CLICK HERE TO LISTEN TO: Episode 81 of the Invest Florida Podcast with host Eric Odum and featured guest David Campbell – founder of Hassle-Free Cashflow Investing. David and Eric talk about investing in mortgage notes and making hassle-free cashflow as a private lender.
David Campbell from HassleFreeCashflowInvesting.com is a featured guest in this episode of the Best Passive Income Model Podcast with host Mark Podolsky.
If you’d like to help out the Land Geek Community, please rate, review, and subscribe to the podcast on iTunes.
Tip of the week:David: I’ve got a couple resources on my website at HasslefreeCashflowInvesting.com for free you can download a very expensive white paper called Hassle free Cashflow Lending that’s on my website at HasslefreeCashflowInvesting.com. I’ve also got three awesome webinars each of them are an hour long specifically Nuts and bolts of private lending, with the Tax investing strategies for private lenders and How you use self-directed IRA to be a private lender and all those are free videos on my site at HasslefreeCashflowInvesting.com.
Mark: Hey, it’s Mark Podolsky The LandGeek with your favorite nichey real estate website www.TheLandGeek.com and today guest probably forgot more about real estate than I’ll ever know, this guy is so big, the founder of Hassle free cashflow investing. David Campbell started investing in real estate part time while he was working as a full time high school band director with zero net worth and within six years and before the age of 30 David had become a financially independent millionaire through the vehicle of part time real estate investing. He has done over a billion dollars bid, a billion dollars of transactions and advisory experience and he’s very well know within real estate circles. I’ll just put on my anchor voice. David Campbell you’re a big deal, how are you?
David Campbell: Hey Mark I’m so happy to be here with you and your audience.
Mark Podolsky: I’m thrilled to be here. So let’s go back to the high school band director days and how did you get the bug and the gumption and did like okay I’m going to be big in real estate?
David Campbell: When I was first teaching I was working part-time in an income tax office and my job was to put the stuff in the computer and then let the CPA
process it and at the end I would staple the return together and hand to the guy and say you owe so much in taxes. I did a tax return for my middle school science teacher came in, “I’m like you owe 32% of your income in taxes.” I’m like that’s not very good and I could see in their pay stub he didn’t make very much money.
And then this guy came in and it took me a whole week to put his tax return into the computer and he owned business, shopping centers and apartments and grocery stores and at the end I put it was like a rim of paper his whole tax return and I gave to the guy and said, “Your tax bill is zero.” Wait something is wrong here. I know that you make hundreds of thousands of dollars this year and your tax is okay, zero and I asked my boss. I’m like, “Eleanor how is that possible that this guy made so much money?” And she said, “Well someday you’ll figure out you know depreciation and the tax shelter for business and the best advice I can give you is when you get your first grown up paycheck go buy a two bedroom something and go rent out the other bedroom.” So I did.
I was teaching high school then, I got my very first paycheck and I went and I applied for a loan and they said you got a credit score and a job so here you go 100% financing to buy a two bedroomed, two bath condo. I think I bought it for 140 grand in Southern California in 1999 and I rented out that bedroom and it covered half my mortgage payment. I thought that’s cool and then I did a little bit of work on it and at the end of the year I looked into my check in account and it said zero. You have $0 in your checking account and I’m like oh that’s not a surprise, I’m like I’m a high school band teacher. I was making like $30,000 a year teaching a high school band in 1999 and then I looked at my balance sheet and I had my $140,000 condo had gone up $170,000. I had $30,000 of equity that I didn’t have before.
That was my entire paycheck earned as a schoolteacher now is equity on my balance sheet and then the very next year, the same thing happened. The $140,000 condo was worth $200,000, I was getting some great tax shelter from the depreciation on half my condo and writing off half the utilities and that turned out to be a good deal. I suddenly after two years of teaching high school then I had 60 grand and I sold that condo.
I thought if it worked small it will work and I bought a five bedroom house. The biggest I can afford and I rented out four bedrooms and there I was now I had no housing payment. Those four roommates paid the entire PITI on my mortgage, plus the utilities, plus the cleaning, and I was living there free.
Mark: Yeah, but David you got four roommates.
David Campbell: Yeah, when you are young.
Mark Podolsky: Yeah you’re right. That’s right I keep forgetting you’re not even 30 yet, okay.
David Campbell: Yeah. So here I am young, four roommates it’s not optimal, but now I’m bankable. Because I got to my bank and I say look I have no housing payment, check out my DTI. Give me a loan to go buy rental property and I was able to do a cash-out, refinance and pull some money out of my primary residence and I was bankable. I went out and bought a rental and that rental went up in value and I took the money out of that and I bought three more rentals and the rentals all went up in value. I sold those and I bought eight more and those all went up in value. Then I bought an apartment building and I was out of the rat race, bada bing it’s pretty simple.
Mark Podolsky: Wow. Okay so you’ve gone the whole gambit as far as real estate investment. I mean you’ve done single-family homes, you’ve done apartments, you’ve done retail, you’ve done offices, you’ve done medical, you’ve done condo conversion, net lease properties, triple net lease, I love triple net by the way, syndications land development which we’ll talk about, production homebuilding, private lending and a winery. If you could go back in time are there any of those pieces that you’d be like yeah I could probably do without the condo conversion or you know the production homebuilding. I don’t know or is there’s any that you’d have double down on? Like you know what apartments are great or retail is great.
David Campbell: That’s a good question. So I’m very much a market cycle investor. So when I look at my real estate resume it looks like I’ve got ADD and I just don’t know what to invest in but I very much look at what the opportunity is in the market, will find a way to add value, will look to see where there is a gap in the marketplace to add value and then there’s a little bit of do the deal that’s on your plate. When someone brings you a deal and it’s a good deal. You know, when I was early in my career I didn’t have a very clear investment philosophy and so it was do every deal that makes sense.
Mark Podolsky: Right but there’s a big education piece to this. How are you learning land development, syndications and triple net lease properties?
David Campbell: That is a great question and you find people who are experts in the field and then you partner with them and you put together groups of people and you sit back and you be the quarterback of your team so you don’t have to know. Like when they interviewed Henry Ford and said, “Mr. Ford how does a carburetor work?” And he says, “I have no idea but I know how to use a telephone and I just call someone who works for me and they tell me how a carburetor works. In fact they don’t even tell me they just tell the guy in the production line how to make a carburetor and then I just sit back and run the whole thing.” That’s what I view my role as an entrepreneur is to pull the puppet strings. Find the opportunities, analyze them, pull the puppet strings and let your team do what they’re good at.
Mark Podolsky: Yeah. I love the model and the beauty of this is you’re doing this all part-time. You’re still a high school teacher.
David Campbell: No no no. I retired from teaching 11 years ago.
Mark Podolsky: No, I know but like then…
David Campbell: Oh at that time.
Mark Podolsky: …you were doing it. When you first started, you were doing this all part-time you don’t leave until 2005.
David Campbell: That’s correct. Yeah, that’s correct, so you’re right. In year one when I was teaching high school band I was very fortunate that I had summers. So you get the couple of months of summer vacation and when I was teaching I’d spend my lunch hour, and before and after school time really reading and immersing myself in real estate. So there I was in my office and school was done at 3 o’clock and then band practice didn’t start till seven so I got four hours and I didn’t want to go home. It was a long way to go for just a short break to go around and then come back. So I would sit in my office almost every day after school and just read and study real estate and got my license and anyway it’s been a great great ride.
But your question earlier about what would you again and what would I not do again and the crux of my current investing style is hassle free, cashflow, investing it’s got to be all three. It’s got to be cash flow, it’s got to be hassle free and it has to be an investment and to me an investment is not a job. So if I’m working it, if I have to put in my time, it might be lucrative, it might be a very lucrative real estate business, but it’s not an investment. An investment is something that I can put in money and my money makes money and cashflow is obvious. It’s got put more money in my pocket every month, or every quarter, or every year, whatever that time period is it puts money in my pocket rather than take money out and then hassle free.
There’s a whole realm of things that go into making hassle free investment. So when you’re looking at a lot of those things on my bio like land development, production homebuilding and condo conversion those are not
hassle free and they’re not cashflow. But it was certainly a great way for me to make a bunch of equity in a real estate related business and then move that equity over into hassle free investments like triple net lease properties and mortgage investment.
Mark Podolsky: Yeah I mean absolute. I remember having a talk with a big apartment investor in California and he said Mark if I could do it all over again I wouldn’t have gone through the brain damage of apartment investing. I would have only focused on triple net leases on like Jack-in-the-Box’s and Taco Bell’s and these big single tenant leases with these franchises that rarely go out and I thought was really interesting. He says at the end of the day its 15% all day long. You know the rents go up every about 15 years or something and they never leave. Is that your experience with triple net?
David Campbell: Yeah absolutely. So when I’m buying a triple net property I’ve got a couple of rules. The first is I want the cap rate to be higher than the interest rate. So if I can borrow money at five and I can buy a seven cap property then I’ve got a 2% arbitrage spread, positive arbitrage and that makes my yield really work. If you go out and borrow money at 5% and you go buy a 30 year triple net lease McDonald’s at the corner of Main and Main in San Francisco it’s going to be two maybe three cap and you’re upside down.
Mark Podolsky: Yeah exactly and that’s the problem with getting triple net properties is that the cap rates are so low.
David Campbell: Yeah. So I winded up buying triple net lease properties where I’ve got a very strong national credit tenant, but I might be in a secondary market. So I got to go to Georgia or South Dakota or somewhere where you know Wall Street doesn’t want to go buy that net lease to asset for some giant hedge fund. It’s more of a mom-and-pop style investment which gets you those higher yields but still great locations, great land and great tenants.
Mark Podolsky: Yeah okay but let’s get back to the original question. If you could do it all over again where do you think you’d put most of your focus? It’s because I love the model hassle free, cash flow and an investment because my model eventually becomes an investment but it’s really… It starts as a land business and until you create your team, your systems and your automation you don’t get out of it for a while.
David Campbell: That’s right.
Mark Podolsky: So I like the start out with the investment part.
David Campbell: So there are certain things that I’d definitely do again and there are certain things that I would recommend to a new investor and those aren’t necessarily the same thing. Things that have worked very well for me that I would you again and again I really like production homebuilding, particularly during the last market crash. We were very aggressive about buying finished lots. We bought a lot of lots that were below replacement cost. For example, maybe we paid $10,000 to buy a lot where if the dirt were free it would still cost you $25,000 to put the roads and utilities and all of the improvements to make that a buildable lot.
Mark Podolsky: Oh yeah. I mean we had tonnes of that out here, tonnes of it.
David Campbell: Really?
Mark Podolsky: Yeah.
David Campbell: So that was a no-brainer for me is to go heavy into developed finished lot inventory in a down market and then the homebuilding company is just a means to an end to realizing that equity. Because if you go buy that distressed lot you could just sit on it and hope and pray and feed the alligator of mowing, taxes, insurance and maybe your mortgage payment or you could build your way out of that. You bought the land cheap, go put a house on it and if it sells that’s awesome you make your money, if it doesn’t sell you just built yourself a rental property at wholesale rather than retail.
Mark Podolsky: Right. Yeah I love it. So is that what you’d have done from the very beginning?
David Campbell: No.
Mark Podolsky: If you can go back or how would you have started?
David Campbell: I think if I were to start I would do it at the same. I’d go buy a condo and get a roommate and then leverage that into more and more single family homes. I think I call it the low hanging fruit, when it’s a buyers’ market you buy, when it’s sellers’ market you sell and here we are in 2015 it is a hard time to buy properties in this market so I go on the habit that makes sense. So I think it’s a good time to sell. In your stock market when stocks are high you sell stocks and you buy bonds and then when the stock market gets low you sell bonds and you buy real estate. So right now in this market cycle I’m selling real estate and buying mortgage notes. I don’t want to be holding real property; I want to be holding paper. So if there’s a market correction then I’m insulated from that and then in the mean time I can collect the income on my mortgage paper just wait for the next market cycle to correct.
That makes a lot of sense for me because I have a lot of resources to play with and a lot of education to work with and a big team to work with. So that makes sense for me but for someone just starting out and investing I would say go find some house that you could buy at a six or seven cap rate, you put 30 or fixed debt on it at 5% get as much leverage on that as you can and just sit and wait. It’s not a great vehicle for producing atomic cash flow, but it’ll create equity for you. Right you just sit and let your tenant pay that mortgage down for you and let that property appreciates due to inflation and appreciation. It’s a slow road to pass to 12 but you got to do something to get your equity and then once you get your equity, convert that equity into cash flow either through more cash flow investments like triple net, commercial property or through mortgage notes.
Mark Podolsky: Yeah I know. I mean I’m a big believer like let’s start slow and then build your wealth gradually right and then you won’t end up making a huge mistake I don’t think if you do it that way. Where if you were starting out let’s say in 2006 and things seem so easy, it’s very easy to kind of crash and burn I think. You know, not having any perspectives as far as what a real estate cycle really looks like and the typical real estate cycle is 10 years, correct?
David Campbell: Yeah.
Mark Podolsky: So where do you think we are in our cycle.
David Campbell: It’s hard say from like a national perspective because real estate is local, local, local. So like the markets that I really keep my eye on are the Bay Area. San Francisco, Bay Area because that’s where I live then and then I keep my eye on the Dallas-Fort Worth market because that’s where the majority of my investing is. And I think here in California were in a bubble and I think the stock market is in a bubble and I think real estate market is in a bubble and I see the next move is either going to be kind of just sideways or slightly up and then 10 to 25% down. That’s my perspective, and I’ve got a great blog article that went a little bit viral on how to predict real estate prices. So on the website at HassleFreeCashflowInvesting.com there’s a great article. Just Google HassleFreeCashflowInvesting.com how to predict real estate prices and you’ll find a great blog article that you can apply your local market and say hey me what’s happening in my local market. Dallas-Fort Worth I think has a lot of very strong fundamentals. I still think that market is undervalued so it’s still very bullish on Dallas-Fort Worth. It’s affordable, jobs are abundant, jobs are being created at a record pace, people are moving in faster than people are building new housing and the ratio between incomes and housing prices is affordable. So for example in San Francisco just for a teaching point, and these numbers are not accurate but just for an illustrative point.
Let’s say the median home prices in San Francisco are $1,000,000 and the medium income is $100,000 that’s 10 times. You’re using 10 years of salary to buy the median home or median income times 10 equals the median home price. In Dallas and a lot areas where we’re investing the median [00:18:00] [Indiscernible] which is less obviously in San Francisco but the median home price is only 150 which is three years of median income divided by median home price which is very affordable. So that’s where I see areas like San Francisco have to come down because there’s no greater fool, there’s no one left to come in the door to push the prices up.
Mark Podolsky: Right but San Francisco is kind of an interesting market with all that Silicon Valley money you know.
David Campbell: It is and a lot of the people who are always pushing the prices up are not doing it with wages, they’re doing it with stock options that they received at their tech companies. So the stock market has done really well, that stock market equity has found its way into the housing market, but if the stock market goes down those buyers don’t have any equity to buy real estate with or if the stock market just stays sideways everyone who bought is going to buy and there’s no one new coming in the door to have that instant equity or the pop of equity that they earned in the stock market.
Mark Podolsky: Right. So David, I’ve never heard a note buyer or a note investor or note expert on the podcast you will be the first. So can you kind of just give us at a high level what note investing is, why it’s hassle free and what the benefits are?
David Campbell: That is a great question. When I’m looking at mortgage note investing I want it to be profitable if I’m repaid which means I’m looking for a strong interest rate or a discount on that mortgage to give me the yoke that I’m looking for and I want to be profitable if I’m not repaid. If I can answer those two fundamental questions will I be profitable because when you’re buying a note there’s only two outcomes you’re going to be paid or you won’t.
If I’m buying an unsecured note, like a credit card note or medical note receivables or something like that, if they pay you’re happy, if they don’t pay you well you just say please pay me and they’ll say no. You say well please, please, please pay and they’ll say no again and there’s nothing you can do about it and you’re right it’s not a good outcome. So part of investing in mortgage paper is the collateral, that’s what makes the whole thing work. If the borrower doesn’t pay you, you get the property for pennies on the dollar, which makes it worth the time and effort of making a loan and foreclosing on the asset.
Mark Podolsky: Right. So it’s really underwriting game at the end of the day. Can you get extra yield and is there enough equity in that property so worst case if I got to go through the pain of foreclosure I’ve got an asset at unbelievable discount.
David Campbell: That’s right and you look at most mortgage lending the vast majority of mortgage lending in the country is either purchased by Fannie Mae Fred [00:20:58] [Indiscernible] government is manipulating interest rates there to creating low yields or it’s securitized and sold on Wall Street and investors are so starved for yield and bond rates are so low that they push the yields incredibly low. So the vast majority of paper is going be Fannie Mae, Freddie Mac or securitized on Wall Street and they buy very sanitized things. They’ve got a very clear box of what fits in those niches. If it doesn’t fit in that niche, let me just take a step back. If it does fit in that niche your interest rate is incredibly low.
Mark Podolsky: Right so there’s no deal there for you.
David Campbell: That’s right. If it’s an A-plus borrower, clean collateral and they fit in that Fannie Mae, Freddie Mac box I can’t compete there because Wells Fargo is going to do the loan at 4% and I need to get a higher yield than 4%. So if it doesn’t fit in that box there is no lender and so then the private investor gets to step into that market and state Mr. Borrower I am the only lender you have. So when I look for opportunities in the marketplace, I’m looking in places where I can add value and not compete with the bank but to provide this service that is absent from the marketplace. So I’m not competing with Fannie Mae, Freddie Mac or Wall Street, I’m the only lender that will do that loan so I get to dictate the interest rate and the borrower can either accept that rate or not.
Mark Podolsky: Yeah. In order to do that many deals you needed to move the needle?
David Campbell: That’s right. One of the things about making a hassle free investment is duplicate ability, being able to do the same thing over and over again. In my business I look at say Starbucks and McDonald’s and every single Starbucks and every single McDonald’s has the same systems and the same products. If a big mac in Los Angeles is tasting the same as a big mac in New York City as it will in Dallas and that’s what I want for my business is systems where I can do the same thing over and over again. Having been that kind of ADD market cycle investor doing [00:23:46] [Indiscernible]. I realize if I can make something duplicate able and put a system then I know the types of deals that I can and I can go to the market place and create them.
Mark Podolsky: Yeah I love the model, I love it. So how did you get into that?
David Campbell: I was running my home building company in 2009 is when we started building houses in Dallas, Texas. It was great time to start a home building company because land was cheap, everybody was looking for work and so labor was cheap and materials were cheap because no one else was building. So it was a great time to build except for there was no buyers and there was no money. There’s only a small problem so we specifically said let’s go build now and build rental products because everyone has to have a place to leave.
In 2009 when everyone is being foreclosed upon they still needed a place to live so they were just moving out of owner-occupied housing shifting to rental housing. So we created a model to fit that time in the marketplace and then we went to banks and said, “Mr. Banker look I’ve never built a home in my life, but I’m an experienced investor developer who’s only had kinds of commercial real estate development that I’m doing. I’d like to build a single family home and put it out for rent would you give me a loan?” And they said “Don’t let door hit you on your way out. Get out of here there’s no way we’re going to lend to: a) home building that’s a nasty word and two you’re like a new developer forget it and three you want to go rental product no way.”
Mark Podolsky: Right.
David Campbell: So most people would just stop and give up and I said no this is going to work. So I called up hard money lender that I knew from Alaska and I said Mr. Hard Money lender in Alaska I know that you got a very fragile economy there in Alaska and all of your assets are single economy focused. How would you like the opportunity to diversify into Dallas, which is one of the most safe economies in a tomentous time would you like that opportunity to diversify? He said great 12% and six points and I said thank you I’ll take it.
So we started a home building company with a line of credit out of a hard money loan company in Alaska and we started building house and it went great. I had the opportunity to build more houses and I thought you know what I don’t want to pay 12% and six points, let me see who I know in my personal sphere of influence that might want to do that loan. So we started borrowing money at 10% from friends and family type investors and suddenly we had more capital available to us than we could use. So it was a good problem I didn’t have to borrow money at 12 and six any more I can borrow it at a 10 and no points and suddenly I had more money than I could use as a borrower so we started lending it out.
I started brokering deals, finding other homebuilders that needed money to build. So we would borrow it basically at 10 from our clients and make some points on the deal by lending it out and that went well and then we started buying houses fixing them up and selling them to families that had a big down payment, great job, great debt to income ratio, but their credit profile didn’t fit that Wall Street or Fannie Mae, Freddie Mac box. So they couldn’t go get a loan at 4% from Wells Fargo and I said well how much would you be willing to pay for a private loan on the house and it turned out that there’s a whole bunch of people that are willing to pay 10% on 15 year note
to buy a home. So we’d fix their properties, we’d sell them on seller financing and then we’d sell that seller financing paper to our clients that want to have a first position lien at 10% interest rate.
Mark Podolsky: Sure. It’s so good David Campbell but now we’re at that point in the podcast that I get to put you on the spot and explain to you my business model and ask you, do I have the best passive income model like the podcast says. Are you ready David?
David Campbell: I’m ready.
Mark Podolsky: All right so I buy and sell raw land and the ways that I buy it is I look for somebody who’s distressed. And how do I know they’re distressed? They owe back taxes and if they live out of state that’s even better. There’s no emotional connection to that raw land. So we send him a “top dollar offer” typically 20 to 30 cents on the dollar and percentage of those are accepted and then we can flip that property at about 300% return on investment on average.
But my favorite way to sell it is as we’ve been discussing owner financing. So I typically get my money out on the down or within six months of that time and now I have a thousand percent return on my investment, I’ve got a one-time sale, I’ve got recurring income coming in every single month on that note, and I don’t have to deal with any tenants, no renters, no rehabs, no renovations, no rodents. Because I’m not dealing with the tenant I don’t have to worry about Dodd-Frank, I don’t have to worry about RESPA, I don’t have to worry about SAFE Act land is exempt and I’m in a noncompetitive niche, there’s no private equity groups, there’s no hedge funds that are in this unsanitized real estate investing niche. David Campbell HassleFreeCashflowInvesting.com do I have the best passive income model?
David Campbell: Mark what I love about your business model is you found something where someone has a need, they’ve got a need to sell that property and there are no buyers. You’re filling that need with a cash offer and then you’re reselling that property by providing the value of seller financing to the marketplace and so you’ve added value each step of the way and you deserve to be compensated for creating that value. I think it’s awesome, I think that is an amazing business model.
If I’m trying to shoot holes in it the caveat is if someone buys that vacant land at a discount because it couldn’t be sold otherwise and then they try to resell it. It’s possible that that land has no value because either for example, it could be in a part of the country where if it’s development land, I’m a developer, sometimes I look at land and say if this land were free I couldn’t pencil a development on this, I couldn’t put a house on this property and sell it at a profit because everything is selling below replacement cost. So I’m going to say a very qualified you have an amazing business model and for people who are looking at getting into the niche you just have to ask the question, do you have the experience or a team that gives you that experience to help determine if that land has value or not.
Mark Podolsky: Right. I’ve done over 5,000 transactions and I’m kind of embarrassed to say it because it sounds so unrealistic, but I’ve never lost money on a land transaction and that’s since 2000.
David Campbell: That’s awesome.
Mark: Yeah. So in our niche if you buy it right it’s really really hard to lose if not impossible.
David Campbell: I love land; I’ve made a lot of money in land but one of my rules as a land purchaser I only buy land that I’m going to consume myself. Either I’m going to develop it myself or I have an end-use for that land immediately. Because one of the challenges of raw land is you buy it if you buy it on leverage, you’ve got a mortgage payment, you’ve got taxes, you have insurance and then it eats. It is negative cash flow so it doesn’t fit that paradigm of my investment philosophy but on the same time I probably made money in land more than anything else. Because even my home building company we make money selling houses but it’s really because we paid a good price for the land.
Mark Podolsky: Right. I love it, I love it. All right one more time I’m going to put you on the spot and I’m going to ask you for your tip of the week, a website, a resource, a book, something actionable with the best passive income our listeners can go right now, improve their businesses, improve their lives David Campbell what you got?
David Campbell: Mark we talked a lot about paper today and I’d really like to help [00:32:44] [Indiscernible] understand some of the terms, hence the mechanics and the nuts and bolts of how paper works and private lending works. So I’ve got a couple resources on my website at HasslefreeCashflowInvesting.com for free you can download a very expensive white paper called Hassle free Cashflow Lending that’s on my website at HasslefreeCashflowInvesting.com. I’ve also got three awesome webinars each of them are an hour long specifically Nuts and bolts of private lending, with the Tax investing strategies for private lenders and How you use self-directed IRA to be a private lender and all those are free videos on my site at HasslefreeCashflowInvesting.com.
