Archive for August, 2007

So – what kind of person are you?

Are you one of those people that listens to the screamers and over-reacters?

Or perhaps are you’re a chicken little yourself? You know the kind of person I’m talking about – they spend all of their time running up and down the street with their dress up over their head yelling “the sky is falling, the sky is falling”.

Or do you look at facts, even if they clash with “conventional wisdom” or what your neighbor or the perky Katie Couric thinks, even if the facts seem counter-intuitive?

I ask because we’re in a very interesting situation here in the real estate market in the Metro Detroit area. Very interesting indeed.

You see, I keep reading the same headlines over and over again about how many foreclosures are out there. About how many people are losing their homes, and about how bad the economy is here. This is all true, by the way. It’s even true the lenders are holding back on letting their foreclosed homes hit the market to prevent a further decline in the market.

These are all facts, and they’re all true.

But if you’re making decisions on the economy or real estate market right now based on these facts, you are making an earth-shattering mistake.

Why?

Because as I briefly discussed in a prior post, the number of foreclosures hitting the market is a lagging indicator, and a significantly lagging indicator at that. What that means is that if you are basing your assessment of the market on the number of foreclosures hitting the market TODAY, then you are basing your decision on information that is 12-18 months old! Quite simply because the foreclosure that hits the market today started the foreclosure process AT LEAST 12 months ago.

That’s right. The number of new foreclosures today is ancient history.

Using this information is exactly like driving while only using your rear-view mirror – you’re getting information that is not only irrelevant to your goals, but it may also be a pointing you, not just in the WRONG direction, but in the OPPOSITE direction from where you ought to be going.

So if you listen to my nemesis on Craig’s List  and the others that continue to post “THE END IS NEAR” messages, then quite frankly you deserve what you get.

Let me give you some additional facts on the local real estate market here that were recently published in a report by Real Estate One:

I realized the other day how much I really don’t like working on houses.

Sounds odd coming from someone with a real estate business, doesn’t it?

But I’m not alone. Most of the people that know in this business are the same – they really don’t like doing the work themselves. And for good reason. It’s dirty, sometimes difficult, and always takes time away from other things. Especially family.

But as I was crawling around on the floor removing the old carpet tack strips from the beautiful hardwood floors of my newest rental (at least the Tigers were POUNDING the Yankees) because my college helper had to go back to school, I was thinking about something else. I was thinking back to the time where I thought that I HAD to do everything myself, and that I was “saving money” doing it that way.

So much so, that it took me six months to take my first rental from purchase to rented. SIX MONTHS of evenings and weekends, not to mention nearly an entire Christmas vacation (my wife is a saint). But BOY did I save money doing some of the work myself. Sure, I probably let at least $800 per month in rent times 4 months = $3200 slip through my fingers, but damn it I sure saved money on the rehab.

I got a little smarter with the second one, but I still did too much. So after hobbling around Home Depot for two hours on crutches with my broken leg in a cast buying materials I FINALLY vowed never again!

The challenge then became HOW. How would I extricate myself from any direct involvement in the process but still make sure that everything gets done. How would it all come together, and most importantly, how could I let go?

The answer was much simpler than I ever could have imagined. All it took was establishing and implementing a number of tools, systems and processes, and then getting out of the way.

Tools are items that make work easier to accomplish. In this case they include checklists, contracts, and technology, such as a digital camera and MS Project.

A system is a group of related components that work together to complete a specific project. Like lenders, contractors, inspectors, home depot, and me.

And finally, a process is simply a predetermined sequence of events that leads to a predetermined end. This was the key to everything.

In short, when you put all three together you get something like an outsourced business model, where you have specialists doing ALL of the work that specialists SHOULD be doing.

I tested this methodology first with a small rehab. It worked well but it had a few kinks. I addressed those areas of weakness and then tested it again with a major rehab. It worked flawlessly. Does it cost more to do it this way? You bet. But what did I gain?

How about more time.

Just look at the difference. My first paint and carpet “rehab” took six months, but after implementing this model I put in a total of 12 hours on a $40k top-to-bottom renovation. And then there’s this newest rental, which will be rehabbed and rented within 21 days from the day I bought it.

The beauty of all this is that you let go of the work, but still maintain control.

That’s the power of putting tools, systems, and processes in place.

And that leaves time for you to do the high-value things that you should be doing. Like marketing. Like sales. Like getting more business. Like spending more time with your kids, and spending time on worthwhile volunteer activities.

