March 1986
Vol 8 No 6
1986 has come in with a bang. Interest rates haven't been as favorable in 7 years. The stock market keeps setting new records. Single family re-sales are coming off their best year ever. The Saudis have doubled oil production, driving prices down below $18. Our Navy is cruising just off hostile shores. We've had a disaster in the space program. Banking remains poised on a knife edge of solvency. Congress has sent the new tax proposal on to the Senate in this election year while Gramm-Rudman cuts are threatening both defense and social spending. The dollar has been falling against foreign currencies. Our recovery is 3 years old in some areas, while in the rust belt and farm areas, it doesn't seem to have even started to come yet. What else is new? How 'bout the IRS finding out too late that all those little portable computers aren't compatible with the ones back at headquarters? It's getting curiouser and curiouser.
Take a look at the securities markets. Billions of dollars are rushing into the market speculating on quick profits. How much higher can it go before someone asks about the return on investment from company profits rather than from a 'greater fool'? It seems to me that the uncertainty of the times calls for caution. And I prefer the low road. The simple road that I can understand. Oh, there are plenty of people who'll willingly undertake to invest my spare change in speculative ventures. I get calls all the time from people who are onto 'sure things' that will offer exotic profits, but when I don't understand the fundamentals, I don't believe the projections.
In the coming year, it appears credit will be reasonably available for owner occupied housing for the first half. Of course, should there be a banking panic brought on by the low oil prices, or a shooting war, then all bets are off. We're probably going to see a tax increase, but it may be in the form of a Federal value added tax or sales tax. That would be easier to pass in an election year than the one proposed by the House. Whatever form it takes, it will pull money out of the consumer's hands and the last half could see things slow down a little. What about investment houses?
It all depends upon where they are. In depressed areas there will continue to be plenty of bargains available. But beware. If the banks and thrifts are taking a beating, they'll be reluctant to allow thinly financed investors to qualify for loans. We've seen several instances where lenders offer fantastic bargains for cash buyers who can take foreclosed properties in large volumes off their hands, but that hardly helps the little man. That opens the door to syndicators who can assemble funds from small investors and buy at wholesale. With all the attention that stocks have received for the past 4 years, contrarians are beginning to move back into carefully selected single family houses when they can be bought with the right prices and terms.
Demographically, it becomes much more critical to buy properties in solid neighborhoods regardless of the region of the country one invests in. Millions of our citizens are entering prime earning years while a corresponding number of people are growing out of their 'first home' years. So the 'El Cheapo' houses in marginal areas may become a trap within the next 5 years. Take a look around your town and see if there are any abandoned older properties that no one will either buy or finance. Don't be caught. The well located, moderately priced house conveniently situated near neighborhood amenities is going to become much more attractive in those areas experiencing rapid growth. The 'grid-locked' commuter will pay more to rent or buy close in contemporary homes.
Copyright Sunjon Trust All Rights Reserved
Quotation not permitted. Material may not be reproduced in whole or in part in any form whatsoever.
1-888-282-1882 www.CashFlowDepot.com
ONE FINAL WORD ABOUT TAXES . . .
It's too late for 1985 strategies. Start working on 1986 NOW! Either arrange for good advice or start working on your own tax education. It's probably best to do both. Start with a good bookkeeping system you can maintain yourself. There are several 'one write' systems such as McBee or Safeguard. You can get these through business supply houses. Take an interest in how income and expenses are translated from your bookkeeping system into your tax bill. Schedule E works well for rental houses. It doesn't take any more brains to learn rudimentary tax concepts than it does to learn how to play poker, and in many respects, both skills have a lot in common.
The more you know about taxes, the more intelligently you'll be able to work with and to evaluate the person you select as a tax adviser. And tax savings go straight to the bottom line after tax income. I've found tax education usually repays its cost in one or two years. When it comes to selecting the person with whom you'll be working you can't be too discriminating. Take the time to ask around. If you belong to an investment club, try to get it to make selection of an empathetic tax counselor a group project. Try to match the cost and sophistication of your ultimate selection to the complexity and aggressiveness of your tax strategies and activities. Be prepared to pay for professional guidance. Make sure your adviser will be there if/when you're audited too.
ME, INC. – SHOULD YOU BE INCORPORATED?