Mark Podolsky: I love it. So my tip of the week is also your site but, which is HasslefreeCashflowInvesting.com, you kind of stole my thunder there David Campbell.
David Campbell: You let me go first.
Mark: I let you go first but that’s okay because look I always have a good site to send people to. So how about because we have such a geeky group of listeners have you ever heard of site called BlessThisStuff.com? This is pretty geeky.
David Campbell: No.
Mark Podolsky: Okay it’s not real estate it’s BlessThisStuff.com and it’s just these geeky gadgets that you can go on and see and they’ve got the latest and greatest of whatever geeky gadget you want. But if you want to learn more about building your wealth in real estate please go to HasslefreeCashflowInvesting.com and download for free all the resources that David has. Wouldn’t talk about it but your real estate blog is repeatedly named one of the top 100 real estate blogs in America. I want to remind the listeners the only way to get the kinds of quality of guests like David Campbell on the Best Passive Income Model podcast is if you subscribe, rate and review it. So please do that. David are we good?
David Campbell: Mark I am so happy to be on your show today and really excited to be a student of the content on your site. The information that I’ve been able to read and digest is fantastic and no matter how much experience you have as a real estate investor it’s so important to be a perpetual learner. Always be learning, always be studying and as a note investor I love that you’re teaching people how to create paper. I mean you call it LandGeek but the land is just a vehicle for manufacturing in equity that becomes a piece of paper, a note and once they have that note it produces income, it can also be sold. Our company loves buying existing notes. So once you create that paper you can sell it.
Mark Podolsky: Yeah exactly and actually the honors are mine. Thank you so much for taking your valuable time out of your day to share all your real estate investing wisdom with our listeners. I really really appreciate it and if you guys want to learn more about me of course, go to TheLandGeek.com and download for free The passive income blueprint and get the e-book How to avoid 3 fatal land buying mistakes and get this always informative and engaging podcast delivered each week to your email inbox. Dave Campbell of HassleFreeCashflowInvesting.com thanks again and we’ll see everybody next time.
[End of transcript]
Many of the local real estate markets in America are in a Seller’s market. If you want to determine if your real estate market of choice is a Buyer’s or Seller’s market CLICK HERE to read one of my most popular blog articles: “How to Predict Real Estate Prices”
I get this question a lot: “Should I Buy A Home In Today’s Seller’s Market?”
This is easy to answer from a purely theoretical perspective: NO!
(Disclosure: Yes, I sell mortgage notes and I hope you buy lots of mortgage notes from my company. However, I hope you can read past this author bias because there are a lot of good lessons to glean from this article. Shameless plug: CLICK HERE to gain access to our current inventory of Hassle-Free Cashflow Mortgage Notes producing 10% annualized ROI.)
When I look at the vast number of buyers in today’s real estate market, I want to shout “WHERE WERE YOU FIVE YEARS AGO?” when it was the best buyer’s market of our lifetimes. You see it always happens this way… Smart investors buy when everyone is selling. When everyone is buying, dumb money rushes in and smart money sells. I’m not saying don’t buy right now. I’m saying BE SMART about buying. If you can still borrow at 5% and buy a property producing a +6% return… well, that sounds pretty smart to me. You see, even though real estate prices are relatively high right now compared to rents, money is still cheap (as a result of an abundance of Federal government stimulus). Interest rates are low which means it is a buyer’s market of debt. Smart investors are still borrowing all the money they can get their hands on at long term fixed interest rates. What do you do with that cheap money after you borrow it… well, BE SMART and make sure you are “positively arbitraged”.
If you aren’t really, really, really sure what “positive arbitrage” means, you must absolutely watch this free video series as soon as you’re doing reading this article: CLICK HERE
After you’re done with the above video series watch this free video training series on real estate investing math.
CLICK HERE
These two sets of free investor training videos could make you rich, or at the very least they could save you from making some very poor financial decisions.
OK class… everyone turn to your neighbor on the right and explain “positive arbitrage”. Getting the positive arbitrage formula right (CAP > interest rate) is the razor’s edge difference between financial freedom and bankruptcy. Positive arbitrage is the most important real estate lesson there is. Unfortunately, very few people teach it. If you don’t understand positive arbitrage well enough to teach it, please promise you will watch the above videos and not just gloss over this point.
The question “Should I Buy A Home In Today’s Seller’s Market?” is harder to answer from an owner occupant perspective because a primary residence is both a consumable item for pleasure and utility as well as a major financial investment.
As long as it is cheaper to rent than own, you are financially ahead to be a renter and go buy rental property in parts of the US where it is cheaper to own than rent (CLUE: this is why so many California investors are currently buying rental houses in Texas). When real estate prices are at a market cycle low, it could make financial sense to buy a primary residence even if the cost to own is higher than rent if you choose to speculate that when real estate prices return to market cycle norms you will make a bunch of equity that would be significantly greater than the cash flow “losses” you experienced from paying more to own than rent. The caveat of this formula is that once the market cycle booms, you need to sell your house, reinvest the equity, and go back to renting. In lieu of selling and going back to renting, some savvy property owners choose to harvest their market equity gains through a cash out refinance and reinvest the capital elsewhere. That is an excellent strategy as long as you have the positive arbitrage formula right (CAP > interest rate).
Of course, many times the decision to buy a primary residence is made on emotions rather than finances alone and that’s OK too. Ultimately, the money you earn is designed to bring you the things you want when you want them. So, if you can afford a house and you really want to own it, then market economics be damned! A house to live in is really a liability (not an asset) anyway. If you like the convenience of paying retail prices to get what you want when you want it, then who cares what part of the market cycle we’re in. A retail buyer will buy something because they want it and can afford it and that’s OK! I pay retail prices for food all the time. I know it is cheaper eating at home than eating out, but eating at a fine restaurant can be really, really fun. Sometimes it’s OK to pay retail prices for stuff you want when you want it. Just make sure you know you’re doing it on purpose. Dumb money buys the things they want because they want them and then justifies the expense as an investment. Expenses are fine; just realize that expenses and investments are very different things.
If it is cheaper to rent than own and you’re trying to make a financially intelligent decision, go find a rental situation you are happy in and use your cash to invest where the numbers make sense. If it is cheaper to rent than own and the house you want to buy is relatively fungible (e.g. not a unique one of a kind property that comes on the market once in a generation) then I would wait until the next buyer’s market to buy a house to live in. When the next buyer’s market comes along, it will be obvious to you and every one else because the words “foreclosure” and “short sale” will be on the evening news like it was 2009-2011 all over again.
If you have assets in the stock market, I would apply similar advice to the above. IMHO stocks are in a bubble. A few months ago, I published a prognosis to my newsletter subscribers that the stock market was at a top and ready to crash. The DJIA was 18,100 when I made that announcement. As you know, the market is currently down significantly from that point. Two weeks ago, I published to my subscribers that there is a lot more downward movement coming in the stock market. Today’s DJIA closed at 16,384… that’s a ~10% decline from the market peak just a few months. After reading my prognosis, a few of my investor clients cashed out of the stock market (at the top) and used their cash to buy well secured mortgage notes paying 10% interest. These clients achieved an ROI well over 20% annualized relative to where they would have been if they had left their assets in the stock market. Protecting yourself from loss is almost as good as earning a profit.
Of course, no one knows for sure where the market is headed so use your own judgement where things are going and how to prepare accordingly. Personally, I’m selling real estate in areas where I see a price bubble and moving this equity into income producing mortgage notes, farmland, and silver bullion. I am also still bullish on the Dallas-Fort Worth metro for acquiring income-producing, positively-arbitraged rental houses. If you can still borrow money cheaply and you’re looking to build long term equity and tax shelter, I would not be afraid of taking a long term investment position in the DFW rental housing market (HINT: CAP > interest rate). If you’re looking for investment opportunities in income producing Hassle-Free Cashflow Mortgage Notes or Dallas-Fort Worth (DFW) rental property, I am here to help you. Always remember, I offer a free 30 minute investment strategy consultation over the phone to help you navigate the potentially turbulent economic waters ahead.
CLICK HERE to schedule your no-cost investment strategy consultation with professional investor David Campbell
Best regards,
David Campbell
Real Estate Investing Strategist
866-931-9149 x1
We are living through interesting times. If you’re thinking about investing in real estate (or anything for that matter) in a Seller’s market, it’s essential to change your investing strategy to respond to different investment cycles.
Amateur investors learn an investing trick that worked once and try using that same trick over and over in all market cycles. That’s like planting corn in your garden every single month of the year. Some months you’ll have a bumper crop and other months you’ll wonder why there is no corn growing in your frost-covered garden. Your mutual fund sales person will call that dollar cost averaging; I call it silly.
There are times for buying and there are times for selling and times for just holding on. Having invested through the last real estate cycle of boom and bust and boom again, I am currently investing a lot more conservatively than I was in 2003-2007. Although real estate is local and there will always be good deals to be found, in today’s market good deals are definitely getting harder and harder to find. That’s because we are in a Seller’s market. In a Seller’s market, amateur investors overpay for properties because they don’t see any other alternative.
Investing 101 – buy as much as you can during a BUYER’S market. My home building company was very aggressive about purchasing heavily discounted vacant lots during the down market. Now that the housing market is booming, we are building houses with the help of contractors like Ideal Construction LLC and selling more houses than ever.
Vacant lot prices have quadrupled from the market bottom making it extraordinarily difficult to find vacant lots to replenish our inventory for future development.
Investing 202 – don’t overpay for assets during a SELLER’S market. Most home builders are currently ‘overpaying’ for the small supply of lots on the market, because they only know one trick – building houses. They have to pay the high market prices for lots because that is the raw ingredient that makes their business run. Many home builders will ‘overpay’ for lots even if that means their profit margins virtually disappear. Because they only know one trick, it means ‘overpay’ for their raw ingredient of lots or go out of business because they have no more lots to develop.
If you’re thinking about buying real estate in a Seller’s market, think long and hard about that decision. Although I don’t think we are at the peak of the current real estate or stock uptrend, I do think we are currently well above where the next market bottom will be for both real estate and stocks. Of course, if you’re buying real estate for long term cashflow and positive arbitrage, it could still make sense to buy today because interest rates are still incredibly low. You could say that real estate is in a Seller’s market, but interest rates are still in a Buyer’s market. If you are buying ‘over priced’ real estate with ‘under priced’ financing and you are positively arbitraged you hold on for a very long time, you’ll probably do very well. (Positive arbitrage is when your CAP rate exceeds your interest rate)
Investing 303 – When equities are overpriced, sell equities and buy bonds. In most of today’s US real estate markets, real estate is now overpriced. Click here to read my blog article “How To Predict Real Estate Prices” to determine whether your real estate market is currently under or over priced. DON’T MISS THIS PROFESSIONAL INVESTOR HINT: I am currently selling most of my real estate portfolio, using the cash to buy mortgage notes, and will sit on the sideline collecting mortgage interest until the equity market / home prices crash. I plan to buy back into the real estate market at the next cycle low. I am currently buying precious metals as their price continues to drop, as well as farmland and timberland as an ultra-conservative hedge against hyper-inflation and a potential currency collapse. Market cycles are very long. It can be a decade or more from market bottom to market top and back down again. Amateur investors do not think far enough into the future. They plant corn seeds in summer expecting to harvest their corn crop in the middle of winter. Sometimes it just makes common sense to stop planting and wait for the proper season for planting to come along.
Investing 404 – Not all bonds are created equal. Mortgage notes are my personal choice of bonds. The only thing I own in my IRA is mortgage notes. A mortgage note (bond) is a promise to pay secured by a piece of real estate. If the borrower pays me as agreed, I am happy because I have earned a 10% interest rate with no tenants, no toilets, and no vacancy. If my borrower pays late I earn late fees in addition to mortgage interest and my ROI goes even higher. If I buy a corporate or government bond and they don’t pay, I can pretty much write off that investment as a total loss. If I buy a real estate mortgage note (bond) and the borrower doesn’t pay as agreed, I will do the happy dance of joy because I get to foreclose upon the real estate for pennies on the dollar. By restricting my original loan amount to 75% of the property value, I should make a higher return on my money by foreclosing on the borrower’s equity rather than getting paid as agreed. That’s what I call a win-win! If the price of real estate drops and I have to foreclose, I at least have the borrower’s 25% down payment equity as protection from loss. I also have title insurance to help protect my investment from fraud and/or sloppy paperwork.
I am currently focused on buying income producing mortgage notes in Dallas, Fort Worth, and San Antonio Texas. These three cities have excellent population growth, economic diversity, very affordable and stable housing prices, and the foreclosure laws are extremely favorable to lenders. I’ve been buying and brokering mortgage notes in those cities for about five years and I’ve developed an extremely strong system in the process.
Using the strength of my investor network (the same network that brought you to be reading this blog post today), I have developed a steady supply of mortgage note investment opportunities. I promise you won’t find mortgage note investments like these anywhere else, because these notes are specifically created by my team to fit my personal investment philosophy.
All of our mortgage notes:
(1) are in the foreclosure friendly state of Texas and the rapidly growing markets of Dallas, Fort Worth, and San Antonio.
(2) are secured by recently renovated, highly affordable, single family homes in class B neighborhoods near major employment centers.
(3) have strong borrowers with less than 45% debt to income ratio.
(4) are 1st position deeds of trust at ~75% loan to value.
(5) have mortgage payment comparable to the cost of renting the same property. If it is the same monthly payment to rent or own, the borrower has little economic incentive to default. If you do foreclose on a non-performing note, you can resell the property for cash or rent out the foreclosed property and generate about the same net operating income as you were getting from your note.
(6) are supported by a conditional buy back guarantee from Hassle-Free Cashflow Investing giving our investors peace of mind and a secondary source of repayment for their mortgage investment.
(7) are professionally serviced by a licensed and bonded mortgage servicing company.
(8) are self-directed IRA friendly. Our team can handle all of the compliance paperwork for you.
(9) are turnkey and hassle-free.
(10) have lender title insurance in place issued by Chicago Title Company and paid for by the borrower.
(11) have zero investor closing costs associated with the purchase price.
(12) are able to be purchased at a nominal discount below the face value of the note – usually about 99 cents on the dollar and the 10% annualized ROI would be improved if the borrower paid their note off early.
(13) have complete due diligence files available on the property, the loan, and borrower.
(14) are professionally underwritten by a licensed and insured residential mortgage loan originator (RLMO) to be “Frank Dodd compliant”.
(15) are secured by houses who have a minimum value of $75,000.
(16) are fully amortized over 15 years but can be resold for the amount of the unpaid balance at any time.
(17) have a bite sized purchase price between $60,000 – $120,000
If you would like to purchase high-yielding real estate notes secured by 1st position deeds of trust recorded against quality real estate in Dallas-Fort Worth, TX send us an email – David@HassleFreeCashflowInvesting.com or call 866-931-9149 ext 1
To request general information about mortgage note investing, you can read my free white paper – “CLICK HERE for Secrets of Hassle-Free Cashflow Lending” as well as watch this video “CLICK HERE for Investing and Tax Strategies for Mortgage Note Investors” and this video “CLICK HERE for Nuts and Bolts of Being a Private Lender.”
Don’t let the tax tail wag the investment dog. Consult the Hassle-Free 1031 Exchange Decision Matrix to help you decide whether a 1031 exchange makes sense.
Be sure to read:
by Professional Investor David Campbell founder of www.HassleFreeCashflowInvesting.com
http://www.hasslefreecashflowinvesting.com/ten-rules-for-a-hassle-free-1031-exchange/
by Professional Investor David Campbell founder of www.HassleFreeCashflowInvesting.com
An Internal Revenue Code Section 1031 Tax Deferred Exchange (“1031 exchange”) is a tax and investing strategy that allows an investor to reinvest the profits from the sale of an investment property into another “like-kind” property while deferring the taxes owed on the sale. The goals of a 1031 exchange can include: increasing or decreasing management intensity, increasing or decreasing risk profile, and/or increasing or shifting (but not decreasing) leverage on your real estate portfolio.
Completing a 1031 exchange can be full of pitfalls even for the most experienced investors. It requires a combination of investing, financing, and tax strategies that frequently require the seamless coordination of multiple advisors, along with the adherence to strict timelines. Hopefully, this article will help you avoid the obvious, and some of the less obvious, pitfalls of doing a 1031 exchange. However, this article should not be considered a substitute for competent legal, tax, or investment advice.
If you are contemplating a 1031 exchange, the author of this article, David Campbell, would be happy to offer you a no-cost investment strategy phone consultation to see what insights he can bring to your unique situation. You may schedule your free consult by CLICKING HERE
The founder of Hassle-Free Cashflow Investing, David Campbell, started investing in real estate part-time while he was working as a full time high school band director with zero net worth. Within six years and before the age of 30, David had become a financially independent millionaire through the vehicle of part-time real estate investing. David left public school teaching in 2005 to focus on real estate development and commercial real estate investment brokerage. His company’s investing and advisory experience has included single-family houses, apartments, retail, office, medical, condo-conversion, net-leased properties, syndications, land development, production home building, private lending, and winery. David has been a featured guest on some of America’s top radio shows and investing podcasts. His blog www.HassleFreeCashflowInvesting.com has been repeatedly named one of the top 100 real estate blogs in America. David is widely recognized as a cashflow real estate investing expert with real estate transactional experience totaling in the hundreds of millions of dollars.
The feedback I get from investors across the country is that we are in a seller’s market. Prices are up. Inventory is low. Properties in the hottest markets are selling over asking price with multiple offers. Investors are paying “more than they want to” just to get a deal done. The ratio between rents and purchase price is favoring sellers and squeezing investor buyers out of the market. Another way to describe this trend is that CAP rates are decreasing, or “compressing”. We are approaching a delicate part of the market cycle where the flood of inexperienced investors is driving prices up to places where experienced investors shake their head and wonder, “How is the winning bidder ever going to make a profit?”
Wouldn’t life as an investor be easier if the market gave you clear signals about the future? Interpreting investment signals is a mix of science, artistry, and luck with a bit of clairvoyant magic thrown in. In today’s blog, I’ll share a few of the directional signals I use in making real estate investment decisions. I will also talk about what investment strategies and buying opportunities I am excited about in today’s seller’s market.
A common mistake investors make in reading market signals is what I call, “You see what you look for and you look for what you know.” If you are seeing prices going up all around you and all you are looking at is prices, it would be natural to assume that if you buy now the price will go up next month. As sophisticated investors, we know this is not true and we need to learn to look beyond price and historical price trends. Appraisers are trained to look at what price similar properties sold for in the past 3-6 months. Appraisers are required to always look in the rear view mirror at prices in the past. In an upwardly trending market, homes will be selling higher than appraised value. It makes sense that if your home is in contract at a price higher than the previous sales comps, it won’t appraise at the contract price. A low appraisal doesn’t mean a home isn’t worth the contract price. A property is worth what a reasonably motivated buyer and seller agree to. A maxim to remember in real estate: “You will overpay for every property you ever buy; if someone else is willing to pay more, they, not you, will become the property owner.”
Simple economics teaches us that as you lower the price of your property there are more buyers. As you raise the price of your property there are fewer buyers. However, if you only have one property to sell, you only need one willing buyer. In a seller’s market, the seller of a performing income property is not typically in a rush to discount the price to find a buyer.
This graph illustrates the yin-yang relationship between pricing and quantity of buyers. The centerline represents market value. As you move above this market value, you attract a smaller percentage of prospective buyers, reducing your chances of a sale which typically increases the time it will take to locate a buyer at that price. Conversely, as you move below market value, you attract a much larger percentage of potential buyers which typically shortens the time it will take to locate a buyer at that price. One of the important take aways from this illustration is that there is a range of market prices for every property. Take appraisals with a grain of salt. Appraisers don’t provide a price range; they must isolate a single market value based on a subjective series of adjustments to historical prices. The marketplace where investors compete represents all of the “bid” and “ask” prices of buyers and sellers in real time. That’s why you will see buyers in a seller’s market paying higher than appraisal. That’s also why you will see sellers in a buyer’s market selling for less than appraisal.
Appraisals are “lagging indicators” of value, not “leading indicators” of value. A lagging indicator confirms a previous price trend but it does not predict the future. A leading indicator helps you predict the future. When you hear someone say, “You should buy in such and such hot market because prices appreciated XYZ percent in the past year,” remember that person is describing a lagging indicator of value not a leading indicator. If you would like to see into the future of real estate, look for leading indicators of value not lagging indicators.
You will have an economic advantage if you know how to evaluate the leading indicators of real estate demand, supply, and one of the most overlooked real estate signals – affordability ratio. To learn more about using leading indicators to predict the future of real estate prices use this link to my blog article Predicting Real Estate Prices. If you enjoy the article, please leave a comment or question below.
While you can’t change the signals you are getting from the market, you CAN change your investment strategy depending on what signals you are getting. We are currently blessed with incredibly low long-term fixed interest rates. Low interest rates are a signal for how to invest. While current prices are high relative to rents, interest rates remain low. One of the best assets to acquire in this seller’s market is the ability to control long term fixed low interest rate debt and to use that debt to create positive cashflow now and in the future.
If you can borrower long term fix rate money at 4% and invest in a property or note that produces a profit of 6% or more, how much money would you like to borrow? As much as you possibly can!! This strategy is called arbitrage. Positive arbitrage means you are making money on the bank’s money. You can’t do anything about today’s high prices, but you can focus on winning through positive arbitrage. Over 30 years you will make more money paying a “seller’s market premium” for a property and financing it with today’s insanely low interest rates (4-5%), rather than buying cheaply at the bottom of a “buyer’s market” and financing it with traditionally historical interest rates (7-8%).
Here are two Hassle-Free ways to create positive arbitrage in today’s seller’s market.
Option one is for the long term investor (10 years or more) who is (a) targeting higher yields, (b) is willing to take on a little more risk to achieve higher yields, and (c) is looking for a blend of positive cashflow, tax benefits, equity build up, and shelter from inflation. The formula is simple: buy a rental property whose CAP rate is greater than the interest rate on the financing used to acquire the property. A good goal is to achieve at least a 2% spread between the long term fixed interest rate and the CAP rate. While you may be able to achieve a CAP rate to interest rate spread higher than 2%, you may not like the quality of property that comes with higher CAP rates. Hassle-Free Cashflow Investors gravitate towards newer properties that are lower hassle to manage and have lower risks associated with property maintenance. Watch this video series to learn more about this investing strategy.
Option two is for the income investor who is looking for a combination of safety, semi-liquidity, and immediate cashflow. The formula is to borrow money at a low rate to be a lender at a higher rate. You can borrow capital (aka equity stripping) at today’s long term fixed interest rates around 4-5% from a bank using equity in properties that you currently own. You then use the proceeds of the loan to buy income producing notes (aka hard money lending) secured by quality real estate in first position at conservative LTVs that produce interest income of 8% or higher. For example, if you borrowed $100,000 against your $125,000 free and clear rental property (80% LTV) and you make a $100,000 loan @ 10% secured in first position against a single family property valued at $133,333 (75% LTV) you would have two assets – a house and an income producing note – and you would have one liability – the mortgage on your $125,000 rental property. The income from the note @ 10% interest rate would produce $10,000 a year income and the cost of your rental property mortgage @ 4.5% interest rate would consume $4,500 of interest expense. You can create a $5,500 annual profit out of thin air just by moving $100,000 equity from an existing property into equity in an income producing note. Remember, you still own the rental property and the profit from the rental property is exactly the same. The profit comes from putting your equity to work in two places at the same time your equity controls the property and the note at the same time. Assuming the income producing note is in first position at 75% LTV, if the borrower stops paying you can foreclose on the asset and it’s like buying the property at a 25% discount. In fact, some hard money lenders prefer making loans to borrowers who are unlikely to repay the loan. They call it a “loan to own” investment strategy. Making hard money loans in a seller’s market is a great way to produce income and potentially acquire real estate at steep discounts you are unlikely to find in the currently competitive seller’s market.
If you are looking to accelerate your wealth through income producing notes, please email David@HasslefreeCashflowInvesting.com to receive access to our current inventory of income producing notes / private lending opportunities.
If you are looking to buy turnkey positive arbitrage rental properties, please click here to view our current inventory of hassle-free cashflow rental properties.
If you’d like help refining your personal investment philosophy, please click the link below to schedule a free consultation with professional investor David Campbell.
