Have you ever gotten an appraisal that doesn’t match up with our estimates or your thoughts? Happens often. I was recently in Las Vegas with my wife and I had an epiphony. My real estate is actually up 20%, while the market is down. Radio show #3 from last Saturday was dedicated to this topic. While reading Kiyosaki’s Financial IQ I came to a realization. If you increase your rents, your values increase as well. In a nutshell, higher rents = higher values. Do sold comparable units even matter when you’re renting the home as opposed to selling?

The problem with many appraisers is that they base their valuation on 1 factor alone. An accurate appraisal considers all 3 of the valuation methods. The most commonly utilized valuation method is the sold comparable method. We are all pretty familiar with this method. A comparable is a similar home (same size, beds, baths, etc.) within 1 mile that has sold within the last year. As appraisals are largely a professional opinion of value, the standards change quite often based on the direction of the lenders. We’ve seen the time limit change from the last 12 months to the last 6 months. Some banks require a 3 month window, it could be 3 days at some point. This criteria is really not that pertinant however, when I consider my portfolio of properties. Why? I’m not selling. I’m renting.

The Income Approach is a far more accurate approach for the valuation of my portfolio. The reason? I rent my homes, I don’t sell them. There is no point to value the potential sale of a home while I’m getting $1,200/mo. in rent. In fact, my average rents in 2005 were around $1,000, whereas today they are over $1,200. So, while the comparable home sales in the neighborhood are down 5 or 10%, my rents are up 20%. The true value of my program is the derived rent, NOT the comparables. More Rent = More Value.

The final method is the Replacement Cost Approach. You would be very hard pressed to find someone who could rebuild these homes for you under $100 - $150 per square foot. If we took an average unit that I sell (let’s assume a 1000 sqare foot ranch) at just $125 per square foot, we’d be looking at $125,000 to replace the home. In addition, we need to consider the value of the land as well. I recently sold a lot in Sycamore for $35,000. The averge home of 1000 sqare feet with a decent sized lot could likely carry a value of $160,000, as the lot has value and the replacement costs could be $125,000. There were 2 competing bids for the lot and it sold within weeks of the listing. The average postage stamp lot likely carries some value despite the fact there the might not be sold comps to justify the value. Again, comps do not tell the whole story. Land and these structures derive intrinsic value from rents and the costs to replace.

The next time you have an issue with an appraisal, refer them to this blog post and the sold comparables that we’ve sent out with the email. In addition, you may want to ask them what the value was based on the Income Approach. If they don’t know what you’re talking about, fire your appraiser or find a second opinion. I had an appraisal come back very low based solely on comparables. The second appraiser I used factored in the Income Approach and the second appraisal came in $70,000 higher. The same house, $70,000 difference. Another example of an appraisal issue was the home I rehabbed in Naperville last year. The home sold in 2004 for $310,000 and I was able to pick it up at $195,000. Despite this fact, the original appraiser made so many negative comments on the home that the bank pulled the financing. Mind you, this was not the home inspector, this was the appriaser. Their job was to estimate value, not comment or provide the bank with a home inspection. Needless to say I was angry. I went on to work with another bank and another appraiser. The value came in fine and the project worked out just as I planned. The home sold for $425,000 with 17 days on market to a realtor. Even before the construction process started, the appraisal came in at $375,000 "as completed", which I thought was low.

This second opinion of value saved the deal and kept a great project together. Just like seeing a doctor for a second opinion can save your life, this process saved the deal. Get a second opinion if you ever have an appraiser give you a low ball value. An appraiser’s job is to understand and provide value, not to provide a home inspeciton or to be the price police. If they haven’t provided you with an value based on the income of the property, you almost certainly need a second opinion.

Here’s a good example of a day in the life of our office. I just saw Bruce going through our current bid list as he does every week, and I got a kick out of his desk. He had a stack of files that was ridiculous. I snapped this photo and had to share it with my investors. It’s amazing that this company has grown to the level that it has.  I’d like to thank all of my clients and staff for this amazing growth. Just a few years ago I would bid on 3 homes at a time, as you can see now that number has increased exponentially. The amount of work that goes into acquiring hundreds of great homes involves an incredible amount of time, cost and people. We currently have the buying power to bid on just about anything we like. Our increased line of credit and cash resources allow us to go out each month and bid aggressively on dozens of homes. The 10 - 20 homes a month we win become available to
you, our clients. We will be hosting a seminar prior to our annual post holiday party. Keep an eye out for details.
We will be providing information on wholesaling and other topics you won’t want to miss.

A day in the life of our office. All files are real bids on foreclosed homes.

