Love Austin Homes Investing Blog


Beginner with a question about market analysis companies

Posted in General, Rental Property by Administrator on the April 24th, 2008

Hi, I am a beginning investor looking at Austin. I have been investing for almost a year in my home market of Salt Lake City, but I want to expand my operation. One of my mentors told me that the secret to finding great markets is researching them. Having no clue where to start, I started seeking out market analysis companies, but was shocked at the cost of most market reports. Then I found this company called Redfish Emerging Markets (redfishemergingmarkets.com). Has anyone heard about them before?

Answer

I’ll assume you are talking about buy/hold rental property. If you were talking about flipping properties, you really need CMAs for prospective properties (to determine value) and you also need to know a little about how easy the property will be to sell, and how marketable it is relative to other properties in the area. I recommend a realtor for that purpose. I use my realtor, Shenoah Peck.

For Rental Property…
For starters – I DON’T recommend investing in a market you don’t thoroughly know. You can spend any amount of money you want trying to determine what cities to invest in, but the truth is that the devils are in the detail. Case in point – droves of California investors bought reports over the last couple of years touting Austin (and central Texas) as one of the hot hot markets to buy rentals in. So in they came, by the bus load. The problem is that many of them bought properties in Round Rock, Hutto, Pfluggerville, Del Valle, Leander, and various new construction areas. When you buy in these areas, you compete with builders. Builders offer financing…often sub-prime financing. Areas filled with sub-prime borrowers have lots of foreclosures. Areas with lots of foreclosures go down in value and not up. Bottom line – lots of California investors got wiped out because they bought in the right city but wrong subdivisions.

Now, you can buy reports telling you where, in general, to invest. Before you spend your money, however, I suggest looking at the free reports done that are all over the internet. If you email me, I will send you one from Wells Fargo, for example. This recent report, which is fairly sober overall, basically says that Austin and several cities in Texas are among the best places to invest nationally.

Keep in mind, however, there is no such thing as a national market analysis report that you can buy that will tell you EXACTLY where to buy within a market. The only way to get this right is with a lot of local expertise. You need to develop that expertise or hire someone that has it. My partner and I, for example, have that expertise and we buy properties for ourselves, and for our clients, in very specific neighborhoods. Our own sizable rental property portfolio has appreciated at 5-12% (12.5% average) annualized, for example.

Phill

Training for New Investors?

Posted in Education by Administrator on the April 8th, 2008

I am interested in getting started in real estate investing. Do you have any suggestions on training, books, tapes, etc.? I want to start off part time, but evolve into a full-time career.

Answer

Well, this is actually a long and involved discussion, but let me give you a few pointers.

1) On my website I have links to just about every web-based resource a Texas investor would need, including this link: http://www.johntreed.com/Reedgururating.html , which reviews just about every book and guru out there.

2) In general, I am OK with reading books, but they are not for everyone. I, for example, fall asleep after about two pages – I’m more of a learn by doing than learn by reading kind of person. Everyone is different, and you have to determine what works for you. What worked for me was getting out there, joining some of the local real estate clubs (see links) , meeting other investors, and working with a local mentor.

3) My biggest problem with most of the books, tapes, and gurus out there are that they tend to emphasize successful case studies and strategies and gloss over the problems and catches. Sort of like the gambler that always brags about his big wins, but never mentions his big losses, these books have a “get rich fast and easy with no money down” flavor to them. I guess that’s what sells books. When someone looks at these get-rich-quick books in the bookstore next to my “work hard and get rich slow over time” book, they always go for the former, until they ultimately realize that those books are fiction and mine is a biography. I guess my point is that those that can, do, and those that can’t teach, so you might consider finding a doer to be your teacher.

4) If you do hire a trainer or mentor – get someone LOCAL! I can tell anyone that would like to listen dozens of stories of California investors that came to Austin and got slaughtered. Simply put, they bought the wrong houses for the wrong prices in the wrong places expecting the wrong appreciation. Many of these people were experienced investors that were employing strategies that had worked for them in California…but just didn’t work here. Why? Every market is different.

5) While I’m at, I’ll also plug my own training class. I have a training class that I give a few times a year with a training partner. I only give a class a few times a year. I also offer personal mentoring. I only do this a few times a year because, I’m a full-time investor, and don’t have time to do this more often, but I do like bringing new people up to speed, and most of my students go on to become partners of mine in various real estate ventures in the future (which is the real value of doing the training). Regardless of who you decide to work with in learning real estate, I’ll go back to point #4 – do go local. If you want more info on what I offer, check out my website for info on the next class coming up: http://www.loveaustinhomes.com/real_estate_education_and_mentoring Thx.

Phill

Selling a house without professionals

Posted in Creative RE, General by Administrator on the April 7th, 2008

I have a question.

