Wealth Building Basics

This brief overview will outline why Real Estate is such a powerful investment for the new millennium. Once you are familiar with its concepts you are ready to start buying properties for long term wealth building.

Sections:

• Why invest in Real Estate
• Why invest in Apartment Buildings
• The Four Engines of Real Estate Wealth
• The Power of Control
• Defining Your Goals and Choosing a Property
• Making Your Purchase
• Operating Your Property
• Moving Up to Greater Wealth

Why invest in Real Estate

Will Rogers, the American humorist, once said: "Buy Real Estate; it's the only thing they ain't making any more of".
J. Paul Getty, once the richest man in America, remarked: "80% of all the wealth in America has been created in Real Estate." Countless other multimillionaires owe their success to prudent Real Estate Investing.

Why has Real Estate dramatically outperformed all other investments (in relation to risk), over time. There are some powerful forces at work that have constantly driven up the price of real estate over the last 80 years:

• An Ever-Expanding Population has driven up the demand for housing, and will continue to do so in future years.
• An Ever-Shrinking Supply of Land within our metropolitan areas has driven up the price of land for all buildings
• An Ever-Increasing Cost of buildings (bricks and mortar), drives the rent needed to encourage new development.
• An Ever-Shrinking Dollar, reduced year after year by inflation, makes tangible assets, such as Real Estate, more and more valuable in constant dollar terms.
• An Enormously Favorable Tax Treatment designed by the Congress to encourage long term investment in housing.
• An Incredible Boost to Returns available from leveraging. Smart Investors borrow money from the bank and then make money on the Bank's money over time.

Put all these forces together, and it is not unusual for a properly leveraged piece of income property to return 12% to 25% After Tax, year after year.

Why invest in Apartment Buildings

You can make money with any form of Investment Real Estate. We can show you what the other strategies are if requested. But the more generic the property, the easier it is for the investor to create strong returns. Apartments fit this bill because:

• Apartments represent the largest, wonderfully imperfect market in the country. There are litterally thousands of residential investment properties. Many opportunities to find exactly what you are looking for. Pristine buildings you simply have to watch and cash the checks. Neglected buildings you can boost the value of by returning them to their normal state of repair. And everything in between. And because nobody sees all of the market at once, it is often possible to make great buys by working harder and being there sooner than the next buyer.
  
  
• Apartments are easy to understand. We've all lived in an apartment at some point in our lives. We intuitively understand a good property from a bad one. And it is easy to understand how a property fits into its marketplace. A two bedroom flat is in just as much demand on the east side of town as on the west side.
  
  
• The properties have good immediate demand to a broad range of tenants. As long as there are sufficient jobs and households in an area, apartments will always attract potential renters. With most apartments on month-to-month agreements, tenants are very mobile. Unlike office buildings or retail spaces, this means you can fill any vacancy on any given weekend with the right "Move in special"
  
  
• Apartments respond quickly to market forces. When market rents go up in a given area, owners can respond as soon as the first of the following month with an appropriate rent increase. A twenty dollar per month increase can boost the value of a 100 unit building by over a quarter of a Million Dollars.
  
  
• Owners Can Make a Big Difference. Unlike other investments, you can increase your value substantially by taking good care of your apartments. It grows even faster if you spend a little on exterior curb appeal. Remodeling interiors. Adding cost effective amenities, such as garages, carports, or washer-dryers in the units.
  
  
• There is a huge pool of Buyers. When you are ready to move up to a larger building, you won't have to wait long to find the right buyer, assuming you market your property correctly. This is one of the critical areas where your Real Estate Advisor will make a huge difference.

The Four Engines of Real Estate Wealth

Real Estate is a long term investment, usually held for more than five years. The initial return usually gets better over time as rents go up, loan payments stay the same. taxes are saved, and property values appreciate. These four factors drive real estate wealth.

• Cash Flow A good apartment will yield between 4% and 9% cash on cash return in the first year. Many investors look only to the current year cash flow when trying to buy a property. While significant, initial cash flow is not a very important measure of a properties' overall performance.
  
  
• The Power of Leverage  Most investors use the bank's money, in the form of a mortgage, to buy larger properties than they could get on an all cash basis. This Leverage creates powerful returns over time. The graph below shows a typical building, purchased to gain a $1.00 annual net operating income (NOI), using a loan with a $0.90 annual mortgage payment, leaving $0.10 in the owner's pocket after paying the bank.
  
  Look what happens as rents go up over time. We have assumed 5% annual rate of increase for illustration. Since the bank's payments are the same year after year, the owner gets all the increases. This drives his initial $0.10 return to $0.74 in the tenth year, for a 740% overall increase!!! This is one simple example, but you should know that your Real Estate Advisor has other ways to help you increase your cash flow over time.
  
  
• The Power of Leverage on Equity Appreciation Just like the boost to cash flow, property equity is dramatically increased over time with the use of leverage. There are two reasons for this. First, your payments each year are reducing the principle owed. Second, as properties appreciate, the increase goes to you, the owner, not the bank.  
  
