Adventures in Money Making

I get periodic emails from John Burns Real Estate Consulting.
Today's email was particularly enlightening. I've reproduced it below and I recommend everyone sign up for it.

Tax Proposal Could Wipe Out Housing Market

Executive Summary

You may be aware that the Bush administration is proposing to eliminate the tax deduction on mortgages in excess of $227,000 to $412,000 (depending on metro area). The proposal also reduces the tax break on all mortgages to a 15% credit. While those of us who live in expensive housing markets initially believe that the odds of this passing are next to zero, especially under a Republican administration, we need to remind you of a couple of things:

1. The vast majority of Senators and Congressmen represent areas where their supporters have mortgages less than $227,000. The median existing home price of a home purchased last month was $220,000.

2. In 1986, Congress (under the Reagan administration) passed a tax reform bill that reversed tax benefits created in 1981 that encouraged apartment construction and investment. An 81% increase in multifamily construction from 1981 to 1985 was followed by an even steeper decline in construction.

3. In 1989, Congress passed the FIRREA Act, which effectively wiped out the capital to the home building industry and resulted in a 20% reduction in single-family construction in a 2 year period. A significant Congress-induced reduction in defense spending didn't help either.

4. In 1997, Congress (under the Bush administration) passed a tax cut bill that encouraged investment in single-family residences. The law has created tremendous wealth for households and investors alike, and helped deplete the IRS coffers during a period when government spending is growing significantly. Since 1997, single-family construction is up 53%.


What would the passage of the proposed tax law due to the new home construction industry? For those who say "but the demographics for single-family housing are awesome," we point out that those same demographics supported apartment construction in the 1980s when the younger Baby Boomers were graduating from college. The demographics and mortgage rate environment have been phenomenal, but they haven't created a 53% increase in demand over an 8-year period.

Conclusions
A stable housing market is in the best interest of almost every household in the country. In the past, it has been elected officials that have created booms and busts. Let's encourage the elected officials to leave the housing market alone or, at a minimum, implement changes over a long period of time instead of the immediate "phase in" of radical changes that has occurred in the past.

Got a letter from one of the builders I'm building a house with in Salt Lake City. Apparently they decided they weren't making enough money from the houses so they decided to disband their company Big Canyon Builders and regroup under a new banner called Bristlecone Builders. But of course, now they no longer need to keep their end of the bargin and stick to their contract price for the homes. They're just going to jack up the prices 25-35k.

I know a few other investors who are caught up in this and are really pissed. Some of them are keen on suing the builders but I don't know if this will accomplish anything.
Lets see. I have so many homes tied up, the loss of 1 or 2 of them doesn't make too much of a difference. Going to court takes money, time and a great deal of stamina! I'd rather figure out how to make more money than chase after the loss of 20k in one deal.

One of the tenants on my Salt Lake City properties are late on the rent. Well, they're not late, they just haven't paid for a few months. Nothing but excuses and sob stories. I had taken them to court in June for non-payment of rent and instead of leaving, they requested the judge for 2 weeks during which they paid up. Its not that they're flakes. They have an option to purchase the house and they really want to do that. Its just they're have poor money management skills and no concept of financial planning. They had promised me some money by the 25th November. Today I got an email with some more sad tales of family trouble. Its either that or the husband health problems.

I basically told them that they had to tell me when and how much they were going to pay me the next week or I was going to have them move out. No one likes to evict people the day before christmas so I'm trying to get a head start!

Should've been more stern with them but I felt sorry for them. The husband had genuine heart problems. Anyway, if I don't get paid soon i'm going to be in the hole myself. I just paid $6k for the landscaping on the same house plus i haven't received rent for a few months. Atleast the house has great curb appeal and should rent out much quicker now.

I'm currently re-reading The Millionaire Next Door. I had read it back in 2000 after my wipe-out in the stock market. Its good to re-read books every so often so the salient points stick in your mind. Especially the points in this book.

Most millionaires are extremely frugal. They don't waste money on luxury cars or fancy stuff, nor do they feel the need to impress others about their wealth. This is an especially important thing to remember especially considering that Black Friday is tomorrow and Walmart's selling a 42 inch plasma for $997.00. Thats an unbelievably low price and if I was in the market for a TV I'd definitely get it. However, once I get that, I'll probably feel the need to get digital cable which is a waste of money and of course time. The goal is to simplify life and get out of the consumerism mentality. Thats how average people making ordinary salaries become millionaires.

A very high percentage of millionaires are self-employed and own a small business. That makes sense, since the self-employed have many more ways to save money on taxes than regular W2 income people.

They also didn't get much financial help from their parents. Gifting money to kids after they graduate and helping them buy a house creates an economic dependance and is detrimental to the parents financial well-being. Parents of financially independent kids are more likely to be millionaires themselves.

