Adventures in Money Making

I recently applied for the American Express Small Business Rewards Credit Card in the name of my Corporation. I filled out an online form in 5 minutes.3 days later someone called me up and verified the information and told me I was approved for a $5k limit card. I already have $25k limit on my personal cards and this card was personally guaranteed too so it doesn't seem like its any different except its more credit.
However I filled out a mortgage application last week for a house I'm buying in Indiana. On my credit report was an outstanding balance for my Amex Card for around $4500 with a monthly balance of a few hundred dollars. Although I pay off my balance every month the lender assumes the 200-300 dollar balance is going to be paid off over time and deducts that from my income, thus lowering my debt-income ratio.
With the Corporate Credit card, I can charge the expenses for my business like phone bills, airline tickets, hotels and educational seminars on it instead of my personal credit card. This way it doesn't negatively affect my credit when I've made a large purchase, even though its still personally guaranteed. So I can still go full doc on the loan application and get slightly better rates.

Ray Roman wrote a nice little article in his millionaire blog about what makes millionaires different.

There are 4 basic points
1. Educate yourself about money
2. Recognize opportunities to make money
3. Buy assets and not liabilities
4. Delay gratification

I completely agree with him on all four points, however I feel he's left out two important
point.

5. Network with other successful people
Money and assets may come and go through the whims of lady luck, however the reservoir of contacts you build up during your lifetime can be a priceless commodity. I suggest reading Never Eat Alone by Keith Ferrazzi.
6. Share what you know and help others achieve the same level of success
Not only do you get to help others, but you never know who you'll meet who can help you in future. What goes around definitely comes around!

It normally costs 4-6% to use a full-service real estate brokerage company to sell your home. On a $200,000 home thats between $8,000 and $12,000. Quite a sting!

I recently sold 2 condos in the past 2 years myself. I did a search on Google for flat-fee mls listing and got a bunch of agents who'd list my house on MLS for a couple of hundred bucks.[thats cheaper than running ads in the sunday newspaper for a month in San Diego!] I offered the buyers agent 2.5% too.[usually, buyers agents get 2% in my area]

If you're uncomfortable with contracts and other formalities you can search for "discount real estate brokerage" or "flat-fee services" and you'll get a list of agents who'll represent you for a lower amount, typically ranging between 1% to 2% or a flat fee of $2,500-$4,000. Remember, commissions are always negotiable.
In my area, the listing and buyers agents split a 4% commission. Rather than doing that, I listed my home for $199 and offered the buyers agent 2.5%. The advantage is that the buyer doesn't know his agent is getting a higher than average commission and might influence his decision to purchase my house if there is a tie between 2 or more similar properties. [I'm probably going to get a lot of flak for this but I think its true]. In any case, if the buyers agent doesn't put any additional pressure to purchase my home, atleast I generated a lot of foot traffic from agents who hoped their clients would like the home.

On both occassions I got a full-priced offer within 7 days.

I recently purchased a new home in Salt Lake City for $210,000 including closing costs. I had $500 into the deal with the rest being financed. I lease-optioned the house and I cashflow neutral. After 5 months the tenant informed me that he's exercising the option. His exercise price is $232,000. After closing costs I net just over $20,000. On my $500 investment, thats a phenomenal 4000% return. [Over 8000% annualized.]

Here lies the power of leveraging and the beauty of real estate. No other investment allows you to borrow 90-100% of the the amount required to purchase the asset.

Of course, through my contacts with builders I was able to buy the house at a slight discount to market and through my research I was able to pick a market that is rising even though prices are flattening out or decreasing in popular investment places like California, Nevada and Arizona. Who said making money was easy?

A lot of professional money managers will quote some nobel prize winning economist theory about strategic asset allocation.[For the record, Harry Markowitz won the nobel prize in 1952 by showing that in the long run, investors make more money by investing in assets whose prices don't have a lot of fluctuation]. They make you di"worse"ify your portofolio by buying a bunch of stock in totally different sectors, on the assumption that some of the sectors are non-related and thus you'll get an average performance in the long. However if you've read When Genius Failed - The Rise and Fall of Long Term Capital Management you'd know that sometimes even non-related sectors can go down all at the same time.