The Truth About Bailouts:

As a staunch supporter of free markets, the thought of a bailout makes me nervous. Many smart people made smart bets and didn’t over leverage themselves. So why should we be liable for others, who went nuts and borrowed themselves into the ground. This, of course, is a tragedy for some and an incredible opportunity for others. While your retail purchases, perhaps your primary residence, may have taken a 10 – 15% dip in value, chances are your foreclosure purchases are still excellent sources of wealth, with ample equity. Those of us who purchased homes 50 – 70 cents on the dollar are still in a great position. The flooded rental market has likely also helped you with better quality and higher paying tenants. In short, most savvy investors are still in great shape. So what will the bailout do for (to) us?

In the short term, a bailout represents more liquidity for financial markets. For those of you who’ve recently been told that you no longer qualify for credit, this is a direct reflection of tightening credit markets. Banks are being extremely cautious. They are increasing their debt service coverage ratios, they are increasing their vacancy factors in their analysis of you, all the while, they are lowering LTV’s. All this leads to less available credit for investors, which is a mess and it does affect our business. It affects my investors and it’s obviously not optimal for any real estate finance. In the face of this, I have requested and received an increase in my line of credit of $600,000, which now totals $1.6M. This will allow me to fund additional deals for investors who may qualify for end financing, however without a lease in place, they fall short of a commercial approval. This comes at a personal cost to me and my business, but was a necessary move. In addition, the new Fannie/Freddie guidelines have limited investors to 4 properties from 10. This is a huge decrease. Those of you who have 4 homes or more, will no longer be cashing out in the secondary market. I fall into this category as well. With close scrutiny of the markets and constant communication with banks, we foresaw this. We were able to increase my line of credit and move to an 80% "as completed" commercial loan product in order to limit the need for cash out refinances. This product is UNLIMITED in terms of the number of projects you can buy, as long as you qualify based on credit, cash flow and income.

Both of these solutions became available with incredible timing. You may be thinking that I love this bailout, as it will likely loosen the purse strings with the banks and credit will be more readily available. In one sense I do, as my investors will get reasonable credit again. There is however a down side to this. The $700 Billion comes from us, the taxpayer. While I’m for (and in need of) increased liquidity, I’m fundamentally and incredibly opposed to taxation. Taxation can cripple the economy further and bring us from a limp to a crawl. We need tax relief, not increased taxation. A tax on large corporations will undoubtedly hit you, me and everyone else in the country. There is no tax that does not take money out of private hands and into the government. Government can call it what they want but taxing anyone, even the oil companies, will hurt us. The thought that these companies take the hit without passing it on to us is sophomoric. In addition, the terms of the bailout are vague, to say the least. We need much more control over what these funds are used for and how they are used.

Newt Gingrich was on Fox and basically trashed the structure of the bailout. I tend to agree with what Newt says, as he’s both pragmatic and bright. Neal Covuto was on the same program and mentioned 2 times where bailouts have been profitable for tax payers in previous crisis situations. I see where this could be a long term win for the taxpayer if the government were to structure and manage this bailout properly. There, my friends, is the problem. Ever been to the DMV? How about the post office? Government couldn’t successfully work a toaster, let alone a $700 Billion dollar bailout. Let’s face it, this is a tough one.

Do we let the economy fall apart, or do we quickly solve the crisis with a huge bailout? I believe that the laissez faire approach is the best, however we live in a big government world, so chances are, libertarian ideals are never going to come to fruition, although I respect and agree with their passion for a free market. Something is needed for sure. I could argue that bad businesses deserve to die (ala the George W. national address), but if their death starts to carry over into your world, you may be torn as I am. I am not thrilled with the concept of a bailout, but I need it for some of my clients. The sad thing however, is that when government is in charge you can be sure that there will be a down side. The free market approach, in this situation, could ultimately lead to a bank run and mass panic. There’s just something that stinks about the urgency of this bill and how they plan to solve this in a weekend. The element that stinks to me is that the Fed (owner, printer and controller of the money supply) will have increased power over us. That’s just plain scary, especially if you believe the Fed was a huge contributing factor in this by jacking up rates 16 sessions in a row. Can you say overkill?

Right now, I am buying homes that provide tremendous equity and cash flow. Most investors can still get money and they are doing the same, however the denials are stacking up and the bank’s credit criteria is not getting looser. The problem in my opinion, is that the pendulum has swung and it’s swung too far. This is not the immediate fault of the banks. Remember the FDIC insurance tag that you see at your banks? This insurance comes at a cost. The banks are being scrutinized by regulators. Regulators come in and review the loans of the banks. They review concentrations, appraisals, valuations, insurance and many more components. In order to insure your deposits, these banks need make sure the loans that are on the books are not “risky”.  "Risky" loans can lead to default, which leads to less "insurability" of your money. Bad loans, can lead to liquidity issues for banks and ultimately insolvency. Banks become insolvent and your money is gone. These bank runs from the depression era were attributing causes to the formation of the Federal Reserve Bank. The catch of course, is that the Federal Reserve Bank has quite a large amount of control, yet it is not quite a governmental institution. The Fed lends money to the banks, government and ultimately us. Every dollar you have is a borrowed dollar. This is a core reason that I am vigilant with leveraging “appreciating” assets. Remember, houses don’t go up in value, dollars go down. Accumulating cash will NOT solve your problem, however assets that tend to keep up with inflation (houses) can curb the ever deflating dollar and create the stabilization of your financial wealth. If you have stock, you’re down big. If you have cash, you’re down big. If you have homes, you may be down from retail values, but if you buy foreclosures, you’re likely still up big. Your cash flow is likely up big too.