A friend of mine and his brother live in a house that one of them bought a few years back. The owner of the home is wanting to move to a nicer house, and the renting brother is interested in buying the home from his brother.

To me it seems that they could cut down on closing costs significantly just by hiring an attorney to write up the contract (anyone know what that costs?).

I was also wondering what else they could do to make the transfer as painless and minimal cost as possible. I don’t think assuming the loan is something they would want to do, as it would probably hinder the credit of the owner making it harder to buy a nicer home.

Does you have any suggestions of what these two could do?

thanks
Andrew

ANSWER

Anyone can download contract at TREC, fill it out, negotiate an offer, and give it to a title company with some earnest money to “receipt” it. for their, the title company will sechule the rest and process the transaction with all parties. If you want copies of contracts, look at my links section at: http://www.loveaustinhomes.com/real_estate_investing_links

Now – keep in mind that this can get a little complicated, which is why most people hire realtors to handle everything. In general, realtors are like insurance – you really don’t need them unless something goes wrong, in which case they are priceless…

A few other ideas for doing this creatively…

The very cheapest simplest transaction would be for the one brother to simply sign a general warrantee deed giving the property to the other brother who would then simply continue making the payments on the loan indefinitely, or until sometime in the future when he refinances. This is sort of a “poor-man’s subject-to” transaction that can work for family to family transactions. The beauty of this is that the total cost of the transaction is just the $25 filing fee for the warrantee deed. The cons is that sometimes relatives don’t trust each other with each other’s loans.

The next slightly more complicated transaction would be for the first brother to sell the property to the second brother with owner financing. In other words, same as above, except the seller collects the loan payment from the buyer and makes sure the underlying loan is being paid. The pro here is that the seller is more protected and could even sell the home at a different price and interest rate than the existing loan. If that is done, it’s called wrapping the loan – “a wrap”. The con here is that the seller still needs to service the loan and the buyer has some risk that the underlying loan payments might not be made.

Either of these transactions could also be done at a title company to provide title insurance, further increasing the cost of the transaction, but providing insurance that the ownership and amount owed on the property is as expected.

Phill

Stated Income loans?

Posted in Financing by Administrator on the April 1st, 2008

Has it become more difficult to obtain a stated income loan since the mortgage industry is having such difficulties these days.
Dawn

ANSWER

Dawn,
Generally speaking, yes it has, but money is always available to people with good credit, and money is always available to fund good projects regardless of credit.

Introduction

Posted in Uncategorized by Administrator on the March 25th, 2008

Wecome to the Love Austin Homes – Austin Home Investor’s blog site!

PLEASE NOTE: The views expressed in this BLOG are ONLY the OPINION of the contributors and are not to be taken as legal advice.

Thanks!
Phill Grove

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Q&A: Unsecured Lines of Credit?

Posted in Financing by Administrator on the March 25th, 2008

Question:
Hi,
I was looking for suggestions/referrals for a good source of an unsecured line of credit.

Thanks in advance,
Kevin

Answer:

Kevin,
The only way that I know of to acquire “an unsecured line of credit” is to get a credit line based on your own good credit.
This is a great idea for all investors. I recommend Wells Fargo for this, because they have a wide variety of investor-friendly products including an unsecured credit line, that you attached to your bank account as an overdraft account. This can provide $20-50K of credit depending on you. As you do more business with the bank, you can get the line extended.
For additional credit, you can apply for a Wells Fargo Visa card, and apply that as additional overdraft credit for an additional $15-40K (or more I suppose).

The other nice products that are available from Wells Fargo are no-cost home equity loans and no-cost home-equity line of credits (HELOCs). The loan is simply a low-interest fixed rate mortgage on the property. In other words, you can buy a property with your credit lines, and then refinance the property at a low-interest rate after the renovation (assuming you plan to keep it for a while). The other option is a HELOC – this is money that you can borrow at any time that is secured by the property. You can even get a loan and then later get a HELOC (on top of the loan) after the home appreciates and there is some equity you can borrow against.

A great was to get rich slow is to acquire rental properties, rent them to pay the mortgage, and then get HELOCs on them as they appreciate. This money you “take out” is tax free and low interet! As you acquire more and more rental properties and as those appreciate more and more, you end up with numerous HELOCs that will give you a lot of credit to invest with, enabling you to do more and more deals leading to more and more rental properties. Obviously, you don’t want to over-leverage, but usually this is not a problem, because lenders will not allow you to borrow all of your equity (as they should not).

This is my basic strategy. If you already have a little money and want to learn more about getting rich this way, give me a call…

Phill

Q&A: Buying Bad Loans and REOs from Lenders

Posted in Foreclosures, REOs, Notes, Short Sales by Administrator on the February 25th, 2008

I work with major banks in the US who are looking to liquidate their
portfolios. You will work directly with the seller mandate to purchase
bank REO’s in bulk from a minimum of 10 million to 1 trillion dollars
nationwide at about a 70% discount on retail value. Our inventory is
mainly residential with some commercial investments available. We are
looking for CASH investors with a minimum of 10 million dollars
documented by proof of funds from your bank. Time is of the essence,
as these deals move quickly and we currently have investors buying in
the billions.

