Fixer Jay’s Mom & Pop Millionaire Blog

Sad as it may be, anyone can be sued anytime, anywhere for anything! Hey, it’s the American way! Naturally, landlords and property owners fall smack-dab in the middle of this wild west, shoot ‘em up free for all!  The big question for us hard-working landlords and housing providers is:  What can we do to protect ourselves?

If you operate real estate and manage the tenants who live there, your first line of defense will always be your insurance policy.  Don’t confuse corporations, LLC’s, trusts or hiding on some far away island with the protection you need.  When you own mortgaged properties and you have rental customers (aka), tenants living on your properties - you must have adequate insurance to protect yourself from losses. The only thing we need to discuss now is what kind do you need and how to go about buying it!

Basically property owners (investors) need two kinds of insurance!  They need property insurance (a fire policy) and they need liability insurance, which protects against personal accidents and injuries that may occur.  I call this the people insurance!  Liability insurance for investment real estate owners should provide protection for two different kinds of exposure.  The first would be protection for accidents at the property.  For example, say the bathroom floor falls through with the tenant standing on it, causing a personal injury — Or perhaps a board pops up on the front porch and smacks your tenant in the head.  This I call exploding type liability because the injury is caused by the property (exploding outward).

LIABILITY INSURANCE - PEOPLE PROTECTION

The second kind of liability for investors is what I would call the imploding liability. It’s a risk for owners but has nothing to do with the property itself. In this situation, the property doesn’t cause the problem, yet the owners and his real estate holdings will be exposed to a loss just the same! Here’s an example of what I mean.  Let’s say your handyman worker has just purchased a new toilet plunger at Scotty’s Building Supply and while driving to your duplex loses control of his VW bus and steers right through the middle of a troop of Girl Scouts selling their cookies on the sidewalk. Obviously, the property had nothing to do with this accident; yet· the liability will be tied to the owner and his real estate through the actions of the handyman!  Naturally, you as the property owner-employer will be held responsible.  You’ll need lots of insurance to pay for the cookies, believe me!

HOW TO BUY LANDLORD INSURANCE

Commercial insurance is different than homeowner’s insurance! It’s called commercial because renting out properties is considered a commercial venture,  just like any other business activity.  It’s also different in a few more ways.  It’s much harder to find because fewer companies sell it - and,  it’s more expensive because a much greater risk is associated with the business of renting out properties for profit - as opposed to the average homeowner insurance policy.

When you begin to own several rental properties, you’ll find as I have, using insurance brokers will buy you the best coverage at cheaper costs. Independent brokers have access to many different insurance markets (companies) who offer the kind of insurance landlords need.  Insurance brokers, unlike an agent, can bid your properties out to many insurance companies who will compete to get your business.  Also, many single market agencies like Allstate may simply drop out - or quit writing commercial policies leaving you high and dry if you have their policy when they quit.

A technique I have found to be very beneficial to me and most certainly helpful to my insurance agent is to prepare a sketch of each of my properties.  My sketches are drawn on 8~ x II” standard binder pages and my houses or apartments are shown as little squares (one square for each living unit).  Next, I show the size of each unit - like 2 bedrooms, 1 bath and the approximate square footage.  I note several construction features, such as wood shake roof - and wood siding or a stucco exterior.  I also note if the electrical panel has breaker-type fusing or the old glass screw type. Finally, I make a guess about how old the building might be.

With these sketches complete, showing the above-mentioned details for each of my properties, I now present them to my insurance broker, which gives him all the information to submit to various insurance companies soliciting their bids.  I keep these sketches handy in a 3 ring binder and they’re always available when it’s time to review or seek alternate bids from multiple brokers.  They also save a lot of time digging out the same information year after year for renewals.

Folks familiar with my writings and seminar training already, know that I draw up sketches for each property right after I close escrow.  I cannot begin to tell property owners how much time you’ll save if you’ll do this small chore.  You’ll find that using them for insurance work is only the tip of the iceberg when it comes organizing (streamlining) your operating procedures. I always recommend you purchase “Loss of Rents” coverage! This is very inexpensive to buy and will protect your income in case you are shut down by a fire or some other disaster that prevents you from earning your rents.  I suggest buying 12 months worth of rent payment insurance because quite often it will take that long to appraise and adjust the damages, solicit bids and rebuild after a fire.  This insurance will allow your income to continue, which is very important to most landlords.

AN UMBRELLA POLICY STRETCHES YOUR MONEY

An umbrella liability policy is a separate policy.  It works in tandem with your regular policy.  Umbrella policies work just like “hamburger helper” because they stretch or increase your buying power for liability protection.  Let’s say that you and your insurance agent have decided you need 5 million dollars worth of liability protection just in case all your tenants slip and fall in the bathtub at one time.  Hopefully, not the same tub!  You have calculated that your liability from a successful lawsuit might cost you $250,000 for each one of your 20 tenants who slipped and fell!  Additionally, there might be some mental and emotional stress caused by the fact that $250,000 is not enough to allow them to retire in luxury on your money!