Last weekend I was with some investors who were discussing what amount of cash would allow you to live in this world without actually working. I’m not saying here that you’re yachting or at the country club, but you’re comfortable and eating. Your number can vary quite a bit, but the number I hear often is $3M.

$3,000,000 @ 3.5% in a bank is $105,000. No worries right? Remember, you’re only insured to $100,000.

$3,000,000 @ 5% in bonds is $150,000. Very limited worries right? What about market swings and corporate insolvency? Mortgage back securities were triple a rated, now the only buyer is the government (us).

Invest $3,000,000 in small single family homes, priced at $80,000 each, that rent for $1,200/mo. This would allow you to purchase 37.5 homes. Assume you pay $300/mo in real estate tax and insurance. This will yield you $405,000. Insurance Companies will insure $3M in real estate.

My point was, if you have half a brain and just a little drive, you can create the same returns with half the money. I’ll take bricks & mortar over cash, bonds, crooked ceo’s or the government anytime. I’m not exactly a conspiracy theorist, but it seems odd that the Fed is garnering even more power, with a swift move, in a time of crisis. If the Fed was created to control the money supply, curb inflation and stop crisis, then why are we, in 2008, faced with a such a national and global crisis? It could be that the Fed is overrated. It could be that the Fed overshot by raising rates 16 times in a row. Nobody was more outspoken about rates being artificially high than I was, I had quite a bit of my portfolio floating with Prime. Remember the inverted yield curve? How we got here is important, the liquidity is needed, and we must ensure that politicians are taken to task. I keep hearing that this bailout will cost $7,000 per taxpayer. In the same broadcast, I hear someone else say that it’s possible that the government and taxpayers make money on this deal. After all, 92% of people are current on their mortgage, so why are these mortgage backed securities worthless? The answer, is that something is worth what you can get for it. This reminds me of my dad telling me that the Becket stating my Ryne Sandberg rookie card was worth $49 may not mean I can actually get that price. I was devastated! I bought the card for $7 at a flea market, and to a 9 year old kid, I was loaded and impressed with myself. Baseball cards, homes and mortgage backed securities are all the same, you get what someone is willing to pay. Timing the purchase and sale is often more important than how or even what you buy. The intrinsic value of these securities is supposedly much higher than we’re paying, which I like. I’ve heard several of my friends who are investment bankers say that someone is going to make a lot of money out of this mess. I agree. It’s time to BUY. Ever heard of buy low, sell high? This is what they are talking about. The fact that the government is managing the process, well that’s a gamble.

You may be shocked that my typical comments on the stock market have come a day late. Yesterday’s stock market fiasco was the worst in nearly 7 years…and you thought real estate was bad.  The point, I try so hard to make with investors is that real estate is often more “secure” than your standard 401K and IRA options.  This is counterintuitive to what you may believe and is certainly counterintuitive to what you hear from the media.  When I discussed with my dad early on in my real estate career, my vision was simply to do something I loved, while being profitable.  My original visions of becoming a custom home builder never happened, largely because my dad convinced me that the low end was far safer, which I now believe to be true.  I could never leave the comfort and safety of low end real estate.  If you can’t sell your $1M spec home, chances are you’re stuck.  As a builder, you need to constantly acquire new land and build new homes to make money, while being an investor, you can buy 1 project and make money for a lifetime.  I wanted to create enough wealth to retire extremely young and enjoy life during the process.  While being licensed to sell insurance and mutual funds, I never felt that I could sell the product because I didn’t believe in it.  I did not see anyone getting rich, or even getting a decent return except for the asset managers.  On the contrary, I see many of my real estate investors doing very well.  See, the particulars of our success are extremely fundamental.  Everyone needs a place to sleep.  Does everyone need stock? No.  You can’t rent your stock out and you’ll have a hell of  time using a bank’s money to buy stock, so the beauty of leverage is out for the most part.

