May 2007
Vol 30 No. 8
HOW MANY WAYS CAN YOU MAKE MONEY?
Over the past few years, a lot of people made money buying a house, holding it a few months, and then selling it. It was almost automatic. Millions of dollars seemed within the reach of people all over America. Many of those millions came home to roost in the hands of entrepreneurs willing to take a chance on risking their own money and/or credit buying low and selling high. It was that simple. Buy at retail, let the market drive up the price, and sell at retail. Buy high, sell higher.
Some were able to buy pre-foreclosures and negotiate bargains. Some bought and held houses as rentals; managing them to produce cash flow and profit from appreciation. Others made huge profits in the foreclosure markets. Some created profit fixing up houses for sale. Some were just plain lucky. Others financed entrepreneurs who were doing all of the above. Some entrepreneurs were wholesalers who sold to others with low mark-ups; relying upon them to earn retail profits with which to pay them. Many made a living brokering both property and credit for a fee. Still others performed the same services for a share of the eventual profits.
Most of the foregoing entrepreneurs specialized exclusively in one particular market activity to the exclusion of all others. For example, some bought and sold mortgages carried back by sellers in various transactions. Others pyramided assets using tax free exchanging. Some were able to build their assets tax free in Roth IRAs. Still others managed property for a fee or used Leases and Options to control income and gain. Some specialized in “short sales” to capture equity and profit when they bought property which they later sold for a profit.
Let’s not overlook land developers and builders who created subdivisions and either built or manufactured housing to sell into the retail market. Then there were financiers who provided credit to enable entrepreneurs to earn their profits. Regardless how entrepreneurs might have specialized in the market, specialization might at one point have been their strength, but it could well turn out to be their weakness in the changing future. Where do you fit into this scheme of things?
When markets evolve, regardless how successfully you might have been earning a living and building future financial security in the past, if you want to continue to do be successful in the future, you must change with markets. Now might be a good time to do a personal assessment of your skills and experience to see how you might use your talents to your best advantage in the future.
What does the future hold? If I really knew that, I wouldn’t be spending much time writing a newsletter; I’d be playing Texas Hold ‘Em in the stock market. I don’t know what’s in store for the future, and neither does anyone else. At best, all anyone can base future market predictions on are educated guesses. As the past has demonstrated, betting on the way the market is going to move is like forecasting the weather. There’s a 50% chance of snow, rain, overcast or sunny somewhere; or not.
I know this isn’t very comforting to the person who has become accustomed to almost instant profits in the past, but the unvarnished truth is that only by being able to do a wide of variety of things can one expect to profit over the long term in real estate. What are these things? Come down the yellow brick road with me and take a look at the possibilities. Hopefully, you’ll find something that fits your specific talents and aptitudes; something you can do to continue to produce income and gain as an entrepreneur without having to rely upon the promises of your government or corporate America for your future financial security.
DIVERSIFICATION IS THE KEY TO FINANCIAL SECURITY . . .
The history of commerce is studded with the financial remains of those who bet their entire financial survival upon mastery of a single skill. Type setters were replaced by computers. Buggy whip manufacturers were made obsolete by the automobile. Computer programmers saw their market value destroyed by equally skilled people in India at about the same time as Fortune 500 companies began to “outsource” many of their operations off shore where labor and materials costs were lower. Today, drug company profits are under assault by off shore suppliers of drugs at mere fractions of the costs of U.S. manufactured pharmaceuticals.
Arguably the world’s best investor, Warren Buffet once said that the safest course for the person who doesn’t know what to invest in is diversification. In short, this amounts to betting on every horse in the race in hopes one of them comes home in front. The same principle applies to investing ones time and know how in real estate. The only real security is to be able to do a lot of things and to hope one of them proves to be winner. In real estate, continuing to find new ways to do business in a lot different ways is the key to financial survival. You dare not stop learning all you can about the business. How do you rate yourself in this regard?
Take another look at all the ways that people have found to profit from various aspects of real estate, and more particularly, the housing industry. How many of the various profit centers implied in all those specialties are you familiar with? More importantly, how many could you engage in profitably given all of the competition you might encounter? At this point, do you feel at all vulnerable in the changing market that we are all going to have to adapt to?
