The Good News
Real Estate Investing is what you make of it. A friend of mine once said, "The best thing about Real Estate Investing is with patience you can create your own deal." I've seen that Investor's strategy change over the years as he become aquainted with Market conditions and he has made his own deals. Above all patience and a conservative approach have been his montra.
Eagle Real Estate Blog Policy:
Blog Topics will be added as various subjects present themselves. Feel free to email me with Investment questions. I may publish a blog on the topic of your email and I will always email a response or refer you to an expert. If you disagree or feel that a statement requires clairfication please feel free to email me with your comments.
Email Address: NickL@eaglenm.com
Before reading any further consider Webster's deifinition of a Blog: a Web site on which someone writes about personal opinions, activities, and experiences. Having said that, please seek Professional Advice on these topics before investing using these opinions.
Blog Entry #1 July 9, 2015
Today I would like to take a few minutes to discuss the unique advantages associated with Real Estate Investing. At least I believe they are unique. If you have ideas of other investment opportunities that provide these types of advantages, I would like to hear about them, as I’ve described these concepts many times to first time Investors and they are always excited to hear the details.
Most Real Estate Investments provide these four factors, which feed your Return on Investment:
Appreciation is the increasing value of the investment over time based on Market Conditions. Yes, the Market may shrink the value of your investment, but smart buying should reduce that exposure.
Depreciation is a factor which influences your income, as calculated by your accountant at tax time. For example, the IRS allows your accountant to add depreciation expense to the other operating expenses on your tax return. The theory is, Real Estate does not have an infinite life expectancy, so the purchase price or build-out price is multiplied against the depreciation factor to provide a method of expensing the Investment’s lifecycle. At the point of sale, you may need to repay the IRS for the depreciation expense, but usually the repayment is a fraction of the expense you benefited from. Discuss this topic with your Tax Account.
Cash Flow is the revenue stream resulting from the operation of the Property. Examples are: A vacant lot purchased from a developer would not have income, thus it provides no cash flow. In contrast, an apartment building provides Rental Income proportionate to the quality and quantity of its units. Cash flow pays the monthly operating expenses and pays the loan payment. The monthly principal payment of any loan and the monthly profit are positive cash flows that benefit the Investor.
Leveraging is the concept that Lenders are happy to loan against Real Property, as opposed to Paper Investments. Leveraging is the result of the Investor’s financial persona. In other words, to some extent, the Lender can judge your financial personality by your credit rating. If you, as the Investor, are able to manage your finances, the Lender is more likely to partner with you. When I visit with first time Investors I emphasize the fact that the value of their Credit Rating is immeasurable. An Investor with a credit Rating of 800 can confidently sit with a Lender to discuss the Lender’s best loan terms. Investors with a credit rating of 500 may not even get an appointment with a Lender. Leveraging the purchase of an investment is the result of the partnership with the Lender. For example, the Lender may partner at 80/20, meaning the Lender is providing 80% of the funds to purchase the Investment. Or, I’ve seen cases where the Seller of a property provides Owner Financing for 90% of the Selling Price.
The advantage of Leveraging is this: your Investment realizes Appreciation, Depreciation, and Cash Flow based on the entire purchase price. Your investment is a fraction of the purchase price. A $250,000 income property requiring a 20% down payment is in fact only $50,000 out of your investment funds. Cash on Cash Return says you invested $50,000, thus all Cash on Cash math is based on the $50,000. See the graph below to understand the power of leveraging. This graph is a summary of the Cash on Cash Return of a 20 year loan life for a specific property I have monitored. The graph includes only the operating expenses and the interest. No Appreciation, Depreciation, or Principle Reduction are included in the graph.
As you can see, the result is counter intuitive. An investment of 10% of the purchase price results in several times the Cash on Cash Return, compared to that of the 100% investment or pure cash purchase. The greatest contributor to the return is the basic fact that your investment percentage sets only the interest paid on the loan each month. With the right investment property choice, the impact of the interest paid on 80% of the purchase price, versus the lesser amount of interest paid on a 50% loan, is not significant. Just a note, all investments are not the same. Remember your results may be different based on your operating methods.
And lastly, partnering with a Lender provides another advantage. The Lender will have certain formal expectations that will elevate the quality of your investment strategy. The Lender will, at what I call an “Arms Length” (as opposed to partnering with Aunt Martha who might get closer than “Arms Length” if she decides you are not performing as expected), request data at the inception of the Investment and at intervals throughout the Loan. These data requests will hold you accountable on the topics of good accounting practices, detailed tax returns, and cash flow trends of your investment. Your Lender will also be able to assist you with insight into the Market niche you have chosen.
Blog Entry #2
Will My Retirement Run Out of Money????
You may have seen the Television Commercials which toss around the worrisome question “Will your retirement run out of money?” This is just one more reason I appreciate Real Estate Investing.
Below is the short list of reasons to invest in Real Estate vs. Paper Investments. These topics allow you to manage your own destiny:
In the case of an annuity or cash retirement account, such as Traditional IRAs, 401ks, or CDs you will most likely be paying yourself the Cash Principal of the Retirement Account. This method does eat away at your Retirement, which will, at some point in time, dwindle the principle to $0.