The most idealistic investors focus on the flip, but their eye is not on the ball.  My program has been rooted in the HOLD since I started.  If you want to make a quick buck, flipping is a neat concept.  I’ve flipped before, many of you have as well.  That is a great little injection of capital from time to time, however if you’re like me, you’re likely trying to replace your income with rents.  That’s right, the good old fashion landlord routine.  And yes, it involves a little risk and a little work, however the rewards can be incredible.  If you’ve met me before, you’ve probably heard me say that Donald Trump is not a flipper.  He’s an investor.  While I’m not a huge fan of Donny’s, the point helps new investors realize that the old fashioned hold is not all that bad after all.  True investors hold and recapitalize at the right times.  Selling in a down market is nuts, especially when you consider that rents are through the roof and rates remain relatively low.   The market is dictating hold, so I hold. 

The most important component that differentiates real estate from traditional investment strategies that are so ingrained in our psyche, is the fact that there is a plan B.  What started out as my plan B, holding, has now become  my A game.  There is an inverse relationship between values and rents.  Chances are that you’ve owned homes in hot markets and cold markets.  This year is a “cold” market with regard to value, however my rent roll has never been stronger.  Nearly every home I have rents extremely quickly and at peak rents.  The 2005 hype is gone.  Flippers quit, yet investors are buying with both hands.  I’m not overly concerned with a 10% decrease in values.  First of all, I (and my investors) have likely purchase the home for 50 - 70 cents on the dollar, so a 10% hit in value still allows us to have incredible equity positions. It’s important to mention here that my cash flow has exploded.  My rents are 10 - 25% higher in this market than they were in past “good real estate” years.  

The best way I can explain the root safety in my program is with a teeter totter example.  When prices go up, we create equity and have the ability to sell at profits.  When prices fall due to increased rates or credit tightening, our rents go up as demand increases for affordable houseing.  This, of course, allows us to have the opportunity to cash flow.  Provided you stay in the first time home buyer market and stick to the basic fundamentals, you likely won’t get too hurt. In fact, you’re likely to do extremely well by sticking to the basics.  My fundamental teeter totter approach is basic, but it works time and time again. If there were a better way to create this much wealth with this limited effort, I would find it, sell it or invest in it.  I stick with low end real estate for one simple reason, it works.  It works in good economic times and in bad.  It is not an accident that I have (and likely always will) stuck with “first time home buyer” homes. It is an extremely well thought out plan that has proven itself in good and bad markets.

I tell people that question the risk element of real estate, if you’re risky, keep buying stock. The last 10 year has been a good indicator that the risk associated with the stock market is extreme in comparison to real estate.  All the while I’ve been buying little pieces of the American Dream and chipping away at retirement.  It’s closer than you think.  There are no doubt more responsibilities associated with real estate.  Just this last year, I have had a home burn down, and another get hit by a truck.  Both equity positions were lost.  This was a stressful and painful experience, however by staying with my strategy of accumulation (or mass consumption), I have made up the loss in just 1 or 2 new purchases.  Where many folks go wrong, is they stop accumulating. There are times to re capitalize your portfolio.  Sell some (not now) and buy some new projects.  When talking to my very first investor the other day, he mentioned that he had been stagnant for some time and that it was time to get back in.  I expressed how incredible the opportunities are now.  Don’t hesitate.  Managing 10 properties is not much different than 3.  At 20+ you’ll need assistants, management or some sort of help, but I had a full time job and 15 homes at one point.  It’s doable, and I see no viable alternative with this type of return.

I’ve thrown in a clip of a home of mine that burned down.  I lost the equity position which was tens of thousands of dollars.  I wanted to clarify that my tag line of “Expect Maintenance, Expect Issues…” was derived from my own difficulties.  In the same year as this fire, I had a home that was destroyed by a truck that smashed into it.  It’s never fun to lose equity, but the truth is that my insurance kept me from losing everything.  There is no insurance for your mutual funds.  This business has a fair amount of hurdles, but it’s been an incredible wealth builder for me and it can be for you as well, if you’re willing to work at it.  Enjoy!

I recently went through the whole process on a couple of projects and had some incredible success, after the typical bumps. While there are some restrictions and pains in this process, there still remains no other opportunity better than this program, in my opinion.  After 2 months of not hearing back from a lender on a home equity loan, I decided that I needed to investigate some new resources.  I heard the lender cry busy, I left message after message with no response and even had a horrible appraisal come in.  I finally decided enough was enough.  One of my clients, who owns Aurora Sign had some success with Citizens Bank and referred me on to them.  There are some restrictions on the number of deals they can finance, however they still go to 90%.  Yes, that’s right, 90%.  Industry wide you’ll hear people say 80%, even 70%, but in reality there are still banks doing home equity loans and refi’s at higher LTV’s.  It’s important to note that I show solid income and I have a score in the 700’s.