Contact xxxxxx if you are
interested. Thanks.

Response:

There are a lot of these deals being offered lately. Mostly by investors that are pooling money – in other words, depending on who you work with, you don’t actually have to have $10M to invest. Several people can pool together, and most of the investors pitching these have much lower investment criteria.

As for the deals themselves – it sounds great, and it may be great, but the bottom line here is that these lenders are mitigating their losses. They are betting that getting a discount on their loans is better than going through the foreclosure, eviction, and REO process which might only yield 50% on the dollar or less. The discount, is usually based on the original appraisal done when the loan was made, and not on the present value and condition (which is usually not known), which could be substantially lower. In other words, some of these homes could be worth less than you pay for them and others more. Your ability to make money has to do with how sophisticated your system is for foreclosing, evicting, renovating or making ready, and reselling these homes quickly and efficiently, compared to how well the lenders already do this.

Phill

Survey company for Elevation Certificate

Posted in General by Administrator on the February 4th, 2008

I was wondering if anyone had any referrals of a inexpensive survey company that can do a Elevation stud for a certificate (Flood Insurance).

Thanks,
Tim

ANSWER

Tim,
My experience is that any survey company can do this. At least every one I have talked to.

Phill

Tax question on primary residence to rental property

Posted in Tax Questions by Administrator on the January 23rd, 2008

Do you need to take the depreciation when you rent out the property? I think
I’ve read somewhere that for rental properties if you don’t take the
depreciation, you’ll still be hit by depreciation recapture when you sell.
Is this right?

You don’t have to take the depreciation. I believe I read on the IRS’s web site you will
still be hit by depreciation when selling weather you took it or not. I don’t remember
which publication it was 2-3 years ago, contact an accountant about it.

Thanks,
Mike.

ANSWER

Mike,

The IRS assumes you are taking depreciation all along and charges you back for all of the deprecation (whether you took it or not) when you sell the property.

What this means, for those of you new to depreciation, is that the IRS allows and expects that you will take a tax deduction equal to the acquisition cost of a property divided by 27.5 (years). For example, if you buy a house for $100K, each year you get to depreciate $3636.36 of it’s value, which is a “passive loss” tax deduction. These “losses” are a great benefit of owning rental property, because they offset income and thus reduce your taxes each year.

If you hold the property for 27.5 years, you will have depreciated the entire $100K, and thus you can no longer take depreciation (although you can take more if you have made improvements along the way). If you then sell the property for $200K, you profit IS NOT $200K (sale) minus $100K (purchase) = $100K (profit), as some people believe, but IT IS INSTEAD $200K (sale) minus $0K (the depreciated value) = $200K profit, ALL OF WHICH is taxed, at long-term rates. Yes, that’s what I said, after 27.5 years the IRS assumes you took all the depreciation and assumes that whatever you sell the property for is 100% profit, and taxes it all.

Because you are always going to have to pay taxes on the depreciation at sale, I can’t think of any reason not to take the depreciation each year.

Now, of course if your income is over $125K (in which case your deductions are limited) and/or you don’t have sufficient passive income to offset the deduction, you may say “I don’t need, want, and can’t use the deductions this year”. That may be the case, but you pretty much need to take it anyway, and just roll forward (the deductions/”passive losses” ), on your tax return, any so they can be used in future years.

If you do this, then in the example I gave earlier, you take the $3636.36 deduction each year, but because you can’t offset the deductions, you just keep rolling them forward. After 27.5 years, you still sell the property for $200K, but now you can deduct the $100K of “rolled forward” losses from the last 27.5 years, from the $200K profit, thus reducing your profit from $200K back down to $100K.

Of course in the more likely scenario where you start making increasing amounts of income off of your property, that income can be offset by the rolling losses making the income tax free or tax reduced along the way.

Phill

Home Equity Line

Posted in Financing by Administrator on the December 15th, 2007

Can anyone recommend a way to do this low hassle, low cost?
I had heard credit unions had some good programs.

Thanks,
Ashley

ANSWER

Ashley,
Home Equity lines are a great way to tap low-cost short-term cheap money.

Wells Fargo has a great home equity line of credit program. They do not charge any fees and usually don’t even require an appraisal (they go off the adjusted tax value, provided it is sufficient).

Wells Fargo will also give you a mortgage on the home after you have completed renovations, so you can cash-out all of your funds (and perhaps take profit on the refi as well). This too is a no-points low-cost loan, and great for homes you plan to keep as rentals, or when you want to get your money out to put to work on another project.

Phill

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