a fee.
  3. Ask House Flippers – Find some house flips that are on the market and find the owners or attend your local real estate investment club and ask around. Referrals are often the best way to find anybody good in business.
  4. Ask a Real Estate Agent. An agent that works with lots of investors should know several hard money lenders  – or at least be able to get you in contact with someone who knows them.

Should I Use Hard Money?

I have used Hard Money on a number of occasions, but I try to steer clear whenever possible. I am a strong believer in security and in the “buy and hold” method of investing. Hard Money – with its short term lengths – do not fit well with my investing strategies. I like to think in terms of “worst case scenarios”. If I try to “flip” a house using Hard Money, and am unable to sell that house before my term is up, I am in danger of losing the house to the lender.  I only use hard money when I have a clear exit strategy on a flip and secondary funding available as a backup.

Hard Money can be a great way to get into the “flipping” business, if that is the business model you are looking to get into.  However, you must weigh the risks with the reward to decide if this is a path you want to go down.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

How I See My House…

by Brandon · 3 comments

I received this email yesterday from my good friend, designer, and creative genius Krister from Plank Island Studios (www.PlankIsland.com) and found it hilarious and very true. If you are a homeowner you will especially appreciate this.

 

 

 

 

How I View My House:

How I View My House

 

 

 

 

 

 

 

 

How My Buyer Views My House:

How Buyers View My House

 

 

 

 

 

 

 

 

How My Lender Views My House:

How my Lender Views My House

 

 

 

 

 

 

How My Appraiser Views My House:

How My Appraiser Views My House

 

How My County Tax Assessor Views My House:

How My County Tax Assessor Views My House

 

 

 

 

 

 

 

 

 

 

 

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

Screening For Ghost Tenants

by Brandon · 1 comment

I don’t believe in ghosts.

I especially don’t believe in ghosts who apply to live in one of my two-bedroom apartments (I hear they are more attracted to creepy mansions). This is why when poor Miss Abileen’s name came forth on the background check I ran this week, despite her death in 1987, I didn’t immediately call the Ghostbusters. While there are a number of “protected classes” that are illegal to discriminate against, I’m fairly sure being dead is not one of them. Clearly something was wrong with the social security number provided. It was fake, probably purchased by the applicant who was lacking a social security number.

This event has made me revisit just how important screening a prospective tenant truly is. As a young investor, it is easy to want to just let a tenant move in based solely on impressions. After all, throughout high school and college we are accustomed to gauging the integrity of a person based entirely on conversations. However, properly screening tenants is the most important step in decreasing the headaches you will get while investing in Real Estate. I would even be as bold as to say 90% of all management headaches could be avoided by adequately screening.  Nearly every problem I’ve ever had with difficult tenants has been from letting my standards slide when screening for them.  I have learned from my mistakes and hope to teach you to avoid them as well.  The following is a list of the top six things to research before allowing a tenant to move into your property.

  1. Valid Social Security Number: I’ll start with this, as it relates to the story above. There a number of reasons a tenant might have a fake social security number, such as immigration issues or trying to hide their shady history. While you might be tempted to allow a fake or non-existent social security number to slide – this is a terrible idea. Instead, just take all the money from your bank account and just mail it to me. Why? You are almost guaranteeing future financial problems. If they refuse to pay, trash the place, and skip town – you can’t garnish wages. If they hurt someone on your property, you can’t find them. Finally, without a social security number, you have no way of knowing who they really are and what they have done in the past. Do they have several evictions? Do they have seventeen felonies in the past year? Simply put, the risk taken when renting to tenants without valid social security numbers far outweighs the reward.
  2. Job Verification: Tenants may tell you they have an excellent job, but without verifying it from their employer, you have no way of ensuring that they are telling the truth. Even if they bring current pay stubs to you, it is still a good idea to call their place of employment because the job could be just a temporary position ending soon. Renting to tenants without a proper job is just asking for future evictions.
  3. Income Verification: I recommend setting a minimum income level for your property at 30% of the tenant’s gross income – and make this number visible from the start to avoid wasting time. I cannot tell you the number of times I have driven to a property to show a unit, only to find out that the tenant only makes $500 per month in social security and is looking to rent a $495 apartment. It is ludicrous, but it happens all too often. Tenants do not know how much they can afford, which is why you must. I now tell prospective tenants over the phone exactly our qualifications to minimize unnecessary trips to show units.
  4. Previous Landlord References: You do not want another landlord’s trash. Calling a previous landlord is vital to knowing the kind of tenant you might be soon renting your property to. However, do not simply just call the most recent landlord, because more likely than not, this landlord will give a positive review even if the tenant was terrible – simply because they want them gone! Instead, go back to other previous landlords and find out the quality through them. Additionally, a proper background check will include previous addresses for the prospective tenant. Make sure these addresses line up with the addresses they give you. Often times tenants will conveniently “forget” to include landlord information for the property they were evicted from.
  5. Credit – While understanding a prospective tenant’s credit is important, this is the only item on this list that is only necessary depending on the type of tenant you are looking for. Credit checks often just tell you one thing – they have bad credit. However, if you are renting higher income properties – by all means check credit. They way a person has paid their debts in the past is a huge indication of how they will pay you.
  6. Living Style: This includes a number of specific items of note about your perspective tenants that are pertinent to know before renting to the tenant. This includes items such as number of pets, other people who will be living with them, smoking status, and “how much cash do you have”. These questions will help you better determine the type of renter this prospect will be and how they will affect the condition of your home.

Screening tenants does not have to be a scary task, and can easily be subcontracted out to either a screening company or simply a trustworthy college student looking to make a little bit of money. I also strongly believe in charging a tenant for the cost of the background check. It is generally common practice and it will help weed out the tire-kickers and only get serious renters.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

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