I’ve been accused more than once of writing a newsletter with more problems than solutions. I freely admit that I don’t have all the answers, but I do have some of the questions which I hope will jolt you into giving some serious thought to your long term wellbeing. What I hope to do is to open doors through which you might glimpse a range of future opportunities. Hopefully you’ll be motivated to take action to prepare yourself so that you can defend yourself against a kaleidoscope of shifting economic patterns, the effect of which nobody can truly predict with any accuracy. That’s the bad news. The good news is that, in real estate, just about every thing you learn will make you money sooner or later. To that end, let’s look at some of the possibilities:
If we were going to array some of the ways people make money with real estate, we might first divide them into two major classifications: Real Estate itself, and Financing. We might separate the overall classification of real estate into several categories which would include all kinds of land from raw acreage to crop land, to forest land, to development land, etc. This would automatically evolve into construction of all types of property including industrial buildings, commercial offices, retail centers, and residential property. Residential buildings include multi-family and single family homes, which further include co-ops, condominiums, town houses, and manufactured housing.
Each of the foregoing types of property requires separate skills and know-how. Whew, that’s a lot to learn. Because large properties cost so much, a person can lose a lot of money in a very short time if just one little fact is overlooked. That’s why early in my career, after having overlooked more than one fact and having lost a lot of money, I focused on single family houses and mobile homes. These were much easier for me to understand and become knowledgeable about. Although I’m still trying to learn enough about the land business to make a profit, the vast majority of my time and money has been spent buying, selling, managing, and financing stick-built and manufactured single family housing. This has worked better than anything else.
WHEN HOUSES BECOME TOO EXPENSIVE, BE THE LENDER . . .
When does buying houses stop being profitable? When you can’t sell them for more than you paid for them; or rent them for more than their operating costs and debt service. It isn’t the cost of the house that robs it of economic feasibility; it’s the cost of credit required to buy it. Although it is estimated that half of all the housing stock in America is free and clear, almost all of it was originally bought with a mortgage loan of some sort provided either by the seller or by a lending institution. For this reason, the financing business can be a natural adjunct to all aspects of the house business. As a matter of fact, many real estate Brokers are also Mortgage Brokers; and many house investors are also money lenders.
Just as it requires a lot of money to buy houses, so it also requires a lot of money to become a lender. As every self-respecting lender knows, the best way to raise this money is to borrow it. How? Do what the big boys do. Mortgage banks raise loan money by getting investors to deposit funds into their coffers and by borrowing from the Federal Reserve. Once they lend money out, they re-sell their loans to other investors at a profit, and then use the money to fund new loans. They keep a half percentage point of each payment in return for screening loan applicants and servicing loans. A $2000 payment only nets $10, but when you consider that a major mortgage bank might service a $10 million in monthly loan payments, that little fee can amount to $600,000 per year after they’ve gotten all their money back.
You can’t be a mortgage bank making money from servicing fees, but you can borrow money, lend it, sell your loan, and repeat the process just like they do. One person I know has borrowed $4 million to lend out on a short term basis to other real estate entrepreneurs. He operates this business out of a lap-top computer on which he has stored all the forms required to check credit and document his loans. He has raised this money from several investors. Their money earns them 10% in annual interest, but he doesn’t pay this out, he just keeps rolling the money over while they watch their money compound. By recycling this money over and over again three or four times a year, he is able to make more money than those who borrow from him. Suppose he loaned $100,000 for 90 days for a flat fee of $5000; assuming that late charges and loan origination charges paid his overhead, he would earn 20% over the year, and pay out half of this to his investors. That only leaves him $400,000 per year with no investment of his own money. Very few of his customers can do this.
In the foregoing example, the loans were rolled over rapidly. Even with long term loans, the money can be recycled rapidly if the loans can be sold to an investor such as an IRA. You may not be able to raise millions of dollars to work with, but you can do what another person does. He negotiates an Option subject to the existing loan on a house at a discounted price. Next, he offers the house to an owner/occupant with seller financing. While still in escrow, he sells the loan to an investor for enough cash to exercise his Option, pay the seller’s equity, and have enough over to make a net profit after selling and holding costs.