Since most of my investments are in Real Estate my asset allocation is slightly different from the stock market. I have at any given time nearly 25% of my net worth in CASH or cash equivalents like CDs or gold.[not that I have any gold, but I'm looking into it]. Of the remaining 75%, 95% is currently in real estate related investments. Of that 10% is in trust deeds and 90% in actual real estate which is spread across a 3 different states and 4 different cities [as of writing this entry].

Actually a large chunck of this money is in the form of deposits on homes that haven't been built yet. Since I like to get 100% financed loans[at least while interest rates are so low] the equity buildup is without risk[risk to my money that is. the bank is still risking its money and I'm risking my credit]. If the economy tanks and I end up losing money on several deals at the same time, I'd much rather walk away and lose my credit than my money. You don't miss credit so much if you have a pile of cash lying around!!! ;-)
Jokes aside, its imperative to keep a lot of liquid cash lying around as you accumulate more houses. If you have 7 homes vacant at the same time for 3 months thats $30k you'll need in mortgage payments!!!! Thats why you should have 25% of your net worth in CASH.

"I hesitate to make a list
Of all the countless deals I've missed;
Bonanzas that were in my grip
I watched them through my fingers slip;
The windfalls which I Should have bought
were lost because I over-thought;
I thought of this, I thought of that,
I could have sworn I smelled a rat,
And while I thought things over twice,
Another grabbed them at the price,
It seemed I always hesitate,
Then make my mind up much too late,
A very cautious man am I
...And that is why I never buy.

When tracts rose high on Sixth and Third,
The prices asked I felt absurd;
Whole block-fronts bleak and black with soot
Were priced at thirty bucks a foot!
I wouldn't even make a bid,
But others did -- yes, others did!
When Tucson was cheap desert land,
I could have had a heap of sand;
When Phoenix was the place to buy,
I thought the climate much too dry!
"Invest in Dallas-That's the spot!"
My sixth sense warned me I should not,
A very prudent man am I
...And that is why I never buy.

A corner here, then acres there,
Compounding values year by year,
I chose to think and as I thought,
They bought the deals I should have bought.
The Golden chances I had then
Are lost and will not come again,
Today I can not be enticed
For everything's so overpriced.
The deals of yesteryear are dead;
The market's soft -- so's my head!
Last night I had a fearful dream,
I know I wakened with a scream;
Some Indians approached my bed --
For trinkets on the barrelhead,
(In dollar bills worth twenty-four,
And nothing less and nothing more),
They'd sell Manhattan Isle to me,
The most I'd go was twenty-three.
The Indian scowled: "Not on a bet!"
And sold to Peter Minuit.
At times a teardrop drowns my eye
For deals I had, but did not buy;
And now life's saddest words I pen
"If only I'd invested then!"
-Author Unknown

A lot of people have been asking me how I do my research for places to invest in.

It started when I sold my home and was wondering where to invest the proceeds. I moved into a condo that had previously been a rental so I didn't need any of the money to buy a primary residence. I thought that California was overpriced and I definitely wanted to invest out of state.

I spent a lot of time and money reading books and proprietary reports about market cycles, its causes and effects. One great book is Bruce Norris's California Countdown. I found out the periodically the California market experiences a rapid runnup in pricing, then it crashes, stagnates, and then rises again. As housing becomes less and less affordable, people start to migrate to neighboring states.

How do you know people are starting to migrate out of your city witout waiting for the 2008 census? You can see these trends through the "Unofficial Migration Indicator" at www.uhaul.com. Check out the cost of a one-way rental for any given city and any other city. Lets consider the cost of renting a small truck between San Diego, CA and Phoenix, AZ. It cost $225 to rent to from San Diego to Phoenix but only $101 to bring it back! This means that there are probably twice as many people moving out of San Diego and into Phoenix than the other way around. This is basic supply and demand. So you want to make sure that the price is constant both ways or in your favor.

