The True Cost Of Flipping Real Estate
February 4th, 2012
When it comes to flipping, new investors often get burned by their mistakes.
Since the housing market crash of 2007, the government has tried to protect consumers from buying homes at inflated prices. One policy that was quickly enforced was the FHA “anti-flipping” rule: no FHA financing on properties that had been bought, renovated and marketed at a higher price within a 90 day period.
Unfortunately, what the government didn’t understand is that not all “flippers” are ripping people off. In fact, many of the investors brave enough to buy dilapidated properties with cash in order to fix them up and resell them are actually helping to clean up the housing mess.
Vacant, foreclosed homes attract vagrants and vandalism, adding further stress to struggling neighborhoods. Banks won’t lend on vandalized homes, and few buyers can pay cash both for the purchase and rehab of a dilapidated property. Investors are the only ones who will take that risk so it makes no sense to limit their ability to do so.
The FHA finally caught on, and temporarily reversed the “anti-flipping” rule last year, and voted to do so again in January. This is great news for the U.S. housing market, since investors accounted for one third of real estate purchases in 2011.
Is Flipping For You?
Everyone wants to make a quick buck, and in theory, flipping could be a way to do that. But please heed this warning: flipping is not for everyone! Here are some tips to help you decide if it’s for you.
The Fine Print on FHA regulations
>>Certain conditions need to be met to qualify for FHA’s “anti-flipping” waiver.
>>The transaction must be at "arms length" – meaning there is no personal relationship between seller and buyer.
>>If the selling price is higher by 20% or more than the original purchase price, the lender has to keep record and justify the increase.
>>The home must also be inspected when the price increases by more than 20%. That adds the cost of the appraiser to the list of expenses.
The Real Costs of Flipping Property
There are other real costs that many new investors fail to calculate at the outset:
>>The cost of borrowed money to purchase and/or renovate the property
>>The cost to sell: agent fees and closing costs can add up to 10%
>>Holding costs - on-going property taxes, interest charges, and insurance
>>Unexpected costs - leave a 10% cushion at a minimum.
>>Potential dip in sales price - 10% at a minimum.
>>Estimated profit - 10% at a minimum (and if this is all you’re expecting, there are much lower risk investments out there!)
>>Short-term capital gains taxes if you sell within a year’s time frame (approximately 35% of your profit). Always talk to your CPA before making any investment!
So, you’ll need to calculate all repair expenses and still be at less than 60% of market value. Is it possible? Yes. Is it easy? No.
Buy & Sell vs. Buy & Hold
At Real Wealth Network, we advocate buy & hold investing for the following reasons:
>>Flipping requires hands on involvement and most working people don’t have the time.
>>The flipper would need to only invest where they physically live. We do not advise managing a rehab from a distance.
>>A buy-to-hold investor can invest anywhere, wherever they can find the best opportunities, have many investments working at the same time, and still make money doing other things.
>>A cash flow rental property can yield over 10% return after all expenses, without the risk of fixing & flipping.
>>Rental income is much more favorably taxed, and capital gains can be avoided upon sale if a replacement property is purchased according to IRS 1031 Exchange Rules.
>>Growth over time, for both rental income and capital growth, works the same as compound interest; it’s one of the most powerful tools in an investor’s arsenal.
30 years ago you would have had to put down $13,000 to buy real estate. Today that property would be completely paid off, and have tripled in value. What’s more: you’ll be earning at least $13,000 rental income per year!
The same power of multiplied growth is available today – real estate bought today will be worth three times its value 20 to30 years from now. There is no other investment that delivers cash flow and capital growth like long term real estate investments do.
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About the Author: Kathy Fettke is the founder and CEO of Real Wealth Network – “The Real Estate Investor’s Resource.” She specializes in helping people build multi-million dollar real estate portfolios through creative finance and planning. Kathy is also host of The Real Wealth Show on KABC Los Angeles and on iTunes.
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Tags: Current Events, Economy, Flipping Real Estate, Government Regulations, investing, Why Real Estate?
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Ten Real Estate Predictions for 2012
January 5th, 2012
Millions of people have been making predictions about 2012, ever since the Mayans ruled Central America. Hollywood even made a movie about it! So I figured I'd take a stab at it.
Here we go:
1. Interest rates will remain low
This was an easy prediction since the Fed announced it will keep rates low through out 2012. Expect rates to remain under 5% for most of the year - at least until the Fall when it might start to creep up.
Get your low 30 year fixed rate mortgages will you can!
2. The US economy will grow by 2-3%
While a massive recovery is not expected, a positive number is better than a negative one. Corporations will consider spending some of the $2 trillion sitting on their balance sheets. As they start hiring, consumer confidence will improve further.
People with jobs can qualify for housing, which leads to my next prediction.
3. The number of first-time home buyers will increase
More and more people will see that owning a property is now cheaper than renting in most cities. As the employment picture improves, more buyers will qualify for loans.