Instead of purchasing a $5,000,000 liability policy - you should instead consider buying a $1,000,000 primary policy along with a separate umbrella policy.  That increases your liability protection up to 5 million dollars.  The economics work like this — Most landlord-tenant lawsuits are of the “nickel-dime” variety!  Slips and falls, habitability issues, eviction problems - or perhaps the sheetrock falls off the ceiling on your tenant’s head while he’s eating cheerios!  These are by far the most common types of litigation involving landlords and they can all be settled easily under the limits of your $1,000,000 primary policy.

Since the primary liability policy is where all the action is (lawsuits settled for less than 1 million dollars), it’s the workhorse policy that costs the most.  Umbrella policies are structured to take over or provide protection after the liability exceeds the 1 million dollar primary policy limit. However, because landlord lawsuits seldom rise to that level, insurance costs are much cheaper from 1 million ·to 5 million; therefore, umbrella policies are often purchased for one third the cost of a primary policy.

DON’T FIDDLE WITH FRIVOLOUS CLAIMS

Insurance is a valuable necessity for all property owners.  It’s the front-line infantry for protecting your wealth-building program, so you must treat it with much care to avoid losing it.  Insurance companies, as you might imagine, don’t like paying claims near as much as collecting premiums!  In fact, if you file too many claims, you’ll probably find yourself cancelled.  You should avoid turning in claims for every minor damage because it will likely establish you as a frequent “claim filer”.  I don’t know of any magic number, but my friend Larry M. filed 4 claims last year and he was cancelled!

Save your insurance policy for stuff that really counts!  Most insurance policies have a deductible amount like $1000.  That means you are responsible for paying damages of less than $1000 - and the insurance company pays legitimate claims that exceed $1000.  Naturally, you will pay the first $1000 of any loss.  If you should have a tenant go bonkers - and kick in the sheetrock causing an estimated repair bill of $1500 - I strongly suggest not filing an insurance claim even though you might be entitled to a $500 reimbursement!  The $500 counts as one claim, the same as if it were $50,000!  You don’t need the attention for a mere 500 bucks.  It’s not wise to be on a first name basis with your insurance company.

EMPTY HOUSES - INSURANCE COMPANY NO NO

At seminars and speaking engagements, people are always asking me about investing in empty houses - sometimes even abandoned properties. Insurance companies will not insure empty houses if they know about them to start with!  The risk of fire at unoccupied properties is about 20 times higher.  Investors often find out the hard way - just before closing, they cannot get insurance on a property with no one living there. Obviously, no mortgage lender would approve his or her loan without insurance for protection, so you must be concerned when you set your sights on vacant properties.

THE VALUE OF GOOD LOOKS

In the fix-up business I fully understand the financial power of “good looks”.  Good looks create a good feeling and that good feeling translates into dollars — Like in big profits.  Good looks and good feelings can play a big role when it comes to buying insurance. When the insurance agent visits your property, he or she will make a quick judgment about how you operate your business.

That quick judgment immediately determines where the agent intends to place your coverage! That is, which of his insurance companies does he think your property will qualify with?  If it’s junky property, he’ll think “high risk”!  If everything looks nice and smells sweet, he’ll likely attempt to qualify or place your property with a better, but more importantly, cheaper insurance carrier.

FREE INSURANCE SKETCH

If you would like to follow my advice using my Insurance Sketch for your properties, I’ll be happy to send you a sample from my file.  Make your request in the discussion box.  Provide email address with your name and telephone number. You’ll be pleased how well these sketches work.

Tags: Success Secrets by FixerJay
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People invest in real estate for many different reasons, but most are in hopes of making a profit.  When I say hope, it’s because when you ask them how they intend to profit, a great majority can’t tell you how. The biggest reason for this is because many folks, who honestly believe they are investing, are not actually not — they’re speculating instead, and there’s a huge different between the two!

Webster’s Dictionary defines speculating as - buying and selling with the expectation of profiting from market fluctuations - or assuming a business risk in hope of a gain!  Folks - let me be crystal clear’ about this! Speculating is not what I do - nor is it what I teach others to do! I am a pure investor, and as you shall learn, my profits have very little to do with market fluctuations, or as they’re more often called, real estate cycles.

When you learn to invest my way, there’s no need to hope for financial gain. It’s almost certain! Speculation, on the other hand, is a lot like fishing from the riverbank with your trusty casting rod hoping to land a big one. Investing my way is more akin to fishing inside a rain barrel with an AK -4 7.  Can you picture the difference here?  Obviously, being able to more or less predict your profits is a big part of that huge difference I mentioned above.  Naturally, to invest the way I’m suggesting, you must begin the task by learning the right skills in order to become a pure real estate investor.

On a more positive note, nearly everyone has an equal opportunity to succeed with my kind of investing.  Background and education have very little to do with “making it”!  High school dropouts and Harvard law students are pretty much equal starting out!  The reason for this is because a great deal of your investment education will come from on-the-job training.  Obviously, you’ll need what I call, “book learning” or formal training, as in seminars to help you learn the how-to skills - and where to start.  But by far your greatest educational advances will come from putting your book knowledge and classroom training into actual practice. Your on-the-job training or street education will shore up your confidence and provide proof positive that you’ve finally arrived!  There’s no greater thrill for any real estate investor than to create a good deal- and watch it work!