You can also check out population and job growth trends at a variety of different websites, but don't always assume the given data is correct. You can get data at cities chambers of commerce sites or by google searches.
here are some useful links:
city-data.com
US Census Bureau
Milken Institute

I also found out that whenever California property prices bust, prices in other states rise. This is because people move out of California and move to places where housing is more affordable. Eventually as these places begin to rise and CA prices begin to drop, the lure of California becomes irrestible and the cycle starts all over again. Accordingly, there are states that
a) follow an opposite cycle from Calfornia [contrarian states]
b) follow a similar cycle to California
c) states that do nothing or do their own thing.

Contrarian states are states like Arizona, Oregon, Utah, Colorado,etc
Similar states are Connecticut, Florida, Maryland, Nevada, New Hampshire, etc
Limited Movement states are Alaska, Arkansas, Idaho,Indiana, the Carolinas and Dakotas, Ohio,etc.

Each state behaves differently so don't take this as gospel. Do your due diligence.

Look at prospective states or cities and find out how they've done historically. I looked at several states before I settled on Utah.
AZ - already too much appreciation in the residential market. I had missed the boat. vacancies are sky-high. commercial still seems good.
TX - It really hasn't done anything exciting in the past 25 yrs. its a safe place to park money. plus the 3% property tax kills your cashflow.
NM - its looks like a safe place to park your money. a few people I know used to live there and said the local government was not pro-biz.
FL - too late to the party. plus 2% property tax. i had bought 2 pre-construction houses there in early 2004, but the builder had gone under, so I basically lost out on several months of appreciation.
WA - mainly looked at seattle since i went there in july 2004. local economy not
diverse enough for my liking. only 2 main biz - starbucks and microsoft. although the projected job growth is there, the salaries still seem low compared to the house prices/rents.
NY - looked at upstate new york. property tax is over 5%. job growth and population growth are both negative. good cashflow but i'll wait for the indicators to turn before venturing into this territory.
UT - finally something i like! Positive job and population growth. The market was been flat for several years and had just started to perk up. saw 6.5% avg appreciation state-wide last year - that made front page news!!! govenor is pro-biz (he would be, he's the son of a billionaire!). SLC is land locked. There's limited land, always a good sign. Saint George is a hot market too. Also, Utah follows an opposite cycle from california. During the last cycle between 1993 and 1997, Utah saw a 64% appreciation, while California saw only 3%. Between 1999 and 2004, while Southern California saw a 125% gain, utah saw less than 5%.

In 2003 Utah ws 49th in the country in terms of appreciation, beating only Texas. However in 2004, it jumped to the 36th spot. Between 2001 and 2003, utah saw 21 months of zero or negative job growth, which is why prices didn't boom in a low interest rate period. 6 months ago, it was 2nd in the nation in terms of job growth (3.7%) lagging only behind Nevada. Since the beginning of 2005, the unemployment rate has been lower than the national average.

Utah also has the nation's highest birth rates and life expectancy. Over the next 25 years, its estimated that the population will grow between 58 and 75% making it the 5th fastest growing state.

At this point i stopped looking for places to invest and started looking for deals and a team. [feel free to email me for contacts and i'll hook you up with them].I also tied up with local builders and developers. I booked several pre-construction homes there and have already closed on 5 of them. I just bought another lot there next to lake utah with a builout time of 12 months. Some of them have gone up 10-20% since the time i've booked them.

It definitely pays to do your own research!

About a year and a half ago, i was sitting pretty on a pile of cash wondering where to invest it. I had read a book by someone called Mark Stephen Garrisson called Unlimited Real Estate Profit. It was slightly better than a fluff piece and it went into some minor detail about market cycles and said people should buy in undervalued areas that were starting to see increase in prices. [well it didnt exactly says that but it mentioned fancy terms like absorption and expansion]. However it didnt say where to invest. The author did suggest I check out the website narei.com.