First-time buyers will dominate the market since their credit was likely not affected by foreclosures or short sales and they do not have a bad taste for real estate.
4. The stock market will hold steady
This is historically the case during an election year. "The powers that be" will do what it takes to make the economy look healthy.
This doesn't mean the stock market will actually be healthy, but it will appear to be. It could be a good time to self-direct your IRA and buy real estate. Expect the stock market to decline rapidly after elections, mostly due to the fact that Baby Boomer's are pulling money out of their retirement funds.
5. Oil prices will spike
With US withdrawal out of Iraq, warring cultural groups within the country are free to go after each other... and they most likely will. There is also a good chance the US will be at war with Iran. Some economists predict oil prices in the U.S. will rise to $5 and even $7 per gallon.
Buy real estate close to jobs. Sell your SUV.
6. Food costs will spike
Look at your food bill and see how much its increased over the past year. That trend won't stop anytime soon and is a direct result of reckless money creation by the Fed that lowers our spending power.
Buy property only in affordable markets and avoid areas where renters are already stretched. And stock up on food - it's likely cheaper today than it will be tomorrow.
7. Foreign investors will buy up more real estate
A non-U.S. citizen who invests at least $500,000 in the United States is granted permanent resident status (an "Investor Green Card") and is eligible for full U.S. citizenship (under the EB-5 Visa Program.). The visa-holder has the lifelong right to live and work in the United States without restriction.
30% of real estate purchases have been for investment purposes. Expect that number to increase as more foreclosures hit the market and foreigner investors are able to buy them with cash.
8. Rents will continue to rise
Home ownership is declining, while the number of renters is increasing. In fact, according to the Census Bureau, 3.9 million new renters have been added to the pool. Where there's demand, prices increase. Most of today's rental demand is from younger households under the age of 30. These are Baby Boomer children and are expected to be an even larger group than their parents.
Buy rental properties where young people want to live, or buy in neighborhoods where this generation might want to own their first home in 5-10 years.
9. Apartments will be in demand
Young renters like living near town in apartments, for the affordability and proximity to city amenities. Baby boomers also enjoy downsizing to downtown apartment living.
Apartments will be a hot investment this decade. Sell off before 2020, when Boomer kids are ready to buy their own home.
10. Home Construction will Increase
According to John Burns Real estate consulting, new home construction bottomed out in 2011 and will grow 21% in 2012.
Since the cost to build is currently much higher than the cost to buy, buy property near new home sites for a future boom in values.
In Summary:
Things will look rosey in 2012 in preparation for elections. Good economic news will fuel job growth, and more jobs will fuel home sales. Expect price increases on housing (albeit quite small). Jan-April of 2012 will be an optimum time to buy in order to avoid the buying frenzy expected in Spring and Summer.
Speak with a Real Wealth Network investment counselor for tips on the next hottest emerging markets or join us for one of our next property showcase events!
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About the Author: Kathy Fettke is the founder and CEO of Real Wealth Network – “The Real Estate Investor’s Resource.” She specializes in helping people build multi-million dollar real estate portfolios through creative finance and planning. Kathy is also host of The Real Wealth Show on KABC Los Angeles and on iTunes.
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Tags: Current Events, Economy, Financial Predictions 2012, First-Time Homebuyers, Goals and Strategic Planning, Interest Rates, investing, Real Estate Predictions 2012, Stock Market, Why Real Estate?
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8 Ways Real Estate Investors Close Out 2011
December 22nd, 2011
Everyone talks about New Year Resolutions, but rarely do we discuss how to close out the current year. Here are 8 ways to wrap up 2011:
1. Separate all 2011 statements, bills and receipts and archive them all.
We do this with 12 manila envelopes, one for each month. Then put 'em in a box and store them where you can easily access the data if needed. You can also do this with your on-line files. If you are ever audited, the process of finding receipts and bills will become quite easy.
2. Review reports in Quickbooks or Quicken.
If you are not on a program like Quickbooks or Quicken, make it your goal for 2012 to do so. It is a powerful tool for staying on top of your net worth, budget and spending. Once all your data is inputed (and can be easily downloaded from your on-line banking) you can click on any category and find out what you really spend and what you're really making. It's a great time to compare to prior years, and see how close you are to your financial goals.
3. Create More Tax Deductions
If you want to reduce taxes for 2011, you can create deductions before the end of the year. For example, you can pay some bills early. You can also purchase good and services that qualify for write-offs. Some qualifying expenses for rental properties include: repairs, advertising for tenants, printing, insurance premiums, association memberships, seminar fees, mobile phone services, subscriptions, utilities, etc. You can also stock up on office supplies and office furniture. Consider claiming a home office or work space. Also, talk to your CPA about deducting auto expenses for real estate related activities.
4. Pay Your Kids
Consider hiring your children to help with your rental business. Then you can deduct their compensation as a business expense. They will be in a much lower tax bracket than you. The money can be used to pay for their extra-curricular activities.