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To your success,
David Campbell
Professional Investor
866-931-9149 ext 1
When I find myself in a recorded interview environment, which I often do as a financial educator, I don’t usually know the questions coming my way until the interviewer opens his or her mouth. I’ve got to think on my feet. I improvise. I do my best to sound intelligent even though the answer to the question still hasn’t fully formed in my head. It’s a lot like being a jazz musician, or the parent of an inquisitive young child who asks difficult questions you didn’t see coming. After several dozen radio, TV, and newspaper interviews, talking to the media has gotten easier. Responding to my child’s difficult questions… well, I’m still practicing that one.
In my interview today as a guest on the “Best Real Estate Investing Advice Ever,” the host of the show, Joe Fairless, ended the show with what he called the “lightning round” where he asked some rapid fire questions:
What your best real estate investing advice ever?
What book has given you the best real estate investing advice ever?
What event or audio program has given you the best real estate investing advice ever?
What’s the best real estate investment you’ve ever made?
If I had a week to prepare, I could talk for hours responding to each of these questions. Maybe for the sake of brevity, radio guests don’t get time to prepare their answers. Or maybe it’s exciting to hear each guest drool into the microphone while trying to form a coherent thought!
If you’ve been following my investment blog and videos for any length of time, you can guess my best real estate investing advice ever: “Buy Hassle-Free, positive cashflow property whose CAP rate is higher than your long term fixed interest rate and get as much of this positive arbitrage debt as possible.” A Hassle-Free property is a property you understand. You won’t lose sleep at night because you own it. That usually means buying new or like-new single-family houses, but it can also mean buying net-leased shopping centers, self-storage, billboards, leased land, or any other cashflow producing piece of real estate that YOU understand and feel comfortable with. I generally steer new and part time investors towards like-new houses because of the incredibly attractive long-term fixed interest rate financing available for rental houses compared to other investment properties.
On the “Best Real Estate Investing Advice Ever Podcast”, I said the most helpful book I’ve ever read was “Think and Grow Rich” by Napoleon Hill. What I should have said, “Think and Grow Rich is the best TITLE I’ve ever read.” The book itself is awkward to read and a little bit cryptic at times. But, the idea that I can grow rich if I only think the way rich people think is powerful for me. It also turned out to be true!
After the “Best Real Estate Investing Advice Ever Podcast” recording was over, though, I texted the host of the show – Joe Fairless – that I wished I could change my answer. I wish I had said the most helpful book I’ve ever read is “The Clipper Ship Strategy” from the Uncle Eric series by Richard Maybury. 
Unless you run in homeschooling circles, you probably aren’t familiar with this great book. It is an easy and quick read written at an 8th grade reading level. Although this book doesn’t contain the “Best Real Estate Investing Advice Ever”, the concepts in the book were nevertheless profoundly helpful to my business philosophy. The general concept is that clipper ships are much faster than cargo ships, but they also hold a lot less cargo. If you can be quick to market like a clipper ship, you will make a lot more profit than a cargo ship that enjoys cost efficiencies but is very slow to get to market. Remember in the 1990s when they piled Cabbage Patch dolls into the seats of 747’s so they could fly from China to the US in time to meet Christmas demand? The Cabbage Patch dolls that arrived a month after the Christmas rush were cheaper to produce but also sold for less than half as much. That’s a great example of the clipper ship strategy in action. Now go read the book! You can buy it on Amazon or through Blue Stocking Press and you’ll probably read it in one or two afternoons.
The event / audio program that changed my life is undoubtedly the “2003 Weekend Event: Excelling In The New Millennium” featuring Jim Rohn, Dennis Waitley, Brian Tracy, Zig Ziglar, and Charlie “Tremendous” Jones. I remember listening to that audio program over and over and over again while driving to my job as a band director from 2003-2005. And since I retired from being a band director in 2005 as a self-made real estate millionaire, the program must have worked! As I listened to that CD set, I knew I was literally reprogramming how I looked at the world. Listening to programs like this one in the car every day for years changed my thinking, which changed my actions, which changed my peer group, which changed my life. Sometimes the best real estate investing advice comes from non-real estate places. Turn off the radio in your car and put on some programming that will challenge you to think about creating a life by design!
When asked about the best real estate deal I’ve ever done, I was stumped. People ask me for my best real estate investing advice all the time, but there was something intimidating by the addition of the word “ever”. It’s a good thing this wasn’t live radio because I just sat there in silence like a deer in the headlights. There were so many voices in my head competing for attention all at once. Do I talk about the deal where I made a ton of money… Do I talk about the deal where I lost a ton of money but learned so much from the experience… Do I talk about the high profile deals that sound so impressive… Do I talk about the low money down deal that brings in a cashflow stream every month and follows the principals of Hassle-Free Cashflow Investing… dozens of ideas were flowing through my brain at a mile a minute. The host said, “David, are you still there? Did you hear the question?” I rallied and talked about a specific deal that teaches some of my best real estate investing advice but is a rarely used investing concept called “over-financing” a property. The concept of “over-financing” is to buy a property at a steep discount but then take out a loan against the property based on its market value so your loan is greater than the purchase price. I’ve “over-financed” several properties in my life. It generally means that you not only bought a property at a great value, but you get cash back at the close of escrow. These deals are few and far between and it generally means that you’ve put in a lot of sweat equity into finding and/or financing a deal creatively. I was able to buy a piece of land for $50 that was worth $100 and I got a $60 loan on the property (60% LTV) which means I put $10 of cash in my pocket at closing. Then I had a nice piece of land to develop for a nice profit in the future!
Here’s some more of my best real estate investing advice that I wish I had included in my guest appearance on the “Best Real Estate Investing Advice Ever Podcast”: (1) if you’re afraid of the stock market, you should be!, (2) if you are afraid of debt, you’re doing it wrong, (3) if you think you can, you can, (4) if you think you can’t, you’re also correct.
I hope these ideas and those found on my blog will be helpful to you in your quest for financial freedom and the best real estate investing advice ever.
If you are looking for opportunities for investing, you aren’t alone! There are currently more investors than good deals at this time in the market cycle. You’ve got to look harder for good deals now than you did in 2011! One of the values of being connected to a company like ours is that our investor relationships and media presence give us access to quality investment property throughout all investment cycles. If you are looking for investment property, don’t keep it a secret; be sure to give us a call and see what we can do to earn your business!
CLICK HERE TO LISTEN TO THE RECORDING OF THE PODCAST
All the best,
David Campbell – professional investor and founder of Hassle-Free Cashflow Investing
866-931-9149 ext 1
David@HasslefreeCashflowInvesting.com
keyword: best real estate investing advice
Investing in Real Estate and Cashflow Producing Notes Using These Eight Hidden Sources of Capital
by Professional Real Estate Investor David Campbell
It is amazing how fast time goes. 2014 marks my fifteenth year investing in real estate and my tenth year as a real estate developer and syndicator. Long time readers of my blog will know that I started investing in real estate while I was a high school band director with no business training and no net worth. Over the past 15 years investing in real estate I’ve been fortunate to have had more real estate wins than losses (losses are an inevitable part of investing in real estate) and I am grateful for the amazing mentors and life experiences that have helped me get to where I am today. Growing a successful real estate investment, brokerage, and development company out of humble beginnings has taught me a lot of lessons that I would like to share with you.
You can find many of those lessons reading my blog and free eBooks and enjoying the free video training at: http://www.hasslefreecashflowinvesting.com/video/
Here is a question I get asked all the time: “How did you become so successful investing in real estate when you started with no money?” What the asker is usually thinking is: “How do I become successful investing in real estate with a limited amount money?” Whether you have $100 to invest or $100 million to invest, everyone’s personal financial resources are limited. Don’t feel intimidated by investing in real estate just because you don’t have a large bank account. A great mentor once told me “Never let lack of capital get in your way of doing a good deal. If the deal is good and you know how to tell the story of a good deal someone will fund it.” As an innovating investor I took those words of encouragement one step further and looked for creative ways to fund my real estate growth. Below are a handful of creative ideas to help you improve your wealth and passive income investing in real estate regardless of how much capital you are currently starting with.
Disclaimer: Ideas can be powerful tools. Please remember in the hands of an untrained user, any tool can also be dangerous. Please digest these ideas with a air of caution and if you decide to implement any of these strategies I encourage you to reach out to an experienced financial mentor to discuss your plans. A good mentor may help you identify pitfalls you may not have thought of. For example, some of the ideas listed below are legitimate strategies when working with private financing and commercial lenders, but these creative financing techniques may not work or worse could get you into legal trouble when working with conventional “Fannie Mae” style residential lenders. I am not a tax advisor or a legal advisor; check with your team of professionals before committing to any financial decisions!
Hidden Capital Source #1: Self-directed IRA – If you are self-employed or have IRA funds saved from when you worked at a previous employer, you can roll those funds into a self-directed IRA and use those funds for investing in real estate and notes. If you earn $1 and put it into a tax deferred IRA you will have $1 to invest. If you are in a 40% tax bracket and don’t defer the tax, you earn $1 and have $0.60 to invest. That means you need a 67% profit just to break even ($0.60 x 167% = $1)! If you would like to learn more about self-directed IRA investing here are some great free training videos for you: http://www.hasslefreecashflowinvesting.com/video/ira-tax-videos/
Hidden Capital Source #2: 401(k) loan – If you have a 401(k) plan you may be able to borrow against your 401(k) to create a pool of cash to invest for investing in real estate. (Check with your plan administrator and tax advisor to make sure this would work for you!) If you use the proceeds of your 401(k) loan for investing in real estate you may be able to pay interest to your 401(k) that is tax-deferred income to your 401(k) (A GOOD THING) and take a present day interest expense tax deduction on your personal tax return (A GOOD THING). Let’s say you borrowed $50,000 from your 401(k) for investing in real estate and then paid 4% interest per year to your 401(k), your 401(k) would be earning a 4% return ($2000), tax deferred, while you would have a $2000 deduction on your personal return. Let’s say you then invested the $50,000 from your 401(k) into a note and trust deed that paid 10% ($5000 profit per year). You would have $5000 of interest income less $2000 of interest expense (to your 401(k) which means $2000 of your note income would be tax deferred as earnings to your 401(k) and $3000 would be taxable to you personally in the current year. While it might be better tax planning to own the note directly in your 401(k) it might be logistically impossible to do so. For example if your 401(k) is invested in your current employer’s plan and you are unable to roll it over into a self-directed plan, most employer sponsored IRA plans will not let you self-direct your IRA into notes and real estate, but they may let you take out a loan against your own 401(k) and pay yourself interest.
Here’s a potentially better tax plan for investing in real estate with your 401(k) funds. Let’s say you borrowed $50,000 from your 401(k) and purchased a $250,000 rental house with 80% financing and 20% down. Let’s say the rental house was a 6 CAP rate
($250,000 purchase price x 6 CAP rate = $15,000 Net Operating Income)
and you borrowed 80% of the money from the bank at 5%
($200,000 bank loan x 5% bank interest rate = $10,000 interest expense to bank)
and you pay back your 401(k) loan at 4% interest
($50,000 401(k) loan x 4% interest = $2,000 interest expense to 401(k))
Your gross real estate profit from rental activities would be $3,000
$15,000 NOI – $10,000 interest to bank – $2,000 interest to 401(k) = $3,000 profit
However, this $3,000 profit is before we add in the tax loss from depreciation. Assuming a $250,000 rental property is $30,000 land and $220,000 structure and we depreciate the structure over 27.5 years we get an $8,000 tax loss from depreciation.
$3,000 profit less $8,000 in depreciation results in a $5,000 tax loss
***Check with your tax advisor about all income tax related issues. Nothing on this website should be considered tax advice.***
So let’s recap this strategy…
EXAMPLE 1: By borrowing $50,000 from your 401(k) and purchasing a note you create profit and positive cashflow inside and outside of your 401(k). You would be creating tax deferral on the funds going into the 401(k) but you would have a taxable event in the current year on the profit that is in excess of the interest charged by your 401(k). Talk with your 401(k) plan administrator and tax advisor to see if you have control over the interest rate charged to yourself by your 401(k) and also confirm with your plan administrator that the interest you pay to your 401(k) accrues to your benefit rather than to the benefit of the plan administrator.
EXAMPLE 2: By borrowing $50,000 from your 401(k) and purchasing a $250,000 rental property you are creating tax deferred interest income and cashflow inside of your 401(k) as well as a “phantom loss” on your personal tax return in the current year. This “phantom loss” may or may not be able to offset other income you’ve earned depending on your personal tax situation. Although the property is showing a paper loss (aka phantom loss) the property itself is profitable because you borrowed all of the money at an interest rate lower than the earning rate of the property. Investing in real estate at a CAP rate higher than the cost of borrowing is called positive arbitrage and this is a key component of the Hassle-Free Cashflow Investing philosophy. CAVEAT: even though the property in this example is profitable and creating a phantom loss (which are both good things) it could result in negative cashflow because the amortization on the bank loan in addition to the shorter term amortization on the loan to your 401(k). Remember, not all profitable investments are positive cashflow and not all negative cashflow investments are bad.
Hidden Capital Source #3: Cash value life insurance. I got the downpayment for my first rental property by taking a loan against a cash value life insurance policy my dad purchased for me when I was a kid. You can learn more about investing in real estate using cash value / permanent life insurance and the “infinite banking concept” by watching this great video webinar with myself and Patrick Donohoe from Paradigm Life. http://www.hasslefreecashflowinvesting.com/video/cash-management-strategies-for-real-estate-investors/
Hidden Capital Source #4: Deploying existing real estate equity owned by you or your friend. This is a potentially obvious investment strategy that I am going to put a creative twist on for you. Investing in real estate or notes using a cash out mortgage or line of credit against real estate you already own can have very powerful results and can often improve your cashflow and LOWER your risk. Here’s how: My client owned a primary residence valued at $500,000 and had a $300,000 first mortgage and $200,000 of equity. The client refinanced the property with a new $400,000 first mortgage and pulled out $100,000 of investment capital. His net worth was the same before and after the refinance; he just moved half of his equity into cash. He then took the cash and purchased two $50,000 notes totaling $100,000, secured by $140,000 worth of real estate. The client borrowed the money from his primary residence at 4% and invested it into notes paying 10%.
$100,000 borrowed capital x 4% = $4,000 interest expense
$100,000 invested capital x 10% = $10,000 interest income
$10,000 interest income – $4,000 interest expense = $6,000 annual profit
On a simplistic basis, we can see this was a profitable move because the fixed cost of funds was lower than the fixed earning rate. Let’s look a little deeper at the cashflow on this deal.
The $100,000 of extra mortgage expense at 4% on a 30 year fully amortized loan is a cashflow outgo of $477/month.
The $100,000 investment notes at 10% interest on a 15 year fully amortized loan is a cashflow income of $1,075/ month.
$1,075 cash in less $477 cash out = $598 positive cashflow
(Albeit, not all of the $598 is profit because we are dealing with principal and interest payments using two different amortization schedules (expense is 30 year and the income is 15 year).
The above is a great example of how being a borrower and using the concept of positive arbitrage can improve cashflow. The investor client is happy because he improved his cashflow position by $598 per month simply by signing his name a few times, but he is also happy because this situation LOWERED his risk. Here’s how:
When your monthly cashflow improves, your risk goes down because you have more liquidity to service your debts and build up cash reserves.
When the investor moved $100,000 of equity from his home into first position debt secured by other real estate, he moved the asset from higher risk “equity” to lower risk “senior debt”. Let me go deeper into this concept. If the investor loses his job or credit in the future, he would be unable to tap the equity in his home without selling his primary residence. However, by moving the equity from his home into first position liens on other property, he has the peace of mind that if he ever loses his job and wants to tap the equity in his home, he can always liquidate the notes for cash.
The investor has also insulated his assets from the potential of real estate price declines. If the investor had not moved his equity from his primary residence and real estate prices decline 40%, his $500,000 property would be worth $300,000, less the $300,000 of original debt, so his net equity would have gone from $200,000 to $0. If he sold his house at this point in the market, he would have zero cash from the sale and he certainly wouldn’t be able to refinance any equity out of her home because there would be no equity.
By moving his equity into first position notes, his liquidity is more insulated from loss. His $500,000 property declines to $300,000. Less $400,000 of debt, that means he has a $100,000 negative equity in his primary residence but he doesn’t have to sell his primary residence until the market recovers. Remember, when investing in real estate the value of a property only matters when you are selling or refinancing. The main concern the investor is insulating against is not a change in profitability but a change in access to liquidity. Even if the notes go bad (always a risk), the investor will end up owning the underlying real estate. Ideally, the foreclosed houses would make great rental properties and would produce more rental income than what he was originally receiving in interest income from the previous owner. However, if he decided to sell the foreclosed real estate, even if that real estate had gone down in value, it would not have declined to zero as the equity in his home did. Moving your at risk “junior” equity into positively arbitraged “senior” notes while you have the equity and credit available to you would be the lesser of two evils in the event of large price declines.
Here is another risk mitigating bonus for my investor client: The investor owned a home in a high priced state and was concerned that the state’s economy and home prices might be fragile and unaffordable in the future. He moved his at risk “junior” equity from his high priced state into “senior debt” secured by entry level real estate in Dallas, Texas, which is a more vibrant and diverse economy. The investor felt that moving the equity out of his primary residence into a senior debt allowed him to (1) improve his immediate cashflow, (2) allow him to have access to this equity in the future regardless of his employment or credit position, (3) gave him options for liquidity in the future even if there are massive price declines, and (4) it gave his investments geographic diversity by moving a portion of her equity to Texas.
Hidden Capital Source #5: Cash advance credit cards – Here is a practical application on the idea of positive arbitrage that has merit but comes with some powerful caveats. I have a client with the ability to borrow from his credit cards at a teaser rate of 0% for 12 months. The client borrowed $10,000 from his credit card for 18 months and invested in a $10,000 note and deed of trust paying 10% that had a due date in 12 months. The client borrowed the money at 0% and invested at 10% which generated a 10% yield spread.
$10,000 trust deed x 10% interest rate – $10,000 credit card loan x 0% teaser rate = $1,000 profit
The client used the $1,000 interest income generated from this “arbitrage play” to pay down some of his longer term student loan debt. It’s another example of borrowing for profit. There is a risk that the credit card teaser rate would expire and reset to 18% before the note and trust deed were paid off so the investor made sure that if the note and deed of trust were not paid by the 12 month due date the note would have a default interest rate of 18%, which is the same as his credit card interest rate. A big consideration for this type of arbitrage play is that your FICO score will be negatively impacted for the period of time your credit cards are drawn more than 50% of their available credit line. However, when you pay off the credit card at the end of the borrowing period your FICO should improve. You probably don’t want to use this strategy if you are about to apply for financing on a new real estate purchase. And while this strategy could work well in investing in shorter term notes, you probably don’t want to use this strategy for investing in real estate as a long term investment unless you are confident you have another way to repay the credit card before the interest rate increases.
Hidden Capital Source #6: Barter your services or personal property – I once had one of our company’s vendors express interest in investing in real estate by purchasing a home built by my home building company. The vendor could qualify for the loan but didn’t have the down payment. We signed a seven year service contract with the vendor and paid the vendor for all seven years in advance. The vendor gave us a slight discount for pre-paying for his service. The vendor then used the lump sum of cash we paid to him as the downpayment on a property we built and sold to him. This was a win for the vendor because he got a seven year contract out of us when we previously had a month to month relationship and the vendor got to purchase a house he could not previous afford to because he didn’t have the down payment. This was a win for our home building company because the profit on the sale of the house exceeded the amount we advanced to the vendor and we got the added bonus of a slight discount on a vendor’s services we were going to purchase anyway. In the past, I’ve offered to accept vehicles or musical instruments or jewelry or land as the downpayment on houses. If you’re looking investing in real estate or a trust deed and you have personal property or land that you’d like to use as your downpayment, give me a call. I would love to work with you. Often times I have taken my real estate equity or real estate broker commission in a promissory note or co-ownership in a property. If you would like help investing in real estate or an income producing note and you want a broker to co-invest their commission with you give me a call at 866-931-9149 x1 and we’ll see what we can put together.
Hidden Capital Source #7: Investment partners / syndication – When I find a good investment larger than what I can purchase with my own capital I go to my investor clients to form a partnership or real estate syndication. Investing in real estate using partners can be a very complex subject but it is something I have gained a lot of experience with. Here is a great video with myself and real estate attorney Jeff Lerman teaching a free one-hour course called “Partnering for Profit” http://www.hasslefreecashflowinvesting.com/video/partnering-for-profit/
Hidden Capital Source #8: the seller’s bank – Here is a great strategy for investing in real estate that works especially well with commercial properties: On multiple occasions, I have met commercial real estate sellers who owe slightly more money on their property than it is worth as a cash sale. A great investing formula is to get the property in contract with the seller for the best price you can (usually what they owe on the property) and then go to the seller’s bank and say, “Mr. Banker, you currently have a loan on such and such property for $1m and the property is really only worth $975,000. I know you typically require a 25% downpayment on commercial real estate, but I am only interested in buying this property (for more than its worth) if you will give me special financing terms to buy this property. I would like to reduce your loan from $975,000 to $900,000 and I will give you a personal guarantee that is worth more than the seller’s personal guarantee. Will you do this?” Usually the bank will say no. However, you can explain to the banker that if the seller pursues a cash sale it will probably result in a short sale for the bank. If the bank will cooperate with you by offering a higher than normal LTV loan you will lower the bank’s debt / risk position in the property by slightly paying down the existing loan, provide superior management to the asset, and provide a superior personal guarantee on the loan. It doesn’t happen often, but I have been successful acquiring high LTV property using this strategy. There are an infinite number of variations on this strategy, but the key points to remember are: how do you make the situation into a win for a bank who has a problem (loan overexposure and risk), a win for the seller (who has a loan/property they think will be a short sale), and a win for the buyer (who is willing to slightly overpay for a property to get superior financing terms from the seller’s bank).
In addition to these hidden sources of capital for investing in real estate and cashflow producing notes, I encourage you to also watch this free video series where we discuss your “Eight Essential Resources” and how to use them to produce real estate profits: http://www.hasslefreecashflowinvesting.com/video/secrets-of-hassle-free-cashflow-real-estate-investing/
If you would like help formulating your personal investment strategy or if you would like to learn about current Hassle-Free Cashflow investment opportunities please give me a call at 866-931-9149 ext 1 or schedule our phone call using this link to my calendar. https://my.timedriver.com/WBYTQ
To your success!
David Campbell
Real Estate Investing Strategist
Office: (866) 931-9149 Ext. 1
Cell: (707) 373-9966
Keyword: investing in real estate
David Campbell’s 26 Tips For Efficiency and Success in Business
Although I’m a professional real estate investor / developer, I wrote these efficiency tips in a very broad sense so you’ll get some juicy tidbits from this article regardless of what your business is. If you are a busy person looking to become more efficient this article is for you. I’d love your feedback on these tips so if you have an efficiency tip of your own please leave it in the comments below or send me an email David@HassleFreeCashflowInvesting.com
Professional Real Estate Investor David Campbell’s
26 Tips For Efficiency and Success in Business
1) Use Workflowy.com (free app) to create action items and “how to” lists. Share lists with your colleagues who can update data in real time from their smart phones.
2) Use TimeTrade.com (inexpensive app) to coordinate meeting times with other people.
3) Google Calendar (free app) synced with your smart phone to schedule your day before it happens.
4) Google Docs (free app) for file storage and file sharing with your team and customers.
5) Pre-screen email on SmartPhone during downtime on the train or waiting in lines and then respond when sitting at a desktop.
6) Delegate tasks that take your emotional tokens, especially those that are repeatable. But don’t delegate tasks that only you can do or that would require more time to delegate than if you had done them yourself.
7) Organize your email box using folders with retrieval categories.
8) Schedule the ending time for appointments.
9) Calendar time to complete your to do list.
10) If you have something to say, don’t tell one person at a time; share your message with a group of people.
11) Schedule time to socialize and rest.
12) Make your rest time restful.
13) Be accessible but out of reach by creating small barriers to protect your time.
14) Return phone calls using a hands free headset while walking for health or commuting
15) Articulate what success and accountability looks like to you.
16) Let your professional team earn their fee – don’t try to do everything yourself even if you can.
17) Create and follow systems for accounting and document retrieval using file name taxonomy.
18) Don’t let the urgent get in the way of the important.
19) Start your day with your list of most important things to do (this is not usually responding to all email).
20) Close your door to distractions.
21) Open your mail over the recycle bin or, even better, hire someone else open and sort it for you.