The most important thing for a millionaire is financial independance. Most millionaires can survive for over a decade just on the cash they have without any additional capital input.

Basically attaining millionaire status is part of your mental attitude. If you can modify it so that you save a portion of your salary & learn how to invest it, you'll become a millionaire.

I recently attended a Millionaires Market Game where I met some who invested in oil fields. I got to talking with him and we decided that I could raise a few million dollars for him to start drilling in some of his oil fields. Apparently his fields have a total of $600 million worth of oil & gas in them.

Since I don't have any info on oil & gas investing I thought I'd do some research on it. Well I found some pretty interesting stuff. First you probably need to be accredited to invest but there is room for tiny investors too [but not much]. Second and most interestingly the returns are 25% to 50% per year. It takes a few months to start production of oil, at which point you start getting dividends.

Of course there are significant risks involved. The oil field could be a dud and you can't extract oil profitably from it. Then there's the swindle risk. How trust worthy are oil field operators?

Don't know how I'm going to come up with the money, but its a lot of money if I can!

If anyone has any exprience in this, please drop me a line at emptyspacesinc@gmail.com

Last thursday I attended an asset protection seminar by attorney Clint Coons of www.alglaw.com. It was pretty good and it reconfirmed some of the information I had read elsewhere.

1. Own real estate in a manager-managed LLC for optimal asset protection and tax benefits.
Nevada has great benefits for an LLC. Charging order is the only remedy in Nevada.

2. Use a C-Corp to shelter real estate related income.

3. Use a Land Trust [grantor trust] for obscuring ownership. Its not foolproof but it hides ownership. If LLC is the beneficiary you also have asset protection.

Overall, I was very impressed with his legal and tax knowledge. They sell a kit for creating your own corporation, LLC and land trust for $1500. I'll probably get that. I've already created a C Corp and an LLC but it's propbably worth it to learn more about the different entities.

In my experience, it never takes 30 days to close on a purchase. Always 45 to 60 days. I'm trying to buy 2 houses in Indiana. Both were supposed to close on the 4th November. This got pushed back to the 11th. Around the 7th I remembered I was going out of town so we pushed it back to the 17th. At this point the seller said after the 15th, there's a $50/day late fee. Thats fine, my loan officer promised me we'd close on the 17th. Then we're supposed to close on the 21st. Then the 22nd. The seller said we better close on the 23rd or the deals off.

Well I really wanted this deal since it was $90k for a 4/2.5/2 1650 sq ft 5 year old house with a replacement cost of $135k, but I was willing to walk away if need be. I just didnt tell the loan officer that.

Anyway, finally at 4pm today I got the loan docs. Just enough time to go to the bank, get a cashiers check, head off to my favorite escrow company, have them print out the email I got with the loan docs, blindly sign them and notarize them and drop them off in the fedex box for overnight delivery with 5 minutes to spare!

If you loan officer claims they can close in 30 days, don't believe them. Especially if you've never done business with them and they've been in the business for a short period of time.

It seems that GM and the american car manufacturers are having a tough time staying afloat. The November 14th edition of Wall Street Journal had an article titled " A Middle Class Made by Detroit Is Now Threatened by Its Slump" about how the car parts suppliers located around Detroit are also facing a similar recession and are cutting back on employees, wages and benefits.

At the Self-Storage seminar I attended a few weeks ago, one of the presenters mentioned Detroit as a place with potential. He was a hard-money lender and said he was lending money to investors in Detroit. I disagreed with him on that issue and I thought he didn't know what he was talking about.

Just over a year ago I was looking at Detroit as a place to potentially invest. Houses were dirt cheap and the CAP rates on apartment buildings were in the 20s!!!! Then I found out why. For the past 20 years there has been a steady population loss, job loss and a decrease in the median wages. The median wages should increase slightly year over year but that wasn't the case in Detroit. Doesn't sound like a place with tons of opportunity to me.

And now with the WSJ article, it just confirms my belief. Always look for a turn-around before you invest in a contrarian market.

Bloomberg News reports that Foreign Investors are losing their appetite for US Debt.

This basically means that the Fed is going to have to raise the interest rates offered on the treasures, which in turn will cause the mortgage rates to rise as well. This doesn't bode too well for the countless investors and homeowners with ARMs. In San Diego this year, 87% of all new loans were ARMs. This is one of the factors that will cause home prices to deflate in the area.

Finally closed on my house in Grantsville, Utah. I had booked it in March for $151k and it appraised for $171k which is pretty good. It took about 6 weeks to close after completion, partly because my loan officer was in hospital for surgery and partly because my debt to income ratio sucks now. I could go stated and lie about my income just like everyone else, but I'd rather go full-doc. Its a federal offense to lie about your finances and I'd rather no go to jail for that!