5. Accelerate Depreciation Expenses
Your rental property is depreciated over 27.5 years, but the property's assets may be depreciated over a 5-year span. Property assets include: air conditioners, refrigerator, carpets, dryer, etc. Other items may be depreciated over a 15-year span, including fences, patios, sidewalks, etc. Talk to your CPA about accelerated depreciation!
6. Make a list of all your successes in 2011
Our family does this together at the end of every year. We pull out an old calendar and start making lists of all the successes and wins each of us experienced. You can also do it with your business and staff. You may be surprised at how long the list really is! Put it in a binder so you can look back at it over the years.
7. Make a list of all your challenges in 2011
What? Why would you want to remember those nasty moments? There is tremendous value in life's challenges. These are often the times we learn our greatest lessons. So write down the challenges, and next to it, write down the lessons learned. List the new qualities you developed. You may be surprised at how wise you've become!
8. Create a theme for 2011
Once you've reviewed your successes and lessons, you may see a common theme for the year. Give the year a movie-like title. "Rebirth," "Surviving the Financial Storm," "Change for the Good." are just a few ideas.
Do you have other tips or rituals for closing out the year? If so, please share them in the comments below.
Next week's blog will be on how to launch the new year. Stay tuned!
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About the Author: Kathy Fettke is the founder and CEO of Real Wealth Network – “The Real Estate Investor’s Resource.” She specializes in helping people build multi-million dollar real estate portfolios through creative finance and planning. Kathy is also host of The Real Wealth Show on KABC Los Angeles and on iTunes.
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Tags: Current Events, Goals and Strategic Planning, Healthy and Wealthy Lifestyle, investing, Tax Credit, Taxes, Why Real Estate?
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Is Deferring Taxes Through a 401K the Right Choice?
December 12th, 2011
One of our Real Wealth Network members came in for a strategy session last week to get some ideas on how to reduce her taxes this year. I'll call her "Sam," for the purposes of this blog.
Sam and her spouse are self-employed and earned approximately $230,000 this year. Assuming a 35% effective tax rate, they're looking at paying approximately $80,000 in taxes. They have $130,000 in the bank.
Their CPA gave them some suggestions that included:
- Buying more stuff to write off (computers, office supplies & furniture, etc.)
- Buying an SUV, which would be a 100% business deduction
- Contributing to a 401K or other tax-deferred retirement plan
Sam was advised to set up a Solo-401K as the best way to reduce taxes this year. A Solo 401K plan is for self-employed individuals and owner-only businesses. Under a profit-sharing contribution plan, Sam could contribute 25% of her compensation, up to $49K, to her Solo 401K retirement plan. Doing this would reduce her taxes by approximately $17K. She asked me what I thought.
We are often sold the virtues of tax-deferred retirement plans by our financial planners and CPA's as a wealth-building and tax-saving tool. But is it the best choice? I decided to take a deeper look. What I discovered surprised me and actually helped me readjust my tax planning for this year. Remember, I'm no CPA, so please verify any of these ideas with your own tax professional!
OPTIONS
Choice 1 - Pay the Taxes
Sam does nothing and simply pays $80,000 in taxes. She would have $50,000 left over in savings.
Choice 2 - Contribute to 401K
Sam opens a Solo 401K and contributes $49K. This saves her $17K in taxes so she only pays $63K in taxes today (but remember, this is a tax-deferred account. She will pay someday!). She is left with $33K in savings.
Choice 3 - Buy a Vehicle and Equipment to Create Deductions
She buys an SUV for $50K and some new office computers ($5K) for write-offs.
This saves her $19K in taxes, so she only pays $61K to the government. She is left with only $14K in savings.
Since Sam's expenses are $10K per month, she is uncomfortable with Option 3, even though it saves her the most in taxes. She wants at least 3 months reserves set aside in savings. This leaves her with Choices 1 or 2. Since she is wanting to both reduce taxes and plan for retirement, let's take a look at how either choice would pan out 20 years from now. She is 45 now.
POTENTIAL OUTCOMES
Choice 1 - 20 years later (after investing in real estate):
When Sam paid her $80K in taxes, she had $50K left in savings. She used $20K of the savings for a downpayment on a $100K investment property. This left her with $30K in reserves.
If she used all the rental income to pay down the mortgage, she would have it paid off in less than 20 years. Her $20K investment would then be worth $100K (assuming zero appreciation). Her rental income would be $10K per year (assuming no increase in rents).
If either Sam or her husband qualified as real estate professionals (please ask us for more info on this) she could deduct $3K for depreciation each year, plus approximately $3K on various expenses (About $2K in tax savings every year). After 20 years, the tax savings could be well over $42,000.
Summary: In 20 years, Sam would own:
$100,000 asset (rental property)
$10,000 annual rental income
$42,000 in potential tax savings, plus continued tax savings through out the life of the property.