22) When your brain is fuzzy: STOP working, drink water, eat a snack, and get your heart rate up before going back to work
23) Keep other people’s dirty feet out of your head.
24) Maintain positive peer groups and avoid negative peer groups.
25) Work for passive income streams rather than paychecks.
26) Stay with a task until it is done. Minimize mental multi-tasking which results in fewer transitions between projects.
Hopefully at least one of those tips will bring more efficiency to your business. If you have a great tip for efficiency in business, please send me an email or share it on our Facebook page: https://www.facebook.com/cashflowinvesting
If you are looking to efficiently grow your passive income through Hassle-Free Cashflow real estate investments and income producing notes, please schedule a phone call with professional investor David Campbell by using this link to his calendar. https://my.timedriver.com/WBYTQ
Best regards,
David Campbell
Real Estate Investing Strategist
Office: (866) 931-9149 Ext. 1
David@HassleFreeCashflowInvesting.com
Every investor wants to know how to predict real estate prices and the process is not as mysterious as it may appear
While I focus on investing for cash flow, loan amortization, and tax benefits, I also appreciate the warm and fuzzy feeling you get as a investor when your real estate values climb! So, what are the things I look for when figuring out how to predict real estate prices?
Prices are a result of supply, demand, AND capacity to pay.
Let’s look at these factors one at a time:
Demand for real estate is driven by population growth which is fueled by job growth. In resort and retirement communities, you might see high demand and price growth even when the local job market is stagnant because the money to fund real estate purchases in resort areas was earned somewhere else and imported.
Real estate supply is restricted by (1) availability of land, (2) geographic boundaries such as water and mountains, (3) political boundaries such as permit fees, restricted density policies, and (4) economic boundaries such as availability of development capital and the ability to build and sell new properties at a profit.
No matter how desirable or limited in supply something is, the price of the thing will be dictated by how many people can afford to buy it. Affluent communities have more expensive restaurants than the poor communities. Although the desire for food and supply of food to both of these neighborhoods might be the same, the prices in these two neighborhoods can be wildly different based on capacity to pay. For example a can of Coke could be $1 in a poor neighborhood and $3 in an affluent neighborhood. The main thing driving price differences in this illustration is capacity to pay.
Last week,my five year old son and I made blueberry muffins together. When they were done he proudly exclaimed, “Come buy blueberry muffins! Only THIRTY DOLLARS each!!!” I asked him why his muffins were so expensive. Without hesitating he said, “Because people around here have a lot of money!” Even at five years old, he’s paying attention to his dad’s lessons on economics!
As a real estate investor, I am attracted to affordable housing markets because it means the price of housing has the ability to increase in price. Just because something is affordable doesn’t mean it will go up in price, it just means it can go up in price. For prices to rise, the other variables of supply and demand must also be working in your favor. However, if something is unaffordable for the majority of people who want to buy it, that’s a pretty strong indicator that the price could be in a bubble and may soon come down to more affordable levels.
The ratio between median income and median home price is an effective way to gauge the affordability of housing in a particular market.
Using data from Q3 2013, the San Francisco – Oakland MSA has a median home price of $705,000 and a median income of $76,300. That means the median home price is 9.2 times higher than the median income; it would require 9.2 years of median income to buy a median priced house. In terms of a monthly housing payment (Principal, Interest, Taxes, Insurance, and HOA dues), a median home in the San Francisco-Oakland MSA requires ~70% of the median income. That’s not sustainable. Either income must go up or housing prices must come down. I would bet on the former.
In Rockford, Illinois, the median home price is $88,900 and the median income is $51,500 which means the median home price is 1.7 times higher than the median income. To put it in other terms, residents of Rockford use a mere 13% of their household income for housing. WOW, that’s affordable!
Lenders don’t know how to predict real estate prices, but they know how to predict what borrowers are likely to pay and which are not. Lenders know that when you use a lower percentage of your income for housing, their loans are less likely to go into default. For example, FHA requires its borrowers to use no more than 31% of their gross income for housing and no more than 43% of their income for total debt service including housing and other loans. It seems pretty crazy for someone in California to use 70% of their income for housing!
I’ve traveled to both San Francisco and Rockford and I can tell you without hesitation there is more demand and less supply of housing in San Francisco, CA than Rockford, IL.
If you want to know how to predict real estate prices, there is a great equalizer in this supply and demand equation. CAPACITY TO PAY. Someone earning the median income and living on their parents’ couch in Rockford can save up all their pennies for 1.7 years and pay cash for a median level home in Rockford. Now, I’m not saying run out and buy real estate in Rockford because it’s amazingly affordable. (Remember, if you want to know how to predict real estate prices you also need the combination of supply and demand to create upward price movement.) However, I am saying San Francisco-Oakland prices are back into bubble territory and are poised for a downward price correction. If you’re thinking of buying a home in the San Francisco Bay Area because you think home prices will continue to go up, just ask yourself “Who can afford to pay more than 70% of their gross income to buy this house?” That’s right: NO ONE!
A housing price to income ratio less than 3 is very affordable, from 3 to 4 is moderately affordable, 4 to 5 is moderately unaffordable, and over 5 is severely unaffordable. Here’s an example of these ratios based on a $100,000 house whose PITI is $7500/year and using variable median incomes to illustrate my point.
If the median home price is more than five times the median income, those buyers will be required to use too much of their income for housing and will not qualify for mortgages. This affordability ratio can be comfortably higher in resort and second home areas because the income is imported from outside the metro where the property is located. However, if you are looking for rental property in a typical metro, properties with affordability ratios over 5 are overvalued based on the measure of capacity to pay.
One of the things I notice on this list is that the major metros in Texas rank remarkably well in terms of affordability: Austin 3.7, San Antonio 3.3, Houston 3.3, Dallas-Fort Worth 3.1 This healthy price to income affordability ratio is one of the things driving employers to bring jobs and people to Texas. The population of the DFW metro is booming and that is why I am focused on building affordable new homes and owning affordable rental properties in that metro. Let me know if you’d like to add some affordable Texas real estate to your portfolio as I would be happy to help.
CLICK HERE FOR A LIST OF OUR CURRENT INVESTMENT PROPERTY INVENTORY
If you would like to improve your odds knowing how to predict real estate prices, look for these three indicators of success: increasing demand (jobs), limited supply, and an affordability ratio below 5. Click this link if you want to use these criteria to see how to predict real estate prices in Dallas Texas.
To your success,
David Campbell – professional investor / founder of Hassle-Free Cashflow Investing
866-931-9149 ext 1
All rights reserved. This article “How To Predict Real Estate Prices” may not be reprinted without permission.
Eleven Real Estate Investor Lessons You Can Learn From The US Postage Stamp
by professional investor David Campbell
On Monday January 26th, 2014 the price of a first class stamp in the US will be going up 6.5%, from $0.46 to $0.49. No one is really surprised by this, so where’s the lesson and how can it help you be a more successful real estate investor?
Lesson 1: Utility – The utility of a stamp on Monday will be exactly the same as the utility of a stamp today. The VALUE or UTILITY of the stamp is the benefits that the stamp provides. Regardless of the price, the UTILITY of the stamp will remain the same; what really happened is that the utility or value of your CURRENCY went down. On Monday, it will take more dollars to buy the same amount of stamp utility you can buy today.
In real estate investor terms, the utility of a single family home is its ability to provide shelter. Over a thirty year period the utility of a four bedroom two bath home stays exactly the same. On day one, the house will provide the same amount of shelter it will in thirty years.
Lesson 2: It’s Not a Secret – The post office announced this price change on September 25, 2013. They gave you plenty of warning that the utility of your currency was about to go down by 6.5%. That’s a lot!!!
The Federal Reserve Bank, which has a substantial control over the utility of your currency (meaning the amount of stuff your dollar will buy), also announced in a press release on December 18, 2013 that “Inflation has been running below the Committee’s longer-run objective… of 2 percent.” You can insert your political opinion here regarding whether inflation is really running below 2% or not, but the point is nobody is keeping inflation a secret. The post office told you the utility of their service was going to stay the same but prices were going up. The Federal Reserve is giving you fair warning that the utility of your currency is going down by (at least) 2% a year if they can do anything about it.
As a real estate investor, inflation makes it relatively easy and predictable to find properties that will make me money over the long term. I want to find a property that will preserve its utility over a long period of time, will be a hassle-free ownership experience for me, and cashflow along the way especially when inflation pushes up the rent. In my world as a real estate investor that means owning new or like new properties with professional management, in landlord friendly states, and purchased with creative deal structures that allow me to cashflow with as little money down as possible.
Lesson 3: Leverage – Let’s say you go out on Sunday and buy 10,000 postage stamps using all of the cash you have on hand. You’d be out of pocket $4,600. You could theoretically sell those stamps in less than 30 days to your short sighted friends and family who didn’t know the price of stamps were going up to $0.49 or who didn’t prepare and take action like you did. Maybe you sell them at a slight discounted price of $0.48 so you have a value proposition to offer. Your 1,000 stamps would sell for $4,800 in 30 days – a 4% profit in 30 days or a 48% annualized yield. That’s a pretty astounding return for such a simple investment, but at the end of the day you only made $200; not a lot of profit for the effort involved. Let’s take this exercise a step further… So you have an AMEX card with a $23,000 limit on it and you have $4600 in cash so you go buy 60,000 postage stamps at $0.46 for a total investment of $27,600 (OK they probably don’t have that many in stock, but just hang in there for the lesson). You have $4600 of your own cash invested and $23,000 of credit invested. That’s A LOT of stamps, so let’s say it takes you 60 days to sell all of those stamps and you wind up paying 18% annualized interest to AMEX for the privilege of borrowing the money for 2 months. At the end of 2 months your profit loss would look like this: 60,000 stamps sold at a discounted price of $0.48 = $28,800 less your initial investment of $27,600 less credit card interest of $690 equals a total profit of $510 divided by your initial cash investment of $4600 annualized equals a 67% annualized rate of return. The unleveraged version of this investment produced a 48% annualized yield and the leveraged version produced a 67% annualized yield. The takeaway is that the leveraged version of this deal produced both a larger gross profit and a larger annualized yield even when the interest rate was high because the investment yield was higher than the borrowing cost. I love real estate because there is an amazing amount of leverage available to a real estate investor. What other asset class can you borrow 75-95% of the purchase price and still produce positive cashflow after debt service?
Lesson 4: Scalability – In the above example, you made $510 of profit and there was virtually no risk involved. So you say “WOW, that is a genius business model, David. I’m ready to hop in the car and go buy stamps right now! I actually have $100,000 of investment capital available so let me run out and buy 217,391 stamps and I’ll make $20,000 on this flip.” The problem with this massive postage stamp flip is scalability. If you have a two cent profit per item, you need to sell A LOT of items to make any money and find a big enough market to absorb the item you are selling. One the best parts about being a real estate investor is that it is very scalable. If you make a 5% profit on a million dollar property, we’re talking about $50,000 and that is serious money! Even better, if you bought your million dollar property with only 5% down and your property goes up in price by 5% you’ve actually doubled your money.
Lesson 5: Historical Perspective – The price of a postage stamp was $0.10 when I was born in 1975, $0.29 when I graduated from high school in 1993, $0.32 when I graduated college in 1997, $0.42 when my first son was born in 2009, $0.46 today and $0.49 on Monday. The day I was born in 1975, someone could have purchased a decent home in the US for 400,000 ten cent postage stamps (or $40,000). Purchasing this same amount of “house utility” still costs 400,000 postage stamps in 2014, but the price of a stamp moved from $0.10 to $0.49 and the price of a decent home moved from $40,000 to $196,000. Even though the price of the home and the stamp have increased almost 500% in the past 38 years, the utility or value of both of these things remained the same.
Lesson 6: Making Money With Debt – Imagine buying a $40,000 house in 1975 using 100% financing and interest only payments. That means $40,000 loan with no principal payments would have the same loan balance in 2014 as it did in 1975. On the date you purchased the home the loan was worth 400,000 postage stamps and the home was also worth 400,000 postage stamps. If you sold this house in 2014, you would be able to sell it for … ta da! 400,000 postage stamps. The way you make money with this formula is that it only takes 61,224 postage stamps to repay the $40,000 mortgage in 2014 and you would receive the equivalent of 238,776 postage stamps as your profit. You started with zero postage stamps invested (remember 100% financing) and 38 years later you have 238,776 postage stamps, or $156,000, to show for your profit. Remember, the utility or value of the house did not change;he utility of the currency decreased as the government printed more of it. As the currency devalues, borrowers of good debt are making a profit. As a real estate investor, how much good debt would you like to control?
Lesson 7: What This Means For You As A Real Estate Investor – I’ll keep it as simple as I can: Buy real estate whose intrinsic value will remain the same or decrease very little over time. Finance that real estate with as much positively leveraged debt as you can while still maintaining neutral or positive cashflow. Wait two or three decades and the value of our currency and the value of the debt will both decrease in value. Pay off your debt with devalued currency and you will have lots of postage stamps… ahem… I mean dollars left over to show for your foresight. (Positive leverage means the CAP rate of the asset you purchased is higher than the interest rate used to purchase that asset. Positive leverage is an essential fundamental of the Hassle-Free Cashflow real estate investor philosophy.)
Lesson 8: If It’s That Simple Why Doesn’t Everyone Do It? – The price of postage stamps is going up 6.5% tomorrow. How many people are running to the store today to stock up on stamps? Not many, and that’s exactly my point. People know currency devaluation is happening and the majority of people aren’t doing anything to prepare for it. The post office and the Federal Reserve are both telling you your currency will continue to devalue. Now that you know what’s happening, what are you doing to not only protect yourself from inflation but to profit from it?
Lesson 9: Banks Love Inflation Too – Banks don’t lend their own money. They lend other people’s money. They collect deposits and then leverage those deposits by borrowing from other banks. They pay less than 2% interest on those deposits and loans and then they lend it out to other people for 4% or higher. The bank makes a spread on other people’s money. The bank doesn’t care if the currency is devaluing because the currency doesn’t belong to the bank; it belongs to their depositors. As the currency devalues, the prices of the assets securing the bank’s loans go up and the loan to value improves thus making the bank’s job easier to foreclose if needed. If you are a real estate investor paying attention, you should be asking “How do I get to be the bank?”
Lesson 10: The Big Take Aways – I hope you enjoy my real estate investor newsletter and the tons and tons of free real estate investor education and investment opportunities you can find on my blog. Our team at www.HassleFreeCashflowInvesting.com can help you buy positive cashflow rental houses with as little as a 5% downpayment using our proprietary real estate investor financing programs. We can help you BE THE BANK. If you could borrow money at 5% and invest it at 6% or more, how much money would you like to borrow? We can help you acquire brand new rental houses in the hottest rental market in the country (Dallas – Fort Worth Texas) that will cashflow with as little as 5% down. The more positively leveraged money you borrow the more property you control. The more property and good debt you control, the happier you will be when currency devaluation occurs. Remember, your property doesn’t have to go up in value to make a fortune; it only has to go up in price as a result of currency devaluation.
Lesson 11: How To Be The Bank – AMAZING MONEY MAKING BONUS -What if I were willing to loan you $60,000 at 5% interest and then borrow $60,000 back from you at 10% interest using my loan to you as collateral? You’d make a 5% profit ($3,000 a year) on the money I loaned to you and you’d have absolutely zero risk because if I defaulted on my loan to you, you would just tear up the note that you owe to me and we’d be even. That seems crazy so why would anyone in their right mind do this? There’s a perfectly logical reason, but if you want to find out that reason you’ll have to schedule a brief phone phone call with me! https://my.timedriver.com/WBYTQ There are always a few strings attached so let’s get them out in the open so we aren’t wasting each other’s time on a phone call talking about a real estate investor opportunity you aren’t qualified for. To qualify for this insanely simple and safe program you need to meet the following criteria:
(1) have a minimum credit score of 680 if you are a US citizen or an equivalent amount of strong credit if you are not a US citizen,
(2) you have a healthy job history and debt to income ratio which allows you to qualify for a conventional loan (if you have 10+ financed properties we can still help you),
(3) you can show a conventional lender a minimum of $40,000 in cash reserves ($80,000 if you are not a US citizen),
(4) you have a long term real estate investor mindset.
If you fit the financial criteria above and you’d like to make $250 a month or more as a passive private lender and real estate investor using my money you need to give me a call. Why would anyone lend you money at 5% and borrow it back at 10%. That seems like a terrible business decision?!?!? I guarantee when you get on a short phone call with me it will make sense very quickly. I can only accommodate about twenty investors into this risk-free, sounds-too-good-to-be-true-but-isn’t, private lending and real estate investor program so if you are interested, please schedule a call with me ASAP using this link to my calendar: https://my.timedriver.com/WBYTQ
Real Estate Investor Opportunities – Our team wears a lot of hats so we can provide diverse investment opportunities for our clients: We have brand new homes for sale in Dallas-Fort Worth Texas that create positive cashflow with as little as 5% down.
We buy and sell notes to help our income investors achieve cashflow. We currently have notes available for sale! Our supply of notes is relatively small and they usually sell very quickly to our inner core of clients who pick up the phone and make their investment objectives clear to us.
We aggregate real estate investor capital into private placement syndications (aka group investments) to buy net leased commercial properties.
We are a hard money lender and buyer of income producing notes. If you have quality notes for sale, give me a call.
If you are a real estate investor looking to increase your wealth and cashflow as a hassle-free cashflow real estate investor, try scheduling a 30 minute phone call with me to see if there is an opportunity for us to work together. https://my.timedriver.com/WBYTQ
Best regards,
David Campbell
Real Estate Investing Strategist
Founder of Hassle-Free Cashflow Investing
Office: (866) 931-9149 Ext. 1
Cell: (707) 373-9966
You may schedule a investor strategy consultation with professional real estate investor David Campbell by using this link to his online calendar. https://my.timedriver.com/WBYTQ
Keyword: real estate investor
by professional investor David Campbell
A year ago I published my economic predictions for real estate investors in 2013 on my BLOG. It’s fun to go back in time and see how well my crystal ball worked. Click here to read my 2013 real estate investor economic predictions and with the benefit of hindsight see if you agree my predictions were pretty spot on.
“More Federal stimulus ahead causing malinvestment in localized asset bubbles”. I’ll say that again but in English this time. “People do stupid things with easy money and there is a lot of easy money floating around. So, when you get some of this easy money don’t be stupid with it!”
The current level of prosperity in the US is being fueled by the “wealth effect” which is fueled by massive government stimulus propping up asset prices (mostly the stock market and to a much lesser degree the housing market as well). The prosperity feels real from the standpoint that people are spending and earning money again. However, this is a game of musical chairs and you won’t want to be the last one standing. Economic stimulus through the printing press is like taking a drug that makes you feel great until the buzz wears off; then you have an economic hang-over worse than your original problem. I believe we are at the end of the economic hang-over created by the last boom and bust cycle and we are just ramping up the euphoric feeling of the current QE infinity inflationary cycle.
The following are my specific 2014 Economic Predictions for real estate investors :
Very few people are bold enough to make specific predictions because the more specific you are the easier it is to be wrong (and most people hate being wrong). Take these predictions with a grain of salt. Forward this email to your friends and use it as a conversation starter. You can use the dialogue to make up your own predictions for the year. I really want to hear your feedback about these 2014 Economic Predictions on my Facebook page. After you are done reading, come find me online https://www.facebook.com/cashflowinvesting
Real estate rents, wages, food, interest rates and energy prices will rise moderately in 2014.
Gold will trade $1150 – $1450 and silver will trade $18.50 – $23.00.
I predict 30 year owner occupied mortgage interest rates to go up to five percent by July and hover in the low fives through the end of the year. Commercial mortgage rates will be lower than residential mortgage rates because commercial banks will remain flooded with cash and have no one to lend it to. Residential interest rates will creep up as the government withdraws stimulus from that part of the market in an effort to moderate housing price growth.
Wall Street funds that bought large portfolios of foreclosed homes will start to liquidate their single family holdings as a result of increasing adjustable rate mortgages (*many Wall Street investment funds bought houses with short term adjustable rate loans and those loans are either coming due or are looking at the probability of rising interest rates). These Wall Street funds never intended to be permanent landlords (and they aren’t very good at it). With home prices up this is a good time for these funds to start cleaning up their portfolios by liquidating their most troublesome and most price inflated properties. The release of this inventory will put a downward price pressure in those markets who had the highest rates of appreciation from the trough. I would be very cautious about buying into Las Vegas, Pheonix, San Francisco Bay and Southern California and if I already had a sizable profit tied to a property in one of those markets I would consider exchanging out of it.
I remain a huge fan of the Dallas-Fort Worth metro. I do have a personal bias for telling you about that market because I am building and selling rental houses in Dallas and Fort Worth, but there are a lot of other really smart people who are very bullish on Texas. Here’s a great video by the North Texas Economic Commission why the DFW economy is at the very beginning of a long term upwardly trending market.
I am also intrigued by Charlotte, Denver, Atlanta, Miami, Tampa, Washington DC metro, Portland, and Seattle but not nearly as much as I like Texas. I predict all of the major cities and small oil towns in Texas will have 6-10% housing price and rent increases along with lower rates of vacancy (6.5% vacancy or less).
Bit coin will get more media attention, but its pricing will become even MORE volatile such that only the blackmarket economy will really accept it for payment. Governments around the world will find a way to tax bitcoin.
Stock prices will become extremely volatile in 2014. Watch for heart wrenching price swings of 10-15% up and down in a given month. Stock traders will make record profits in 2014. Stock investors will end the year sideways or down. If you aren’t sure about the difference between an investor and trader, here’s a great article for you.
The unemployment rate is much worse than the published numbers because many people who have expired off of unemployment benefits and have stopped looking for work or they have moved onto the rolls of Federal disability. States pay for unemployment benefits but the Fed pays for disability so cash strapped states are moving people off unemployment benefits and onto Federal disability benefits as a way of balancing their budgets. Those on disability are not counted as unemployed. Expect to see a jobless economic recovery. The gap between the affluent and the poor will widen because the affluent make money by owning assets which are inflating in price while the poor make money selling their time but there will be fewer and fewer jobs for unskilled workers as a result of increased environmental protection legislation and higher minimum wage laws. “The best way to help the poor is to not be one of them.” – Laing Hancock
2014 will be a prosperous year for many. Be careful not to sucked into speculative investments because fiat currency will be causing malinvestment everywhere. If you are looking for a fast read on how fiat currency manipulation leads to bad decision making I highly recommend reading “The Clipper Ship Strategy” and “Whatever Happened to Penny Candy” by Richard Maybury.
A mentor of mine once said, “There is no such thing as a good or bad economy” You can only be skilled or unskilled in your interaction with the economy.”
If you’d like to discover more ways how you can use your eight essential resources to get good at this economy, be sure to take advantage of the offer of a no-cost personal investment strategy consultation with me – David Campbell. It’s a powerful way to start off your year. https://my.timedriver.com/WBYTQ
Best regards
David Campbell
Real Estate Investing Strategist
Founder of Hassle-Free Cashflow Investing
Office: (866) 931-9149 Ext. 1
FREE Investor Strategy Consultation – Valued at $300
Are you looking for ideas of what to do with your business and investments. You have the opportunity to discuss your goals and financial strategies with millionaire investor David Campbell.
David Campbell is the Founder of Hassle-Free Cashflow Investing – an organization that helps real estate investors and business owners acquire wealth through turnkey real estate investments. David is the CEO of a investment real estate brokerage, development, and property management company with well over $100 million of real estate transactional experience. His professional background includes real estate development, apartments, condo-conversion, retail, and office.
You can schedule an investor strategy consultation with professional investor David using the below calendar link to book your FREE phone appointment. https://my.timedriver.com/WBYTQ
Your call with David is to help you gain clarity on your financial goals. Nothing will be promoted for sale on the call.
Here is a hypothetical conversation to help illustrate the relationship between price and financing.
BUYER: “Hello, I’m a first time home buyer. I’m very interested in purchasing the super-low-priced house you have listed for $100,000.”
BROKER: “Ma’am, let me show you the virtually identical house next door I have listed for $125,000. I think you’ll find it more affordable.”
BUYER: “Are you a moron? I want to buy the cheapest house! Why would I buy the identical house next door for more money?”
BROKER: “Unfortunately, the lower-priced house doesn’t qualify for FHA financing, so if you want the cheaper house you’ll have to bring in a 20% down payment.”
BUYER: “I don’t have $20,000. I was planning on getting an FHA loan with a 3.5% down payment.”