I met with 2 of their appraisers (that I’ve never worked with) provided them my comps and they hit the value exactly.  As an investor, you get to know value pretty quickly.  I have likely sold more homes in Aurora than 99% of agents and likely investigated more homes than the average appraiser has appraised.  This experience helps me understand value to the point where it’s nearly gut instinct.  Obviously, I need to have sold comps within 1 mile that are less than 6 months old, with similar square footage, beds and baths.  This is key for the appraiser, so I do my homework on every single unit.  One appraiser that I met with recently had a great comment, he said, "I’m not the price police".  This was great because some appraisers think they have to scrutinize everything that is successful as though it’s fraud of some sort.  Obviously, this program is based on acquiring properties that are undervalued and realizing that value via rehab.  The equity that is created here is largely due to 2 main facts. 1. - We buy foreclosed homes at incredible prices (Typically around $100K).  2. - We get these home rehabbed at incredible values.  The rehab that our crew does would retail around 2-3 times what we pay.  The crew has been assembled to do, what nobody else can do, at half the cost.  I’ve shopped rehabbers for years, and never found anyone even close.

We all know that the landscape of this business is changing and appraisers and banks are nervous.  Our track record is extremely solid and it’s really starting to pay off.   It’s a great sign that there are still banks that are eager for our business.  It’s important to continue to develop new banking relationships and foster current relationships.  I’m THRILLED to announce that we are in the process of developing a new loan program.  I have 2 commercial banks that will lend 80% of the "as completed" value, that’s right, the END VALUE.  Both First Choice Bank and Golden Eagle Bank have partnered with me in order to expand my business with this incredible offering.  This concept has been around for quite some time, however it was not always available to real estate investors.  Banks have been lending to builders for years utilizing this concept.  80% of the end value is available for the purchase and construction, often through escrow accounts.  This program is new and will require some tweaking, I’m sure, but it’s an amazing opportunity and will provide investors with a great second option.  When I started buying foreclosures, the banks required 20% down and the rehab was funded out of pocket.  With much negotiation and a lot of vision on the part of First Choice Bank, the bank agreed to go to 90% of the purchase price.  After all, if you put 10% down and rehab the home, the bank is typically around 60% - 65% LTV based on the completed value.  This is actually quite a conservative loan.  In order to recapture your capital, a cash out refinance was necessary.  I do still see value in this process and will continue to utilize cash out lenders as needed.  The benefit of the new program will be the elimination of the cash out refinance, and the benefit of having only 1 loan. This will provide us with 1 set of closing costs, the elimination of the Deeding process back and forth for the refinance as well as less cash out of pocket.

There are 2 huge components to getting this program approved.  1. I’ve worked diligently with my commercial bank to perform accurately for myself and my investors, which allowed the banks to better understand our business.  2. I’ve researched and provided appraisers with accurate numbers.  The most important step in this process is working with banks and appraisers to get accurate values and progressive programs.  This has been the focus of my professional career for the last 8 years and has materialized with the development of this latest product.  These factors have opened an incredible door for us.  This process will not be perfect, as nothing is, but it will allow investors an incredible opportunity to grow their portfolios. 

If you’d like to learn more about the new 80% "As Completed" program please contact me via email @ joshblank@gmail.com.

Here’s a video of a recent project I bought, I poke a bit of fun at some of the nonsense infomercial stuff you see.  Hope you enjoy.

I recently looked up the definition of the term Investment.

Investment or investing[1] is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. The word originates in the Latin “vestis”, meaning garment, and refers to the act of putting things (money or other claims to resources) into others’ pockets. See Invest.[citation needed]. The basic meaning of the term being an asset held to have some recurring or capital gains. It is an asset that is expected to give returns without any work on the asset per se.

I was shocked to find that the last phrase suggested that there are expected returns without any “work” involved.  That seems both comical and inaccurate to me.  I tend to find that successful “investors” are those who are realistic, as they expect to “work” on their investments.  By “work” I mean manage your investments, not painting the walls.  I did that type of “work” in the beginning of my real estate career, however I “work” by simply managing my investments now.  I don’t own a single stock, just cash and houses.

There will be “work” with Real Estate.  There will be “work” in any worthwhile investment.  There will be maintenance, there will be bad tenants, and there will be management.  If that is above your head, or beneath your standards, good luck with a mutual fund.  Anyone who believes that you can become wealthy (or even get ahead) without some element of “work” is insane.  Work is part of any good investment.  Even if you buy a mutual fund, you likely “work” on some sort of qualifying analysis of the fund.  You will track performance; you will likely even do some of your own homework on these funds.  This time spent analyzing your positions and investments is “work”.  Many brokers will encourage you to sit back and relax, and continue to dump your cash into their fund whether it is up or down.  Heard of dollar cost averaging?  Not my favorite investment strategy in the world.