Choice 2 - 20 years later (after investing 401K in the stock market):
When Sam contributed $49K to her Solo401K, she invested in the stock market, gaining 6% annually. After 20 years, she would have $157K, if all went well. If she takes out $10K per year for retirement, the funds would last 15 years. And if she was in a 15% tax bracket at that time, she would have to pay over $22K in taxes over the 15 years - more than the $17K she saved by deferring it.
Summary: In 20 years, Sam would own:
$157,000 in her Solo 401K
But she could owe $22,000 or more in taxes when she uses the money.
Choice 2 - 20 years later (after investing 401K in real estate):
When Sam contributed $49K to her Solo 401K, she self-directed it and bought a property in the Midwest for cash. It yields $5,000 per year, which went directly back into the Solo 401K. In 20 years, she would have over $100,000 cash. In retirement, if she took out $10K per year, it would last her 10 years. Assuming a 15% tax bracket at that time, she'd also pay over $15,000 to the government for accessing those funds. This is approximately what she saved in taxes when she decided to defer it 20 years before.
Summary: In 20 years, Sam would own:
$49,000 asset (rental property)
$5000 annual income
$100,000 cash
$15,000 or more due in taxes
There are many assumptions in this little story: Assumptions that the tax laws will not change. Assumptions that our government won't go after our retirement funds as some senators have suggested. Assumptions that the property values and rents won't increase. Assumptions about Sam's tax bracket.
Given the outrageously irresponsible money printing by our central bank, I would argue that the home values would at least double if not triple in 20 years. The average increase in property values over the past 50 years, even though 4 recessions, has been 6%. If that trend continued, the $100K home would be worth $$320K in 20 years. Rents could be expected to continue to increase 4% every year, doubling the cash flow.
It is very difficult to know what the future holds. It's even more challenging to make decisions today that we know will affect our lives 20 years from now. With that said, Sam decided to go with Option 1. Initially, it appeared to be the least savvy choice, but after analyzing the numbers a little more closely, Sam left my office convinced that the best way she could take control of her future was by keeping her retirement in her control.
If Sam continues on this path, she could own several homes outright by the time she's ready to retire. As a high-income earner, she would need at least 10 to replace her current income.
There are many pathways up the mountain. Which one will you choose?
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About the Author: Kathy Fettke is the founder and CEO of Real Wealth Network – “The Real Estate Investor’s Resource.” She specializes in helping people build multi-million dollar real estate portfolios through creative finance and planning. Kathy is also host of The Real Wealth Show on KABC Los Angeles and on iTunes.
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Tags: 401k, Current Events, investing, Market Indicators, Retirement, Taxes, Why Real Estate?
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Will HARP 2.0 Help?
November 21st, 2011
Obama has less than one year to boost his ratings, and the latest housing bail-out plan is part of his campaign. But will it work in the long run? Let’s take a look.
HARP 2.0 launched this week with the hopes of helping at least 1 million underwater borrowers refinance into today’s low rates, even if they owe much more on their home than it’s currently worth.
While the rules are less stringent than the original not-so-effective HARP program, it still won’t save enough underwater homeowners from losing their homes.
Why?
1. It only applies to primary residences, not second homes or investment properties.
2. It only applies to borrowers whose loans are held by Fannie Mae or Freddie Mac.
3. The loans must have been sold to Fannie or Freddie before April 1, 2009.
4. No late payments in the last 6 months, and only 1 late payment in the last year.
5. Adjustable rate or 40 year mortgages are limited to 105% LTV’s.
So who will it help?
1. LTV’s (loan to values) have been lifted for those with 15 or 30 year fixed mortgages. It used to cap at 125% of value, but now borrowers can refinance no matter how upside down they are (unless they have an ARM or 40 year mortgage).
2. Since the program has been extended until Dec. 31, 2013, those who have had late payments can get back on track and still be able to qualify.
3. The waiting period has been lifted for those who have had a recent bankruptcy or foreclosure.
It looks like the banks will also get help.
HARP 2.0. now waives the required lender representations and warrants — for both the loan that is being refinanced and the new loan that is being originated. This means that when lenders refinance loans through HARP 2.0, they are free of any legal obligations to the old or the new loan. (Borrowers, make sure you read the fine print!)
So, as long as the government is giving out freebies, won’t the borrower want to walk away from some of that liability as well? Less than 1 million out of an expected 4-5 million homeowners successfully refinanced through the original HARP program. Will the 2.0 version fare any better? I don’t think so and here’s why:
Of the few who actually qualify for HARP 2.0, how many will choose a lower payment on an upside down mortgage over simply walking away from the debt all together? Remember, FHA will allow those same borrowers to qualify for a new mortgage in three years.
Bottomline: The former bubble markets (mainly AZ, NV, CA and FL) will continue to see foreclosure activity as homeowners walk away from debts. Those markets could very well recover after a 3 year period, at which time FHA would let those same borrowers qualify for a new mortgage and purchase the same or similar house for much less.