As you read about my dollar numbers and the formulas in my books and courses, keep in mind that it’s the relationship or percentages that are most important!  The dollar numbers, and mortgage interest rates are always changing, but my techniques and strategies will always stay the same.  They’ve already worked for 100 years or so - and I’ll guarantee you, they’ll keep working for another hundred if you need that much time.

Speaking of time, I have always been a stickler for quicker payment of my time - as in, how long before I’m gonna be rich?  That’s a fair question, I believe.  Call me a bit selfish if you wish - but I don’t get much satisfaction from scrimping and saving today, during my present life - working on some marginal plan that might make me rich long after I’m dead and gone! Obviously, age is always a factor, but my investment strategies are geared so most folks can see a pot of gold at the end of the rainbow much quicker!

Being rich can mean different things to different people! Some might say — If my income were suddenly doubled, I’d be rich - or, if I had $100,000 in the bank, I’d consider that rich!  Others might argue that a big fancy car and an oversized home would fit their idea of rich.  Obviously, no single answer is likely to fit everyone, so allow me to toss in my two bits and we’ll expand the definition!

I consider the first step to rich as having all the monthly income you need - with perhaps a little left over.  There’s no need to worry about spending all you’ve got because there’s a brand new truckload coming in next month!  Rich, wealthy or whatever you choose to call it is about having all the money you need without running out!  Many so-called equity investors can’t pass this first step; although some are quick to point out- they’re millionaires on paper!  Try using this logic in the checkout line at Safeway sometime!  You’ll quickly find out that cash in your purse trumps paper millionaires every single time.

At my FIXER CAMPS, I teach investors how to begin earning cash flow as quickly as possible!  Keep in mind, most wantabee investors who seek my help, are not rich or anywhere close!  Mostly, they have average paying jobs, but they’re totally committed to rising above their current financial circumstances.  They also have the wisdom to know that acquiring appreciating real estate is a proven pathway to financial independence! What they don’t know is what kind of properties they need to reach the promise land.    98% of all the available real estate for sale will not generate one thin dime of cash flow with 30%  down!  Obviously, you need to learn about the 02% that will.

Building net worth is an important part of my wealth building formula, but it’s the cash flow that gives you time to build it. Many brand new, “starry eyed” investors learn this lesson the hard way. They immediately rush out and acquire houses without regard for cash flow!

Instantly, they are saddled down with over burdensome mortgage payments, maintenance and repair expenses and very often, tenants who tear up their properties faster than they can fix ‘em.  No tax shelter in the world can save you from this mess!  As always, investors must pay the price for jumping in before they fully understand where to jump!  As of this writing, Safeway is still insisting that shoppers pay for groceries with cash. Equity shoppers will be ushered out the door with an empty shopping bag and a courteous reminder - not to come back without money!

Cheap houses in a bunch (like bananas) and small rundown apartment units offer the best ray of hope for Mom & Pop investors in their search for cash now investments.  This is what I teach at my FIXER CAMPS and this strategy has made many students wealthy and financially independent. Many have built sizeable retirement incomes that won’t dry up before they do.  My investment techniques are very do-able for average working folks!  First of all, we’ll build a solid cash now foundation so we never have to retreat!  Every now and then, someone asks me — Will your teaching make me like Donald Trump?  They answer is no, it will not.  I can however teach you ways to invest that will make you financially secure for your remaining days on the planet - assuming of course, you’re ready to do your part!

My FIXER CAMPS will open your eyes to brand new opportunities when it comes to the right kind of properties, how and where to find them and of course, how much you should pay to acquire them!  Investing for cash flow works anytime, almost anywhere, regardless of the economy and the up and down real estate cycles.  You’ll also learn many different ways to generate income from your properties besides collecting rents - or profits from sales!  Real wealth comes from keeping your name on the deed and harvesting the profits until you no longer need the money!

Tags: Long Term Investing vs. Speculating by FixerJay
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More than three centuries ago, Sir Francis Bacon wrote an essay, “Of Negotiating”, in which he advised: “It is generally better to deal by mediation of a third than by man’s self. Use bold men for expostulation, fair-spoken men for persuasion, crafty men for inquiry and observation, forward and obscure men for business that doth not well bear out itself — In all negotiations of difficulty, a man may not look to sow and reap at once. ”

BACONS WORDS HAVE NOT LOST VALUE

Negotiating to purchase real estate can be a downright intimidating experience for the weak-hearted, worse yet; the results can end up a total disaster with both parties wondering exactly what went wrong! What mostly goes wrong is that emotions get in the way. Pride of ownership becomes an issue and personalities will often clash, making it nearly impossible for either side to remain objective. For these reasons, a good third party real estate agent, who is knowledgeable about the deal, is worth his weight in gold-or in my particular situation, with agent Fred — “A reasonable commission”.