The longer I am involved in my type of Real Estate (single family foreclosures), the more I believe there is no better investment available.  There are specific strategies that provide for the level of success my investors and I enjoy.  Listed at the bottom of the post you’ll see just a few simple guidelines that provide great insight to what works in today’s market.  If you’ve ever read my site before you’ll see a similar theme, own (don’t flip) Real Estate.  The reason I own Real Estate rather than “flipping” real estate is several fold.  First, it generally works better.  It’s typically hard to do poorly on a project if you buy it in foreclosure, rehab the property with our resources, rent it out for 3-5 years and ultimately sell for a nice gain (long term capital gain that is, of course = less tax).  Secondly, flipping is difficult to time.  Flipping is a nice thought in good markets, but prices are typically higher and competition forces us to bid up, or pay more on the front end.  Flipping in “bad” markets is typically hard because buyers are scared due to the media frenzy and inventories are high creating competition on the back end.   Don’t get me wrong, I do “flip” properties in a sense, but the flip is typically over a 3-5 year period.  The investments involve a longer hold period and a rental period.  This is what I advise all investors to do, and it is a practice that has worked for me time and time again.

Many investors think the point of this or any investment is to “make money”.  The problem of course is that investors all too often have a “right now” mentality.  The true nature of any investment is actually deferred gratification.  You sacrifice today for a potential future benefit.  Many bright eyed and bushy tailed Real Estate investors come in thinking they are going to “make money” in real estate.  Some do, many don’t.  If you want to “make money”, work more hours at your job, get a second job or better yet, get yourself a better job!  To really be a true investor, utilize your capital (or better yet, do what I do, and utilize the banks borrowed funds) to create a return and ultimately capital and equity.  If you want to create a phenomenal future income stream, buy single-family foreclosures around $100K.

The Truth About Cash -

So are you concerned with the economy? Good.  You should be.  How do I hedge against any economic crisis?  I buy houses.  Economic times are good = home values soar.  Investors win.  Economic times are bad = rental demand causes rents to soar.  Investors win.   We win either way.  These “first time home buyer” homes are the great equalizer within the economy.  This may sound odd, but homes do not really go up in value.  Dollars go down in value.  That’s right; homes appear to appreciate, when in actuality it is our currency that is plunging in value.  Inflation has been around forever, and will likely grow at a rapid pace in the near future.  Our economy is literally driven by oil.  (Nice pun eh?)  I see prices over $4/gallon.  That’s angering to me, but what am I going to do?  Buy a hybrid?  No.  I’m 6′4″ and I’m sticking with the SUV.  What is this $4/gallon going to do to us?  It’s going to create inflation.  It’s going to drive everything (including home prices) up.  Dollars are worth less; therefore it takes more of them to buy the same goods.  The “appreciation” effect of homes will return.  Historically homes have outperformed inflation at times and underperformed at others, but the bottom line is your homes tend to hold (often increasing) their value relative to other goods.  My rental homes help me hedge against inflation and are ultimately what I call, the GREAT EQUALIZER.

I remember asking my dad when I was young, “Why do homes go up in value and cars go down?”  He explained that cars eventually lose their utility.  They are worth less as they get used up.  I bring this up because it is important to note that the useful life of a home is EXTREMELY long.  Older outdated homes tend to become rentals and rental real estate is a huge part of our economy.  Tight credit markets lead us to a bulging rental market that has driven prices up.  I estimate that rents are up 20% based on numbers I see come through our office and based on my portfolio.

Saving is another alternative often touted as a wise option.  Some will suggest you live like a pauper and save 10% or even 25% of your income.  Pack your lunch, skip the “expensive” coffees and save your way to a million.  Great idea right?  Wrong.  Horrible idea.  Enjoy your life.  I’m not talking about spending like a fool.  I’m talking about investing aggressively in a low risk, high reward medium that can change your lifestyle so the $3 coffee won’t put you in the poor house.  Without getting into the difficulties of actually saving money, it’s important to note that many Americans have quite a hard time actually saving anything.  Saving is one of the worst ideas I have ever heard of as a means to retire.  You just can’t save enough.  Saving is difficult and spending is so easy.  The amount of discipline required to save enough to retire capital to retire on is likely unattainable.  If you were to have saved $1,500,000 over the last (or next) 30 years, (which would have been difficult or impossible for many folks) and you had those funds in a savings account, you’d generate around a 3% return.  That would yield you $45,000/yr.  Not good.  $45,000 will not get you very far in an economy that is in a hyper-inflationary mode.  $1,500,000 invested in my program would likely buy you 14 - 20 homes.  While it’s nearly impossible to calculate, the raw numbers would look something like this.  Obviously this is an estimate, but I believe it to be an accurate estimate.
16 homes at $1,150 in rent = $18,400/mo.