The non-bubble markets that are experiencing job stability (like Dallas) will see a recovery first, since fewer home owners are under-water on their loans. They can lower their payments through HARP 2.0, and would be less likely to walk away from their debt obligations.
As usual, if you are looking for a stable investment, consider a non-bubble market with jobs, population growth and affordability.
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About the Author: Kathy Fettke is the founder and CEO of Real Wealth Network – “The Real Estate Investor’s Resource.” She specializes in helping people build multi-million dollar real estate portfolios through creative finance and planning. Kathy is also host of The Real Wealth Show on KABC Los Angeles and on iTunes.
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Tags: Current Events, Dallas, Distressed Properties, HARP, investing, Market Indicators, Why Real Estate?
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Home Sales Are Up and Investors Are Buying
October 24th, 2011
Sales of existing homes in September were up a whopping 11.3% from last year at this time, according to data released by the National Association of Realtors (NAR) this morning.
That’s significant, considering buyers were eligible for the $7000 first-time homebuyer credit until the end of September last year.
Remember? The tax credit allowed a first-time buyer to put just $7000 down on a $200,000 home purchase using an FHA loan, and then receive $7000 back from the government - essentially a no money down deal.
And even more enticing: a buyer of a $100,000 property could have put $3500 down and still be reimbursed the $7000! They could receive $3500 cash back from the government for buying a home with no money down.
The fact that this year’s sales were up 11% in September compared to last year, without the $7000 tax credit, is a very positive sign.
When we get October sales data next month, we will finally be able to compare apples to apples, since last October the tax credit was expired. We’ll have a better gauge of the real estate market with less government interference.
Also of interest in NAR’s report: contract failures were double this month compared to this time last year. This tells us the demand is there, but financing is not. Not surprisingly, one of the main culprits is government interference again - this time regarding appraisal policies.
The new HVCC laws prohibit realtors and mortgage brokers from choosing their appraiser, and instead, are required to use a third party appraisal management company. While this was created to protect the consumer, in reality, the opposite is true. Now the consumer pays more for a less accurate appraisal.
Why? The appraisal management company acts as a middle man, and therefore takes half the appraisal fee. This makes it difficult for experienced appraisers to stay in business, so many closed up shop.
As a result, new and inexperienced appraisers willing to work for half the fee are being assigned to the job. Often they are sent out of town, driving hours to a location they don't know or understand.
Being new to the market, they don’t know a good neighborhood from a bad one, and are forced to rely on recent sales. When 30% of sales are from distressed property, the comparative values will often come in lower then market value.
Low pay also requires appraisers to get the job done in half the time, eliminating the time for proper research. Are they comparing a beat up house with a fully renovated one? Is one vandalized in a high crime area, while the other is in great shape in a good school district? They may not have the time, knowledge or resources to find out. This, of course, results in lower appraisals on higher-valued properties, and buyers are simply unwilling or unable to pay the difference in cash.
Even if the appraisals came in right, contracts might still get cancelled. Banks don't have a secondary market to sell off their loans to anymore, so they no longer have an unlimited supply of money to lend. This is one of the reasons qualified buyers are denied loans for no good reason. Many banks just don't have the capital.
That's why 30% of sales are going to cash buyers
Investors know that when financing is tight, the masses can't buy and prices decline. In many areas, they can purchase property at half the cost to build. They're happy to pay cash now and refinance later.
If you have cash or a self-directed IRA, certainly consider buying high income-producing real estate today. You can enjoy the cash flow now, and then when financing loosens up, more buyers will be in the market and inventory will burn off. Since building has come to a halt, there will actually be a shortage of homes, which will increase home prices at least to the cost to build.
Institutional lenders are getting into that game now, allocating some of the billions of dollars they’ve had sitting on the sidelines to pick up discounted properties.
The little guy is benefiting from low home prices too. 32% of buyers are purchasing a home for the first time. These folks are locking in a historically low interest rate (4.1%) with a fixed payment for 30 years on reduced home prices. This is a welcome relief to former renters who were watching their lease payments increase every year.
In fact, in many parts of the US, it costs much less to own than to rent. In these areas, new homeowners are increasing their monthly cash flow while paying down their mortgage. If they keep that up, someday they will join the ranks of comfortable retirees who own their homes free & clear.
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About the Author: Kathy Fettke is the founder and CEO of Real Wealth Network – “The Real Estate Investor’s Resource.” She specializes in helping people build multi-million dollar real estate portfolios through creative finance and planning. Kathy is also host of The Real Wealth Show on KABC Los Angeles and on iTunes.
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Tags: Cash Flow, Current Events, Existing Home Sales, investing, Retirement, Why Real Estate?
