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The following applies for buying real estate in California, and only reflects my own experience. Your experience/area/conditions may vary.
1. Real estate cycles come and go every decade or so. Like stocks, buy on the way up not on the way down.
2. Really good deals come up once in a while, and you need to be there to recognize it for what it is, and put a bid on it ASAP. Browsing through MLS listing on the internet isn't going to get you there, you need to dedicate a lot of time on the ground looking. Your time is money, use it well.
3. Avoid fixer-uppers unless if you know what you're doing. No fixer-upper job is "simple". Be suspicious of any owner-additions and check permits. When in doubt, buy the "turnkey" properties that you can move in or rent out immediately after close of escrow. My business partner bought a 3 bed house this summer for $150k and didn't due his due dillegence. Afterwards he found out the 3rd bedroom in the back was illegal and did not fulfill city's 20' setback requirement.
4. There is no safe way to remove lead paint from a house, including burning the whole house down. Lead paint was banned in 1978, so any properties built before then should be tested or avoided -- don't forget to test the CEILING. As a landlord you must disclose lead paint to your tenants and that doesn't relief you from potential lawsuits. One of my ex-GF's tried to be the landlord/land-lady herself with no experience and got sued by the tenant for lead poisoning. Somehow people think I can fix all their problems and I got dragged into that mess. I told her to settle ($$). GET A PROPERTY MANAGER if you don't know what you're doing.
5. Although absbestos was banned in 1978, the use of existing stocks were permitted in construction. So some properties built after 78 may still contain absbestos. Fortunately, this stuff CAN be safely removed, it just cost $.
6. Don't forget to check for liens on the property. Another business partner bought 2 properties in 29 Palms (north of Palm Springs) and they had private water bond liens on them, which he didn't find out and nobody told him about it. Now that money is tight, the bond holders decided to sue him for $30,000 in unpaid liens. Again, somehow people think I can fix their problems with magic. Good luck buddy.
7. Hills and mountains are formed by underground geological faults. So when buying near hilly areas, expect to find an earthquake fault somewhere. Earthquake insurance typically have high deducitible and only useful for insuring against complete loss. Most EQ damage is less than the deductible amount. If you must buy, try companies like GeoVera.
8. Sometimes you get a squatter, and the eviction process takes forever. Offer the squatter $500 if they move out by end of the week, or else the 2 guys with big muscles standing behind you will come and make his day. If you don't know where to hire muscle thugs, join your local real estate investor groups and ask discretely. If you ever had to ask how the local biker gangs sustain their lifestyle...
9. Generally speaking, investor RE requires 30% downpayment or better. For cash flow property, your monthly mortgage (without tax) should be about 1/2 of the rental income or less to make meaningful cash-flow. For example, if the property can rented for $1500 per month, then your mortgage should be $750 or less. After figuring additional expenses and taxes, your actual cash flow will be about 1/3rd ($500) or less if you used expensive property management, had to hire gardener & pool man, or propety has expensive HOA fees. Those things will nickle and dime your profits.
10. If the property cannot make cash flow, then you're looking at equity gain. Some of the best equity gains can be had in stigmatized properties that nobody else wants. If you're brave enough to buy a former drug lab house for $20,000 in a bad neighborhood, you got balls and will probably make very high returns on it years later.
11. People would spend many hours researching for their new $20,000 car, but spend less time looking when buying a $200,00 house. WTF? If I was buying a $200k house, you bet your arse that I'm going to check for lead paint, permits, and liens. Remember that you can make an offer on a property and still BACK OUT within 2 weeks. USE THE TIME WISELY.
12. DO NOT assume that you can buy something and easily make modifications to it. My doctor bought a $1.5 million dollar building that used to be a radio station and want to convert it to a medical building. The city planning commission said there's not enough parking spaces. So he thought it'd be simple to fill in the swimming pool and knock down a courtyard wall to make more parking spaces. Well, guess what, the property is in a "potentially historical building zone" and any modifications would require a historical building review, which will cost $5000 from some consultant. Funny thing is, the building was built in 1985. How does a 1985 building qualify for historical building, I have no clue. But rules are rules. And yup, this one got dumped on my head too.
1) If you're buying in an area with termite problems, consider newer properties. New homes have chemically treated lumber that are more termite resistant for x number of years. If you have to buy an older home, SFR is better than condos or town-homes because you can tent it and kill termites without agreement from your attached neighbors. I once owned a middile unit in a 5-unit building, and the owners could never agree to tenting the whole place while termites are eating their way through from both sides. The HOA wouldn't do anything either. Also, if you look at a property and it has obvious termite damage, you're better off not buying it anyway.