Instead of crawling around pulling out tack strips.

Try it. It could change your business.

Ever since the dot com bubble burst in 2000 and the catastrophic events of 9-11, as a country we have been struggling to recover the value in our retirement accounts. One article that I read indicated that the losses in value due to these two events were as high as 60%.With the overall market averaging an historical annual return of 7%, do you know how long it would take to recover that 60%.

14 years.

If, of course, the average return stays at 7%. Do you know what it was in 2006? 16%.

In 2005? -0.6%.

In 2004? 3.1%.

Since January 2002? ONLY 5.5%!

What does this mean?

That after six years, those retirement accounts that have continued to invest in the “market” are less than halfway back to breaking even with where they were in 2000.

Less than halfway back. Doing things the same way that they have always been done. This is having a real, material impact on retirement planning, isn’t it?

Now I’m sure that you’ve looked at some other alternatives, as I have – derivatives, currencies, commodities, and the rest – to find your way back. If you did then you found the same thing that I did – that for the privilege of chasing those elusive higher returns, I had to sign up for exponentially greater risk. Kind of like betting the whole retirement farm on black in Vegas. I said no thanks. I hope you did too.

I’m here now to tell you that there’s a better way.

There’s a better way to earn high returns in your retirement accounts. A better way with less risk.

The Self-Directed IRA
Did you know that it’s possible to invest your retirement accounts in products other than stocks, bonds, and mutual funds? It wouldn’t surprise me if you didn’t, because most people that I talk to aren’t aware of it. But it is possible.

Unfortunately, though, most people usually don’t have much variety available in their traditional-type accounts, so in order to broaden your choices wide enough, you must have a retirement account that is “self directed”.

A self-directed IRA allows you to invest in both “traditional” investments such as stocks, bonds, and mutual funds, as well as “non-traditional” investments, like commercial and residential real estate.

The best part is that anybody can have a Self-Directed retirement plan, because they’re not limited to certain people or business owners or the self-employed.

But that’s only part of the story. Think for a moment about the power of combing the tax deferability of an IRA with the higher yields of real estate investments. When you combine them you have . . .

The Self-Directed Real Estate IRA
Historically, real estate had supplied many people with a stable investment vehicle. Not only stable, but real estate can also can provide predictable, fixed rate returns far above what the market offers on average. How far above? How about 10, 12, or 15% annually? With far less risk than the stock market.

The primary benefit to you of course will be that the rate of return for this portion of your IRA portfolio will be based on investments secured by real estate, not on the ups and downs of the stock market. You’ll have a truly diversified portfolio.

The most important things to remember are that 1) with a self directed real estate IRA, the type of investments you make will be exactly the same kind you presently are making for your personal account. The only difference is that the profits in your real estate IRA investments are tax free/deferred, and 2) you will need an IRA custodian because the IRS does not allow you to personally “touch” your self-directed IRA account.

So – how do you set up a Self Directed IRA to invest in real estate?

It’s actually simple to do. It involves picking a custodian that has experience with these types of IRAs, deciding how much of your retirement funds you’d like to invest in real estate projects, and then filling out the paperwork. It’s that easy. Then you can join me in laughing at the volitility in the market!

Visit www.MPSG-LLC.com for more information.

For those of you familiar with the real estate market in the Detroit area, you know that this is a ONCE IN A LIFETIME opportunity to build a real estate portfolio.

Yes, I’m sure that you’re all used to the bombast and hyperbole inherent to bogs. But I’m serious about this. Dead serious.

Why? Let me ask you this – where else can you routinely find single family homes priced at forty to fifty cents on the dollar, with a minimum of $40,000 in equity, that need LITTLE or no rehab?

Tell me – where else?

There is no other market like this. Is it risky? Sure. And even more so with the sub-prime crash. But is good, solid suburban property ever going to go to zero value?

No.

When you take into account the fact that General Motors and Ford BOTH turned a profit last quarter for the first time in a long time, you begin to see that the real estate market in this area is not as it seems on the surface.

So as I discussed in a prior post, I seriously recommend that you add some “buy and hold” to your mix. I know that you flippers and wholesalers are all groaning now, (and apologies to Mark) but stay with me for a minute and let me show you what I mean.