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The Savvy Investor's Best Kept Secret: The Self-Directed IRA
October 20th, 2011
If you didn’t know anything about the stock market before October 4th, you’d think the US had the strongest economy ever. The Dow rallied more than 1,220 points since then - a gain of 12%! Naturally, the uninformed investor may think it’s time to jump into this bull market.
However, thousands of investors are waking up to the reality of Wall Street - that it’s become more of a Vegas gamble than an investment based on fundamentals. Nothing is backing this latest rally, except for a few headlines swaying public sentiment.
When the media announces that Europe has found a temporary solution, stocks rise. Then when the uncontrollable debt inevitably rears its ugly head again, stocks plunge. Is this where you want your precious life savings?
Americans have lost over $6.6 trillion of their retirement savings due to the volatile stock market, according to a study commissioned by Retirement USA. Thousands of investors have had enough and are looking into alternatives to traditional tax-deferred retirement plans. The dream of letting someone else manage their money and expecting it to be ready and waiting for them after 30 years is dead.
One of the savvier investor’s best kept secrets is one you probably haven’t heard about from your traditional financial planner: the self- directed IRA.
With a self-directed IRA, you can take control of your retirement by choosing over 45 different types of investments outside of Wall Street - without penalties.
Here’s a partial list of what you can do with your self directed IRA:
>Residential real estate: apartments, single family homes, and duplexes
>Commercial real estate
>Undeveloped or raw land
>REITs (Real Estate Investment Trusts)
>Real estate notes (mortgages and deeds of trust)
>Private limited partnerships, limited liability companies, and C corporations
>Tax lien certificates
>Foreign currencies
>Oil and gas investments
>Private stock offerings, private placements
>Gold bullion
The IRS actually only disallows two investments within the IRA: Life Insurance Contracts and Collectibles (www.IRS.gov Pub 590). Everything else is fair game so long as it’s for “investment purposes only.”
If you wanted to self-direct your IRA to buy real estate and take advantage of today’s bargains, you could not invest in a home for you to live in or a second home to use for vacations. However, you could buy a rental property, and all the rental income would flow back into the IRA tax-free or tax-deferred.
A great benefit of investing with money from your IRA is your ability to let money grow year after year without losing part of it to taxes. Real estate values have overcorrected in many parts of the US. If your IRA bought a discounted property that increased in value over time, all the profit upon sale would go back into the IRA - tax-deferred.
Some banks even offer financing for your self-directed IRA. However, to avoid paying UDFI taxes, use a self-directed 401K instead if you plan to leverage your real estate purchase.
A great benefit of a self-directed 401(K) plan is the large annual contribution limits allowed. Businesses with a spouse on the payroll can also contribute to the Solo 401k. Provided the business owner and spouse have sufficient income from the business, taxpayers may be able to contribute up to $49,000 each ($54,500 each if both are age 50+) in 2011.
That Solo K Plan would allow the taxpayer to contribute a total of $109,000 during the year, and save close to $50,000 in taxes. This is significantly higher than the IRA contribution limit of $6,000. You get a huge tax write off in the years of contribution, and the funds can be immediately utilized to invest into real estate and receive tax deferred treatment.
Most types of retirement accounts can be converted into a self-directed 401(k) plan. However, if you discuss this option with your traditional financial planner, you may be highly discouraged to proceed.
Remember, most traditional financial planners only get paid when your assets are under their management. Why would they encourage you to leave them, even if it’s a better deal for you?
For a list of IRS approved self-directed IRA companies and CPA’s, contact support at RealWealthNetwork.com
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About the Author: Kathy Fettke is the founder and CEO of Real Wealth Network – “The Real Estate Investor’s Resource.” She specializes in helping people build multi-million dollar real estate portfolios through creative finance and planning. Kathy is also host of The Real Wealth Show on KABC Los Angeles and on iTunes.
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Tags: Cash Flow, Current Events, IRA Funds, Real Estate, Retirement, Self-Directed IRA, Stock Market, Taxes, Why Real Estate?
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U.S. Government Going into the Landlord Business?
October 17th, 2011
Are the rumors true that the U.S. government is going into the landlord business? Probably not, but Wall Street might.
Mortgage giants Fannie Mae and Freddie Mac, along with the Federal Housing Administration (FHA), are currently holding approximately 250,000 foreclosed homes. That’s roughly half of all unsold, repossessed properties - making the federal government the largest owner of REO (bank-owned) inventory in the country!
Plus, these government-backed agencies may soon be forced to repossess 830,000 more homes currently in some stage of foreclosure.
What’s a government to do with so many distressed properties?
Unloading them into the market would only further depress values, while damaging the fragile U.S. economy that depends on real estate stability. Holding the homes vacant leaves them vulnerable to vandalism and disrepair.
One suggested solution is for the government to mimic successful real estate investors and rent them out! Millions of former homeowners who lost their homes to foreclosure are now becoming renters and need housing. The cash flow on rental property is at all time highs so it would be a profitable business. But who will profit?