It took me nearly four years to train Fred how to gather the kind of information I need for my line of work. My line of work, of course, is real estate investing for profits. That’s a lot different than merely investing in real estate! That’s what many naive investors do, and unfortunately they acquire properties all right, but what they’re missing is profits. Let me say this before I move on — Fred is an excellent real estate agent. He has many outstanding achievements to his credit, but the simple truth is, I need Fred to be my detective as much as my real estate agent. That’s where my four years teaching Fred about my special requirements has paid big dividends for me. It’s also meant more commission checks for Fred.

SPECIAL TECHNIQUES HELP ACHIEVE CASH FLOW DEALS

An agent provides a middleman “buffer” between the buyer and seller. This is a valuable service to me or any real estate investor who owns multiple properties already. “Mom and Pop” real estate owners (the kind I buy most properties from) often feel intimidated  negotiating with me one-an-one. They seem to feel that because I own so many properties and am successful, they’ll automatically end up on the short end of the stick! It’s a perception that’s hard to eliminate regardless of whether it’s true or not. Fred can generally dispel this problem for me in his capacity as a neutral third party.  Sellers often – often feel that a licensed person will be more sensitive to their needs, as opposed to direct, face-to-face negotiating with a “ring-savvy” buyer.

Fred’s job is to qualify the property.  Is the seller in any sort of financial trouble?  Does he live out of town?  Are they managed for him?  Are the tenants causing the owner problems?  Fred tries to determine if there are reasons for the seller to be motivated — Retirement, going broke, dying, etc.  This is what Fred finds out.  It’s detective work like Colombo does on TV.

TRAINING YOUR PERSONAL AGENT PAYS OFF

A good agent will do “weeding out” for you automatically once he or she becomes accustomed to what you really want. Fred always brings me everything I need for making an educated evaluation on each deal. The information provided is normally A PROPERTY PROFILE, copies of EXISTING PROMISSORY NOTES and either a filled out INCOME PROPERTY ANALYSIS FORM (the kind in my fixer house book), at least the necessary data to fill one out.  He verifies rents, vacancies and liens.  This is valuable “time saving” work for an investor, yet it’s needed before any intelligent buying decision can be made.  All this stuff takes
time and it costs Fred money.  The only way he gets paid back is if I buy the property.

Fred doesn’t make a lot of dry runs.  He knows what I want and determines quickly if a property has the right stuff.  How did Fred get so smart?  How did he ever learn this detective business anyway?  When Fred and I started, we spent a lot of time discussing what I wanted! Investors must be very clear about which properties they will buy when one comes along; otherwise agents will attempt to show them everything.
Agents won’t hang around you if you’re just a LOOKY-LOO.  That’s a person who wants to see everything but nothing ever seems to meet his approval.  ”No agent worth his salt can afford that nonsense!  Fred works for me for one simple reason — It’s profitable!

He knows I can close fast if he does his job. Fred’s job is to know exactly what I will buy.  He don’t call me about every property for sale in my town.  A good agent will immediately qualify the property to determine if it has potential.  Fred knows I don’t normally want deals where new bank financing is required.  He also knows I want sellers who will carry paper and that I rank small “leper-type” properties, like 4 to 6 houses on a single lot or a bunch of ugly rundown duplexes at the top of my buying list. When he hears about these kinds of properties, he acts quickly!

DON’T FIDDLE WITH SELLERS WHO CAN’T OFFER YOU A GOOD DEAL

Fred often interviews sellers who have over-financed their- real estate by paying too much in the first place or by adding additional loans during their ownership.  Regardless of the reason, it doesn’t matter much because these sellers are not in a position to make us a very good deal! The only way they could, would be to pay down the existing debt or to
pay me money to take their property!  Obviously, these are not very attractive options for most sellers.  The simple truth is, when too much money is already owed on a property, it can seldom be a good deal for me. Fred has learned from me not to waste his time, fiddling with deals that don’t show us a clear plan for making reasonable profits!

Properties that have been owned by the seller for a substantial period of time, 10-20 years or more, will offer you far greater opportunities for negotiating the selling price downward.  The reason for this is because the existing mortgage debt has most likely been paid down over the years.  It’s always to your advantage to negotiate a purchase price when only the seller’s equity is at stake!

INVESTIGATION STARTS YOU ON THE RIGHT FOOT

The very first thing we do when either of us hears about a property that becomes available, assuming I’m interested, is to begin what I call “detective work”!  Fred usually gets to perform this task, remember it took him 4 years with my coaching before he became snoopy (skilled) enough to suit my taste!  Brokers and sales agents typically don’t do the exhaustive research or “snooping around”, like I insist must be done.
The biggest difference between Fred and most other agents is that they accept the word of sellers as being mostly true!  I convinced Fred to accept it as being mostly exaggerated and generally untrue!  It’s never considered true until it’s proven to me.  I’m not trying to be overly critical here, but you must never forget this important fact of investment
life.
ONCE THE ESCROW CLOSES AND EVERYBODY GETS PAID, IT’S YOU, ALONE, BY YOURSELF, WHO MUST LIVE WITH THE DEAL YOU SIGNED!  IF SOMEHOW YOU’VE FAILED TO UNCOVER THE TRUE PROPERTY EXPENSES AND IT TURNS OUT THEY’RE CONSIDERABLY HIGHER THAN YOU WERE LED TO BELIEVE, GUESS WHAT?  IT’S YOU ALONE WHO IS NOW THE STUCKEE!