BROKER: “If you don’t have $20,000, then let me show you the more expensive house next door that does qualify for FHA.”
BUYER: “But the houses are identical from the outside! Why would one house qualify for FHA and one wouldn’t?”
BROKER: “The lower priced home needs a new roof, so FHA won’t lend on it.” (send an email to david at HasslefreeCashflowInvesting dot com to request a free FHA property inspection check list)
BUYER: “Why doesn’t the seller replace the roof so the property becomes eligible for FHA financing?”
BROKER: “It’s owned by a bank, and the bank isn’t interested in doing the repairs. The bank will just keep lowering the price until someone buys.”
BUYER: “I’d like to buy the cheaper house and fix it up myself, but I don’t have a 20% down payment. Can I make the repairs first and then buy it with FHA financing?”
BROKER: “Maybe if it were owned by a regular seller, but the bank doesn’t work that way. The bank doesn’t want the liability of you doing construction on a house they own.”
BUYER: “Hmmm…. if I buy the more expensive house my down payment is $4,375, but if I buy the cheaper house my down payment is $20,000 plus the cost of a new roof. What about my mortgage payment?”
BROKER: “Your mortgage payment on the more expensive house will be $611 and your mortgage payment on the cheaper house will be $546.”
BUYER: “Sixty-five Bucks!!! Is that all?!?! I spend more than that at Starbucks! If the loans are $40,625 different, why is there so little difference in payment?”
BROKER: “The cheaper house will financed by a local bank at 7.25% and the more expensive house is financeable by FHA at the subsidized interest rate of 4.5%.”
($125,000 x 96.5% = $120,625 x 4.5% 30yr amortization = $611 payment versus $100,000 x 80% = $80,000 x 7.25% 30yr amortization = $546)
BUYER: “I see what you mean. Financing can have a larger impact on affordability than price!”
BROKER: “If you want the more expensive house, we should write an offer today. It just came on the market and I think it will go into escrow this weekend.”
BUYER: “You’ve got to be kidding me! The media says real estate is dead and average days on market for houses in this zip code is over six months.”
BROKER: “You are only partly correct. Very few people qualify for current bank financing, so if a property doesn’t qualify for FHA financing the property isn’t selling. However, lower priced homes that qualify for FHA are selling fast and with multiple offers.”
BUYER: “WOW, the newspaper lumps all the data together by zip code and it’s really misleading.”
BROKER: “My phone has been ringing off the hook with people interested buying in low priced houses, but the buyers can’t get FHA financing because the properties need work.”
BUYER: “If you could get a handyman special for $20,000 down or a brand new house for $4,000 down and $60/month more which would you choose?”
BROKER: “Exactly!”
INVESTMENT TAKEAWAYS: Most people don’t buy on price; they buy on payment! The ability for a customer to buy on payment increases the price a customer is able to pay. Easy and cheap financing is one of the main reasons why real estate prices went up so fast in the last cycle and tight financing is the main reason why prices subsequently came down so fast. More people currently want to buy real estate than can get financing. This is creating a pent up supply of buyers (and tenants). As financing starts to loosen (the US Government is trying everything possible to help this) there will be a flood of buyers into the market. The question is whether there will be enough buyers to consume the pent up inventory, and that is a very marketplace specific question. If you are a professional ‘fixer upper’ investor and you can purchase with all cash, there is definitely an opportunity to make a home FHA ready and resell it for a fast profit. The trap here is experience and hassle!!! There is usually a fairly small profit margin in fixer uppers, and if you don’t have the right team and experience you’ll eat up your entire profit margin in unexpected repairs and transaction costs.
In most of the US, the housing market has turned positive and is slowly appreciating! The macro data will be slow to show this because the published data is usually 3-6 months old before you read about it. If you would like to talk with a real estate professional about what is happening in today’s investment real estate market, please give me a call! You can schedule a phone appointment with me by using my online calendar: https://my.timedriver.com/WBYTQ
David Campbell
Real Estate Investing Strategist
Office: (866) 931-9149 Ext. 1
Navigating Investments in Interesting Times
Economic forecast by professional investor David Campbell
As Americans and as investors, we are definitely living in interesting times. Regardless of how you personally voted last Tuesday, it is essential to feed the election results into your investor crystal ball so you have a more educated guess at where economic puck is going.
I will write about our economy in much more in depth in the future, but for now here’s my basic economic forecast. If you agree or disagree with this forecast, I would love to know what you’re thinking. Come participate in a dialogue on our Facebook fan page: https://www.facebook.com/cashflowinvesting
COMING SOON – GOVERNMENT DRIVEN ECONOMIC BOOM: On Tuesday, American’s reconfirmed they are in favor of a socialist economy. The people have empowered the present federal administration to spend more and print more to increase the power of our federal government. I believe that America is about to experience an economic “boom” led by a major expansion of federal government spending designed to help American’s feel that the socialist economic agenda is successful at growing the economy. The current administration will spend and spend and spend until they can say “I told you socialism would grow our economy”. The massive amount of federal government spending will be targeted at bringing a divided country together. Most Americans will think we are experiencing an economic boom but it will really be the printing press at work. Inflation is like a drug that makes you feel great until the buzz wears off; then you have an economic hang-over. I believe we are at the end of the economic hang-over created by the last boom and bust cycle. Expect to see a major expansion of social programs funded by the federal government. I don’t believe the declining value of the dollar will plummet society into chaos, however I am more confident than ever that high rates of inflation are imminent and inevitable. Caveat: local and state governments are being pressured to provide social services they cannot afford. Only the federal government has the power of the printing press. When you are looking for a state or city to invest in, consider the economic health of the local and state government. Although I love living in California, I will not invest here because the state is on the verge of bankruptcy and their aggressively high tax burden is causing jobs and people to migrate to the South and Southeastern states who are more job friendly. Texas is top of my list for states I want as a business partner. Retirees will have their fixed income eroded by inflation and will be more prone to relocate to lower cost parts of the country; especially those warmer states with no state income tax: Nevada, Florida, Texas
COMING SOON – AMERICAN ENERGY BOOM: The amount of untapped oil and gas reserves in America is staggeringly; America has more untapped oil and gas than all of the middle east combined. New technology (“fracking”) has given us a cost effective way to extract this resource. Low natural gas prices combined with EPA regulation uncertainty and lack of infrastructure in the North Dakota oil shale means extraction has only just begun. The current administration is likely to capitalize on aggressive natural resource extraction to help our country feel that their socialist agenda is creating prosperity. The current administration will expand and tax energy extraction like never before. Expect a surge of oil and gas production all over the US but especially in North Dakota and Texas. The taxes generated from the regulation and sale of this natural resource will provide much needed revenue to expand government social programs. This monetization of our oil and gas resources will strengthen the appearance that socialism is bringing prosperity to America which in turn strengthens the political power of the current administration. This revenue will create a lot of new jobs. Some of the jobs will be real (energy) and some will be artificially created through more and more federal stimulus.
INFLATION = CURRENCY SUPPLY x VELOCITY: Increased government hiring, increased entitlement programs, and an energy sector boom will stimulate velocity or the speed at which money circulates. The velocity of money will create inflation faster than increased supply of currency because the impact is more immediate. Many Americans are hoarding cash because of the economic uncertainty. As America emerges from the economic rock we’ve been hiding under, people will start spending again and that will rev our economic engine faster and faster. Most Americans are emotionally “done” talking about politics and are ready to watch the new Fall line up of TV shows, buy a new iPhone 5, and start shopping for Christmas. As aggressive government spending trickles down to job security and consumer spending we’ll see an uptick in the velocity of money. The reason we have been able to quadruple the money supply without seeing noticeable inflation is three fold (1) we exported most of this newly created money to foreign countries thus it is not circulating in the hands of consumers (2) consumer spending / velocity of money has been extremely low (3) Americans who want to borrow but do not qualify.
So before you misinterpret that I am rosy and bullish on the American economy, know this… inflation always leads to bubbles and mal-investment because it is difficult to know whether economic activity is a result of genuine consumer demand or government stimulus. We’re about to experience a period of prosperity that is part real and part stimulus. It will create un-uniform inflationary bubbles that will eventually deflate. Image it is 1999 all over again. Great fortunes will be made in the artificially stimulated and highly volatile stock market, the real estate market, and the energy sector. This next economic bubble could last for several years, but remember to question whether the prosperity we’re about to see IS REAL and whether it can be sustained. While it may seem tempting to invest for real estate appreciation in this next market cycle remember that you will need to time your exit carefully because each injection of stimulus will make the boom and bust cycle larger.
I advocate investing in income / dividend paying properties using high leverage and positive arbitrage. When the inflation happens, you can repay the debt using devalued currency, however if values decline you will not need to sell prematurely because you are collecting positive cashflow. I remain a fan of entry level housing and small retail properties that cater to low income demographics (Dollar General, Family Dollar, Dollar Tree, etc.) I want to own properties in geographic markets whose basic economy includes energy and/or agriculture because those industries are poised to remain relatively strong even if we experience stagflation. I want to stay away from owning properties in dense urban environments (e.g. downtown) that could be the gathering place for disgruntled mobs of people whose social benefits were protested or interrupted.
There is a small possibility that the current administration will socialize your existing pension plan, IRA, and 401(k) and force your hard earned retirement savings into a government facilitated plan like social security. Although I think the possibility of this happening is small, I think it is a risk worth mitigating by having your IRA self-directed into tangible assets or plan for your retirement needs outside of a traditional qualified contribution plan.
The second biggest risk to your financial future is socialization of your assets through devaluing of our currency. The number one biggest risk to your financial future is the failure to act when you see an opportunity. TODAY’S AMAZING BUYERS MARKET WILL NOT BE AROUND MUCH LONGER. Buy as much positively arbitraged real estate with 30 year fixed interest rate debt as you can and be vigilant.
I wish you much success navigating these interesting times.
Best regards,
David Campbell
Real Estate Investing Strategist
Founder of Hassle-Free Cashflow Investing
Office: (866) 931-9149 Ext. 1
About the author 
David Campbell is the Founder of Hassle-Free Cashflow Investing an organization that helps train real estate investors and business owners and assist them with the acquisition of turnkey real estate investment opportunities. David is the CEO of a commercial real estate brokerage and property management company. His professional background includes production home building, commercial real estate development, apartments, condo-conversion, retail, and office.
The real estate market has been rocky for the past 4 years. However, there is a law about to expire on December 31, 2012. If you have forgiveness of debt on your primary residence, you don’t have to pay the tax on the amount forgiven. However, if you sell your house on January 1, 2013 and have an outstanding loan, you WILL have to pay the tax on the amount forgiven.
Taxpayers facing foreclosure or short sale on their principal residences have been able to avoid some of the income tax that would normally be assessed thanks to the Mortgage Forgiveness Debt Relief Act of 2007. But that relief is set to end for home transactions that occur after December 31, 2012.
The act will expire at the end of this year; therefore, if you have fallen behind on your mortgage payments and are facing foreclosure or the short sale of your home, it may benefit you to have the transaction completed before 2013. Here are some important facts to understand about foreclosures and short sales.
If you FORECLOSE…
1. You are deemed to have involuntarily “sold” your home, making it subject to taxes even if it resulted in a loss.
2. The IRS will issue you a Form 1099-A showing the balance of your loan at foreclosure and the price the bank was able to sell the house for. This is often referred to as the home’s market value. The difference between your original investment in the home and the market value is the gain or loss on the “sale” of your home.
3. You may also receive a Form 1099-C, or Cancellation of Debt, showing the amount of the loan the bank forgave you when it foreclosed.
4. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may still be able to exclude up to $2 million of debt forgiven on your principal residence until December 31, 2012.
5. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that home.
6. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
7. Proceeds of refinanced debt used for other purposes do not qualify for the exclusion – for example, to pay off credit card debt.
Understanding Forgiveness of Debt Tax if you SHORT SELL…
1. You have voluntarily sold your home, and the proceeds from selling the property will fall short of the balance of what you owe on it. The lender must agree and determines whether to allow the short sale.
2. The lender forgives the balance of the debt on your home by entering into an agreement with you and the buyer. Your lender may require you to contribute some amount of money in order to go ahead with the transaction.
3. You will receive a Form 1099-S showing the balance of the loan at the short sale and the sale price or market value of the home. The difference between your original investment in the home and the market value is the gain or loss on the sale of your home.
4. You may also receive a Form 1099-C, or Cancellation of Debt, showing the amount of the loan the bank forgave you when it agreed to the short sale.
5. Again, forgiveness by the lender of the debt usually means you have reportable income. However, because of the Mortgage Forgiveness Debt Relief Act of 2007, you may still be able to exclude up to $2 million of debt forgiven on your principal residence until December 31, 2012.
6. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
7. Proceeds of refinanced debt used for other purposes do not qualify for the exclusion – for example, to pay off credit card debt.
So what if the property you own is a rental? The IRS says there’s no free lunch here. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may apply.
If you have the option, seek legal and tax advice BEFORE you sell on a short sale or go through a foreclosure. Do tax planning ahead of time, before it is too late. Call our office to discuss your options.
Renee Daggett is the president of Administrative Bookkeeping Co., Inc. She received a bachelor’s degree from San Jose State University in 1989 and is an Enrolled Agent tax preparer (enrolled to represent tax payers before the IRS). Renee is also the author of “Your Financial Flight Plan: Pilot Your Business To Profitability.” In her book, she demonstrates in a creative way the reasons why every business owner needs to be a better manager of his/her business. http://www.adminbooks.com/
One of my most prized skills as a professional investor is my ability to sniff out amazing real estate investment opportunities and then engineer creative and lucrative deal structures to lower investment risks while increasing investor profits.
While choosing a strong market and property are certainly important pre-requisites to a successful real estate investment, I view individual properties as pawns in a larger game of financial strategy; the financial and ownership structures surrounding a real estate investment have more impact on my bottom line than the sticks and bricks in the transaction. I’ve simplified some of these strategies into sound bites to help you do this. Even though investing tends to be based on each investor’s personal investment philosophy than universal rules, I call these sound bites “Hassle-Free Cashflow Investing Rules” .
Hassle-Free Cashflow Investing Rule: Buy what tenants want.
In today’s buyer’s market, there are a lot distressed commercial properties that need to be repurposed to a higher and better use. The economic collapse of the community banking business model as well as technological advances in online banking have resulted in a slew of vacant bank properties and very few banking tenants looking to lease them. It would be a bad business plan to acquire a vacant bank and try to release it to another bank. My partners and I recently acquired a vacant bank property we are converting to a Class A medical office building because that what tenants in this area are looking for. We started with the tenant and then located the property. My team brought the active management / sponsorship / development resources to the project and several of my clients provided the passive equity for the project.
Hassle-Free Cashflow Investing Rule: Start with a real estate investment business plan not with a property.
Our business plan is to purchase vacant (bank) buildings and convert them into medical office. Our real estate investment strategy was to identify a strong primary care physician group to be the anchor tenant and then go shopping for a desirable property together. The anchor tenant physician located a vacant bank building in a fantastic location where he would love to locate his business. The property is on a major thoroughfare with good signage visibility, close to a hospital and in a large population center. These are promising attributes for any medical office, but there were positive attributes about this particular property that appealed to the tenant which I would have never thought of. First, the tenant needed a property that could easily accommodate ambulance access. Second, the tenant wanted a property in a “health professional shortage area” (HPSA) with a specific HPSA score that increased the amount of government subsidies doctor tenants in this building would receive. If your HPSA score isn’t strong enough you may have difficulty attracting doctors to your building and you may have to lower your rents to do it. HPSA scores change street by street based on census data. In effect there is an invisible line down the street that says “this property is more valuable as medical office than the property next door” because of where the line is drawn.
Hassle-Free Cashflow Investing Rule: It’s essential for a prospective landlord to listen to their tenants and discover what they value most.
I steer new investors towards owning houses as their first investment because it is fairly intuitive to understand the amenities residential tenants will pay for and what they won’t pay for (number of bedrooms, proximity to jobs, etc.). When you are in the world of commercial real estate, prospective tenants are fewer and their needs are more exact. Instead of starting with a property, it can be much more lucrative to go shopping for a property with a prospective tenant or buy a property with a strong anchor tenant in place and fill up the surrounding vacancies with those types of tenants who have a proven history of success co-locating with your anchor.
Hassle-Free Cashflow Investing Rule: For a real estate investment partnership to be successful each partner needs to offer a resource the other does not possess.
The basis of my value proposition to the primary care “anchor tenant” looks like this: “You become the anchor tenant in our multi-tenant office building and invite the doctors who receive your patient referrals to lease additional space. My team will put up most of the money as well as the real estate skills needed to purchase a vacant property, redevelop it into a large multi-tenant office, and then manage the mechanics of the property and a complex financial transaction. We each bring something unique to the partnership and we’ll co-own the property in partnership together.” By partnering with my anchor tenant, I am 100% confident our building will have higher rents and a higher rate of occupancy than if I were trying to do this real estate investment on my own.
Hassle-Free Cashflow Investing Rule: Privacy can be a valuable tool in your real estate investment arsenal.
My anchor tenant physician located the property he felt was perfect for his practice. It became my team’s job as the real estate professionals to negotiate a favorable price and terms with the seller. We put on our best poker faces and made sure the seller did not know the identity of our high profile physician tenant by writing the offer in the name of an entity controlled by my team. It appeared the seller was distressed because the property was vacant and the seller’s prospects for finding another bank tenant were slim, but if the seller knew who our tenant was our intended use of the property the price would have surely gone up. It was easier for my team to negotiate aggressively with the property seller because we were not as emotionally involved with that specific property, as our anchor tenant was.
Although we had a property identified and an anchor tenant lined up, there were still miles and miles to go before we had a viable project. It took a lot of time and resources for my team to develop financial forecasts based on rental income, operating expenses, redevelopment costs, availability and costs of capital, etc. It took months to create architectural drawings and use those drawings to entice prospective tenants to sign binding leases in our property. It took weeks to get our building permits and change of use permits approved by local government. And then there was the financing! A huge risk in purchasing any property in this economy is the availability of conventional financing. A lot of banks that issue attractive terms sheets for commercial loans only to back out at the closing table, leaving you scrambling.
Hassle-Free Cashflow Investing Rule: Shift as many financial risks as possible from the Buyer (you) to the most motivated party in the real estate investment transaction (usually the Seller).
In our project, we were able to negotiate a four month escrow with the ability to extend the escrow an additional three months if required by our lender. We used this extended escrow to complete all of our pre-development activities. Architectural plans were drawn, leases were signed, permits were approved, guaranteed maximum price bids were solidified with our construction contractors, and we had time to shop the debt and equity we needed for this project. Our long escrow period shifted all of our pre-development carrying costs onto the seller and more importantly we drastically reduced investor risk. In the event we were unsuccessful leasing the building during the escrow period, we structured the purchase contact such that we could cancel with no penalty and thus dodge the bullet of purchasing a vacant, unleaseable building. We eventually closed escrow on the property without ever putting a dollar of earnest money at risk and all of our architectural fees were paid at closing after we’d raised all of the capital through syndication!
This business plan worked out well and I am grateful to have a strong team and partners to work with which is why I can write this newsletter with a smile on my face, but not every real estate investment is smooth sailing. I invest a lot of resources into real estate investment projects that never go anywhere; that is just part of the cost of doing business. As a professional investor, it is my job to forecast where the hurdles of each real estate investment might be and determine the probability of clearing these hurdles while putting the least amount of capital at risk.
Hassle-Free Cashflow Investing Rule: Novice investors will make mistakes and that’s OK as long as you’ve started small.
A great place for new investors to start is the acquisition of like new construction, entry level single family homes purchased from a developer who offers a builder’s warranty and investor-friendly terms is. The process is not complicated, you can do your due diligence while putting little or no capital at risk, and the opportunity to learn from the experience is high while the risk is low. This is more than a shameless plug for my homebuilding company that sells positive cashflow, like new homes with creative investor financing. www.HassleFreeCashflowInvesting.com I really want you to take this paragraph to heart and not overextend yourself on your first few deals. When you are a new investor, your first few deals should be as simple as possible so you gain experience, confidence, and a positive track record to set you up for future deals. As you grow and diversify your real estate investment portfolio into more complex transactions, consider becoming a passive investor in group investments with sponsor who can mentor you through the process. My first venture into medical office development was simply writing a check to another developer who did all the work and mentored me through the process.
You can read about real estate investing all you want, but until you’ve jumped into a deal with both feet, you’re still a newbie who doesn’t know what he doesn’t know. If you want to lower your real estate investment risk while simultaneously venturing into potentially more lucrative ventures, let’s talk. I am a teacher at heart and I love mentoring new and part-time investors. If you are looking for a real estate investment to work hard so you don’t have to, my team can also help you become more of an armchair investor.
Regardless of your real estate investment style. If you’d like help lowering your investing risks while increasing your real estate profits, please reach out to me and I’d be happy to help.
To your success!
Keyword: real estate investment
I cautioned my son a hundred times about keeping his distance from fire, but not until he stuck his curious little finger into a candle flame did he learn the meaning of “Be careful, son. That’s HOT!”
Once you’ve experienced loss, you never want to experience it again. Fortunately, losing is an event, not a permanent situation.
“Risk adjusted return” is a theoretical concept to a newbie investor, but it is an indelible, searing reminder to someone like myself who has ridden the financial roller coaster up and down and back up again. Thankfully, the experience of loss is a lot easier to talk about when you are no longer broke. As actor Mike Todd famously said, “I’ve never been poor, only broke. Being poor is a frame of mind. Being broke is only a temporary situation.”
In Mr. Kiyosaki’s best selling book Rich Dad, Poor Dad, he tells the story of building a multi-million dollar nylon wallet company from nothing and then going broke. He went from multi-millionaire to living in the back seat of his car. I think we all know he’s doing pretty well for himself today.
The up and down process of wealth is a character-building and wisdom-building experience you can’t comprehend until you’ve lived through it. We’ve all heard stories of Wall Street bankers jumping out of windows because their entire financial portfolio evaporated over night. While I can relate to the immense sadness and self-doubt that comes from catastrophic financial loss, I can’t comprehend taking my own life over something so ultimately trivial as money.
Money is a vehicle that has the ability to take you to a lot of amazing places, but the vehicle itself will never bring you happiness. Appreciating the journey is only thing that will bring happiness, regardless of whether you are driving a Porsche 911 or riding the bus. When you truly comprehend that your net worth is not a measure of your self worth, then real wealth building can begin.
Like anything else, investing is a sport we learn by doing. If you want to become a professional investor, you’ll need to practice a lot and sometimes that means falling down. You can talk about investor theory until you are blue in the face, but until you’ve invested through an up cycle AND a down cycle you will make rookie mistakes like everyone else. It’s called seat knowledge and there is no way to avoid it. However, there is a way to mitigate it and that is to learn from an investor who has made and lost and remade their fortune again and is not afraid to talk about it.
One of those people is my friend, mentor and investment partner – Mr. Ken Gain. Ken has been a real estate investor for over 50 years!!! He was a millionaire in his 30s but went bankrupt at age 47 in the Alaska real estate crash. “That almost cured my real estate addiction,” he says. “But by getting back into real estate, I have again prospered”. He tells his investor clients that “my greatest value is that I have made almost every possible mistake but have still prospered. Think of what you can do by avoiding my mistakes”.
1) how to identify investment opportunities and business relationships that will bring you future prosperity AND current happiness.
2) how to create financial abundance without ruining your health, happiness, and relationships to get it.
3) how to clearly identify what you want out of life so you will make better investment decisions
ABOUT THE FACULTY:
Ken Gain has been a real estate investor for over 50 years!!! He holds professional designations in appraising (MAI), syndication (SRS), commercial / investment real estate (CCIM) and real estate counseling (CRE). He was a millionaire in his 30s but went bankrupt at age 47 in the Alaska real estate crash. “That almost cured my real estate addiction”, he claims. “But by getting back into real estate, I have again prospered”. He tells his counseling clients that “my greatest value is that I have made almost every possible mistake but have still prospered. Think of what you can do by avoiding my mistakes”.
Are you looking for a simpler and more passive investing experience? If you’ve considered being a passive real estate investor, this introductory video will give you some excellent ideas on where to get started as an investor in group investments (aka real estate syndications).
Not everyone is qualified to participate in a passive investing opportunity. You need some training to be able to make a good investment decision; you need a relationship with a strong sponsor / management team; and you need a minimum amount of discretionary income and discretionary capital to invest.
However, if you have cash, cashflow, equity, or self-directed IRA funds to invest, passive investing in real estate can produce exceptional returns with a minimum of time and a minimum of hassle.