The FHFA (regulator of Fannie and Freddie) have been accepting RFI’s (Requests for Information) from the public for ideas on what to do with all the government-owned foreclosed homes.
At first glance, it sounds like the government genuinely cares about our opinion. In reality, unless you’ve got a billion bucks in your pocket and some insider handshakes, you probably won’t get to play this game.
Even if you submitted your RFI, corporations with billions of dollars will most likely win the opportunity to buy Fannie and Freddie’s inventory at rock bottom prices. In fact, it appears that the RFI process was actually set up by them.
If they get their way, investors from the private-equity and hedge fund community, like Goldman Sachs and company, will instantly become the largest land owners and landlords in the country. They will get to buy US taxpayer-owned properties in bulk for pennies on the dollar. It would be the greatest transfer of wealth from the public to the private sector if Fannie and Freddie are allowed to sell off their massive portfolio of foreclosures to private investors on Wall Street.
If the US taxpayer technically owns these properties, shouldn’t qualified U.S. citizens be the benefactors? If properties are going to be released for pennies on the dollar, shouldn’t the free market be involved in that? And, if the properties were meant to be rented, shouldn’t experienced real estate professionals handle it instead of Wall Street? We already know what happens when those guys dabble in industries they don’t understand.
It’s not too late to put up a fight. The FHFA is still reviewing the proposals and has not yet made a final decision. Members of Congress need to know they can’t get away with this without serious backlash from their constituents!
What does all this mean to real estate owners and investors?
If you are thinking that the housing crisis will continue indefinitely, think again. Obama will need to clean up the housing mess if he hopes to get re-elected next year. One way to do that is to sell off the government-owned inventory to large financial institutions who would rent them.
Another way he’s doing that is putting pressure on banks to modify loans or accept short sales.
These actions will dramatically reduce inventory, which will most-likely increase demand. More demand means higher prices, which is good for owners and sellers - not as good for buyers.
If you are a looking to buy discounted property, don’t wait just because you’re expecting future lower prices from a double dip recession in housing. Due to government interference, the opposite could be true.
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About the Author: Kathy Fettke is the founder and CEO of Real Wealth Network – “The Real Estate Investor’s Resource.” She specializes in helping people build multi-million dollar real estate portfolios through creative finance and planning. Kathy is also host of The Real Wealth Show on KABC Los Angeles and on iTunes.
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Tags: Cash Flow, Current Events, Inflation, Real Estate, Why Real Estate?
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How to Own a Cash Machine
September 30th, 2011
Imagine if you could buy a little machine that spits out $500 cash every month. How much would you pay for such a gadget? Now imagine owning 10 of these cash machines. You’d have an annual income of $60,000 and all you’d have to do to earn that money is maintain the machines.
Welcome to the world of income-producing assets! Income-producing assets can come in many forms. A friend of mine wrote books and over time he became a popular author. His 10 published books are now little cash machines, as they continue selling around the world.
A neighbor bought a fast food franchise, which he successfully reinvested profits to buy 100 fast food restaurants. Now there's a lot of cash machines!
You can buy laundromats, vending machines, create products, write songs, and sell stuff on a website. You name it, there are many different ways to create passive income so that you can stop working someday. You just have to find the one that works for you.
What if your cash machine broke down and you had to fix it? Would you be upset and throw it away or vow to never own another? Of course not! You'd use one of the month’s cash of $500 for repairs so the machine could continue to spit out cash. If you could use the machine until you die and then pass it on to your kids, there would be no need to worry about retirement or wait until you’re 65 to stop working.
Americans have been duped into thinking that contributing to traditional retirement plans are the same as buying cash machines. As the Baby Boomers head toward retirement, they’re realizing tax-deferred plans that were supposed to spit out cash for the rest of their Golden Years are broken and probably can’t be fixed.
What did the Baby Boomers do wrong?
They lost control. They handed money over to a stranger.
They lost interest. They expected the stranger to take as good care of their cash as they would, so they stopped paying attention.
They settled for too little. They allowed upper-management to skim all the profits.
They got too patient. They believed what they were told - that if they just waited long enough, the money would be there for them when they needed it.
In order to create a real cash machine, you’ve got to be in control, pay attention, and be able to keep the profits. And most importantly, the machine has got to create real income for you (not a speculative hope to sell it at a higher price.)
Most people expect at least 6% annual return on their investments, so they’d generally pay around $100,000 for a cash machine that spit out $500/mo ($6000 annually). Unfortunately, not everyone has that kind of money sitting around. But what if you could borrow $80,000 and pay it back over 30 years using money from the cash machine?
Where can you find a deal like that? Little cookie cutter homes in good neighborhoods near jobs to be one of the best cash machines available today. When they are rented out to good families, the monthly rent becomes the owner’s monthly income. And as much as people like to complain about the responsibilities of a landlord, it sure beats a 9-5 job! Toilets don’t break every day, and even if they do, the landlord can make it the tenant’s responsibility to fix what they break.