That’s the reason I taught my agent to become a very snoopy house detective shortly after we met.

PERFORMING THE UNDERCOVER DETECTIVE WORK

The first thing we (Fred or myself) do is visit the local title company, where we do most of our business.  We request a parcel map, the tax roll and copies of all the deeds or mortgages recorded on the property.  Many title companies provide this service free for their repeat customers and to real estate agents.  Some folks refer to this information as a PROPERTY PROFILE.  It’s the best way to start your file on any property you have an interest in owning because these few documents will provide you with the following information:

A. A parcel map gives you lot size and often shows easements and right of-ways.

B. The tax roll shows who owns the property and where the current tax bill is being mailed each year. It will also show you how much the taxes are now and how much value the county assessor has appraised the land, improvements (buildings) and personal property for (dollar amounts).

C. Additionally, with the parcel map and tax roll you can also find out who owns the properties around the parcel you’re investigating.

D. Copies of trust deeds or mortgages will show the amount of debt against the property at the time of the last sale or transfer of title. It also shows who owes the debt (trustor) and who receives it (beneficiary).  For trust deed states, the due-on-sale clauses normally show up on trust deeds also. Obviously deeds or mortgages show the chain of title with recording dates and notarized signatures.

E. The documentary transfer tax, which is a state tax on the sale of real property and is based on selling price or equity transferred.
is generally stamped on the grant deed.  The current California tax is $1.10 per $1000 of property transferred.  When you have a copy of the grant deed, you can easily determine what the current owner paid for the property.  For example, if the documentary tax is $55.00, computed on the full value, then the purchase price would be $50,000 ($55.00. $1.10 = $50,000).  Sometimes knowing what the owner paid can help you develop your offer to purchase.  Seller’s dislike offers for less than what they paid, no matter how motivated they are.  Always keep this in mind when negotiating your deals.

Motivated sellers are not generally “stupid idiots” like many “fly-by-night” seminar leaders might lead you to believe.  Mostly they’re just people who have gotten themselves in a financial bind.  Also, high on the list of motivated sellers are folks who for whatever reason,  are lousy landlords.  Their tenants are driving them “bonkers“. I’ve purchased, several properties from sellers who were actually afraid to drive me to their property for a showing.  Their own renters frightened them! Having this kind of information is extremely helpful to me when I’m negotiating a purchase price.

HOW TO FIND AN AGENT THAT’S RIGHT FOR YOU

The best way to begin your search for Mr. or Mrs. Right is to visit the local real estate offices in the area where you plan to invest.  Ask the receptionist if she knows which agent sells the most apartment buildings or income properties.  Get yourself introduced and tell the agent exactly what you’re trying to accomplish.  The interview will be your opportunity to learn what the agent thinks he can do for you!  But remember, he must know exactly what you want done in order to respond in a meaningful way.

Just like a budding romance, the first thing that has to work is chemistry! It will do you no good in the long run to force yourself into working with an agent who disgusts you no matter how good you think he or she may be. Obnoxious agents are best left to service obnoxious house buyers since there’s no shortage or either one out there! I mention this because it’s very important to develop a relationship that can last a long time. Lasting together much easier when you like each other.  I’ve had just two
agents in the last thirty years.  The first one passed away.

Real estate agents are the EYES and EARS of the real estate business! 96% of all sales and trades involve licensed sales persons and their brokers. It would be very foolish indeed to harbor any serious notions about excluding them from your investment plans. The best thing you can do for yourself is to diligently begin searching for a good one.

Tags: Negotiating With Sellers by FixerJay
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Every time I start talking about making profits at my seminars - someone always reminds me that all one needs to do is buy properties wholesale and sell them at retail!  You can’t help but admire the genius behind such advice, but I often wonder — Doesn’t the asker realize that’s what we’re all trying to do!

The big problem is — Buying low and selling high is not all that easy to do. In fact, it takes some real sound profit engineering to develop a money-making strategy.  A good plan must have several common ingredients, such as PROPER TIMING, EQUITY CREATION, GOOD FINANCING and a REASONABLE METHOD TO EXTRACT THE PROFITS.  None of these can be left to chance if you intend to make any serious money investing in real estate.

Every once in awhile-even dummies make money in real estate!  But take my advice don’t give up your day job thinking it happens to often, because it don’t!  A far  more realistic approach is to learn exactly how and why real estate profits are made to begin with.  If you will do this, you’ll, be in a position to make money in good times and bad tines alike.  Also, you won’t need to depend on inflation to make your profit.  Inflation earnings should be a bonus for investing wisely.