A long time ago, I faced that decision and decided in favor of incorporation. I've never been sorry. But there are pros and cons. Here again, it's a matter of your own needs. The positive aspects are impressive. Corporations don't die. They can be citizens of a different state, under different laws than those where you reside. You can hold assets and easily divide various interests in them through the issuance of shares. A corporation can have a tax year that ends in a month other than December, with many benefits. Corporations can obscure your identity. They can make you appear to be more affluent and powerful, or vice versa. They pay taxes at a lower rate than people and are able to do things with less liability. They are excellent estate planning devices and they enable one to originate and administer a pension plan that's extremely beneficial.
Corporations can deduct many expenses that people can't. For instance, under the proper circumstances, your insurance, business automobile, lodging and travel expenses, business luncheons, entertainment, medical expenses, property used in the conduct of business or held as an asset receive favorable tax treatment. When a corporation invests in the stock of another corporation, 85% of the dividends can be excluded. Your company 'cafeteria' can provide tax free meals to you if you're on call during lunch. Your corporation can CONTRACT to perform services which you formerly may have done as an employee. Corporations are never employees. What about the negatives?
If all your income is tax sheltered now. If you don't like detail work and don't want to hire others to do it for you. If you're not organized with an accurate and current accounting system. If you're not making much cash income. If there isn't much liability or notoriety associated with your activities, it's possible a corporation would just be so much more additional work. The break point is at about the $25,000 income level. As your income climbs, so corporate advantages increase. But there's a lot more paper work involved with corporations than there would be in a sole proprietorship. First of all, you've got to submit articles of incorporation to the Secretary of State where the corporation is going to be located. You'll need to familiarize yourself with the laws and corporate requirements or hire someone else to do it for you. You'll need to keep minutes of meetings. Draft by-laws and corporate resolutions. Keep separate corporate bank accounts and books. You'll have to remember to separate all personal and corporate activities. The rewards are tangible, but so is the effort. If you're interested, this is an area it pays to look into. Laughlin Associates, 2527 N. Carson St., Carson City, Nevada, 89701 (800) 648-0966 sells a corporate manual which spells out many of the specifics. It costs about $35. It may pay you to incorporate in 1986.
TENANT SCREENING STRIKES A NERVE . . .
A few issues ago I listed several opportunities for entrepreneurs in fields related to management. One of these was a rent-up service in which tenant performance would be guaranteed. Another was a collection/eviction service. One I didn't include is a Tenant Screening Service. Here's how that works. A local management firm sets up a small micro-computer and solicits tenant information from other managers/landlords. It also screens courthouse records for the names of those evicted for the past 5 years and includes them in the data base. Now, when the long suffering owner asks for a credit rating of tenant applicants, not only does he have access to the normal range of checks on credit and bill-paying habits. He also can find out what kind of tenants they've been.
Are they clean? Do they get along with the neighbors? Are they destructive? Did they remain for the entire lease period? Did they vanish owing the landlord money? Are they litigious? Did they create problems for the owner? Housing Credit Services, Inc. in Florida goes one step further. Once the applicant has been approved according to their standards, a guarantee is issued that he/she won't be evicted for non-payment of rent for the first 6 months of occupancy. Otherwise, they'll pay for the court costs. For $5 extra, they'll pay $150 to the owner when tenants vanish voluntarily without an eviction during the same period.
Before I'll even agree to an interview with a prospective tenant, I have to have received a favorable report from the local tenant screening office. They can often give me a preliminary report by telephone within a couple of hours. They tie into other screening networks for out of area candidates. The portents of this are ominous indeed for the tenant with a spotty record. I won't rent to anyone they won't guarantee. This is a swiftly growing business and it's having its effect. Tenant screams are loud and long. In Ohio Federal Adjustment Bureau does the screening. In Rhode Island, Landlord Credit Data Service of America, Inc. provides the service. In New Jersey, it's Eviction Data Service Inc. In Los Angeles Unlawful Detainer Registry maintains the files. In Denver it's RentCheck.
On the Today Show one tenant complained that he'd been denied access to several apartment complexes because he'd filed a complaint against his former landlord with city officials. Both he and the interviewer missed the point. Owners have the right to rent to people who cooperate and who appreciate the tremendous sacrifices small investors must make to be able to provide rental shelter. I'm delighted to cooperate as fully as I can with any service that identifies people who don't keep their commitments as tenants. At long last the small investor has an advocate. Because I've already got a small computer, I've listed the names of unsatisfactory tenants since 1979 together with the property they inhabited. This is my own personal housing credit file. Where I've failed is in not sharing this information with other owners. Bad tenants have prospered because owners haven't found a way to expose them. These new services are curing that problem.