Wealthy people create cash machines in two ways: owning businesses or real estate. Real estate is the simpler choice. Don’t believe me? Ask a lender! Walk into a bank and see how much easier it is to get a mortgage on a rental home than a loan for your business.
Today there are 117 million households, of which 79 million own their own home. That leaves 37 households in need of a rental. Assuming an average of $150,000 per property, there is $3.4 trillion worth of rental property out there. That’s nearly double the size of traditional investments.
If you have not taken the time to learn about real estate as an income-producing asset, you’re listening to the wrong advisors. With home prices slashed, low mortgage rates and rising rents, these cash flow machines have never yielded the double digit returns they do today.
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About the Author: Kathy Fettke is the founder and CEO of Real Wealth Network – “The Real Estate Investor’s Resource.” She specializes in helping people build multi-million dollar real estate portfolios through creative finance and planning. Kathy is also host of The Real Wealth Show on KABC Los Angeles and on iTunes.
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Tags: Asset Protection, Cash Flow, Current Events, Inflation, Real Estate, Retirement, ROI, Why Real Estate?
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Housing Doomed?
September 14th, 2011
Headlines around the world scream in panic about the housing crisis in America. But did you know the Chinese symbol for crisis also means opportunity?
Consider comparing the economy to a game of tug-of-war. When there are winners, there are also losers on the other end. And if you’ve played tug-of-war, you know you can be on the winning or losing side of the game just as soon as the momentum swings in the other direction.
Tug-of-war can be a fun game played at camp that leaves half the players in the mud. But when it comes to your money, it’s no fun to be on the losing side. Wouldn’t it be better if you could jump over to the winning side at all times? It can be done, if you understand the market forces.
Let’s take real estate as an example.
Right now millions of people are on the losing side of real estate. Those who bought property in the mid-2000‘s thought they were winners because easy financing allowed them to buy their first home or trade up to a larger home that they normally couldn’t afford. However, when it came time to pay the piper, the momentum quickly turned. Many were unable to make their full payments after the teaser rate expired, and were forced to walk away from their homes.
Who was on the winning side of the tug-of-war at that time?
The property sellers certainly were, since they cashed out at the peak. Banks, title companies, realtors, mortgage brokers and anyone else selling real estate or real estate-related services were also winning.
When the momentum shifted, who became today’s losers?
The banks are certainly the biggest losers today, sitting on millions of repossessed properties worth nearly half of what they were. Certainly the people who lost their homes have taken a hit. Businesses also suffered from the lack of home equity lines that fueled the economy.
Who are today’s winners?
First-time home buyers are in a great position today. If they have saved some money and protected their credit, they have the opportunity to pick though large amounts of housing inventory at bargain prices.
They can get an FHA loan with just 3.5% down payment and lock into a 30-year fixed interest rate below 5%. The combination of low prices and low interest rates makes their mortgage payment cheaper than rent in many parts of the country.
As millions of foreclosed homeowners become renters, we are seeing rents increase. The first-time home buyer will be locked into a fixed payment for three decades - which will be a welcome relief in the upcoming inflationary period the United States will experience.
According to the National Association of Realtors (NAR), 32% of the 4.8 million homes that are selling this year are to first-time home buyers. That means over 1.5M families are growing their wealth by paying off a mortgage instead of paying rent.
Investors are also winners today.
People who have saved money and have good credit can also take advantage of the low home prices and high rents. It is quite common to receive over a 10% return in today’s real estate market as a landlord. Those who can qualify for financing are receiving upwards of 15% return on their money through the use of leverage.
Hard money lenders are also receiving over 12% return for lending money to those who want to buy real estate. And in the “flipping” business (buying distressed property for cheap, fixing it up and reselling), investors are earning as much as 30% ROI.
Who Was On The Winning Side Before and After the Momentum Changed?
Those who bought homes they could afford can ignore the crisis. If they planned to stay in the home, the ups and downs won’t affect them. Each month they make their mortgage payment, they are paying down principal on their loan. Eventually, they can own their home free & clear and even use the equity to purchase investment property..
Those who own rental property and live off the monthly income also could ignore the crisis. They live off the cash-flow from rents. They don’t care if the property value goes up or down because they aren’t selling. Either way, their income has increased because rents are increasing.
Doomsdayers will say that the housing market is hopeless, but that’s only because they are looking at just one side of the tug-of-war. Sellers may indeed be challenged today, but buyers are in shopping heaven.
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About the Author: Kathy Fettke is the founder and CEO of Real Wealth Network – “The Real Estate Investor’s Resource.” She specializes in helping people build multi-million dollar real estate portfolios through creative finance and planning. Kathy is also host of The Real Wealth Show on KABC Los Angeles and on iTunes.
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Tags: Asset Protection, Current Events, Existing Home Sales, Inflation, Interest Rates, Market Indicators, Real Estate, Why Real Estate?
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