Less Vacancy of 10% = $16,560

Less Management Costs ($1,120/mo.) = $15,440

Less Maintenance (est. $1,000/mo.) =  $14,440

Less Taxes & Insurance (est. $4,000/mo.) = $10,440

$10,440/mo. *12 mo. = $125,280

This is a hand free method of investing that will triple the return of a savings account.  One more thing, each of my projects is around 30 - 40% undervalued.

When considering your equity position, you’ll generate $30,000 to $50,000 per project in equity.  We’ll be conservative and suggest that $30K in equity is created in every purchase.

16 homes at $30K equity = $480,000 in equity.

$125,280 in cash and $480,000 in equity = $605,280 in net worth increase.

This is a 40% return on $1,500,000.

PS - it will involve some “work”

Rules that work for me.

1. I buy homes well under valued - Typically 60 - 70 cents on the dollar (in this market we are getting some at 50 - 60 cents on the dollar).

2. When the market is “bad”, I buy.  I’ve bought 3 homes in the last 2 months, 1 in Aurora, 1 in Joliet and 1 in Carpentersville.

3. I buy cheap homes - I tend to buy first time homebuyer homes.

4. I rent my properties out - “Flipping” is generally, good fun for TV shows, but “Owning” real estate allows you to create real wealth. - Donald Trump doesn’t flip homes, he owns buildings.  Doesn’t that make him a landlord?

Recent Fed Rate Cuts are music to my ears.  In my estimation, the Fed increased rates far too swiftly and far too high over the last couple of years.  Today’s rate cuts bring us back to the lowest level they’ve been since December 2004.  Recent talk of recession and mounting foreclosures have induced the Fed to cut rates at a rapid pace.  Whether you’re a homeowner with a home equity line of credit, or a commercial borrower who floats with a Prime based product, you will save interest costs as a result of these recent rate cuts.  Investing in this market has become incredibly exciting.  I have purchased several homes lately as the perfect storm of Falling Rates, Falling Prices and Increasing Rents has forced my hand.  If you’re not buying now, you’re almost certainly missing out.  The “bottom” is difficult to gage, but I have to imagine that my experiences are an indication that the bottom is here, near or passed us.  A recent up tick in the amount of competition for these units has signaled to me that investors are nearly forced to take advantage of these incredible opportunities.  Many investors who were unilaterally focused on buy/sell or “flipping” crashed and burned.   For those of us who realize that successful real estate investors own (and hold) real estate, this has been an incredible opportunity.  If you consider the following, you will see why I have always done extremely well with real estate in both “good” and “bad” markets.

“Bad Real Estate Markets” are largely caused by Interest Rates Increasing = Prices go down, Rents go up
“Good Real Estate Markets” are largely caused by Interest Rates Decreasing = Prices go up, Rents go down

In good markets, I can sell projects that I’ve purchased previously and generate profits.  In bad markets, rents typically increase in collaboration with interest rates dropping, which results in better cash flow.  Either way, as an investor, money can be made in either “good” or “bad” markets.

There are some qualifiers that allow this process to work for me, and should help guide anyone buying investment real estate.

1. I buy low end real estate - I have 2 nice homes…both are for personal use.  I have 18 other homes ( I have had as many as 31 at one time) that are all valued under $250,000, most of which were purchased around $100,000.  These homes are generally in Aurora, Elgin, Joliet and Dekalb.

2. I rent the properties out - With rentals I’m able to cash out (refinance all of my invested capital, often creating even more capital  at my disposal) and cash flow, which allows me to utilize the banks money rather than my own.  Another key to my success is that I take advantage of the taxation surrounding long term capital gains.  Much of my income comes from the sale of homes I have purchased previously.  This income is taxed at 15% rather than my ordinary income tax bracket.

3. I don’t get emotionally attached to homes - When I want to sell a home, I simply price it right and sell it.  I don’t argue with the market.  I don’t demand a price.  I simply take what I can get.  With that being said, I also don’t “need” to sell anything.  If I “need” capital, I often borrow from my portfolio rather than selling my portfolio.

4. I have multiple income streams - Many folks wonder why I broker these homes, rather then buying them myself.  I broker 100 - 200 homes per year.  There is no bank around that will lend me $10M - $20M.  They will however lend me several million.  When I reach their lending limits or comfort level I focus on brokerage.   My brokerage business is a lot like many of my investor’s full time jobs.  Real Estate is likely a 2nd or 3rd profit center for most investors.  For me I need both Brokerage (Income for the Banks) and my projects.  My typical project yields me 5 to 10 times what brokering a project yields me, so it is advantageous for me to actually own the project rather than brokering it, however there are limitations to my purchasing power.  This is one of the principles that has kept me successful.  I never stopped “working” simply to invest.   A key here however, is that I’ve also never stopped investing either.

