Muse

I recently had the honor of having John Fedro write the first of three posts here on RealEstateInYourTwenties.com.  If you haven’t checked out his site yet head over there!

While you are there, check out the article I wrote for him as well! I wrote a post on his blog titled “Don’t (Just) Invest For Retirement.”  Make sure you head over there to read my article!
(Click Here To Read It!)

 

Peace!

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.

I do not like nuts. Pecans, almonds, peanuts, walnuts, cashews, and all other nuts make me cringe. So when I open up a gift box of assorted chocolates, I tend to panic a bit, desperately desiring the milk chocolate goodness with the soft caramel inside but fearing the dreaded trojan horse filled with nuts and evil. When I choose wrong, I spend the next hour spitting tiny shards of nuts out of my teeth and vowing never to eat another chocolate from the mystery box again. For those who know me, though, that is a short-lived promise.

Real Estate Investments are like a box of chocolates. No, not in the Forest-Gump-Never-Know-Whatcha-Gonna-Get kind of way. Rather, there are many different types of investments all within the same “investment box”. Some might appeal to one type of person, some might appeal to another type of person. However, each investment uses most of the same basic principles and fundamentals.

Just as I tend to focus in on the caramel-filled chocolates in the box, I also have focused in on my niche in the field of real estate investments – small multifamily properties. However, you might be different. Your background, relationship to risk, family life, and your location may all affect which area of real estate you will begin investing in. The following is a brief summary of the nine major types of real estate investments.

Types of Real Estate Investments:

  • Raw Land –This is as “raw” as it gets (see what I just did there!). Purchasing land usually does not produce cashflow, but can be improved to add value. Land can also be subdivided and sold as well for profit.
  • Water/Mineral/Oil/Gas Rights – The cousin of investing in raw land, this is the process of buying and selling a person’s (or company’s) right to use the minerals (or water, oil, gas, etc) on a property.
  • Single-Family Homes – This is the most common investment for most first time investors. Single-family homes are easy to rent, easy to sell, and easy to finance. Single-family homes may be more difficult to cashflow, and can take a significant amount of time and effort to purchase just one unit.
  • Duplex/Triplex/Quads– Small multifamily properties (2-4 units) such as these are one of my favorite investment routes. These property types combine the financing and easy purchasing benefits of a single-family home with the cashflow benefits and less competition found in larger investments. Best of all, these properties can serve as both a solid investment as well as a personal residence for the smart investor. See “Getting Started Investing in Real Estate – Part 3: Creating Criteria” for more information.
  • Small Apartments – Another favorite of mine, small apartment buildings are made up of between 5-50 units. These properties can be more difficult to finance, as they rely on commercial lending standards instead of residential lending standards. However, these properties are excellent in terms of cashflow. They are too small for large, professional REIT’s to invest in (see below) but too large for most novice real estate investors. Additionally, the value of these properties are based on the income they bring in. This creates a huge opportunity for adding value by increasing rent, decreasing expenses, and managing effectively. These properties are a great place to utilize on-sight managers who manage and perform maintenance in exchange for free or decreased rent. At this level, real estate can truly become 90% passive.
  • Large Apartments – These buildings are the larger, nicer complexes you see all around the country, often times in upper-middle class neighborhoods in the suburbs. They often include pools, work-out rooms, full time staff, and high advertising budgets. These properties cost tens of millions of dollars to buy but can produce solid returns with minimal hassle.
  • REITs– REIT stand for a Real Estate Investment Trust. At the risk of oversimplifying, a REIT is to a real estate property as a mutual fund is to a stock. Many investors pool their funds together, forming a REIT, and allow the REIT to purchase large investments such as shopping malls, large apartment complexes, and skyscrapers. The REIT then distributes profits to investors. This is one of the most hands-off approach to investing in Real Estate, but do not expect the returns found in hands-on investing.
  • Commercial– Commercial investments can vary significantly in both size and style, but ultimately involve leasing property to businesses. Many commercial investors lease buildings to small local businesses, while others rent large spaces to supermarkets or big box superstores. While commercial properties often provide good cashflow and consistent payments, they also have much longer holding periods during times of vacancies. While most residential properties can be rented within weeks, commercial property can sit empty for months or even years. New investors should avoid these types of investments until they have significant cash reserves to weather the vacancy storms.
  • Notes – Investing in “notes” involves the buying and selling of paper mortgages. Often times an owner of a property may choose to offer financing and “carry the mortgage”. In this case, a “note” would be created which spells out the terms of the contract. For example, an apartment owner decides to sell his property for one million dollars. He offers to carry the full note and the new buyer will make payments of 8% per year for thirty years, until the full one-million dollars is paid off. If that owner suddenly needed to get the full balance of the loan, he might choose to sell that mortgage to a “note buyer” for a discount. That note buyer will then begin collecting the monthly payments and decide if they will keep the note or try to sell it for profit.

As you can see, there are a lot of different types of investments and within each type there are sub-types as well and different roles within those sub-types. This may seem daunting, but the wide variety of different types of investments is actually a great thing, as there is a type of real estate that appeals to almost everyone.  For me, I love finding under-developed small multifamily properties and adding value to increase cashflow and equity. That is my chocolate with caramel.  What is yours?

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 is my muse.

 

In Tim Ferris’ book “The 4-hour Workweek” he discusses the need for a “muse” in which to satisfy that little craving in our life called “money” without needing to fight rush hour, punch the time clock, or suck up to your sexist boss. (If you haven’t read my review yet or want to buy the book for yourself, click here). To quote The 4-hour Workweek:

 

Our goal is simple: to create an automated vehicle for generating
cash without consuming time. That’s it. I will call this vehicle a
“muse” whenever possible to separate it from the ambiguous term
“business,” which can refer to a lemonade stand or a Fortune 10 oil
conglomerate—our objective is more limited and thus requires a
more precise label.

 

For Ferris, it was an online business that sold nutritional supplements for weight lifters. For me, my muse is real estate.

 

A muse is simply a tool you use to generate income, that is not dependent on you working a 9-5 job to make it happen. In the investment world, we call that “passive income”, which comes to you passively (as opposed to “active income”, which – shocker – comes to you through active work). Stocks are passive income, but require large amounts of cash to begin with weak returns.

 

Real Estate, for most, is not a passive activity. Many investors are (literally) knee deep in crap half the time and saturated with headaches the other half. Buildings require work, tenants require training, and toilets will always need to be plunged.

 

But that won’t be you.

 

Hacking Real Estate is about using shortcuts, tips, techniques, and systems to turn a normally “active” investment into a “passive” muse. Its about making the choice to automate your investments. Its about making the choice to control your investments, not have them control you. Its about making the choice of how you want to live, rather than simply following the herd.

 

Your muse can be real estate, a supplement company, stocks, or an infinite number of other sources of income. The important thing is making your muse passive. This doesn’t mean you will never do any work to maintain it. It takes time, patience, and work to create a muse. But it does mean you make the continual and conscience choice to fine-tune your muse into a well oiled cashflow machine that will allow you to live the life you want.

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.