Tenant screening is drawing howls of indignation from militant tenants, but so far, there's no regulation of this industry. For decades, long suffering responsible tax payers have seen their tax money used against them as the political system rewarded the lowest common denominator – the non-paying tenant – through the use of laborious eviction proceedings and printing of various Tenant Rights pamphlets. These detailed the rights of tenants without emphasizing their obligations under the law. In many areas, landlord rights aren't even considered as benevolent judges ignore lease clauses and provisions of applicable landlord/tenant laws for the benefit of non-paying tenants. With screening agencies, we can eliminate the flaky tenant before he takes up residency in our properties.
It behooves all of us to support the growth of these data bases before vote counting politicians outlaw them. They're already trying. Start your own data base if you don't have a local tenant credit screen in your area. Try to get your Retail Merchant Association to put Tenant Credit reports into their files. Start your own service. At $20 per application, just a few apartment complexes can generate a tidy cash flow.
EVERYTHING HAS TO START SOMEWHERE . . .
It's amazing. I still get calls from people who're now just beginning their real estate investing. One of the good things all these TV hucksters are accomplishing is to draw millions of new people into the field who might never have considered it. I'll always feel grateful for the opportunities the single family house offered to a middle aged wage earner who'd just been laid off with few prospects for resuming a career. I was able to pay my dues and to learn ways to convert practical experience into a fair degree of financial security. So can those newcomers who read these pages.
Here are some rules you'll need to learn. It isn't easy! It's not supposed to be. You'll need the support of your family. That's why we offer special prices for your spouse at our seminars. For several years there were special programs for your young adults too. It's about 3 times as hard for one person to achieve success as an investor as it is for a couple. Be prepared to work a double shift if you already have a regular job. My wife and I worked a 90 hour week for 3 years. That's over 12 hours a day, 7 days each week. Remember, I didn't have as much time as someone younger. And I still had teenagers at home. I spent most of my time on the streets prospecting. My wife handled the phone and the advertisements plus contact with the public.
Beware of debt overload. I don't agree with most conventional wisdom regarding debt. Leverage speeds up the fortune building process, but at considerably more risk. For that reason, you've got to be especially careful about the way you handle debt. There are still lots of assumable loans left, but you've got to dig to find them, and then be able to negotiate with the sellers to avoid personal liability when you take them over. In your contracts and on your Deed of conveyance, specify that you're 'taking title subject to all liens, covenants, restrictions, easements of record'. If you're just getting into this business, it's easy to wake up one morning a million dollars in debt. And it's just as easy to find even a minor, local plant closing can result in several months of vacancy. When that happens, it's comforting to know that all you may lose is your leveraged houses. With full personal liability, you can lose everything else – for years to come. Some of the biggest names in this business have filed bankruptcy because they didn't know that!
Be willing to walk away from the best deal. Believe me, there are thousands of good deals. When you can't get the terms you want, or when something about a property just doesn't seem right, walk away. Don't let greed trap you into a bad move. Few among us wouldn't be able to retire comfortably for life if we could just recover the money we lost on properties we shouldn't have bought. Don't pre-suppose that you can solve problems the current owner can't. That's especially true for apartment complexes and offices. I was the proud owner of a vacant office building for 4 years because I didn't know that. Be willing to take the average deal which you can handle comfortably, or to keep on looking.
It's a numbers game. The more you look, the more you'll find. The more you find, the more you negotiate. The more you negotiate, the better you become. Eventually, you'll put everything together and you'll be the proud owner. Then you can start all over and learn a new skill: management. One of the truly great aspects of do-it-yourself investing is that it forces you to grow as a person. You'll find yourself concerned with finance, construction, motivation, psychology, accounting, insurance, law, contracting and cash flow management – and you'll probably have to keep on learning the rest of your life. Heck, you might even find yourself in a seminar some day. Who knows?
Copyright Sunjon Trust All Rights Reserved
Quotation not permitted. Material may not be reproduced in whole or in part in any form whatsoever.
1-888-282-1882 www.CashFlowDepot.com