* Want to take advantage of today’s low interest rates, but can’t qualify for a loan?
* Want to earn while you learn about group investments, commercial property, and larger opportunities?
* Want to own profitable commercial property, but don’t have the skills or capital to do it on your own?
* Want to convert your future paychecks into a down payment today without having to sign on a loan?
* Want “forced equity” as part of your investing strategy, but are too busy or inexperienced to make it happen on your own?
* Want to own highly profitable and cash flowing real estate with a minimum of hassle?
* Want the superior investment returns that come from “needle-in-the-haystack properties”?
Passive investing in a real estate syndication is like owning stock in a small privately held company. Imagine opening your mutual fund portfolio, and deciding to call up the fund manager. Pretty unlikely that you can find his name, let alone his number. Even if you could find his number, would he even take your call?!?!? Most people are invested in stocks managed by nameless, faceless people on Wall Street. Participating in a real estate group investment sponsored by a small, hands on company usually means you have a personal relationship with the people managing your money. Isn’t that how it’s supposed to be? I can empathize with the protesters in the “Occupy Wall Street” movement, because they feel totally disconnected and disenfranchised from their money and the people who have control over it. One of my clients is a very conservative, Christian woman who was mortified to discover that her “financial advisor” (aka mutual fund salesperson) had been investing her retirement funds in companies that produced pornographic films. The financial planner’s response was “I don’t know why you’re so upset, because your stock is up 20%”. This client promptly moved her money into providing clean, safe, affordable rental housing and has been sleeping better ever since.
One of the best ways to regain power in your life is to understand where your money is invested, what it is invested in, why it’s invested there, who is accountable for watching over it, and when is your money coming back (hopefully with friends).
Typically, the simpler the investment – the more likely it is to be successful. Let me try out a simple one with you. “People live or work in my property and pay me rent.” Anyone with an IQ higher than a brick can understand that business plan. However, as simple as it sounds, we all know that it takes an experienced and specialized team to help you execute the nuts and bolts of any business plan. Owning real estate is a business. It has moving parts. You have to manage people, income, expenses, and property. Real estate can get messy and not everyone is cut out for it.
However, if you want the advantages of owning real estate (and there are a lot of them) without getting your hands dirty, you should definitely consider passive investing in a group investment. It is possible to own investment quality income producing, dividend paying, cash flow positive, institutional quality real estate without ever leaving the comfort of your armchair.
1) IRA funds
2) busy people
3) high income earners
4) foreign investors
5) those who can’t qualify for a loan
6) novice investors
7) hands off investors
8) people who want to earn while they learn
9) investors who want geographic diversity
10) investors who want property type diversity
11) investors who want to force equity but don’t have the time, skill, or relationships to do it themselves
12) investors looking to own a small piece of a “bigger” or “more interesting” deal
If you are intrigued by the idea of using your cash, cash flow, or equity to leverage:
* Other People’s Time
* Other People’s Skills
* Other People’s Relationship
* Other People’s Credit
* Other People’s Money
You need to watch this twenty-eight minute educational video. There is nothing for sale on this video, but if you would like to talk about actually investing in a group investment, please call me, David Campbell, at (866) 931-9149 Ext. 1 or send me an email (David@HasslefreeCashflowInvesting.com) to schedule a time to talk. In a 30-60 minute investor strategy consultation, we can help you determine if real estate group investments are an appropriate addition to your passive investing portfolio.
Keyword: passive investing
Tax Planning … It’s not about how much you earn. It’s about how much you keep! Learning how to legally avoid or defer the payment of income taxes is essential to your financial success. Our world class faculty will show how real estate investors can legally earn more while paying less in taxes. This webinar recording is suitable for experienced and novice real estate investors.
WATCH THIS FREE 90 MINUTE WEBINAR – Valued at $197
You will learn:
You can download the slides from this presentation HERE.
In this ninety minute free webinar, you’ll hear from:
This webinar is appropriate for both new and well seasoned investors. While this webinar will be recorded, you’ll get the most out of the experience by attending live so you can ask questions. Sign up early because space is limited to just 100 participants.
MEET OUR WORLD CLASS FACULTY
DAVID CAMPBELL – professional investor / developer
www.HasslefreeCashflowinvesting.com
As a real estate developer, investor, syndicator, and broker, David Campbell has been a principal or key advisor to over $800 million of real estate transactions including apartments, office, retail, hospitality, winery, condo-conversion, and production home building. David’s companies have held real estate interests in California, Texas, North Carolina, Delaware, Canada, Mexico, and Belize.
Believing that properties do not have problems, people do, David takes a people first approach towards finding creative solutions for properties and the people who own them. David has a gift for implementing creative financial solutions. Starting with an assessment of an investor’s strengths, David finds ways to leverage those strengths to maximize profit while minimizing investment risk and minimizing hassle.
Kaaren Hall – president of uDirect IRA Services
www.uDirectIRA.com
Kaaren has helped hundreds of people self-direct their retirement savings. A native of California, she has a 16-year background in Real Estate, Property Management and Mortgage Lending. She has worked at such companies as Bank of America, Centex Homes, Pulte Homes and Indymac Bank. She’s held a real estate license in Washington, Texas and California and a Life & Health license in California. Her company, uDirect IRA Services, LLC, offers self-directed education and services to investors, providing excellent customer service. Kaaren is a public speaker and master networker. A mother of two, she lives in Orange County. Educating individual investors and professionals is the cornerstone of uDirect IRA Services. We have events right here in Southern California geared toward self-directed investing. We also offer webinars so no matter where you are you can “Learn to Earn”. uDirect IRA Services provides complete and accurate information on self directed IRAs so you can make the most of your retirement funds. We do not promote any investments. Rather, we provide the knowledge, tools and information you need to make self-direction easy. At uDirect, we help you get started quickly and easily, and stay with you every step of the way.
Amanda Han, CPA – tax strategist
www.KeystoneCPA.com
Amanda Han is a tax strategist who specialize in creating cutting-edge tax saving strategies for real estate investors. As a real estate investor, Amanda and has an in-depth understanding of the various aspects of investing including taxation, deal structuring, entity structuring, and money-raising. Amanda is a frequent speaker and educator on tax strategies especially for real estate investors¬†and has recently been selected to be the Lead Instructor for the National REIA Organization teaching investors all across the nation on how to use taxes to significantly increase monthly cash flow. Amanda has also appeared on NBC News Radio as well as Realtor Magazine. FREE DOWNLOAD of Mrs. Han’s ebook “How to AVOID UDFI Taxes when investing with Retirement funds”
Jeffrey H. Lerman – real estate attorney
www.realestateinvestorlaw.com
One of the things clients say they most appreciate about Mr. Lerman is his ability to take complex legal concepts and information, synthesize it and present it in a way that allows an investor to make a good decision quickly. Mr. Lerman handles acquisitions and sales, entity formation, syndication, commercial leases, loan documents, construction documents, loan work-outs and litigation. Mr. Lerman frequently lectures on various real estate and litigation topics, has written numerous articles and has been featured in national news.
Michelle C. Lerman – estate planning attorney
www.LermanLaw.com
Michelle C. Lerman is at the forefront of current developments in estate planning design strategies. A highly sought-after speaker in the community, Ms. Lerman has been helping clients with their estate planning needs for more than 20 years. She serves on many boards and mentors upcoming attorneys as well. At ease on the air or in the courtroom, Michelle C. Lerman has helped hundreds of clients with her creative solutions and solid advice about estate planning.
End of the Year Tax Planning Strategies for Real Estate Investors
Copyright © 2011 Hassle-free Cashflow Investing, All rights reserved.
We hope these strategies help you earn more while legally paying less tax.
The value of a commercial property is directly related to the value of the tenant leasing that property. Most common cashflow problems result when a property falls vacant and the manager / owner is ineffectual at filling the vacancy. Once you become skilled at filling vacant properties, you can direct that skill at filling other people’s vacant properties for profit. There are a lot of commercial property owners and prospective investors who would gladly give you a piece of their equity in exchange for filling vacant properties with highly qualified tenants.
If you are doing ALL of the above steps, your property should not stay vacant very long. The exception to this is if the marketplace does not have enough demand drivers to fill the vacancy. In that case, consider a change of use for the property.
Sometimes taking a property through a change of use is highly profitable; other times it is just a way to mitigate your loss on an investment burned by an unexpectedly changing local economy. If there is no demand for housing in your area, perhaps your vacant residential property is better suited as a daycare facility, dentist office, drug rehab center, assisted living, etc. If there is no demand for your vacant retail property, perhaps the property could be converted to vehicle storage, industrial distribution, refrigerated storage, data warehousing, or consider scraping the building and returning it to a previous agriculture use.
If your property is hopelessly vacant and there is no chance for profitable re-use, use this information to gain leverage with your lender. If they see the situation the same way as you do, you might be able to negotiate a lower payment or principal reduction on your loan balance.
To your success,
David Campbell – Founder of Hassle-free Cashflow Investing
Real Estate Investor / Developer / Author
Office: (866) 931-9149 Ext. 1
Skype: HassleFreeInvesting
Twitter: twitter.com/InvestingMentor
Facebook: facebook.com/cashflowinvesting
How To Trade 18 Chicken Eggs For All of the Houses in Orlando, Florida
BY INFLATION DEMYSTIFICATION EXPERT DAVID CAMPBELL- FOUNDER OF HASSLE-FREE CASHFLOW INVESTING
As I’ve discussed before in my free eBook Secrets of Hassle-Free Cashflow Investing, there are (at least) five ways to make money with investment real estate:
1) Cash throw off – the amount of rental income left over after you pay all of the expenses and the mortgage on the property
2) Income tax savings – the amount of money you would have paid in income taxes if you did not enjoy phantom losses from real estate deprecation
3) Amortization – the portion of your mortgage paid by your tenant that makes your loan balance smaller
4) Appreciation – the increase in the ratio between the intrinsic value of real estate and its value compared to other objects with intrinsic value (value increase)
5) Inflation – the increase in the ratio between the intrinsic value of real estate and its value as denominated in a currency (price increase)
It is possible for an item to appreciate and go DOWN in price. For example, if you bought a house for five Toyota trucks and sold it for six Toyota trucks, you have experienced appreciation because your house was sold for more trucks than it was purchased for. However, if the price of Toyotas has gone down, you may have experienced a monetary loss. If you bought a house for five Toyota trucks and sold it for four Toyota trucks, your house declined in value. But, if the price of a Toyota truck went from $25,000 to $40,000, you would have purchased a house for $125,000 and sold it for $160,000. Home appreciation is nice but it doesn’t necessarily mean we will have made a profit. As an investor who borrows money to purchase houses, I need my assets to INFLATE in price regardless of whether they APPRECIATE.
I have been investing in real estate since 2000 and because of my hard work, tenacity, and skill I am now a multi-TRILLIONAIRE. As a reminder of this insane wealth, I carry a fifty-trillion dollar bill in my wallet. OK, so it’s really 50 trillion Zimbabwe dollars which is not enough to buy a can of Coke (Z$50,000,000,000,000 = $0.40 USD), but it is still fun to say “I am a trillionaire”. Carrying this bill around in my wallet is a great reminder to me of how wealth is transferred through inflation.
Let’s examine Zimbabwe’s case of extreme inflationary wealth transfer in a whimsical real estate analogy. If you were smart enough and able to borrow Z$600 billion (Zimbabwe dollars) in 1980, the proceeds of the loan would have allowed you to purchase every single home in the city of Orlando, Florida (population 128,000). Twenty-eight years of inflation later, in 2008, you could have repaid the entire Z$600 billion debt with eighteen chicken eggs. Imagine how much real wealth was transferred through the inflationary actions of Zimbabwe’s central bank. While extreme, this is an example of how inflation transfers things with intrinsic value to people who purchase them with debt denominated by an inflating (fiat) currency. Every government in the history of the modern world has radically devalued (inflated) its currency over time; the US dollar is no exception.
The answer is shockingly obvious. Banks don’t lend out their OWN money. Banks lend out YOUR money. Banks make a profit by lending money at a rate of interest higher than the miniscule amount of interest depositors like you have leant it to the bank for. Your savings account at a bank is an asset to you and a liability to the bank. The banks owes you your deposit back, right? That makes the bank a borrower. Banks are not adversely affected by inflation because they make the spread between the income and expense of your money. The risk of inflation is borne entirely by the depositor not the bank. In fact, banks prefer inflation because as inflation pushes up asset prices the percentage of loans that default is reduced and the size of their loans increases.
Who are the biggest borrowers in the world? Governments and banks! The rules of the currency (inflation) game are made by the same people who have the most to gain from inflation – governments and banks! Expecting the inflation game to change is like expecting the fox in the hen house to stop eating chicken dinners.
Inflation allows governments and banks to reach into your pocket and take your money without your consent. The only way to protect your family from this virtual home invasion robbery of your currency is to be a co-conspirator in the inflation game.
Borrowing at a low rate and investing at a higher rate is called arbitrage. Arbitrage is the best wealth preservation and wealth creation tool there is. Investment real estate whose income is greater than the cost of funds borrowed to purchase the real estate is my favorite form of arbitrage (CAP Rate > Interest Rate). Leveraged real estate generates profits as the asset price (purchase price) increases with inflation and the effective cost of the debt decreases with inflation.
You cannot escape inflation unless you are investing with other people’s money the way that banks and governments do. To protect your family from inflation, you MUST be a borrower of good debt.
How can you make these concepts work for you? Ask us! Our integrated team approach to financial planning focuses on people and their unique resources.
In a sixty minute no-cost consultation, we will:
1) Help you explore your access to Cash, Cashflow, Credit, Equity, Time, Skills, Knowledge, Credibility, Strategic Relationships, and Access to Deal Flow as they relate to real estate investing and your primary job or business
2)Help you articulate your financial targets and personal investment philosophy
3) Help you determine whether you need to be in wealth accumulation mode or redeployment mode for sustainable financial independence
4) Help you customize an investment plan that is consistent with your financial objectives and personal investment philosophy
If you are struggling with an existing property, we can help as well. Our team believes that properties do not have problems, people do. We take a people-centered approach towards finding creative solutions for real estate investments and the people who own them.
If you are ready to supercharge your financial life and protect your family from the injustice of inflation, email me to schedule a no-cost, personalized investment strategy consultation.
PLEASE COMMENT BELOW TO PARTICIPATE IN A DISCUSSION ABOUT THIS ARTICLE.
Best Regards,
David Campbell
Real Estate Investor / Developer / Financial Mentor
Office: (866) 931-9149 Ext. 1
Twitter: InvestingMentor Facebook: CashflowInvesting
KEYWORD: INFLATION
By Financial Mentor David Campbell
While the mainstream media gives us conflicting opinions about whether we are experiencing inflation, common sense tells us our dollar is losing value at a rapid pace. Long time newsletter readers know I write about inflation a lot because it is the most important yet misunderstood economic concept in our society.
Since the dawn of government-issued currency, Federal governments have paid their bills by printing money rather than spending less than their revenues. Inflation is a popular form of taxation because most people are financially illiterate and don’t understand the shell game that is going on. Inflation gives the government virtually unlimited spending power. Virtually unlimited spending power gives the government virtually unlimited power. Once a government has virtually unlimited power, they are highly unlikely to reverse course.
The first people to receive new dollars printed by the US government are foreign governments who received dollars in exchange for service on the US debt and the US trade imbalance. The United States imports things with real intrinsic value, such as clothing and oil, and we export worthless paper backed by a good faith promise to pay from the American people. When foreign governments get a new shipment of US dollars, they have very few places to put them where they will retain value. Foreign governments know the US is sending them the ethical equivalent of counterfeit money and so foreign governments want to trade in their worthless scraps of US currency for something of intrinsic value as quickly as possible. Foreign governments cash in their fragile US Dollars primarily for two things – precious metals and oil. Precious metals have intrinsic value, but oil has much more utility. The world uses the US Dollar to denominate the price of oil. Because of the size of the oil market, its utility, and intrinsic value, oil is the natural commodity to soak up the surplus of bogus currency the US government is floating.
Technological breakthroughs such as hydraulic fracturing have increased the supply of extractable oil while the worldwide recession has reduced the demand for oil. Normally when you have reduced demand and increased supply, the price of something goes DOWN. What’s really going on is the price of gas is rising dramatically because of an excess of dollars, not an excess of demand. The rising price of gas should be a major leading indicator that the price of everything else (including wages and rents and real estate) will go up. Inflation does not affect the price of all things at the same time. Inflation has a trickle-down effect based on who gets the cash first, second, third, etc. The price of gas is leading the inflation charge because the US money supply has flooded foreign governments who get first choice of what resources they want to exchange their US dollars for and they’ve chosen oil.
Ironically, while the US government is printing money as a “hidden tax” to drive up the price of gas, the government is simultaneously lowering the tax rate on gasoline as a way of masking the impact of rising gas prices for consumers. Inflation is driving the price of international crude oil up while reduced gasoline taxes inside the US are influencing the price to go down. An important thing to remember is the reduction of gasoline taxes will have a limited impact on the price of gas while international market and inflationary forces will still be able to drive the price of gas to infinity and beyond (deference to Buzz Lightyear).
Don’t get depressed by this warning of inflation. If you are financially literate, you can use this information to take action and make a profit for your family. There is no way you could have prevented the terrible tsunami in Japan. However, if you had a year’s notice that the tsunami was coming, you would have done a great service to humanity by selling tsunami preparedness kits in the areas you knew would be affected. This is the same as inflation. Inflation is a powerfully devastating force that will wipe out tens of millions of families. Unfortunately we can’t stop it. If you know inflation is coming, you will do humanity a great service by preparing yourself and your family for it.
As the price of gas rises, people will pay a higher premium to live closer to their jobs. As the price of gas rises, your rents should follow suit.
The rising price of gas will stimulate economic growth in oil rich areas such as Dallas, Texas while depressing economic growth in other areas which must pay a higher cost to import their oil. As the price of gasoline rises, job creation and economic prosperity will contribute to rising rents and housing prices in oil rich areas.
As the price of gas rises, the cost of construction will increase dramatically thus limiting the ability to add new supplies of affordable housing. Reduced supply combined with increased demand will drive up prices and rental rates of existing housing inventory. Again, Dallas, Texas is a great example.
I am generally against owning publicly traded stocks because of the lack of control over your investment, the lack of intrinsic value associated with owning a minuscule share of a publicly traded company, and the lack of cash flow from non-dividend paying stocks. However, if you’ve already decided to have stocks in your portfolio, talk with a qualified stock investment adviser (not me) on the potential for including oil / energy stocks into your portfolio.
Best Regards,
David Campbell
Financial Mentor
Office: (866) 931-9149 Ext. 1
HassleFreeCashFlowInvesting.com
Skype: HassleFreeInvesting
Twitter: InvestingMentor
Facebook: CashflowInvesting
Please take a moment to post a comment on this blog post “Understanding and Profiting From the Rising Price of Gas”
If you have limited your investment real estate search to the properties you can drive to within a few hours of your mid-sized American city, you have limited your search to just 0.0005% of all of the potential real estate investments in the world. (0.0005% is about one drip in a hot tub). Sadly, many people radically and artificially restrict their real estate investment search because of old fashioned thinking. People telecommute to their jobs through cell phones and the internet, and they telecommute to their social engagements through Facebook and Skype, but they are unwilling to telecommute with their investments.
As one of my mentors frequently says, “Live where you want to live and invest where the numbers make sense.” Many of my clients have adopted this investment philosophy and they are doing well because they can get in and out of markets and properties as the numbers and local economies change.
Your investments must be Geographically Agnostic (meaning a willingness to invest in any location where the numbers make sense).
Many of you know, I live in Northern California, but I run a development company in Dallas, Texas. I’m willing to get on a plane to go to work because my family likes living in California, but the deals and the profits live in Texas. I have owned property in four countries and four states because I live where I want to live, but I continually invest where the numbers make sense. If you aren’t willing to let your dollars get on a plane to chase profits, you will not be a profitable investor for very long. Markets will continue to change, economies will change, investment strategies will change, laws will change, and your life will continue to change.
What if you select an investment market because it is near your home and then you have to move? I showed one of my clients some amazing investment opportunities in Dallas but he was unwilling to consider them because they were more than 20 minutes from his home. The investor bought investment properties near his home even though the numbers were not very strong. Ironically, this investor works for a company that recently closed its doors in his home town and is moving his job to Texas. The investor gets to make the choice of moving his family to Texas or remaining unemployed near his rental property. Willingness and ability to move for work is a huge asset in this new economy. Willingness and ability to move your capital to pockets of opportunity, regardless of the opportunities’ geographic proximity to your home, is also a huge asset.
If you spend a lifetime investing in one market with the same strategy, you will eventually get burned. Real estate is not a one size fits all strategy. While real estate is generally illiquid, the owner of the property must be fluid. You must be willing to get into and out of properties and markets as conditions evolve. You must continually adapt your investment strategy to market conditions and your need for personal gain. If you are limiting your potential real estate investments to where you live, your investment strategy may or may not work in your local market, or the timing might not be ideal to enter or exit, or your strategy worked in your local market five years ago but doesn’t work today. If you are willing to expand your search criteria from just your local market (0.0005% of all real estate in the world) to include all of the United States (4% of all properties in the world), you have increased your options and probability of success by over 8,000%. Who doesn’t want their investments to have an 8,000% increased probability of success?
I have been focused on the Dallas market for the past three years because Dallas is rapidly preparing for a housing shortage. The Dallas-Fort Worth ( DFW) area grows by one person every 62 seconds. Is DFW is adding a new home every 3 minutes? The answer is NO. Developers cannot get the financing to build houses fast enough to keep up with demand. There is no more available land within close proximity to job centers. The land in Texas that is available to developers is at least thirty minute from where the jobs are and the land requires massive injections of capital to develop infrastructure. The capital for this infrastructure isn’t available. The result is a looming housing shortage. If you get into the Dallas market before the housing shortage is reflected in home prices, you will be a winner. Once the housing prices rise faster than rents, I will move my focus to the next market where the rent to purchase ratios make sense. Once home prices in Dallas increase and interest rates rise, Dallas will be in a holding pattern for investors and we will need to focus on another market for our new acquisitions.
Want to know how to take advantage of real estate opportunities in Dallas? I promise you won’t find investment opportunities like this anywhere else. We are real estate developers who think like investors. We are creating new inventory specifically designed to make you money.
Send an email to consultation@Hasslefreecashflowinvesting.com to set up a free investment strategy consultation, and we will let you in on the biggest real estate investing secrets of the decade.
Best regards,
Real Estate Investor / Developer / Author / Founder of Hassle-free Cashflow Investing
(866) 931-9149
Find me on Skype: HassleFreeInvesting
Part of our series of articles on investing in Dallas
Champion hockey player Wayne Gretzky explained the secret to his success like this: “I skate to where the puck is going, not where it is.” The same advice applies well to real estate investing. If you are willing to make a prediction where the economy is going and you are willing to take action on what you know, you can make a lot of money.
The economy and the real estate market have trends. There are times to buy real estate, times to sell, and times to just hold on. Real estate prices move up slowly and come down quickly. Fortunately, real estate trends are easy to spot and make a prediction on if you know what to look for. Unfortunately, by the time most people recognize the trend, it is too late for them to get into the game.
The real estate market is trending and I am going to spell things out for you in the simplest terms I can. Each prediction and action step could fill a ream of paper in supporting arguments, so for the sake of brevity take things at face value for the moment and in my blog we can dig into each prediction separately as time and interest permits.
Here is my best prediction and action steps to making money in real estate over the next ten years:
PREDICTION 1: Inflation will cause prices to rise substantially as the dollar devalues. I’ve been talking about this phenomenon for the past two years, and it has finally made its way into the mainstream media as retailers are raising the cost of food, fuel, and finished goods. You can visit my blog to read my extensive writing on this subject. I particularly recommend this series of articles on how to profit from inflation.
ACTION STEP 1: Acquire income producing real estate with as much fixed interest rate debt as possible. Do not skim over this statement too quickly. Having both debt AND income to service the debt are vitally important. The income will inflate with the currency and the debt will devalue with the currency. As an investor, you need to prepare to win from inflation by having both of these financial tools in your arsenal (fixed rate debt and rental income).
PREDICTION 2: Texas will dominate job growth and population growth in the United States. Again, I’ve written extensively about this in my blog: Texas Dominates Market Share. If you are acquiring income real estate as a long term investment, you simply cannot ignore Texas. If Texas were it’s own country, it would be one of the largest in the world from the standpoint of population size, geographic size, economic power, and political clout. It would also be one of the fastest growing countries (states) in the world.