At NAREI, they offered buying tours in undervalued markets for $8k. Basically they put you on a bus and show you around the city they think you should be buying in and hook you up with agents to buy properties and also property management. I thought it was a good idea although a little steep. $8k per person, 12 people per tour, 12 tours per year is almost a million dollars for the promoters. Plus they get a cut from the commissions and property management. Hmm...sounds even better than investing itself! I did some more research online, trying to find people who had been on the buying tour. I did find a handful of people, all of which said it was bogus and that it wasn't worth it. Also to get on the buying tour, you had to buy a set of educational materials for $500 so everyones "on the same page". The disgruntled tourists[thats what you call people on tours right ;-) ] said the materials were "godawful".

So I decided to pass and decided to do my own research on where and how to invest.
But thats a topic for another day.

Spoke to a mortgage broker last night. He says business is down but not too bad. Apparently he specialized in sub-prime loans and it wasn't uncommon for him to make 6 points off a loan. thats $24,000 commission off a $300,000 loan. If that isn't obscene profiteering I don't know what is.

WSJ online ran an article that shows how much money some brokers make. $120,000 is average, $1 million is possible and $10 million isn't unheard of. All this money to do computerised loan processing and underwritting which doesn't take too long. They predict that this business will do the way off the discount real estate broker offering fixed price servics regardless of the size of the loan. Here's a snippet from the article.

Mortgage Brokers Benefit From a Refinancing Boom

By JOHN HECHINGER
Staff Reporter of The Wall Street Journal

From The Wall Street Journal Online

WALPOLE, Mass. -- Tom Digan doesn't have to make a hard sell these days to cash in on the mortgage boom. He just needs to pick up the phone.

In his small office, overlooking an auto-repair shop, the 44-year-old mortgage broker returns a call from a customer who wants a $240,000 loan -- one of 50 to 150 daily calls that jam his voice mail. Mr. Digan checks a sheet on his desk, calls up an online credit report and offers a great rate: 5.5% on a 15-year mortgage. "I'll write it up right now," he says, scribbling financial information on an application.

Once the loan closes, Mr. Digan and his employer will split a fee that might make a corporate lawyer do a double take: $2,800. "I know what you're thinking," Mr. Digan says. "He made $1,400 in 15 minutes."

I'm reading Bull! by Maggie Mahar
It follows the boom and bust cycle of the stock market between 1982 and 2004. Here's an interesting tidbit I thought I'd share with you.

Most stock brokers and mutual fund managers don't get paid to take risks. They get paid to beat the index average. Which means that rather than risk their jobs over a stock that may or may not do well, they'd rather buy you the stocks that are in the index or have just been added to the index. This way the performance of your portfolio will mirror the index less of course any management fees or trading costs. Of course, when a stock is added to an. index, in their rush to add it to their funds, the managers create a huge demand for the stock bidding its price up, usually beyond its economic value. Do they care? Yes, they care about their jobs. Very few of them have the nerve to stay in cash, and sometimes they're not allowed to keep cash on the sidelines. So its not like they have a choice. even if they feel the market is overvalued and due for a correction, they're sometimes compelled to stay fully vested.

Also, over a 20 year period, most investors only make 6% return average per year. increase that to 40 years and you're still under 9%. Far cry from the conventional wisdom that says you make 11.5% per year in the long run.

However, if you're 1 in a billion like warren buffet, you could probably make 23.5% per year. But the average investor isn't like Warren Buffet, who's basically a market timer. He buys when prices are dirt cheap and the stock is out of favor and sells when everyone else is rushing to buy.

Be careful of whom you trust with your money!!

That being said I do have a commodity trading account that is broker managed. I don't understand enough about commodity trading to feel secure about trading on my own. Commodity trading is about exploiting the inefficiencies in the pricing of the spreads on futures options which requires a lot of understanding and experience. So far my broker has made about 30% for me this year. Lets see how long he keeps it up. If you're willing to experiment with some money you can afford to lose, shot me an email and I'll hook you up with him.