NO CASH DOWN OFTEN TRANSLATES TO NO PROFITS

Many neophyte investors have made the mistake of buying marked-up houses for no money down.  They automatically assumed they could earn a profit because no cash was invested!  With high mortgage payments and short-term balloon notes, their dreams of becoming rich tycoons quickly turned to nightmares instead.  The “free lunch strategy” may work well for selling slick-covered books on cable TV, but in the real
world — You won’t buy much value for nothing!

The important thing to remember is you can purchase properties with dollars or pay with your personal skills - But you must always pay!  When you are negotiating to buy a property, stop and think about the deal as if you were the seller.  Would you sell your real estate for nothing down if you thought someone would pay a normal down payment?  I don’t think I need to ask what your answer is — And, neither would I.   In most cases, acquiring properties for no money down means you’re paying too much to start with!  That’s the wrong way to make profits in this business.

BUYING HOUSES FOR CASH IMPOSSIBLE FOR MOST INVESTORS

Buying for cash is one way you can get big discounts, especially in a buyer’s market.  With good knowledge about your buying area, it’s not too difficult to purchase $100,000 houses for $80-85,000 cash! Every time you do it,  you’ll make $15-20,000 at closing!  Five or six deals a year will earn you $100,000 profits — Plus $4,000 worth of monthly income! With cash flow and tax savings, you’ll likely earn 15-20% annually.  And,
with appreciation, it’s even higher! It’s a good sound plan. It’s safe and offers excellent earnings to investors who have the cash.

If you’re not quite ready to pay cash just yet, then it’s absolutely necessary that you learn an alternate strategy for profit making.  I call mine “The Poor Investor’s Plan For Profits”. It utilizes each one of the ingredients I mentioned earlier. It’s also a bit more complicated than buying for cash.  But, if you do it right, you’ll end up just as wealthy as the investors who had money to start!

RENTAL HOUSES PAY THE GROCERY BILLS

Before I discuss the common ingredients, let me just say that one of the biggest reasons I’ve kept my flock of rental houses over the years is because they provide me a guaranteed income!  Having a reliable income allows me time to market my properties without being under the gun. There’s a tremendous disadvantage having to sell when you need the money to live on.

Waiting for Mr. Right can often be worth 20 to 40% more when you’re negotiating with a full stomach! Therefore, it’s always my standing advice — Buy a few good rental properties to start with.  Get a monthly income established so you never look hungry when you’re selling.  Buyers can always smell a starving seller a mile away.

EQUITY CREATION

When you purchase average properties in average condition, you can expect to pay average price and terms.  Equity creation or build-up is somewhat difficult when all things are average.  Equity build-up comes from two sources.  The first is very insignificant.  It’s the principal portion of each mortgage payment, which adds to equity in the property with each monthly payment.

The second kind is what I do.  It’s called ADDING VALUE.  It comes from fixing up a property or straightening out people problems by initiating better management.  This kind of equity is forced equity.  The owner makes it happen.

One of the best ways to create equity is to improve the financial performance (raising rents) of a property!  For example: If I’m able to fix up a rundown property and increase rents from $20,000 annually to $30,000, that’s FORCED EQUITY CREATION.  If the property is worth 8 times the gross rents, I’ve increased the value from $160,000 to $240,000.  That’s an $80,000 equity addition.  It has nothing to do with normal appreciation.  It was forced to increase by my fix-up work.  If the building appreciates 05% next year, that will add $12,000 equity to the $80,000 I’ve created.

Almost anyone with reasonable amount of knowledge can buy decent “middle class” tract houses for a little bit less than what they appraise for! The biggest problem is buying them cheap enough so that you’ll be able to sell or rent them for a profit.  If you pay 10% less than the asking price for a $85,000 house and you can only rent the place for $100 more than the mortgage payment, you’ll quickly run out of down payments — And, your investment plan will soon be stuck in the mud!

Selling for a profit anytime soon is not very likely because you’re basically playing the inflation game!  About the only way you could extract any profits is to wait until the property goes up in value — Or, keep making payments till the mortgage is paid down!  Either way, it’s not a very exciting plan, even if the house is a good sound investment.  It’s something like kissing your sister.  It’s okay, but it’s difficult to stay interested very long.

GOOD FINANCING

Unless you’re a cash buyer - good financing is absolutely essential to earning big profits.  If you can’t offer decent financing when you decide to sell - you’ll end up making concessions to the buyer, which will greatly reduce your potential profits.

What I do and recommend for you is to mentally sell your property at the same time you are negotiating to buy it!  In other words, think ahead to when and how you plan to market the property someday.  Specifically the kind of financing you’ll be able to offer to your buyer in the future.
If you agree to mortgages that can’t be assumed (due-on-sale clauses), you’ll restrict any future sales to a buyer who must qualify for new financing!  If you agree to short-term notes or mortgages, most buyers will balk at assuming them.  High mortgage payment are also restrictive because buyers are concerned about cash flow.