2) HOA (home owner assoication) is usually a liability. The only times when I'd consider it is if it's relatively low in a SFR community, and the overed lawn and community pool work. Look, if you had to hire a gardener, it'd cost you $50+/month anyway, so paying toward a HOA that cut the grass for you is OK.
3) When looking at houses, be aware that the neighbors are sometimes hostile simply because they don't like how you look, or that they're a-holes. People hate "rich investors" ruining their neighborhoods in one way or another, imagined or real. So instead of a "buyer" or "agent", present yourself as a blue-collar "property inspector" for your white-collar "business partner", a partnership in which you have a "small stake" in vs. your "wealthy friend".
"hey what the @#%@%$^#$"
"yeah, I know. I'm just here to inspect the property for my business partner..."
"did you know..." (shoot some sh*t, like how the banks are conspiring to steal money from you)
"say, did you guys ever have problem with termites in this neighborhood...?"
4) You don't always need to drag an agent with you to look at houses. Most of the time you can go directly into the backyard in vacant properties and have a look from the back. Try the backdoor, believe it or not it's left open many times by prior visitors. The houses are empty and there's nothing to steal anyway. While you're inside you'd find many realtor's business cards on the kitchen counter. If you're bored, you can re-arrange their cards on the table for fun.
5) If the MLS listing says 3 bedrooms and you count 4, you got a problem. Some owners close off the family room or a den to create an additional, unpermitted room. Others build an office in their garage. Cities have strict occupacy requirements to parking ratio. For example, if the house has 3 bedrooms, you need a 2 car garage, and for 4-5 bedrooms you may need a 3 car garage. In some cases enclosed patios count as a room. If you're caught with illegal additions, you will have to pay $$ to remove them.
6) Where there's a leak, ther's probably mold. Read here:
Use your nose. If a house smells funny, there's probably a good reason why. If you're thinking "this is too much work", ask yourself if you'd rather be working 8-5 for a living for the next 30 years. RE investments, when done right, will allow you to retire early or simply relocate off-shore to a cheaper country and enjoy life. Avoid those "get rich quick" seminars of any kind and learn to do it yourself. It's not easy or quick, you need time and effort.
One reoccuring discussion is workaholic people. See, there's nothing wrong with hard work or the Protestant work ethic, and I purposly inserted this section in the middle of this post to avoid all the lazy people who choose not read the post in detail. Putting off immediate, short-term satisfication for greater gains at later date does work, though you'd be faced with many temptations, and people looking looking for short-cuts by convincing you to give them your money. Don't fall for any of that, it's your time and your hard earned money, use it for yourself and yourself only. From the time that you're born, it's a race of time to your death, so use your time wisely.
What's wrong with workaholics? Well, nothing, if they enjoy what they're doing. If not, then have yourself an exit strategy from the rat race. Work hard toward that goal and not putting yourself back in the rat race. Spend less, save more, invest more. When your investment's cash flow exceed your living expenses, you're free. Yes it's that simple. I'm blabbering about real estate because it's what I know. There are many other ways to do this, go find it yourself.
7) Windows -- the fire department have strict rules on building windows. Older homes may not have windows up to code, and some expansion/addition rooms may also fail to have up to code windows. A typical requirement reads like this: "dual glazing with max U-factor of 0.67 and max solar heat gain coefficient of 0.4", "for bedroom windows, minimum 5 sq ft of openable area (5.7 sq ft for 2nd+ floor), minimum 20" clear width when open, or minimum 24" clear height, max height of 44" from floor to bottom of opening..."
And, yes, when you buy the property and the windows is not up to code, if you want to use it as a rental, you need to bring it up to code.
Drive around the neighborhood. Steel security doors, bars on windows, and so on are warning signs. Where's the nearest gas station? Shopping center? What kind of people shop there? Use google maps and do an overhead view of the area. Where's the freeway entrance? How will your tenants get to work?
9) If you're buying investment property for rent, understand that the wife or GF makes the decision, not the man. Things important to a women: the kitchen, bathroom, master bedroom closet, etc. Bathroom fixes doesn't cost as much as you might think. A brand new toilet is $100 to $300, and it just might be enough to make someone decide to rent from you.
10) When buying investment property, remember that you're buying to make $ and not to live there. So yeah, that lake front house looks great and you love it, so will your tenants. But will it make $$? If it cost $100k extra for the lake view, but you can only charge $200 more for rent, is it worth it?
11) In a hot RE market with many competitors, the most imporant part is to stand out ASAP with your offer. If you cannot compete against the #$@#%# wealthy people bidding with all cash offers at asking price, then be within the first 3 bidders with an offer of $10k over asking. If you're trying to sell a house for $200k and the 2nd bid that came in was $210k, that bid is going to make you say "wow this guy really want it" and you may be considered to submit counter-offers later.
