Jeff, Now What Do We Do?

Yesterday Jeff Brown, real estate investment advisor, explained the two myths that prevent most people from enjoying a work-free retirement. Once folks understand that they might actually be better off with a mortgage and investments. They get interested in the process. That’s where our conversation went next.

Jeff, how do you answer when someone says “Okay, I’m ready to invest. What is the process?”

Liz, Let’s assume we know exactly where you are now financially. Let’s further assume you have about $125K in cash to invest.

The first thing we do is decide how much should be allotted to cash reserves, or what I’ve already referred to as your Sominex account. In this case I’ll feel very comfortable if you retain around $40K. This will result in excellent sleep even though you had to buy that $700 refrigerator for unit #2. J

Before we get all excited and start making offers, we’ll head over to the lender to get you pre-qualified for the loans you’ll be getting. This will result in a letter from the lender saying you’re a solid citizen, and that yes, they’ll loan you the money for the property on which you’ve made an offer. This allows you to look very strong as a buyer from the seller’s viewpoint.

We’ve decided that since you need to grow your capital, Boise is a very good fit. You can find homes in great areas in the price range of $175-240K. The area is a job magnet, unemployment is below the nation’s average, and people are moving there in droves. In short, we like the region very much. Now all we have to do is start our search for appropriate properties.

While we’re doing that you have the option of flying to Boise or not. Most investors either never go to the far away city in which they invest, or wait until they’ve closed all their purchases. We recommend the latter. Since as professionals we already know the area well, plus have the valuable backup of the local pros, a trip to Boise before buying will only serve to make you feel better, not really accomplish much. We’ll arrange for our team to give you a very comprehensive tour of the region, take you to lunch for a one on one question & answer session, then take you wherever you need to go. We’ve even had clients land in the late morning and leave at night to go back home.

Whether you go there or not, you’ll be introduced to everybody on our team — agents, inspectors, and most importantly the property manager. You’ll know them by first name before the process is finished.

We’ve arrived at the good part now. We’ve found three homes priced to fit your budget. The offers are structured to your financing requirements, and plainly spell out who pays for what, when certain things must be done, (deadlines) says how much you’re putting down, and the rest of the details involved in buying real estate. One thing we insist on is a home warranty, which comes in very handy when a heater breaks down. Most of the time we’re able to get the seller to pay for the first year.

So now we’re in escrow on three Boise houses. We’ve done the numbers backwards and forwards, and it appears it will cost you a total of about $82.5K to close them. Since they’re set up to close in 30 days, we quickly order the appraisals and the professional property inspections. We have our managers also attend the inspections with an eye towards potential tenant objections. The inspector might not care about the neon orange shag carpeting, but the manager doesn’t want to try to explain to a potential tenant why orange shag is in these days. J

When we get the inspection report back we go over it with a fine tooth comb, then list the repairs we want the seller to make at their expense, before escrow closes. The seller then agrees. But we don’t just accept that. Before the closing date we send the same inspector to the properties to ensure all the repairs were made, and made professionally. (This second inspection is also attended by our manager.)

The only thing left is loan approval, loan document signing, and closing. Sounds simple doesn’t it? Actually those three things should be very simple. In real life Murphy sometimes finds a way to entertain himself at your expense. Let’s say your escrows are smooth as silk, as most are. The loan approval comes in, which triggers the drawing of the loan docs. Once drawn, they’re usually sent to the title company/escrow who then packs it off to wherever you are going to physically sign them. (For instance, in San Diego my mom would take them to your house so you wouldn’t be inconvenienced.) J

The signed loan docs are then shipped back to escrow. Escrow then crafts a HUD-1 statement, better known as a closing statement. This will detail where every last penny went for both the buyer and the seller. Some things like rent, interest, and HOA fees will be prorated between the buyer and seller as of the closing date.

The next day your escrow closes. The escrow sends the deed to the title company for recording at the county recorder’s office. You now own three well-located Boise homes. You’ll receive an envelop from the escrow company by mail containing all the documents for your records. Since their estimated closing amount is usually over-stated, you may also receive a check for unused funds.

All you have to do now is find a nice family who wants to rent your new places, and help make your retirement what you’ve always wanted it to be.

Thanks Jeff. You make it sound seamless.

Understanding and tracking investments can be a full-time job. It’s not something that will take care of itself. That’s why we have investment advisors to help us out. Find advisors you decide are intelligent and have integrity. Never feel like you’re being asked to take an off-the-rack plan. Have your planners justify why their choices are individually suited for you.

Even when your investment is small, your advisors should believe that you are with them because they are going to make your investment grow. So it’s to their benefit to pay attention to you. If they don’t have time, do what you do on the Internet, move on to one who knows how valuable you are.