The best kind of financing you can have when it comes to making a future sale is a long-term (20-30 years) seller carry back mortgage without a due-on-sale provision.  Also, payments that are 50% or less of the current rental income along with a modest interest rate.  This type of mortgage can easily be wrapped (wrap-around) by a new all-inclusive mortgage allowing the seller to earn extra profits on the interest spread and, also avoid big income taxes from the sale by using installment reporting.

A METHOD FOR EXTRACTING THE PROFITS

Many investors buy houses without the slightest idea about how they’ll make a profit!  Others buy real estate and more or less figure that when it’s time to sell, profits will somehow; automatically be there for them. Investing in this fashion is an easy way to fail. Its too much speculation or guessing rather than investing.

When you have limited funds, like 95% of all my subscribers - you must make a thorough analysis or projection of future profits before you close escrow on every purchase!  You need to understand exactly how each investment will pay you back for owning it.  One method is to explain it thoroughly to an un-sympathetic spouse who would rather use the down payment for a trip to Disneyland.  If you can pass this test, chances are you’ve already given considerable thought to the deal — Which is exactly my point here!

My method is a very simple one, which has served me well for a good many years.  My tools consist of a yellow legal pad and a couple of pencils! I sketch out, sort of a credit-debit schematic or cash flow chart showing all the dollars I expect to spend in each year of my ownership.  I also estimate my income or profits for every year.  These income figures represent all the monies I expect the property to pay me for my period of ownership!

Lastly, I estimate my future selling price and develop a realistic plan for making the sale.  By going through this exercise, I’m forced to take a hard look at the various factors that contribute to a profitable investment — And of course, that’s the main purpose of the exercise!  Take it from me, if you can’t show someone on paper how you intend to make your profits - chances are - you won’t!

Tags: The Joy of Cash Flow Investing by FixerJay
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 About once a month or so I get the opportunity, to go out and visit one of my investor students (subscribers to my one-an-one counseling service). Most students tell me they find my visits extremely helpful and beneficial to them! It’s probably because they have a chance to show me what they’re doing on their hometown turf! Others are looking for a little extra push from me, I’m sure — And some simply want my opinion on a particular property before they sign the deal.

I know people tired of my saying this, but I feel it’s worth repeating just as many times as it takes! THERE IS NO VALID REASON TO BE IN THE REAL ESTATE INVESTING BUSINESS IF YOU DON’T MAKE A PROFIT! Losing money is not fun, and it’s especially a bitter pill to swallow when you do it five or six years before realizing you are. By the way, this is quite common in case you’re wondering if it really happens! When you jockey tenants around for some time and then suddenly discover one day it’s actually costing you money every month, you’re not going to be a happy camper either.

Okay, okay I agree with you Jay — But- is there supposed to be some special message here? The answer my friends is yes - yes there is, so we’ll cut to the chase and get on with stuff that really counts.

BUYING WHOLESALE - SELLING RETAIL

Buying older rundown houses cheap, then fixing them up for a profit has been an excellent moneymaking, low risk investment plan for many years now and it remains the same way today. Obviously, we’re not blazing any new trails here! And thankfully, it doesn’t take a math major from Stanford to get it right — Believe it or not; it doesn’t even require a computer, not even a cheap one! What is required is plain old common horse sense. Horse sense says, you mustn’t spend more than a reasonable retail marketplace can pay you for your finished product or service! This means with rundown houses, you must not spend your fix-up budget for things that don’t pay you back in a reasonable period of time. See how easy this stuff is! Don’t agree with me - it’s really not, but it can be done by almost anyone who learns what to do. The key here is, do exactly what the marketplace requires and spend only what your customers (tenants or buyers) are willing to pay for.

All fix-up work should pass some financial scrutiny! Does it really need doing? I believe most improvements should be justified on the basis of paying for themselves I expect the payments to come from higher rents or bigger profits as my reward for doing the work. Fixing or changing things around purely, on the basis of personal likes and dislikes will seldom provide a justifiable “mark-up” (profits). Those kind should be avoided. This happens to investors who quickly charge forward without a plan. It also happens to folks who fall in love with investment property I advise you — Be very careful and avoid these two common pitfalls. Remember, fixing up dumpy-dirty houses is not glamorous work. But, if you do it right, you can double your money faster than anything else I know of.

FIX-UP SIZZLE OFFERS THE BIGGEST PROFITS

Let me take a moment to say that all rundown properties must be brought up to basic minimum building code standards before you can expect them to generate income. That’s a must rule for all investment properties.

 When I talk about fixing for dollars, I’m primarily referring to what I call, “SIZZLE ITEMS”. Things like white picket fences, fresh paint, window coverings, ceiling fans, wallpaper, new plastic countertops (Formica), attractive floor coverings, planters, shower curtains, decorative porches or entrance doors, trees & shrubs, green lawns, modern toilets and new plastic shower enclosures.