ACTION STEP 2: Acquire income producing Texas real estate near major metros within a short drive of major job centers. There is a lot of open space in Texas however, land is just now becoming scarce in the urban centers. The scarcity of land in the major metros is an emerging trend for you to capitalize on. People need jobs and houses. You should own houses near major job centers so there is a constant demand for your housing. A major job center will have at least 1,000 employees and will create a good or service that imports revenue from as far away as possible (e.g. a business with a local and world wide customer is more economically stable than a business who only has a local customer). To learn where the revenue importing job centers are, here is an interactive map for you to use. (Special thanks to Hassle-free Cashflow Interns Rob Kippel, Brandon Krasner, and Heather Weldon for their assistance in creating powerful tools for you to use. If you are interested in becoming a Hassle-free Cashflow Investing intern, please send us an email.)
PREDICTION 3: Hispanics will dominate population growth throughout the US and especially in Texas. The Hispanic population of Texas grew by 2.8 million people over the last decade. This accounted for 65 percent of the state’s growth over the last 10 years. In 17 Texas counties, the Hispanic population grew by more than 100 percent. The Hispanic market is the fastest growing segment of the middle class. Here is a great newspaper article on the subject. I predict this trend will pick up speed partly because of immigration and partly because the Hispanic birthrate is double what it is in other ethnicities.
ACTION STEP 3: Invest in real estate and businesses that would appeal to a middle class Hispanic market. Make sure your property managers speak Spanish and advertise in Hispanic media. Hispanic families often have more children, have multiple generations and families that occupy a single home. Buy properties with several bedrooms, but modest square footage to be price competitive. Real estate prices go up when more people compete for a limited supply of inventory. Own the types of property that the maximum number of people would like to live in – single family houses with 3 or 4 bedrooms and 2 bathrooms. A master bedroom is essential. Game rooms, lofts, and media rooms are a non-recoupable expenditure to a cashflow investor.
PREDICTION 4: Domestic military spending will contract. As the US becomes further entrenched in foreign wars, the US will spend less money keeping troops inside its borders.
ACTION STEP 4: Do not invest in military towns. If a military base represents more than 10% of a local economy, put your dollars somewhere else. It isn’t worth the economic risk if the military downsizes or eliminates the military base that is the lifeblood of your town.
PREDICTION 5: Fewer people will be attending college and more people will return to manufacturing. The US economy is globalizing and many white collar jobs are headed overseas. As the dollar devalues, it will be more competitive for the United States to manufacture things and export them to emerging markets in Asia and South America.
ACTION STEP 5: Invest in areas of the country such as Dallas where there is a tremendous amount of manufacturing infrastructure already in place. Large manufacturing centers need transportation logistics such as heavy rail, trucking centers, highways, and cargo airports. Manufacturing centers also need a very cost effective workforce and real estate prices. Dallas-Fort Worth is a prime market for this.
PREDICTION 6: States with a favorable business climate and a low income tax burden will enjoy the most prosperous economies. Formerly prosperous and business unfriendly states such as California will raise taxes, lower wages, and default on government pensions to cover their economic shortfall. In areas where big business feels constrained by taxation, labor relations, and environmental regulations, expect declines in government services, poor quality public education, and weak transportation services as a result of unparalleled shortfalls in revenue and a declining business environment.
ACTION STEP 6: Examine the financial well being of any state, county, and city in which you decide to invest. Live where you want to live, but invest in areas where local and state governments embrace responsible business growth.
PREDICTION 7: Interest rates will rise as the US government receives foreign political pressure to stop buying its own bonds and mortgage backed securities. The stock market will see unexplained and radical fluctuations in value as the government manipulates stock prices through covert buying and selling of public traded stocks.
ACTION STEP 7: Do not invest your IRA in the publicly traded stock market. Cash investors can get in and out of the stock market when times are turbulent while IRA funds are often “stuck” in the market with no place to go. Evaluate options for investing your IRA in private placement investments, businesses, notes, or the indirect ownership of real estate. I do not recommend buying real estate directly inside your IRA, but there are great strategies for getting your IRA funds into the indirect ownership of real estate. If you’re interested in this, send me an email and I’ll send you some great information on creative ways to invest your IRA in non-volatile IRA friendly assets. There is no one size fits all investment / financial strategy. That’s why we want to hear from you so we can help you develop a personal investment philosophy and then take action on it. If you’ve read this far, pick up the phone 866-931-9149 ext 1 or send me an email so you can take action on these ideas. CLICK HERE to schedule a no cost investor strategy consultation with David Campbell or one of his team members. We are here to help you come up with creative investing ideas and solutions to your financial goals.
While I hope everyone reading this will do business with my real estate development and investment companies, I appreciate that there is no one size fits all solution to your financial goals. The purpose of an investor strategy consultation is to help you understand what your financial goals are and find a customized solution to solving them. I look forward to hearing from you and hopefully I will be able to introduce you to an idea, person, or opportunity that will revolutionize your financial life.
To your success!
David Campbell
Professional Investor, Developer, and Financial Mentor
707-373-9966
David@HasslefreeCashflowInvesting.com
by Rob Kippel, Hassle-free Cashflow Investing Specialist
There is endless debate among economists right now on whether the US is heading for inflation or deflation. While these economists are content arguing back and forth, savvy investors are taking action. The stakes here are very high as being on the wrong side of this trade could be catastrophic while being correct could be outrageously profitable. Not taking a position and just sitting on the fence as most Americans are doing will be costly in either outcome.
Many of whom I consider the brightest economic minds are convinced we are on the precipice of an inflationary holocaust. I, for one, happen to agree but there are an equal number of great minds who have a very plausible argument for why the US will face crushing deflation in the years to come. Even those convinced of an inflationary demise for the dollar will often concede that we will experience a bout of deflation before we face the inevitable inflationary outcome.
Those placing all their bets on one side or the other will either end up tremendously more wealthy then they are today or completely wiped out. This is great if you came to the right conclusion but what if you are wrong? Or what if you were right but the trade goes against you just long enough so that you are unable to hold onto your long positions and you end up not profiting when you had the right strategy? This could certainly be the case if we were to see a severe bout of deflation prior to the spectacular inflation.
If you arrive at the conclusion that inflation is inescapable for the US, as I have, your knee-jerk reaction may be to structure all your investments to profit from Dollar devaluation. Although this position should be extremely profitable, the key is being able to hang onto it through a deflationary storm should it strike. This is where hedging through seller financing a portion of your portfolio can be effective.
A hedge is when an investor takes an opposing position to his core portfolio to help mitigate risk and decrease volatility. Although a hedge will usually lower your return slightly if your core position becomes profitable, it primarily serves to counteract loss on your core portfolio with profits made on the hedge position.
Let’s now see how we can place a hedge on our Hassle-Free Cash Flow Real Estate portfolio by becoming a lender through seller financing.
As David Campbell has shown us in previous newsletters (if you are not familiar with these articles, visit the blog page), purchasing highly leveraged undervalued cash-flowing real estate with long term, low fixed rate debt can be extremely profitable through inflationary times. This is one strategy I particularly like and personally employ in my portfolio, however, a large portfolio like this can get quite hairy during a bad bout of deflation and may cause you to actually lose a substantial amount of the portfolio that would have ultimately been profitable had you been able to hold on to it once inflationary economic conditions resume.
Becoming a lender through seller-financing is a tool you can use to weather the storm and hang on to your core portfolio while you wait for it to bear its fruit. During deflation, the price of your real estate as well as its stream of income will tend to decrease but the debt service remains constant making your debt load more burdensome. If your rental real estate becomes a negative cash flow that you must feed each month, the inability to keep up with the payments will lead to the loss of the property regardless of how much equity you have.
The same way fixed debt works against you as the borrower in deflation, it can work in your favor as the lender when you seller finance a property. As the holder of a seller financed note you will be receiving a fixed level of payments at the same time your expenses are going down in deflation, making the stream of income relatively more valuable. It is this relative increase in income right when you need it that can save a portfolio geared to profit from inflation.
In addition by selling a property with seller financing you will have locked in the price of the property at the sale which would have otherwise decreased during a deflationary episode. This protection does however come at a cost, as most hedges do. When selling a property with seller financing you do give up the other profit sources you would have realized had you simply held and rented that property (appreciation, amortization, and tax benefits).
In addition, in an inflationary environment the relative value of a fixed stream of income decreases as the cost of living increases. So you must ask yourself, “How much is the safety and protection of my portfolio worth?” This is a personal question and the answer will vary from person to person.
A final consideration is the performance of the hedged portfolio should we experience neither inflation nor deflation. The core portfolio of real estate described above hedged with your seller financed notes should provide you with steady returns and income in a normal economic environment. You will realize all the typical profit sources associated with buy-and-hold real estate as well as receiving higher levels of current cash flow from your notes.
Not all seller financing is created equal and it is important that you do it right. Here at Hassle Free Cash Flow Investing we have a world class team in place to help you successfully and properly build a real estate portfolio that can protect you and even profit from the coming inflation. We can subsequently help you increase your cash flow and hedge against deflation through seller financing some of those properties through our unique system.
The best part is that we can help you achieve this with little money down! This strategy is not suitable for everyone and is only applicable to those who are eligible. I would enjoy the opportunity to speak with you to determine your financial goals and eligibility. You can contact me and the team at Hassle Free Cash Flow Investing at (866) 931-9149 Ext. 1 or you can email me at Rob@hasslefreecashflowinvesting.com. Until next time, stay sharp!
Rob Kippel – Hassle-free Cashflow Investing Strategist
Having a good credit score is an asset only if you plan to use it to make money. I know people who consider their 750 FICO as a badge of honor. A credit score is a financial tool, NOT a measure of self-worth. If you aren’t utilizing your credit score to generate passive income, does it matter whether your FICO is 570 or 750? It’s like having a luxury car that is too precious to drive. If your credit score is sitting idle in your garage, it’s time to put it in gear and make money with it!
1. A credit score above 680 gives you the ability to borrow money for investing.
2. A higher credit score generally means you will be able to borrow cheaper money.
3. Banks borrow money at a low interest rate (banks can borrow money for 1% or less).
4. Banks invest the money at a higher interest rates (mortgage rates are around 5%).
5. Banks earn 5% on money borrowed at 1% which results in a 4% profit on other people’s money! It is good to be the bank.
6. Your good credit score allows you to be your own bank! You can earn 9% on money borrowed at 5% which results in a 4% profit on other people’s money. If your credit score allows you to be the bank, what are you waiting for?
I can show you how to turn your good credit and a good job into $800,000 of loans at 5% secured by $1,000,000 of real estate WITH NO MONEY DOWN! If you could borrow $800,000 at 5% ($40,000 year cost) and invest it at 9% ($72,000 income), you would have a 4% profit on $800,000 ($32,000). If you can make an additional $32,000 from investing your credit score and no cash, why would you let your credit score sit idly in the garage?
If you don’t have a good credit score here are a few tips on how to get one.
1. MAKE TIMELY PAYMENTS: This seems obvious, but we sometimes forget. Consider setting up your bills on automatic bill pay with an arrival date well before your due date. Credit companies typically will let you know when you are a few days late, but they don’t ding your credit until you are 30 days late. If you get a “late pay” phone call, take it seriously and act right away because your time is running out.
2. LOWER YOUR RATIOS: Keep your credit utilization to about 25 to 35 percent of your available credit The credit bureaus don’t like to see “maxed out” credit. You can lower the percentage of your drawn credit to credit limit by either paying down your debt and/or increasing your maximum allowable credit limit. In other words, if you have a credit card that is close to its maximum balance, call the credit card company and ask them to increase the credit limit. Tell them you would like them to do this without pulling your credit. In addition to this, spread out your balances among your cards trying to keep the ratio between card balances and credit limit to 30% or less. For example, let’s say you have 3 credit cards and $3,000 in credit card debt. If all the cards have limits of say $4,000, it would be best to put $1,000 on each of the cards than to have just 1 of those cards with the full $3,000 balance.
3. MINIMIZE CREDIT INQUIRIES: Applying for credit makes your credit score go down. Applying for new credit is like taking one step backward to go two steps forward. Once you attain the credit that you applied for, and you make regular on-time payments, your credit score will go up. If you are shopping for a major purchase such as a car or mortgage, many credit inquiries within a very tight time span are usually only counted as one credit inquiry. If you are applying for a mortgage, you can get many of your questions answered without having your credit pulled, but to get a definitive credit decision a mortgage broker will always have to pull your credit to understand your debt to income ratio as well as your actual credit number. Giving your mortgage broker a copy of your credit report can reduce the number of credit inquiries when pre-qualifying for a loan, but a mortgage broker will always pull your credit report once when they submit your loan and sometimes a second time before the loan funds. If you are waiting for a loan to close, don’t apply for new credit anywhere else until your loan funds.
4. AGE YOUR CREDIT: Never cancel a credit card that is more than 2 years old. Having a “seasoned” account is a big plus for you. If you have children, get them a credit card as early as possible and teach them to use it responsibly. Length of responsible payment history is a major consideration in the strength and durability of your credit. Sometimes you can create additional credit history by adding yourself to the account of a family member who has a long and successful credit history. CAVEAT: This can become a liability if the payment history of your family member is poor or becomes poor in the future.
5. LOOK FOR ERRORS: Studies show that 79% of all credit reports have errors on them. If you have errors on your credit report you can try to fix them yourself through the credit bureau website or seek the help of a credit repair specialist. If you are looking for a recommendation, I know an excellent source I would be happy to refer you to.
You see, our relationship isn’t just about helping you find an amazing investment property; that’s a very small part of what we do. I want to make sure you have access to the financial education you need to make smart decisions and a world class team to support you in the execution of your investing plan.
Thanks again for letting me enter your world each week and thanks for the referrals of your friends and family members. I appreciate it and so do they.
If you would like to monetize your good credit, don’t wait, give me a call soon to talk about your options.
To your success,
David Campbell
(866) 931-9149 Ext. 1
Keyword: Higher Credit Score
In my last newsletter, I wrote about making passive income from seller financing. If you missed that newsletter, you can read it on my blog by clicking here. The idea is to buy a property with conventional financing from a bank at a 5% interest rate, and then immediately resell the property to an occupant at a 9% interest rate. Assuming you can borrow money at 5% and lend it out at 9% with little to no risk, how much money would you like to borrow? If you’re making 4% profit on $500,000, that’s $20,000 a year of passive income from the banks money!
For a lot of people, $20,000 of additional passive income would mean instant retirement. Maybe it is just enough for your spouse to quit their job. Maybe you could cut back your work schedule so you’ll be home to pick up your kids at school every day. Maybe it would give you the security cushion you need to quit your job and become self-employed. Maybe you could just start living life first class instead of coach. Whatever you do with the money is up to you, the important thing is to get started on a plan of action right away.
I have a live deal for you to consider, and if you are interested you should act right away. It’s not that I can’t find a similar deal in the future, but as the saying goes, a bird in a hand starts your passive income sooner rather than later… OK, maybe that’s not the saying your were thinking of, but you get the point! The more important concept at play is the the law of diminishing intent. Time has a funny way of eroding your momentum. If you take action on something as soon as you form the intention, you are likely to be successful. The longer you wait from the moment you are excited, the less likely you are to do anything at all. So, don’t wait!
YOU and your good credit buy this house for $86,000 with a $17,200 down payment (20%) and a $68,800 bank loan (80%) at 5% interest. The monthly principal and interest EXPENSE on the money you borrowed is $369.
A FAMILY buys your house for $86,000 with a $17,200 down payment (20%) and a $68,800 seller financed wrap note (80%) at 9% interest. The principal and interest INCOME on the money you loaned is $554.
YOU collect $554, pay out $369, and KEEP $185 a month. That’s a profit of $2,220/year. Your profit comes from borrowing from the bank at 5% and lending to a family at 9%. Nine percent income less five percent cost of funds equals a four percent profit on the bank’s money.
Your total investment is about $3,500 in closing costs to make $2,220 per year profit. That’s a 63% annual return on investment!!! In 19 months, you have all your money back and your return becomes INFINITE!!!
BUT, you say… What if the buyer defaults on the loan? Whether the family pays their mortgage or not, a savvy investor will make sure it is a win for him either way. If the family doesn’t pay their mortgage, you foreclose on the house and either make it a successful rental OR resell the house to someone else in exactly the same way! You could collect $17,200 in down payments twice! While you want your borrower to be successful, in reality you will make more money if your borrower defaults. The borrower also has a prepayment penalty in the note to ensure if they pay you off early from a sale or refinance, you’ll make enough profit to make the transaction worth the effort.
If you have at least $25,000 and you can qualify for a conventional loan, you should be able to repeat this process over and over again. Within a few days you’ll have your down payment back from your buyer/borrower, and within 19 months you’ll have all your money back. If you can’t qualify for a loan, you can still play! I have commercial lenders who will lend non-recourse money to your entity with 35% down and 7.25% interest on a 30 year fixed rate. Commercial lending eats up a lot of your cash flow, but it allows people who are “Fannie / Freddied” out to participate in this opportunity. Commercial lending is available to non US residents as well.
You could implement this business plan in your own market, but why? Dallas is one of the strongest real estate markets in the country. The population is booming, the job market is stable, and many credible experts are predicting a looming housing shortage in Dallas. While choosing a strong housing market to invest in is important, you are ultimately not investing in real estate. You are investing in the spread between your borrowing rate and your earning rate (arbitrage). You loan is secured by an asset with 20% equity which protects you from default. You are investing in a family who would rather own than rent, but if you took the house back it would make an excellent rental and you’ve got instant equity in it.
While 9% might seem like a high interest rate for a mortgage, the family living in the property is WILLING and ABLE to pay an extra $185/month because there are no other financing options available to them. The occupant has credit challenges and 9% seems like a great deal to them.
I’ve done the hard work of finding an excellent property with a qualified buyer who has a substantial down payment. My team will handle the logistics of the entire transaction. A law firm will draw up the documents, a title company will handle the escrow, and all of these costs are paid by your buyer / borrower. Even after the sale, our team can service the collection of your mortgage for you. Ladies and gentlemen, this is about as perfect as Hassle-free Cashflow gets!
If you are ready for $185/month of passive income (or even better how about $185/month x 10 properties), please email me right away! I expect a high volume of calls on this opportunity.
While this isn’t the only time an opportunity like this will come along, the law of dimishing intent says act on your intention now or you probably never will.
To your success!
David Campbell
Professional Investor, Developer, Financial Mentor
David@HassleFreeCashFlowInvesting.com
707-373-9966
PERSON #1 just moved to Dallas from California because his company relocated and he chose to follow. He has great income, but he just lost his over-leveraged California house through foreclosure or short sale. The result is bad credit which prevents him from buying a house.
PERSON #2 felt the pinch of the economy and was unemployed for a few months. He burnt through his savings and got behind on his bills. He finally found a new job, caught up on his bills, and even put a few dollars in the bank but his credit is still shot which prevents him from buying a house.
PERSON #3 moved to Dallas from Mexico. He is hard working, employed or self-employed in the service industry, and he has thousands of dollars tucked under the mattress in his apartment. He makes enough money to buy, and he has a down payment, but he has no credit profile and his income is hard to document
All three people share the following characteristics:
A private investor can step in to fill the void created by today’s tight lending conditions. This usually translates into seller financing. Here is a case study:
Sound complicated? Well, it’s not! Here’s how YOU can do it:
Yes, this seller financing strategy would work in other markets as well. While Dallas is our specialty, we’re happy to help you implement this strategy in other cities as well. If you are interested in participating as an investor or a buyer in a hassle-free owner finance transaction, please send us an email to learn more.
To your success!
David Campbell
Professional Investor / Developer / Financial Mentor
Founder of Hassle-Free Cash Flow Investing
707-373-9966
David@hasslefreecashflowinvesting.com
Part of our series of articles on investing in Dallas
Last year I was at a friend’s home for a Christmas party. As I was mingling through crowds of festive party goers, I was surprised to meet my friend’s landlord. The party was at his rental house and my friend invited to be a guest of the party. I’ve been a landlord to over 100 properties and I’ve never once been invited to my tenant’s Christmas party!
Mike purchased his first house in 1965. He paid $18,000 using 20% down ($3,600) and an 80% mortgage ($14,400). His mortgage payment was $86/month. That was a lot of money when Mike was a 23 year old school janitor earning $350/month. Today, this Northern California house is worth $575,000 and rents for $2,200/month.
Mike purchased this $18,000 house with only $3,600 down and his mortgage was paid off by his tenant 15 years ago. His $3,600 investment is now worth $575,000. Mike’s annualized non-compounded return on investment has averaged 350% per year for each of the past 45 years. What investment vehicle other than real estate can do that?
In 1970, Mike bought a second house. In 1975 he bought a third house and, in 1980, Mike bought his fourth and final house. All four houses are now owned free and clear with $2.3 million of equity and positive cash flow of $75,000 year. Mike spent his career as a janitor and retired a multi-millionaire because he had the foresight to acquire four pieces of real estate over 45 years.
Inflation seems small because it is reported as a year over year number. However, inflation (and real estate prices) actually move as a compounding force. Below is a chart of a basket of goods with prices from 1965 and 2010. I created a chart to illustrate the annualized compounding rate of increase for this basket of goods. Mike’s houses increased in price just slightly faster than the overall rate of inflation over the same period.
Mike was the happiest guy at the party. He has the most abundant retirement plan of any of his peers, and he spent his entire career as a janitor not worrying about money or inflation. He always knew that when he retired he would have four houses that were completely paid for by his tenants, and these houses would take care of him and his children forever.
It is nice when real estate investing has had such a positive impact on someone’s life. I asked Mike what he would have done differently 45 years ago and he said, “I wish I would have bought more houses.”
David Campbell
Professional Investor / Developer / Financial Mentor
Founder of Hassle-Free Cash Flow Investing
707-373-9966
David@hasslefreecashflowinvesting.com
Please leave a comment on this article.
by Professional Investor / Developer, David Campbell
Real estate investing is full of success stories and horror stories. Everyone loves to talk about their investing problems, but those who have been extremely profitable in their endeavors tend to keep their mouths shut. Talking about personal financial success is socially unpopular. Successful investors want to avoid lawsuits and protect their trade secrets. Profitable investors are usually too busy “doing deals” to take the time to teach others how to invest. People who write about investing are often professional “writers”, not professional “investors”. If professional investors aren’t writing about their successes, how can the average person learn to mimic their success? When you find a professional investor willing to share his ideas, make sure you learn everything you can. With that goal in mind, here are some of my best ideas for becoming a more profitable investor:
1) Surround yourself with successful investors. Real estate investing is like learning a foreign language. You are always learning and practicing. To learn a new language, you need to converse with native speakers on a regular basis. If you are studying real estate and you are primarily speaking with other newbies, you are likely to teach each other bad habits. Real estate field trips can be a great way to immerse yourself in the way professional investors think and act. Visit our field trip page to learn more about upcoming investor field trips.
2) If it sounds too good to be true, consult your mentors / investment team. There are a lot of charlatans and thieves in real estate that are trying to separate you and your money as quickly as possible. However, real estate investing really does offer truly ‘unbelievable’ returns for experienced investors who are in the right place at the right time. If you don’t use a knowledgeable team to help you make major decisions, you are taking unnecessary risks with your capital. A good team includes partners as well as vendors. When you are conducting business, try to understand what both parties have to gain from the transaction and strive for a win for both parties.
3) Slow and steady really does win the race. While you can make enough profit to retire off of a single deal; virtually no one retires off of their first deal. It takes time and repeated positive experience to develop the skills, relationships and confidence to hit a home run in real estate. Nine of out ten times you’ll be more profitable repeating “base hit” deals rather than going for the home run. Acquiring multiple properties over a long period of time increases your probability of success. Learn more by downloading (and reading) a free copy of my ebooks “Hassle-free Cashflow Investing” or “Hassle-free Cashflow Lending”.
4) Solving problems creatively is the gateway to profitability. An investor gets paid when he or she effectively implements a solution to a problem. This could be applying capital in a creative way or re-purposing a property in a creative way or solving a seller’s needs in a creative way. When two people are willing to trade for what the other has, there is usually a little bit of room for the coordinator to make a profit. However, when three people have their needs filled in a triangle of events, there is usually an opportunity to make a much larger profit for the person the coordinates the flow of events/transactions. Here is an example: of a “deal triangle” where there is room for the deal facilitator to make a generous profit: There is a baker who has bread but needs corn, a farmer who has corn but needs milk, and a rancher who has milk but wants bread. A person can identify the needs and capacity of each party and then create an exchange network whereby each party gets what they want by indirectly trading what they have. The indirect trade of a “deal triangle” will result in more profit to the problem solver than just connecting two parties in a more typical direct exchange. The fewer people there are who have the capacity and willingness to solve the problem, the higher the potential reward. If you have a real estate, business, or financial challenge you are trying to solve, consider sending me an email with your situation. I am gifted at finding multiple, creative, win-win, and highly profitable solutions. I also really enjoy doing it.