My man on the ground found me a lease-option tenant and they're ready to move in December 1st so I'm golden!

Now I just need to close on my 6th house in Utah. Its in a place called Jacob's Ranch, Saratoga Springs just south of Salt Lake City. Thats a tough one even though I'm putting 20% down. Lets see how that works out.

I had a really long chat on the phone with Robert Campbell, author of The Real Estate Timing Newsletter today.

I gave a presentation at one of his seminars a few months ago and we've in touch ever since. I like the way he thinks. He does a lot of research and crunches the numbers about the economic trends and tries to figure out which way the market is heading.

He's pretty bearish about the economy in general and the home prices in San Diego which he thinks will drop 40%. [I actually think prices will drop 45%, so I joked that he was being optimistic!]. He thinks that the economy will see a recession in the next few years and I tend to believe him. But thats a topic for another day.

He has a methodology[which is outlined in his book] which he uses to forecast the market trends for home prices in any given location. Historically its had an 80% accuracy rate which is pretty good. His indicator just flashed a sell signal back in August for San Diego so if any of you reading this are in SoCal, nows the time to get out.

I got out exactly at that time and I no longer own anything in California. As I've mentioned in my previous posts, I'm investing in Boise and Utah both of which flashed buy signals using his methodology [something verified by a geeky friend of mine]

Went to the local real estate meeting. I think San Diego has the best REI club in the nation and probably the world. Its non-profit and all profits go to the library.

John Schaub was last night's speaker and he was pretty funny and made a couple of extremely valid points.

1. When you eat out with investors, its not a business meal thats subject to 50% deduction, but a marketing cost that you can deduct 100%.

2. Markets are cyclical. So why buy in places like Texas that never go up when you can buy in San Diego. If you're creative and can come up with ways to pay the mortgage for a few years eventually the rents here will rise and so will the property values. A $500k house in San Diego will be worth $5 million in another 25 years, while in Texas a $150k will probably be worth $300k. [based on whats happened over the past 25 years].

3. He had everyone who's been sued stand up. In an audience of around 250 about 40 people stood up. Out of that only 1 person ever had to pay more than $10k from his own pocket. So don't waste money on asset protection, but get good insurance.

I liked what he had to say so I picked up his latest book. I figure it'll be interesting and I can probably get one idea to make me an extra $5k so the 20 bucks is a good investment.

The Business Opportunities Blog has a ton of ideas for legitimate businesses for entreprenuers and advice on how to start your own business.

Apparently since 2001, Dane Carlson has helped thousands of individuals in their quest for starting a business.

He had a post on an entrepreneur self-assesment test.

Do you have what it takes?

Based on the rumor that AOL paid 20-30 million for Weblogs, Inc. someone figured a way to value
the links pointing to a blog.

Accordingly, my blog is worth $6,774.48 today. I'll take cash or amazon gift coupons.

Through the generosity of a fellow investor, I was able to attend 3-day a Self-storage seminar for free in Salt Lake City last week.

The seminar was at an actual self-storage facility called King Arthur Self-Storage, where apparently the customer is king!. I was amazed at the quality of the facility. It had grade-A commercial offices built into it and a phenomenally plush conference room. I learnt all about the different aspects of starting a self-storage from raising capital,finding land, hiring good help, installing security systems, commercial lending and marketing it. One thing I didn't get enough of was the actual numbers, but I'm a number cruncher so I'll do that myself. I also found out that the self-storage industry has trade-shows and I plan to attend one soon. If you have the land, it costs about 2 million to set up a self-storage complex and you need about $500k cash.

I also met some great investors there and learnt a lot of new things. One of the investors owns 50 businesses [with no debt] and is planning on opening a bank catering towards gocery stores! There was a programmer, a nurse, a builder, an ex-FBI agent, a general contractor and a bunch of other interesting characters. There was also a civil engineer employed by the city of Los Angeles whose Ebay jewellery store did 80-90k in revenue every month! Meeting investors and creating relationships is half the value of these seminars.

The New York Times 7th November edition ran an interesting article - Saying Goodbye California Sun,Hello Midwest

It basically mentioned what I've been telling people for nearly a year now. Once housing starts getting too expensive, people are going to start moving to cheaper places. Last year 100,000 more people left California than moved in. This is a 5 fold increase from 2001 and I guarantee is just the beginning. Since 2001, 50% of all jobs in California have been real estate related and once the market stalls, umemployed people will start moving out in droves.

The article mentions that people have already started moving to states like Arizona, Utah, Texas and the midwest states like Ohio.

I've been investing in Utah for a year now and the day before yesterday I had a chance to met one of my tenants. He moved from Arizona a few months ago and told me a lot of his relatives were moving out of Arizona and into Utah. They could sell their homes there and buy bigger homes in Utah for less.

Heck, I'd move to Utah too if my wife would let me!