I just heard from my CPA. He's filed my 2004 taxes and I should be getting a $3,850 refund. I know its late, but better late than never. Besides I gave uncle Sam an interest-free loan for nearly a year. Can't wait to get it!!

I promise to be more organized this year and file my taxes in january. Yeah Right!!!

While surfing onlne, I came across this blog post: Real Estate as an asset class.

Basically this guy wants to be able to live off his dividends at some point and his blog is devoted to that. He's wondering how real estate fits in. He invests in REITS but isn't too sure about actual investing in Real Estate.

Well here's the skinny on investing in Real Estate for cashflow.

1. You definitely want to buy in an area thats reasonably priced.
How do you define reasonable? As a rule of thumb, the monthly rents are 1% or higher of the purchase price. for example, if you're buying a $90,000 house and the rent is $900 per month or more, thats a reasonable price.

2. You want to make sure that after paying for property management, utilities, taxes, insurance and maintenance the rent still covers the mortgage. You may need to learn how to do this. I strongly recommend reading What every Investor Needs to Know About Cashflow.

3. Make sure you figure out the return on investment, or as I like to call it, the Cash on Cash return. for example, if you put down $5,000 and cashflow $125/mo, thats an annualized return of 30%. These are actual figures.I've also done better. It sure beats the stock market!

4. Make sure your know how to get the best mortgage for your goals. I recommend this excellent book. How to Save Thousands of Dollars on Your Home Mortgage

Make sure you're making atleast $125 over your expenses or you'll be negative on the cashflow. I usually want atleast 16% cash on cash return for properties that are in appreciating states like Utah. If there in states which dont experience much appreciation I shoot for atleast 30% Cash on Cash, which isn't difficult to get at all.

here's an example:
I invested 4.5k to purchase a 90k 3/2/2 house in a city in the midwest.(4.5k is 5%. i added in closing costs to price which the seller paid)

monthly rent = $945 (1050 less a 10% vacancy)
mortgage payment = $517.5(1st at 6.5% interest only and second at 8.5% interest only)
taxes = $120
maintence = $50
property mgmt = $110 (i'm generous)
insurance = $40

cashflow = $147.5
annual cashflow = $1,770
Cash on cash return = 44% (thats 1.770/4,500*100)

A lot of people think dealing with tenants is stressful. It is. Thats why you don't want to be cheap. Always hire competent property management. You should still cashflow after including this expense.

The Wall Street Journal reported today that property prices in Manhattan dropped 13%.

I also remember vaguely reading somewhere that prices in Japan are up for the first time in 15 years. I think it was some minuscule amount like 1% but it beats being negative!

now that Manhattan's dropping, can California be far behind? i don't think so!

I get asked by a lot of newbie investors about what to read. here's a good link which a lot of good books on the topic.
topbooklists.blogspot.com

Also, any time you can attend a seminar for under a $100, you should take the opportunity. Its a good networking opportunity as well so make sure you have business cards printed with your name, contact info and the fact that you're an investor. If you're looking for something in particular, you can put that on the card too.

spend some time reading online forums like www.reiclub.com, www.tcinvestor.com and www.sdcia.com.

I remember reading donald duck and scrooge mcduck comics as a kid. One of scrooge's quotes was "A penny saved is a penny earned". Twenty years later, I still remember that.

I called up my cable company and got them to discount my internet connection $20/month. Doesn't sound like a lot but its $480/year which pays for my wife's gym membership. Moral of the story? I never hurts to ask for a discount. I've found that usually works everywhere from the bank[for waiving account fees & checkbooks] to the local mechanic. Always ask for a discount.

i know this is mainly an investment site and pre-dominantly a real estate one at that, but its also about making money[well, atleast i think it is].

I've recently found out that a bunch of people I know have signed up for this network marketing travel agent program. First it was a real estate agent I know, then it was a fellow investor, and then it was a friend's acquaintance. whats up with that? Seems like its becoming pretty popular. Move over Quickstar!!