5) Be prepared to identify and act on opportunities quickly. There are opportunities to make huge profits in real estate if you are willing and able to take action quickly when the opportunity presents itself. The first step is to identify your personal strengths (assets) and weaknesses (liabilities). The second step is to formulate your personal investment philosophy (financial objectives) so you can articulate as specifically as possible what a suitable investment looks like. A suitable investment is one that aligns with your resources while offering the potential to bring you closer to your financial objectives. The third step is to learn to “thin slice” deals. Malcolm Gladwell writes about “thin slicing” in his excellent book “Blink: The Power of Thinking Without Thinking”. The fourth step is committing to thorough yet speedy due diligence. It is possible to spend years doing due diligence on a single deal, but great deals won’t wait that long. An investor must filter out the interesting digressions and improbable “what ifs” and focus their research only on the most relevant points and most probable outcomes of a deal. While it is possible to evaluate the risks of a tornado hitting your apartment complex, it is more profitable to focus on more relevant due diligence such as rental rates, occupancy, maintenance expenses, market conditions, etc. Focus 90% of your effort on the highest probable outcome, and 10% of your effort on your contingency plan. The fifth step is to consult your team with your business plan and your research. The sixth step is taking decisive action. The seventh step is reflecting upon the process to determine what can be done better next time.
If you are looking for financial or real estate coaching or if you are looking for active or passive investment opportunities, please send me an email or give me a call. I would be happy to help you.
To your success!
David Campbell
Real Estate Investor / Developer / Financial Mentor
Founder of Hassle-Free Cash Flow Investing
707-373-9966
David@hasslefreecashflowinvesting.com
By: David Campbell, professional investor, developer, and founder of Hassle-free Cashflow Investing
Here are a few more reasons why I am absolutely certain Americans will experience high rates of inflation and how you can profit from it.
In my last newsletter, I said the Federal Reserve must inflate the price of real estate by 50% or banks will continue to fail in huge numbers. Why is this?
In areas such as California, Florida, and Nevada, radical fluctuations in home prices occurred between 2001-2010, causing prices to rapidly inflate and rapidly fall. This rapid swing in home prices left banks exposed.
A bank originating an $80 loan uses $10 of its own equity and it borrows an additional $70 to fund the loan. KEY POINT: Banks mostly loan out money that is borrowed from the Fed or created from thin air through the fractional reserve banking system.
Let’s look at a case study: In 2005, a borrower took out an $80 loan against a house worth $100. From 2005-2010, the price of the real estate dropped from $100 to $50 and in 2005 the borrower stops paying.
The bank CANNOT foreclose and resell the property, because the bank will not have enough money to repay the $70 it borrowed to fund the original loan. The lender can choose to take a loss on its $10 of equity, but if the lending bank defaults on the $70 it borrowed to make the loan, the bank is bankrupt and must close its doors. This is the reason over 300 American banks have closed their doors in the past 2 years.
The value of real estate must increase (inflate) before the bank can clear the foreclosed asset off their balance sheets otherwise it will be forced to default on the money it borrowed to make the loans. If you hear about “shadow inventory” held by banks, it is foreclosed real estate that banks are unable to sell because it will trigger repayment of debt the bank cannot afford to repay. The US government is trying to save banks, by inflating real estate prices through a radical increase in the supply of money. The following chart published by the Federal Reserve may give you an idea of the staggering amount of money that is being created.
What is better for our economy, widespread bank failure or rapid inflation? The Federal Reserve has been explicit in its public commentary on this issue: aggressive inflation is preferable to continued bank failure. ‘Helicopter Ben Bernanke’ got his nickname by promising to jumpstart inflation by every means possible, even it if meant literally dropping cash from helicopters.
Inflation hasn’t hit the real estate sector yet, but it’s coming. The banking industry will stay in a nose dive and the Fed will keep printing money until real estate prices go up.
While the government publishes statistics about inflation in the form of the consumer price index (CPI), the CPI has a political agenda to radically underestimate true rates of inflation. Below is a chart from Casey Research that compares price changes of various commodities from Oct 2009 to Oct 2010. When core commodities like food and fuel increase 15-74% in a single year, you better pay attention to what’s going on.
Inflation moves in the following cycle:
1) increased money supply
2) increased commodity prices (food, energy, consumables)
3) increased manufacturing / wholesale prices
4) increased retail / consumer prices
5) increased wages
6) increased real estate prices
7) increased borrowing which further increases the money supply
This seven step cycle then repeats itself in perpetuity and the rate of inflation increases exponentially with the beginning of each new boom and bust cycle. Looking at today’s market data we are in between step three and four in the inflationary cycle.
Inflation is increased prices as a result of “printing money” or increased velocity of money. Change in velocity can impact inflation EQUALLY with the supply of currency. The effects of our rapidly increasing money supply are being temporarily masked by reduced velocity. Consumer confidence is low, unemployment is high, and people are hoarding cash. The result is moderate inflation. We will see radical inflation once the velocity of money ticks up.
Currency supply can increase to infinity, but velocity cannot reduce to zero. Reduced velocity is absorbing the majority of the increased currency supply, but this can’t go on forever. Look for signs that velocity is returning to the market and you will have a more accurate forecast of when inflation will enter the market.
A final, crucial point:
Knowing inflation is coming is very different than believing inflation is coming. The difference between knowing and believing is cognitive dissonance. People know driving without a seat belt is dangerous, but they do it anyway because they don’t believe the danger could happen to them. This is the way it is with inflation. A lot of smart people recognize the warning signs of pending inflation, but they are in disbelief that hyper inflation could happen to them – thereby erasing the value of their earnings, savings, retirement accounts, etc.
You can profit from inflation or become its victim! If you are like me and believe inflation is upon us, how will you prepare yourself for it? Doing nothing means your savings and wages will be decimated through increased consumer prices.
Acquiring Hassle-free Cashflow Real Estate is a very simple step towards prosperity and safety in the coming years. If you would like help building a successful real estate portfolio, please call me right away while prices are low, long term interest rates are low, and banks are still lending to qualified buyers. Inflation is coming, and this beautiful buyer’s market will not last forever.
Best regards,
David Campbell
Professional Investor / Developer / Financial Mentor
Founder of Hassle-Free Cash Flow Investing
707-373-9966
David@hasslefreecashflowinvesting.com
By: David Campbell, professional investor, developer, and founder of Hassle-free Cashflow Investing
This article is a sequel to my last newsletter, but can easily stand on its own. You are invited to read and comment on part 1 and 2 of this article on my blog.
I am absolutely certain we will (continue to) see high rates of inflation for the foreseeable future. Inflation doesn’t mean commodities will increase in value, it just means commodities will increase in price because of a devaluation of our currency. If you understand what inflation is, and you believe it will continue, you can either be a victim or a beneficiary of the phenomena. I went to the grocery store recently and was amazed (but not surprised) at how much food prices have increased. Rising prices is confusing and frustrating to most Americans, but it is a fact of life we must come to accept and financially prepare for. Inflation has a winner and a loser. Unfortunately, most people come out losers because they cannot out-earn or out-save inflation. When I observe signs of inflation (rising prices) around me it does not affect me emotionally, because I have prepared to WIN from inflation. When inflation happens, savvy investors like me get richer while workers and savers get poorer. This doesn’t make me feel good about the situation, but it is the economic reality we live in.
I spend a lot of time talking about inflation and taxes because these are the most important and misunderstood concepts in your financial life. Inflation is a hidden federal tax upon every dollar in circulation worldwide. If you are the US government, inflation is an ingenious invisible tax; if you are anyone else, inflation is taxation without consent (and, for most people, without knowledge). I am about to show you ways to profit from inflation, but in no way do I believe inflation is a good thing for society. If I could stop inflation, I would. Since I can’t stop inflation, the best I can do is make a profit from it.
Here are four ways to profit from inflation:
1) STEP ONE: purchase durable commodities today when the supply of dollars is less than the supply of dollars will be in the future. The durable commodities you purchase become assets on your balance sheet that maintain constant value while inflation drives prices up. When the supply of dollars increases and the supply of commodities remains the same, prices rise because more dollars are chasing the same basket of goods. Inflation as a result of increased money supply assumes demand for commodities has remained constant. If demand for commodities increases or decreases, there is a change in VALUE which may or may not result in a change in price. Value and demand are synonymous price is a metric of demand, money supply, and the velocity of money. We will talk about the velocity of money another day. Commodities may increase or decrease in value/desirability/demand, but inflation will make the PRICE of the commodity go up because of a looser money supply. For example, let’s say you bought a hammer in 1960 and it cost you $2.72. Over the past 50 years, the design and demand for hammers hasn’t really changed and therefore the value of a hammer in 1960 and in 2010 is exactly the same. Because the US currency has devalued (inflated), the price of the hammer is now $20. Over 50 years, the hammer has increased in price by 15% per year. RECAP: the value of the hammer didn’t change, but the price increased 15% per year because of inflation (15% per year is simple interest, but it can also be expressed as 4% annualized compounding rate of increase which is how inflation is usually described). If you had purchased a truckload of hammers in 1960 (for $2.72) and resold them at today’s inflated prices ($20), you would have a healthy paper profit that outpaced most investments even though the VALUE of the hammer DIDN’T CHANGE. While it is nice to find commodities that will increase in VALUE because of increased desirability or demand, it is easier to find commodities that will increase in PRICE because of inflation. Because of increases in the money supply (or increases in the velocity of money), it is possible to have a commodity drop substantially in value but resell at a higher price / profit.
2) STEP TWO: purchase durable commodities using as much debt as can be paid for by leasing out the durable commodity. Cash-flowing real estate is the perfect example of this. Real estate and hammers are examples of durable commodities, while oil or soybeans are examples of consumable commodities. No one will rent soybeans from you because they must be consumed to have value. Many people will rent real estate from you because it produces utilitarian value without consuming it. A bank will loan you most (sometimes all) of the money you need to buy an asset and the income from leasing the asset will pay off the loan. FREE MONEY! Now, let’s add inflation to the mix. Let’s pretend you bought a house in 1960 and the value of your house is 6,250 hammers and the price of a hammer was $2.72. (6,250 hammers x $2.72 per hammer = $17,000 house). Over the 50 years between 1960 and 2010 we know the money supply went through the roof and the price of things followed suit. Let’s assume the value of the house you bought in 1960 didn’t change over 50 years due to deterioration or increased demand and neither did the value of a hammer. In 2010, the value of your house would still be 6,250 hammers. However, as the supply of currency increased, the price of everything increased. Hammers went up in price and so did houses. If hammers now cost $20 ($20 per hammer x 6,250 hammers) your house must cost $125,000 even though the value didn’t change. What happened to the value and price of the debt? Let’s assume you had a 50 year interest-only loan on the property and you purchased it with 100% financing (eg. $17,000 of debt in 1960 and $17,000 of debt in 2010). This assumption is highly unlikely, but it makes our illustration easier to understand. Over 50 years, the price of the debt stayed the same while the value of the debt decreased. When you purchased the property, your debt was equal to 6,250 hammers or 100% of a house or $17,000. Sixty years later, $17,000 is only worth 850 hammers or 14% of a house. Inflation made the VALUE of debt decrease. If you know inflation is coming, you want to be a borrower of good debt (good debt is debt serviced by your tenants) and hold the debt as long as you can while the supply of currency increases. Thirty year fixed interest rate mortgages are on sale right now. Get as many of these mortgages as you can while the government is still subsidizing low interest rates.
3) STEP THREE: Protect your profits from income taxation. As the price of real estate goes up with inflation, there is no income tax on the gain until the property is sold for a profit. It is also possible for an investor to “borrow the profit” out of a property and reinvest it without paying a single penny of income tax. Many types of investments (interest income, business income, mutual funds, oil and gas, etc.) must pay income taxes on their profits every single year. Annual taxation of your profits radically erodes your return (earning power) because you lose the ability to generate compound earnings on the portion you paid in taxes. If you could double your money every year ($1 : $2 : $4), one dollar would equal one million dollars in twenty-one years. Apply a 30% income tax rate before each year’s doubling and twenty-one years results in only $41,000. Can you see how ESSENTIAL it is to have income tax deferral as a central component of your wealth building strategy? The equity growth in real estate is automatically tax deferred (like an IRA) while also creating a tax shelter for the ordinary income through depreciation of the real estate structures. Depreciation is a topic for another day.
4) STEP FOUR: Acquire income streams whose value will be enhanced by rising prices. Let’s assume rent has a fixed value of 60 hammers per month. In 1960 rent would be $163 per month (60 hammers x $2.72) and in 2010 rent would be $1200 per month (60 hammers x $20). The value of rent didn’t change, but the price changed because of increases in the supply of dollars (fiat currency). Let’s assume our rental house in 1960 had operating expenses of 28 hammers per month (taxes, insurance, maintenance, management) and mortgage payments of 30 hammers per month. There would be 2 hammers per month left over as the investor’s profit (60 hammers of income – 28 hammers of expenses – 30 hammers for mortgage). Over time, the PRICE of operating expenses will increase in direct proportion to the rate of inflation. However, the VALUE of operating expenses is not going up, the increase in the currency supply is making the PRICE of everything go up. Over time, the PRICE of your fixed interest rate mortgage will stay the same thus reducing its VALUE. In 1960, your mortgage is 30 hammers x $2.72 = $81.60/month. In 2010, your mortgage is still $81.60, but the price of a hammer has gone up with the money supply. Your mortgage in 2010 is $81.60 divided by $20 per hammer = 4 hammers. In 2010, you collect 60 hammers of income less 28 hammers of expenses (income and expenses didn’t change) less 4 hammers for mortgage = 28 hammers of investor profit (28 hammers x $20 = $560). The value of rent and expenses stayed the same, while inflation caused the VALUE of the mortgage to decrease therefore increasing the investor’s profit. Real estate is powerful because it allows you to control a very large amount of debt whose value is eroded by inflation. As the value of debt is eroded, the borrower of the debt wins. An investor doesn’t need the PRICE of his debt to decrease, to make a profit, he just needs the VALUE of his debt to decrease. If the cost of debt is 5% simple interest, but the rate of inflation was 15% simple growth between 1960-2010 it is obviously profitable to be a borrower of good debt during inflationary times (eg. borrow at 5% and earn 15% = 10% profit on the funds borrowed). Government inflation numbers are reported as compound rates of growth and that confuses people into thinking inflation is less of a factor than it really is. 4% inflation compounded annually over 50 years is the same as 15% simple interest. Here is an easy to use inflation calculator if you want to see how much the price of things have changed over the past 100 years.
In my next newsletter, I will prove the Federal Reserve must inflate the price of real estate by 50% or banks will continue to fail in huge numbers. There were 140 bank failures in 2009 and 149 bank failures in 2010. Here is an interesting interactive map showing where bank failures are occurring. What is worse for our economy, widespread bank failure or rapid inflation? The Fed has been explicit in its public commentary on this issue; aggressive inflation is preferable to continued bank failure, therefore heavy inflation must be targeted at the real estate sector to pull the banking industry out of its nose dive. The Fed has made its decree public knowledge. What are you going to do about it?
If you are like me and believe inflation is inevitable, how will you prepare yourself for it? Doing nothing means your savings and wages will be eaten up through increased consumer prices. Acquiring positive cash flow real estate with 100% financing makes you the ultimate winner during inflationary times.
Don’t become a victim of inflation! Acquiring Hassle-free Cashflow Real Estate is a very simple step towards prosperity in the coming years. If you would like help building a successful real estate portfolio, please call me right away while prices are low, long term interest rates are low, and banks are still lending to qualified buyers. Inflation is coming, and this beautiful buyer’s market will not last forever.
Best regards,
David Campbell
Real Estate Investor / Developer / Financial Mentor
Founder of Hassle-Free Cash Flow Investing
707-373-9966
David@hasslefreecashflowinvesting.com
Builders and banks are in direct competition with each other right now.
I believe construction lending is extra tight because banks are trying to constrict the supply of new inventory to shift buyers into the bank’s foreclosed inventory. CNBC reports 14% of homeowners and 6% of investors will not consider buying foreclosed properties because of the hassle and time and risk associated with buying from banks. Banks don’t want to drop their prices, so they can exert their power by restricting supply of inventory. They do this by limiting the number of foreclosures released onto the market, and by limiting the supply of new construction by clamping down on construction lending.
This is an interesting phenomenon because while quantity of foreclosed inventory varies radically based on local market conditions, lack of construction financing is a national problem. The result is areas like Dallas cannot add new supply because there is virtually no bank financing for builders. However, Dallas does not have a back log of foreclosure inventory like Vegas, Detroit, Phoenix, etc. In fact, Dallas is experiencing a population boom and an artificial restriction on new supply. Let’s see…Dallas has an increased demand for housing and a restricted supply of new inventory because of national banking policies. Does that seem like an opportunity for anyone?
Consider buying new construction homes in a market like Dallas where there is very little supply coming on the market. Consider being a private construction lender in a market like Dallas where there is buyer demand, but no supply of credit for builders. Interested? Give me a call.
David Campbell
Real Estate Investing Strategist
Office: (866) 931-9149 Ext. 1
Regardless of your political opinion about whether quantitative easing is good or bad for our country, the government is telling us they are printing dollars as fast as they can. The question is are you prepared to profit from this inflationary phenomena?
I frequently talk about inflation because it is the most important economic force in our lives. It is by political design that very few people talk about or understand what is happening with inflation. Here are some excellent Youtube videos describing what is happening with inflation and the dollar – Quantitative Easing Explained, Glenn Beck: Just Realize What’s Going On – Part 1, Part 2, Peter Schiff on FOX news, The Attack On the Dollar by Richard Maybury.
2) It is more popular to inflate than to raise taxes. Inflation is a way for the federal government to tax your savings, because as prices rise, the dollars in your savings account buy less. Savvy investors with political influence know how to profit from inflation and simultaneously shift the tax burden onto the financially illiterate working class. Americans are indoctrinated into a compulsory system of government controlled education which teaches: get a good education, work hard at a job for 40 years, and save your money in banks, the social security retirement fund, and invest in Wall Street. This is another example of the fox watching the hen house. People are starting to realize this system doesn’t work, because inflation is consistently outpacing the profits generated by savings accounts and Wall Street investments.
David Campbell
Real Estate Investor / Developer / Financial Mentor
Founder of Hassle-Free Cash Flow Investing
707-373-9966
David@hasslefreecashflowinvesting.com
INVESTOR = mostly passive + dividends + long term capital gainsAs a Hassle-Free Cash Flow Investor, you must clearly understand the difference between an investor and a trader. This is an important distinction in your investment style / investment philosophy. Many people call themselves real estate investors when they are really traders. While you can make a lot of money as a real estate trader, it is not the same thing as being an investor.
Hassle-Free Cash Flow Definition of INVESTOR: An investor converts a lump of cash into an asset that has the probability of paying an income stream over a long period of time. An investor is primarily concerned with cash flow and security of his principal over a long period of time. To an investor, the increase in the equity value of an asset is a secondary benefit. An investor is generally passive and expects his money to earn more money without the contribution of a lot of personal time and skill.
Hassle-Free Cash Flow Definition of TRADER: A trader converts a lump of cash into an asset that has the probability of being resold for a larger amount of cash in the future. A trader is primarily concerned about velocity and security of his principal usually over a shorter period of time. A trader must buy and sell quickly or carrying costs and time will quickly erode his annualized return. A trader is generally active and expects to contribute substantial amounts of management time and skill, as well as money. A trader makes money ONLY if the value of his asset increases in value.
Being a trader is a job. If you are like most people, you already have a job and don’t want a second one. Being a trader is NOT Hassle-Free. As an investor, your money works so you don’t have to! A good investor enjoys freedom of time and money. Begin with the end in mind. Focus on making good investments that will take care of you in the future while not eroding your quality of life in the present.
People looking to make money in real estate often call themselves investors, but their idea of investing is negotiating short sales, going to foreclosure auctions, scouring the world finding a needle in the hay stack deals, or doing rehabs and “flips”. All of these are active forms of real estate trading that involve controlling a distressed property, improving its value, and reselling the property for a short term profit. Admittedly there is a lot of money to be made being a real estate trader, but it is a JOB. I have done over forty real estate flips in my life and I have made a lot of money doing them. But doing flips is VERY hard and VERY time consuming. It took me five years of study and practice before I successfully completed my first flip. If the trader doesn’t show up to work, nothing happens. Unless you want to quit your day job and become a full time real estate professional, stay away from being a real estate trader and focus on being a real estate investor. A Hassle-Free Cash Flow investor should never have to do anything but monitor his cash flow and management team.
It is possible to build a real estate investment portfolio that takes less than one hour per month to manage. With the right deal structure, leverage (financing), and cash flow it is very possible to achieve investment results well over 100% per year as a semi-passive investor. If you can double your money every year as an investor working less than one hour a month, why take on the worries and time hassle of being an active trader?
TAKE AWAYS: Being an active real estate trader takes time, skill and tenacity; it is a job. However, being an investor in Hassle-Free Cash Flow real estate can be semi-passive, simple, and highly profitable. The goal of Hassle-Free Cash Flow Investing is to enjoy your quality of life now, while creating financial abundance for the future.
I’ve heard it said “look at one-hundred properties, make offers on ten, and close escrow on one.” There is a bit of truth in this cliche. I look at several potential investment opportunities every day and very few of them work out. If you are a good investor, you learn to evaluate deals quickly without investing too many resources. I can say no to a deal in 60 seconds, but it can take a few days or weeks of study to say yes.
The first step in finding great investments is to write down your personal investment philosophy. If you know what you are looking for and you articulate it, you will radically improve the odds of finding what you are looking for. This may seem over simplified, but 95% of the people I meet cannot articulate what their investment criteria are. How can you find something if you don’t know what you are looking for? If you don’t have a personal investment philosophy, please call me and I will coach you through writing one. It’s a free call, and I bet I will surprise you with how productive our time together is.
The second step is communicate your personal investment philosophy to people who have access to great deals. THE BEST DEALS ARE NOT ON THE MLS! They are not on loopnet, or some website somewhere. The best deals never make it to the market. Insider trading in real estate is the way fortunes are made AND it’s perfectly legal. I never publish my deals on craigslist for some stranger to call. Are you kidding? When I have a great deal, I give a phone call to my business partners or I’ll send an email or a phone call to my list of best clients. I am fortunate to have created great access to deal flow. People bring me off market deals all of the time. Sometimes the deals come from readers like you. Recently, I’ve been getting a lot of great deal flow directly from banks because they know I represent a reputable investment fund. If you want access to great investments, by all means don’t keep it a secret.
After you’ve articulated your personal investment philosophy to someone who has access to deal flow, it’s important to analyze opportunities quickly, thoroughly, and unemotionally. I could write an entire book on the subject. The best way I know how to learn real estate due diligence is on one of my investor field trips.
Evaluating investment opportunities can be very time consuming. I spent this entire week doing due diligence on a property I’ve decided not to buy. On one hand, I am frustrated I wasted a week of my life investigating a property that will not make me any money. On the other hand, had I moved forward with the purchase I would have wasted far more time and resources. One of the best things about investing in group investments is someone else has filtered through hundreds of deals to find the opportunistic needle in the haystack. Then they assembled a mountain of due diligence information into a neat little package for your review.
If you want to be a relatively passive investor or you have limited experience, focus on hassle-free cash flow investments such as:
If you are interested in being a hassle-free cashflow investor, let me know and you’ll be added to our distribution list for investment opportunities. Better yet, give me a call and we can customize a financial solution for you based on where you’re at now and where you want to be.
If you want to be an active real estate investor, consider soliciting the help of an professional investor such as myself to be your mentor partner on your first few deals.
Real estate can be exciting. It can also be profitable enough to noticeable improve your lifestyle. Don’t take things too seriously or too personally. Be nice to everyone. Continually strive for more balance in your life. Take the middle path.
I wish you much success and happiness, and I look forward to hearing from you.
Best regards,
David Campbell
Real Estate Investor / Developer / Financial Mentor
Founder of Hassle-Free Cash Flow Investing
707-373-9966
David@hasslefreecashflowinvesting.com