12) If you can't compete against 30 other guys bidding on the same property, go further out and find a less competitive area where you compete against 5 other guys. Sometimes moving just 1 city over results in far less competitive bids, while the rent is only $100 less. It doesn't make financial sense to pay $80,000 more on a house only to make $100 more on rent.
1) "Legal experts" would like you to believe that everyone is out to sue you, so when you buy property, you should put it under their recommended LLC structure. I've seen this taken to the extremes where the guy puts each property under its own out of state LLC. 40 properties = 40 LLC's? WTF?
First, before you listen to those "legal exprts" on late night TV or some free seminar, get a real lawyer, preferably one that does estate planning. If you must put your properties under LLC's, understand the tax implications, and do it by asset value and not for each and every house. i.e. if you own 1 house valued at $500k and 2 condos valued at $250k each, use 2 LLC's.
Second, the IRS make the rules, so check their web site, then ask questions with your lawyer or accountant:
http://www.irs.gov/businesses/small/art ... 25,00.html
2) Do a realistic risk assessment. Yes you should at least carry renter's insurance. Most lawsuits in real estate are settled out of court, because the lawyer is looking to make a quick buck and not a prolonged legal battle with questionable returns. I've known large RE holders who owns under his own name and is not afraid of lawsuits. But he's also paid to settle out of court. If you want to take the opposite approach, you could go as far as holding the RE in an out of state LLC held by a trust in another state.
3) Don't get nickled and dimed to death. $300 HOA fee, $80 garderner, and $120 pool man will eat your $500 cash flow into zero. Pools are a liability and you never know if that anti-entrapement drainage cover is going to fail. Your tenant has a party and someone else's kid drowns, you get sued.
It's possible to write the rent contract to have your tenant take care of the landscaping, or if you bought a foreclosed home with dead landscaping, consider dry landscaing that require minimal mainenance.
4) Taxes could make or break your cash flow, so get a good accountant. Your mortgage interest, property tax, and some expenses can be tax deductible. Residental real estate could be depreciated 3.64% anually based on 27.5 year straight line depreciation. All this means more cash in your pocket.
5) If you have to refurb the interior, don't get experiemental with custom paint and colors. Go neutral as much as possible. Plus it's much cheaper to maintain white interior walls later than textured custom paint. Avoid white carpet.
6) I recommend leaving the tenant interaction with your property manager as much as possible. If you have to manage the property yourself, remember that your tenants are not your friends. When everything is well, people are friendly. When things go wrong, they turn nasty. Keep your distance, and carefully screen the tenants. Does he drive a car that he can't afford? Does she spend more money on her breast implants than rent?
Real estate seminars
Over the years, I've attended many real estate and other "wealth building" seminars. My brutally honest opinion is that 99% of the time, these guys are complete frauds. I'm a fan of Robert Kiyosaki's book and even I will tell you that the "Rich Dad Poor Dad" RE seminars are worthless. Just buy the book and the board game (or computer version), skip the rest.
Real estate fraudsters prey on the naive, the stupid, the greedy, and YOU. When you attend a RE seminar, the speaker will probably blab about some sob story, oh his mother worked so hard to raise a family of 8 kids (hello octomom?), they were dirt poor, got sued, everything that could go wrong went wrong, etc. Then he found salvation through a mentor and became rich, and now he wants to share his secrets with you, blah blah. If you enjoy being jerked around on a chain and have him lead you by the nose like a sheep, you might find it enjoyable.
In the old days, these guys want to sell you CD's and books for hundreds of dollars. Today, with inflation, they want to hit you up for hundreds of dollars to come in, then squeeze you for thousands with additional classes, training, seminar, coaching, whatever. Pay $500 to come in and listen to a sales pitch to sell you additional classes at $900-$3000 each.
I went to one where the speaker told the audience that they're stupid if they don't sign up for the classes, and that if they don't have the money, they should call the banks and open 10 credit card accounts today so they can afford it. Insert slide on screenw ith 10 bank phone #'s. Uh, anyone with some common sense would say "WTF", but I saw a lot of people start calling with their cel phones because the "nice man" told them that they're stupid if they don't do it. .
Shysters like the use words like "secrets of getting RICH" and "think outside the box". Paying him $3000 to join some foreclosure listing, or $9000 for a week long "intensive training" is depositing your hard earned money into his cash box. Do yourself a favor and save the money. Why give $12,000 to someone to tell you to buy a house, when you can use the $12,000 as downpayment and just buy a house yourself??