5.  I have stayed with what works - In 2005 many of my peers started building homes and focusing on high end real estate.  I’ve never built a home, although originally I wanted to become a custom home builder.  I did not however do this because the risk was not justified.  I could buy a lot for $175K next store to my home, general the project, build the home for roughly  $100 - $125/sq. ft.   4500 sq. ft. later I’d owe $625,000 - $740,000 on a home that is not rentable.  That same $625,000 could be used to buy 6 or 7 rentals, that would almost certainly yield $7,000/mo. in rental income.  This safety net of rental income provides me incredible security.  At the high end of the spectrum, you are limited to selling the home.  Having a plan B is priceless.

What does another rate cut mean to investors? It means that the Fed is making a serious attempt to curb the struggling real estate market.  By lowering the fed funds target rate to 3.0%, the Fed has established a sincere effort to remedy their overzealous increases of the recent years.  The theory behind raising rates 17 consecutive times, was to hedge against inflation.  Inflation is extremely difficult to gage, and in all honesty, I have a hard time depending on the government to accurately gage inflation. In my opinion energy costs and gasoline are the major source of inflation in the country.  As we continue to see interest rates cut, this will ultimately help the US economy and will ease some of the “inflation” that the average Joe feels. 

I studied economics at the University of Illinois.  The theory or idea that increasing interest rates curbs inflation may be valid, but I have another perspective.  As rates go up, as they did from 2005 to 2006, this hurts the average American’s pocket book.  Think about it.  Credit card payments go up, home equity loan payments go up, and ultimately this cannibalizes the paychecks and pocket books of the American people.  I understand the theory, I really do. My argument here is that we (and the Federal Reserve Bank) need to examine rates and inflation in a different way. Inflation is defined as the increase in the price of some set of goods and services in a given economy over a period of time. It is measured as the percentage rate of change of a price index.[1] 

In my opinion, the price of milk, cars, food, etc. has not increased or “inflated” beyond a reasonable scope. The price of money however was “inflated” drastically from 2005 - 2006 and was kept artificially high in 2007.  By the 7th time rates were increased, I felt as though the Governmet/Fed was egregiously overreacting.  I predicted that this was a foolish move that would ultimately hurt the US economy.  Many made the same prediction.  Many people, as I do, feel that the Fed typically overreacts.  It’s just my opinion, but the fed funds rate cuts to 1%(post 9-11) was aggressive. With all the uncertainty post 9-11, I did feel that it was deemed as necessary and prudent. The increases in fed funds rate (and ultimately the prime rate) from 2005 - 2006 was excessive, to say the least. Economic growth has slowed, the “R” word is everywhere..and here we are cutting rates again.

So what does all of this mean to us as investors. This means that the softening economy has forced the Fed to lower rates, which will cost the average Joe and the average investor less to own their home.  Rates go down, prices tend to go up.  We’ll see if this happens.  It’s my opinion that 2008 will be a year full of incredible deals and incredible cash flow opportunities.  I’d suggest fixing your rates with Prime for the remainder of the year, for short term real estate transactions.  For your homes and your long term holds, I’d recommend locking in longer term products.  I have a 30 yr. interest only loan on my home.  Great product! The majority of my investment real estate is fixed at 7% until early 2009.  If you are investing in our program today, First Choice Bank, will fund your purchases at 90% with a prime (Currently 6%) floating product.

I have said this over and over again, “NOW IS THE TIME TO BUY”. Our average foreclosures is priced at $100,000. At 6% interest only, your payment will be $500/mo.  Add in your RE taxes and Insurance, and you’ll likely be around $750/mo.  Our average rents are $1,100.

With just 10 purchases, you could be cash flowing $3,500/mo.  This will likely take care of your personal mortgage and maybe even your car payments.   But Josh, What if Prime jumps back up?  Well that’s a great question.  We don’t know when rates will go up, but if you were to fix rates now you may pay a slight premium.  That being said, your cash flow situation will likely remain tremendous, as the mortgage crunch has forced first time home buyers to remain renters.  Take advantage now, the opportunities are abundant.

According to foxbusiness.com, foreclosures were up 79% in 2007.  That may sound like an extremely high rate of foreclosure, however a further analysis may provide a different perspective.  Obviously, foreclosures are up, but if you were to listen to the media, you may think that 50% of the U.S. housing market was in foreclosure.  According to the article from foxbusiness.com, more than 1% of all U.S. households were in some phase of the foreclosure process in 2007.

While 1% is quite an increase from 2006, I’m amazed that the number is that low!  It’s shocking. My amazement may be due to the fact that I deal with foreclosures daily.  Maybe I’m so entrenched in this business, that my perspective is skewed.  Or…maybe the media has covered this topic ad nauseam.  I’m guessing it’s the latter.