Actual Example

Purchase Price – Cash:                 $ 45,000

Total Rehab and holding costs:    $   6,000

All in:                                        $ 51,000

Appraisal after rehab:                 $107,000

New mortgage after rented:        $ 65,000

Monthly NET cash flow:               $     175

What’s wrong with this picture? You buy, rehab, and rent. You take ALL of your money out of the property, PLUS some of your profit when you refinance, the house still cash flows, AND you still have over $40k in equity.

Question - - what’s the ROI when the “I” equals zero?

Hmmmmmmm. How about – infinity??

How many times can you do this? How many times could you do this even if the cash flow was zero?

The question everybody asks is, of course, how do you find these properties? My answer – they’re all over the place on the MLS right now. And I’m not talking about the City of Detroit either. I’m talking about clean, suburban homes in good to excellent school districts where all I have to do is put a sign in the window during what I laughingly call my “rehab” (usually just paint and carpet) and get a dozen qualified applicants before I’m even ready to rent.

You just need to understand the math. And that’s pretty straightforward, because you just work backwards.

Here’s are the process steps:

1. Determine what market rent is for your property
2. Determine your costs (taxes, insurance, maintenance, vacancies, etc), or use a cost factor. (Personally I have a cost factor that I use in the cities where I have rentals.)
3. Subtract your costs from your rent, and you have Net Operating Income (NOI).
4. Determine the amount of cash flow you want/need every month. Subtract from NOI.
5. What you have left is the amount of money you have available every month for debt service. If you’re familiar with present value concepts, you can use them to determine the maximum loan that the amount will support.
6. Divide the loan amount by the LTV percent you expect to have on the property. That yields your total, all-in price. (Purchase price+holding costs+rehab costs, etc). I call it the NOOP number, where NOOP is No Out Of Pocket.
7. If your all-in number is less than or equal to the NOOP number. Congratulations and welcome to the world of infinite ROI.
8. If your all-in number is greater than your NOOP number, then the deal still might make sense. For example, if it’s $2000 over your NOOP number, and you’re cash flowing $100 per month, could you live with an ROI of 5% per month, every month??

If this doesn’t make you sit up and take notice, I don’t know what will. When you have the opportunity to acquire properties with equity that are cash flowing, with no out of pocket cost, personally I can’t think of a better way to build a portfolio of of assets and build real wealth. Can you?

WOW. Again.

I had written up a long follow-up post on this Federal Reserve intervention that I had planned to post yesterday, but I got hung up in meetings and couldn’t get to it.

I wrote long (and eloquently, I might add) about how there was NO possible way that after their dump-and-run “liquidity injection” they could even THINK about lowering interest rates for AT LEAST the next two to three months. About how the economy has been experiencing pretty significant inflationary pressure in the food and fuel sectors over the last 12 months. And about how all of this pointed to the rational decision for them to retreat back to their 30 year old policy of targeting inflation as Public Enemy #1. Boy was I wrong.

Not only have they and their colleagues dumped nearly $350 billion dollars into the economy, just in the last few days, but they lowered interest rates a half percent as well.

This is bad news for the economy. Really bad news. Because these acts together pretty much guarantee an onslaught of inflation.

You see, inflation is a bad thing. In the most simplest terms, it’s an oversupply of money in the economy, and anything that is in oversupply decreases in value. The same goes with money. So what inflation does is decrease the value of your paycheck faster than you can make it up with raises. In short, it silently lowers the standard of living for just about everyone that works for a paycheck, and it particularly impacts retirees and others on fixed incomes, because their payments are rarely set to adjust anywhere near the true rate of inflation.

So you end up working more and making less. And if that’s not bad enough, the cure for inflation is worse than the disease.

How do you cure an oversupply of money? You raise interest rates! And raise them, and raise them, and raise them. It’s a bitter pill to swallow for everyone.

The problem is, we’ve gone so long without any real appreciable inflation that everyone has forgotten what it’s like. Remember 20% mortgage rates in the late 70’s and early 80’s? They actually peaked in June 1981, and these staggeringly high rates in turn had a crippling impact on business, because nobody could afford to invest in new business or new equipment. This caused a massive recession to start in July of 1981, which lead to the economic double-whammy – staggeringly high unemployment rates that peaked at almost 11% in 1982.

The interest rates alone were enough to cripple the housing market. The high unemployment only exacerbated it and caused the greatest number of foreclosures in history. Wait – that sounds kind of familiar, doesn’t it?

So enjoy your rally today in the stock market. You paid a high price for it but don’t know it yet.

It’s kind of like everything else we do in this country – we put it on a credit card and figure we’ll worry about it later.