  Look what happens in the graph below as value goes up over time. It shows an initial down payment of $200 on a purchase price of $1,000, for a typical 20% down. We've assumed the same 5% annual rate of property appreciation, and look what happens over the next 10 years. The value goes up to $1,640, while the loan pays down to $640. This means your equity increased by $1,000, for a 500% overall increase!!!
  
  
• The Power of Tax Benefits Real Estate is one of the most highly tax advantaged investments in America. Congress does this to insure that adequate funds will be attracted to housing, giving every American a place to call home. When you own an apartment building, you collect the income each year. Tax law allows you to write off all your interest payments against that income. Also, you get to deduct a portion of your purchase price each year in depreciation, further reducing you taxable income. The overall effect is dramatic. Often an investor will pay no current income tax at all on his property income. He may even be able to shelter other earned income, if he meets certain criteria. When it comes time to sell, you can defer your capital gains taxes indefinitely using a variety of structures, like a 1031 Exchange. Contact your Real Estate Advisor for a more complete picture of how it is done.

The Power of Control

Real Estate is very different than investing in stocks or bonds, where you turn your hope for returns over to other parties. When you own a building, you can become involved in a very meaningful way to increase your overall wealth. Even working through a property manager, you can make day to day decisions that increase rents, reduce expenses, improve the property and retain tenants. This can increase net cash flow over time, and increase your property value much faster than the overall inflation rate.

Defining Your Goals and Choosing a Property

No two properties are completely alike. No two properties perform exactly the same over time. Choosing an investment property starts with defining your goals. The most important thing to remember is that You are making an investment for financial return, not picking a property solely on its emotional appeal.

In order to make the best investment for you, some initial decisions need to be made:

• How much cash do you have available for investing? Check your bank accounts, equity in your home, loans from relatives, in some cases your retirement funds, and decide what amount feels comfortable for you to commit to a long term investment, balancing great returns with lack of liquidity.
  
  
• How much of a loan are you willing to take out for the purchase. A bigger loan means a bigger property, with bigger returns. But a bigger loan also means bigger payments and the risk of negative cash flow from time to time. Typically, investors put 10% to 20% down on 2 - 4 plexes and 25% to 30% on apartments 5 units and larger.
  
  
• Where should your property be located? If you are going to manage it yourself, it should be near your home or work. But if you are going to have it professionally managed, then it can really be anywhere in the region, as long as you are willing to visit it from time to time.
  
  
• How much overall return do you want to achieve? Recognize that returns grow over time at different rates for different buildings. Striving for a higher yield often means compromising in other areas, like age or location.
  
  
• Should it be older or newer? Older properties often give better returns, but can require more work and maintenance. Newer properties can be much easier to maintain, but you give up some of your overall return.
  
  
• Do I want a fixer-upper? Regardless of age, properties come in all conditions. One that is well maintained will give you few problems over time. But if you buy one that needs a lot of work, and you do the work well, you can really boost the value far above the cost of the work.
  
  
• How will you operate the property? Do you have the time to do it yourself, or will you hire a professional manager?
  

Your Real Estate Advisor will give you many pieces of information and insights to help you define your goals. Next your Advisor will show you the whole market in the region, and all the properties that are available. Finally, we'll help you make your own selection of the best property to meet your goals. Remember, no one property is likely to meet all your goals, so your job is to pick the best one(s) from what's offered for sale.

Making Your Purchase

Once you have seen the entire market of available properties, it is time to make offers. Attractive properties that are well priced go quickly, so it is important to make the best offer you can as early as you can. Your Real Estate Advisor has years of experience in the market to help you choose the right strategy. You'll need to make decisions on timing, contingencies, financing, inspections, records review, and a number of other items. You're not alone in the process, but instead are given expert advise every step of the way, from initial offer to close of escrow.

Operating Your Property

Now that you own your property, the real wealth building begins. In fact, what you pay for a property and what it yields in initial cash flow, assuming you are generally in the market ranges, is relative insignificant. Much more important is how you manage it over time. Can you improve the interior of the units and gain additional rent? Can you add amenities, such as Washer/Dryers or Garages to gain additional income? Can you prudently spend money on upkeep without giving up your bottom line?

An Advisor stays with you over time, helping you understand the issues important in making these decisions. We'll keep you constantly informed of rental activity in your area, new loan programs available, and a host of other ideas to help you grow your wealth over the years.

Moving Up to Greater Wealth

Sometime in the future, typically between 5 and 10 years, you will want to get a larger property. Your Value will have gone up, your loan will have paid down substantially, and you will have too much equity in your current property. By moving up to a larger building, you will be ready to experience:

• Greater Pre-Tax Cash Flow
• Faster Principal Pay down on your new Mortgage
• More Tax Benefits from larger interest and depreciation write-offs.
• Greater Appreciation from a larger property.

Your Real Estate Advisor will help you value your property, and prepare it for sale at the highest market price in the fastest time. Then, with a powerful marketing program, your Advisor will bring you the most qualified buyers available. Next, your Advisor will help you structure a transaction to minimize your taxes on sale. Lastly, your Advisor will help you reinvest in the most effective way possible to meet your overall goals.

Give me a call and make an appointment now to discuss your future with real estate.