The reason I call these SIZZLE ITEMS is because they are attractive and eye appealing, as well as useful. SIZZLE ITEMS seldom have anything to do with code problems. For example, an old dingy carpet will pass a code inspection; same, as bright new carpet will! Trees and shrubs have nothing to do with codes or safety and neither does curtains or ceiling fans. What these items have is lots of customer appeal. This appeal translates into more dollars at the box office, aka (my rental office). The very same appeal makes selling properties much more profitable because they look much better.

RENOVATORS - REMODELERS - THERE’S LIGHT YEARS OF DIFFERENCE

I discovered years ago, there’s no inexpensive method to turn older houses into new homes. Many armature fixers try to accomplish this task only to find their bank account disappears faster than the house changes. Herein lies the most important difference between what I do and what remodelers and renovators to. Believe me, it’s a very expensive difference too!

Often remodelers will replace entire plumbing systems with all new piping; sometimes they have the entire house rewired. They tear out old flooring and replace floor joists and girders. They replace wood windows with new metal frame styles. Some will even jack a house up to level it. That means they must also fix all the cracks and often redo the stucco exterior. Don’t do fix-up this way. Unless money is not the object –You’ll lose your shirt if you do.

Since older houses are not the same as newer ones, don’t try to make them so. Instead, try to capitalize on the marketable features not found in the modern-day construction. Older houses quite often radiate charm — A homey feeling! High ceilings, woodwork, large porches, yard space, old windows (dressed up), evaporative cooling with separate heating, storage sheds and separate garages and more often than not, mature shrubs and trees. All these items can add to the charm of older buildings. Add a freshly painted white picket fence after everything else is cleaned and “spruced up” — You’ll have lots of customers — Renters or buyers, depending on your investment plan.

THE WOMEN’S INTUITION SHOWS UP

Fixing houses is also a very equal opportunity business! The job is not the least bit gender sensitive, with perhaps one small exception. I think women understand living space better than most guys I’m acquainted with, for example, cupboards and closets, cabinet space and electrical outlets in the bathroom my male fix-up crew often ignores or overlooks the importance of these items. Later they are called to my attention when a female renter calls to complain about only one cabinet or not enough electrical outlets for all her bathroom goodies! Women seem to have a natural instinct when house remodeling is involved and I suspect this comes from their homemaking abilities. I have caught my fix-up crew building a bedroom closet just large enough for 3 wire hangers. Women fixers seem to know better than that.

 Since almost every problem can be patched up, repaired or replaced by skilled mechanics, it becomes necessary to further qualify fix-up work in terms of the economics, “How much will it cost?” This information will help you decide how much work is too much — And
when it’s best to simply pass over the deal and move along to the next one. The fix-up investor must be concerned with fixing for profits. Not just fixing! This is a very important concept. One you must never forget! The two worst mistakes for beginning fix-up investors are OVER-FIXING and FIXING THE WRONG THINGS.

THE BIG MONEY COMES FROM UNDERSTANDING ECONOMICS

In order to determine what to fix, you must first answer two simple financial questions. First, what will it cost to complete the items you propose to fix or repair? Second, what will the fix-up value be after the work is completed? Cost and value knowledge is critical whether you intend to keep the property for rental income or sell it quick for turn -around profits.

For example, let’s say you purchase a fix-up property for $65,000. Assume the property will have a market value of $89,000 immediately after your fix-up. You can easily see’ that fix-up costs, vacancies, operating expenses and selling costs cannot exceed $24,000 or you’ll lose money on the deal. Again, let me repeat — The same economics apply whether you plan to sell or keep for rental income. $24,000 equals 27% under the market value and that might not be enough! Your job is to know before you sign the deal.

CHANGING LOOKS IS ALWAYS THE FIRST PLACE TO START

It’s not by accident that I always begin my fix-up projects in the front yard. I’ve seen professional appraisers value identical houses as much as $20,000 difference because of plain old filth and junk on one property. In other words, a clean house is worth $20,000 more simply because the owner hauls away the trash and keeps the house looking nice. Think about that for a minute! That’s an awful lot of money for ordinary clean-up skills. Suppose it takes a whole week (40 hours) to haul away garbage and clean up a property — That’s $500 an hour, or nearly as much as a brain surgeon makes on his coffee break!

I haven’t mentioned location here because that’s another entire discussion. However, let me just say this. Don’t buy property near the Beirut Airport or in locations where you’ll need a Bradley armored vehicle to drive through the neighborhood. It’s not that you can’t make money in a combat zone! Because you can! The reason is this — Houses like I’m recommending are not scarce in decent areas once you develop your “star search” network. Bad areas are simply not worth all the hassle. Save your energy for painting and my foo-foo techniques.

 Before you purchase your next fixer property, spend some time on the property by yourself with your, pen and legal pad in hand. I want you to list everything you think requires fix-up or repair. Don’t rush! If several units are involved, write up each one separately. Later, we’ll add cost $ numbers. This is time very well spent because now you are developing a job cost, as well as formulating a reasonable plan of attack. At least 95% of all so-called house fixer investors don’t do this simple act. When you follow my advice, you will only represent 05%, but you’ll be in the profitable group!

 

Tags: Fixing For Money by FixerJay
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