Don't be stupid. If you want to learn about the real estate trade, just sign up for realtor classes at your local college or online. For a few hundred bucks you can attend 3 classes on Real Estate and qualify to take the exam to become a licensed realtor. Give those "get rich quick" guys the finger.
John T. Reed seems to know his shit about real estate and comments on all the scammers out there and decent ones as well.
"The object of life is not to be on the side of the majority but to escape finding oneself in the ranks of the insane." Marcus Aurelius, Roman Emperor and stoic philosopher, 121-180 A.D.
The optimal suburban SFR (single family residence)
A very wise person (BK) once said, the American suburban lifestyle had the following requirements for superior quality of life and community:
* No more than 8 SFR per acre density (about 5,000 sq ft minimum lot size for each SFR) for "elbow room"
* The garage does not dominate the front of the house
* The house itself should not be too large or too small, using the following formula:
Smaller SFR with laundry in garage, ideal sq ft, room, and bath ratio:
1,060 sf = 2 master bedroom / 2.5 bath
1,250 sf = 2 bedroom + loft / 2.5 bath
1,450 sf = 3 bedroom / 2.5 bath
Larger SFR with laundry inside house:
1,700 sf = 4 bed / 3 bath + Great Room (Family room?)
2,150 sf = 4 bed / 3 bath + optional 5th bedroom + Great Room
2,250 sf = 4 bed / 3 bath + separate formal dinning room + Great Room
Luxury Formal Living SFR
2,300 sf = Separate family room + 4 bed + x baths
2,650 sf = Separate living, dining and family rooms + 4 bedrooms + x baths + bonus room
Some multi-story homes have attic conversions to loft-rooms, it's debatable on how you want to count this.
OK, so the math here is to compare the SFR you're looking at with the list above. If the sq ft is larger or smaller, you have an "inefficient floor plan" with inferior livable space. This is also referred to as the "Bag of Cheese Puffs' theory, where you fill up the bag with cheese puffs but there's no real substance to it.
Say if you're looking at a 3400 sq ft, 4 + 1 optional bedroom "large SFR" type house. Compare with the 2150 sq ft specs and you get:
2,150 sq ft / 3,400 sq ft = inefficiency ratio of 63%
Standard grading scale:
So yeah, it's a big 3400 sq ft house, but it's too big for what it's trying to be. Thus, it's a bag of cheese puffs.
I will add a few comments here since I am now starting to buy property in El Paso.
I am not an expert on houses. I pay a home inspector for this. If you have one that you can trust, that is enough.
I don't care whether real estate is on its way up or down. I am not a prophet, so I don't try to predict the future. What I care about is the current value of the house which I calculate from estimated Net Operating Income (NOI) divided by the cost of the house, giving me my effective CAP rate.
Real estate really is local. In some places, the average CAP rate is too low. In such places, one shouldn't invest in real estate. In other places, like El Paso, the CAP rate is great.
Some states have series LLC. This is the optimal legal protection and is what I am using.
I am just starting out in real estate investing, so I will see how it goes.
Following the Old Testament, not evil modern culture
I have a different take on all of this. Firstly, I have no interest in purchasing any residential "investment" real estate here in the US. Too much of a headache for someone like myself. My list of requirements for buying property would be much different. I would only be interested in buying a house in the US as a primary residence.
One of the few things that I like about the US is that it is ideal for those who wish to "homestead," or rather live off the land/grid as a lifestyle choice. Whether that means having livestock or raising horses, growing vegetables, getting power from solar panels, etc. Of course, this kind of lifestyle choice typically entails that a person will be happily married, with the goal of having a normal nuclear family with children.
Inspite of draconian measures to limit freedoms in the US, generally you can still choose to live outside of major population centers, and basically be your own "nation" with little to no government intervention, as long as you can earn enough money somehow to pay the annual property taxes and maintenance. Obviously though, finding a decent wife here in the US is usually a hopeless pursuit if you haven't succeeded by age thirty, so I have abandon my dream of living out in the country, for now.
If, however, I was lucky enough to succeed at finding a good girl here, my goal in searching for a home would then be to make sure I can have the following requirements meet:
- Can I afford it with cash?
- Rural location with conservative people; low population density and little government intervention
- Few zoning restrictions, such as building permits
- Plenty of space between my house and my neighbors, and an ability to fence my property in without being hassled about it; might as well take advantage of the "every man is an island" mentality here in the US, and use it to my advantage
- Arable land, with access to clean well water on property
- Solid, subterrainean basement, to insulate from the heat/cold
- Low property taxes; I don't want to pay lots of $ to subsidize thuglet children to eat and be babysat by the public school system
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