–ME “Liz” Strauss

Jeff offers a free case study in the sidebar at his own blog BawldGuy Talking. Jeff also writes as a contributor at the Bloodhound Realty blog. Jeff will be attending SOBCon 07 in Chicago on May 11-12.

Related
Interview 15.2: Jeff Talks about the Two Myths that Get in Our Way
Interview 15.1: Jeff Brown, Real Estate Investment Advisor

Jeff, What Do You Do?

Yesterday Jeff Brown, real estate investment advisor, explained what he does to help people build wealth toward their retirement. One key he made was that it’s the job of a professional real estate investment advisor to ask and answer teh questions that we wouldn’t think or know to bring up about real estate investing in general or a particular transaction.

It’s also a professional advisor’s job to show us when we’re working with faulty information or hidden assumptions that are incorrect or out of date. That’s the basis for my next question.

Jeff, I’ve heard you talk about the “two myths” that prevent too many people from enjoying a work-free retirement. What are they and what’s the thinking around them?

Liz, I’ll just jump right in and start explaining what they are.

Myth #1 – I must retire with a huge savings account and a paid-off mortage on my home.

This myth is what I’ve come to call Grandpa Economics. Back in his day, few people owned their own home. The goal was to keep your nose to the grindstone, make all of your payments, and retire with a company pension and a free and clear home. That strategy worked for quite some time. The cost of living didn’t really move up much, and Grandpa’s plan served Grandpa pretty well.

Then came inflation, pensions began to disappear, and ‘qualified plans’ such as IRA’s and 401(k)’s put the burden of retirement solely on the worker’s shoulders. It was literally the end of an era. It was also the death knell for Grandpa Economics. Here’s why.

Imagine you’re approaching retirement and have managed to put almost 10 times what the average worker does in your retirement plan. That would be give or take $500K. At 8% interest, you’d receive $40K a year in income, plus the $15K or so from Social Security. That’s $55K in annual retirement income. Don’t smile so quickly.

You see, that’s before taxes. After tax that’s no more than $40K. And by the way, Uncle Sam is likely to tell you in your 70’s to begin paying back some of your principal. This will obviously shrink your $500K, which will then shrink your $40K a year. Not a happy thought.

By the way, since you paid off your home’s mortgage, you now own a 40-60 year old home demanding more maintenance than ever. We haven’t talked about health insurance premiums, replacing that 12 year old car, or just trying to live a life that includes visits to far off family.

Living that way probably isn’t the retirement that you, or Grandpa, dreamed of. Once that die is cast you’re stuck.

One way to climb out of that future is to invest in real estate. That gets your capital growth going. The earlier you do it, the more your investment can gain steam. By the time you’re ready to call it a day, it’s not uncommon to have built up an equity in seven figures. Seriously. You just have to be purposeful in your behavior, and patient with the market.

Myth #2 – I don’t have any money to invest.

I hear this myth the most — usually from folks living in a nice home in a great neighborhood. They almost always have $50-300K in untapped equity in their home. But they don’t have any cash. A business would never let money sit in equity like that, and we shouldn’t either. I help clients in just that position, take money out with a new loan so they can put it to work for them.

Often their new mortgage payments are only a little more than before, and sometimes they’ve actually been less! Really.

They take a big pile of the new loan and lay that money aside as a cash reserve account. I call that a Sominex account. The name speaks for itself — Sominex makes sleeping pills. We set up a Purposeful Plan to use the remaining money from the loan to invest in real estate they can comfortably afford. When we execute the first transaction, they officially become investors.

So you see, Liz, the two myths and Grandpa Economics come down to this.

Would you rather retire with $12,000 a month income and a $2,500 house payment? – OR $3,000 a month income with a free and clear home?

The answer to that question is the path you’ll be on for the rest of your life.

Thanks Jeff. I’m glad I asked.

Understanding and tracking investments can be a full-time job. It’s not something that will take care of itself. That’s why we have investment advisors to help us out. Find advisors you decide are intelligent and have integrity. Never feel like you’re being asked to take an off-the-rack plan. Have your planners justify why their choices are individually suited for you.

Even when your investment is small, your advisors should believe that you are with them because they are going to make your investment grow. So it’s to their benefit to pay attention to you. If they don’t have time, do what you do on the Internet, move on to one who knows how valuable you are.

–ME “Liz” Strauss

Jeff offers a free case study in the sidebar at his own blog BawldGuy Talking. Jeff also writes as a contributor at the Bloodhound Realty blog. Jeff will be attending SOBCon 07 in Chicago on May 11-12.

Related
Interview 15.1: Jeff Brown, Real Estate Investment Advisor