Look at some numbers: In today’s slow market he might Option a house subject to the 4 year old loan with a 5.75% interest rate for $200,000. He wraps the existing $150,000 loan at 8% and sells it to a qualified buyer at its fair market appraised value of $240,000. After a $5000 down payment, he carries back the $235,000 wrap around mortgage at 8%. Next, he sells the loan to an investor for $85,000 cash ($150,000 existing financing plus $85,000 = $235,000) and winds up with $20,000 profit. The investor would have a high yield loan with a $20,000 equity cushion. The best thing about selling loans is that the investor can be from out of his area so long as he is willing to service the loan for a small fee. He won’t be able to make millions doing this, but he’ll be able to sell his loan for more money to a wider market, and he’ll know of any default ahead of everyone else.
LEARN TO BE A SWITCH HITTER . . .
I started my real estate career as a salesman, then opened my own Brokerage and worked for commissions which I used to buy houses for myself. When the market slowed down and my inventory piled up, I began managing property for myself and for others who were caught with too much inventory. When the market recovered and house prices started rising faster then rents, I pyramided my equity and net worth by selling three rentals at top retail prices to tenants; using the money to make tax-free exchanges for two much better houses at wholesale prices.
Quite often the replacement houses I bought were at foreclosure sales. When these sales dried up, I began to buy old houses to fix-up and resell for cash. When this became too competitive, I began to buy defaulted loans on mobile homes, put them on approved foundations, and sold them to people who had been priced out of the conventional housing market. If institutional financing on mobile homes dries up, I’ll start financing sales and selling the loans to investors. If I can’t find investors, I’ll become a lender and make money by lending at high interest rates to buyers and home owners. If I run out of money, I’ll try to borrow it at a rate that will pay me for taking the entrepreneurial risk associated with being a lender.
Sooner or later, all that consumer and mortgage debt that is piling up on the lenders’ books is going to have to be liquidated. The problem is far more severe than it was in the 1980s when the RTC liquidated hundreds of lenders and sold off their assets as pennies on the dollar. When that happens again, I expect to be among the buyers. When the cycle repeats and house prices start to rise again, like a surfer, I aim to ride that wave until something else happens to make me change.
My point is, and the point of this letter is, that I won’t allow myself to be driven out of business because I only have one skill. I’ve been through housing recessions before, and I learned that the only way to survive and prosper is by being willing, able, and ready to do those things that make money in any environment. You should make an effort to find ways to do this too.
To that end, we’ve scheduled a Real Estate Masters Pow Wow in Las Vegas from May 10th – 13th. For three days, a bevy of the brightest and most successful entrepreneurs in the single family house and mobile home business have agreed to tell you how they have made their money, and how they are dealing with the market today. As always, the purpose of my seminars is education, not sales. These aren’t people in the seminar business who are going to try to hustle you into buying their “home study” materials; they are going to be there to try to teach you something, and to answer your questions.
We’ll have as many aspects of real estate as possible presented so you can discover which of these is right for you. We’ll cover creative financing and short sales, hands-off management, and sandwich leases that generate cash flow. A couple of the nation’s top marketers will reveal how they buy and sell houses rapidly. They’ll show you how to use the internet to attract buyers and investors from outside your local area. You’ll also learn how to cut overhead to the bone by setting up a virtual office on a lap top computer. You’ll learn how to buy, fix and sell houses and mobile homes for quick profits; and you’ll learn how to do the same with mobile home parks. You’ll learn how to pyramid profits tax free by exchanging houses, Trust shares, and Options. You’ll learn how to set up a high volume wholesale business using borrowed money; and you’ll learn how to set up a high-yield financing business that will produce passive income for years. Best of all, this seminar isn’t going to cost you an arm and a leg. The speakers know how to make money doing what they say they do. They don’t have to rely upon product promotions and hype.
(Note – the POW WOW videos and audios are part of your CashFlowDepot.com membership)
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