See prior week's tips: 9
When Bad Things Happen to Good People 8The Stock Market is Up, No Down, No Up
7 Roth
IRAs 6 Thanks
5 Opportunity/Uncertainty
4 Estate Planning/Different
View 3 Borrowing
Right 2 Bargains from
Non-Sellers 1 Multi-level Tax
Avoidance Schemes
Q. John, what is the best way to find foreclosures? Some advice I have heard
sounds dishonest or unethical. Most sellers I find wait too long to sell.
A. Buying foreclosures, and pre-foreclosures is a very profitable business.
These large profits attract con artists along with the honest buyers. You can be
honest and ethical and buy properties from sellers in financial distress. You
need to first learn how to buy and close on a purchase in a hurry. Most
distressed sellers will wait until the last possible minute to decide to sell.
You hurt a seller by agreeing to buy their home and then not performing. Never
sign a contract unless you are confident that you can make money and that you
have the ability to close. Some scam artists agree to buy, then move the seller
out and rent to an unsuspecting tenant, never making a payment. This ruins the
seller's credit and is outright theft. These buyers should be put in jail.
I prefer to find sellers who are behind on their payments, but not yet known to
the general public. When a borrower stops making payments, the lender will send
them a notice. Eventually if they don't respond, they will begin a legal action,
and a notice of default will be published. At this point you have a lot of
competition, and the borrower will get a lot of pressure to sell from
foreclosure buyers. If you contact these borrowers before they become well
known, you have an inside track and can help solve their problem while they have
some equity left to save. Most of my purchases are pre-foreclosures. I like
saving the seller's credit and some of their equity. I won't buy unless I can
make a profit, but I am willing to take a smaller profit up front, especially
when I can take advantage of some existing financing or negotiate new, low-cost
financing. This is a terrific time to buy foreclosures financed with low
interest rate, long- term financing. For more nitty gritty details on finding
and negotiating pre-foreclosure purchases, I suggest my full day class
(available on tape or CD) on buying foreclosures titled Buying Property From
Owners and Lenders in Distress. Call Dottie for a special price for the month of
January. JS
Looking Into The Future of the Housing Market
How will the housing market perform in the coming
months? There is no doubt that the housing markets around the country are
confused at best. In Atlanta and Chicago vacancies are increasing
dramatically as people lose jobs. Houses are selling for below asking
prices as the average time on the market increases. Landlords are having a
harder time finding tenants. Markets in other cities are still strong.
We are getting mixed signals from the media and the
government about the economy. I had to chuckle when I heard a government
analyst explain the good news that unemployment was dropping. Then he
explained that unemployed people giving up looking for a job caused the drop in
unemployment. This is good news?
Every day brings predictions that the end of the recession
is near and news of more layoffs. The prediction of the end of the
recession is often made by a young economist who is experiencing he first
recession. His first layoff may come next.
I cannot predict the future, but I can recognize a
changing market in my town. Some long established businesses are closing
their doors. Others are laying off employees. More commercial space
is sitting empty. Bankers are growing more conservative. Restaurants
seem less busy, but the highways are packed.
I'm an optimist, but I'm a realist. In the long run
things look great.
Millions born just after World War II are now in their
fifties and contemplating retirement. Some have already bought second or
retirement homes, and others will follow. Their children are just entering
the housing market. Another housing boom is on the horizon.
Housing can be a good investment in good times and bad. I switched my
portfolio from commercial properties to residential properties in the
seventies. I wanted to avoid the wild swings in prices and liquidity that
commercial properties sometimes experience. I am content with steady
long-term appreciation, and moderate cash flow.
While homes have years where they do not appreciate, they
rarely drop drastically in value. An empty shopping center or office
building may sell for a small fraction of its original cost during a recession.
Homeowners who can afford to will simply hold onto their
homes until prices once again rise. Over the years I have charted home
prices in Sarasota and other areas where I have invested. The charts look
like stair steps. In some years houses appreciate, and in others they
flatten out. They rarely drop significantly in price. If you don't
sell, yours didn't drop.
No one needs a commercial building. Everyone needs
to live inside. In good times homes appreciate. In bad times,
they provide shelter and maybe a place to run a home business.
There are speculators in the housing market. They
often buy with high leverage, hoping for appreciation, or build a house hoping
to make a quick profit. In good markets they profit. When the market
slows, they often become victims of bargain hunters.
In the short run, I expect opportunity as a buyer.
Some owners have borrowed more than they paid for their house, and some cannot
afford to repay those loans. Lenders have made bad loans and will have to
discount those loans to recover part of their capital. Get ready for a
great year!
Dr. Robert Schuler wrote a book
with this title, and this troubling subject has been the topic of countless
sermons. We have lived through a week where many good people lost their lives to
bad things. Many true heroes gave their lives trying to save others. Others were
just in the wrong place at the wrong time.
Now the country is pulling together as
we have not since the last World War. Adversity has a way of bringing people out
of their safe houses and into the streets where they actually meet their
neighbors and even help those in need. This builds community and country.
On the Friday after that terrible
Tuesday, we had a hurricane and lost power for three days. The quiet after the
storm was a relief from the constant news from New York and Washington and
Pennsylvania. It was blessedly quiet, and we had time to let our heads catch up
with our hearts. Once the hurricane died down, people ventured outside to assess
the damage, and then helped each other as they could.
Now, we move forward with hope. Hope
that we will be safe from future acts of senseless terror. We pray for
protection, knowing that even the greatest military power in history cannot
protect us from a terrorist willing to give his life for ours.
Someone wise once said, it is not what happens to you that matters, it is how
you react. Americans are reacting with hope and courage.
Have your friends who
invest in the stock market been asking you how your investments are doing? Isn't
it great being a house investor?
House prices rarely
go up 20% in a month. The good news is that they rarely ever go down 20%, ever.
And unlike the stock market, if my house prices did drop 20%, I would not sell,
I'd just keep collecting rent until they went back up.
When stock investors
start to panic, the prices can drop 5% or more in a single day. Most companies
with stocks that have dropped by 50% or more have had little or no earnings.
Would you buy an investment that lost money? How much would you pay for it?
Stock investors are finally beginning to ask these questions.
Real estate prices
are not insulated from swings. A
house price chart would look more like stair steps, than the lightening-bolt
charts that stock buyers can identify with. There is a reason that house prices
don't gyrate like stock prices.
Most people buy
houses to live in, not primarily as investments. They feel better when they go
up, but if they don't go up every year, they don't sell. It's a lot harder to
sell your house and move all of your stuff, than it is to sell a stock. So house
sellers think twice before putting a house on the market. Most simply won't sell
for less than what they paid unless they have to move.
This, combined with
the time it takes to sell, adds great stability to house
prices. Their prices are far more stable than prices of commercial or
vacant properties, which may drop in half during a recession.
I don't think we are
headed for a big recession. We still have 95% employment, credit is still easy
to obtain, and interest rates are low. I am hoping for some softening in the new
home market because I would like to buy five or ten new houses in the next
couple of years.
Please take the time
to read my latest newsletter on ROTH IRA'S. It will show
you everyone can have one and how to use it to invest wisely in real estate.
Tell your friends to check it out. I want all of my friends to be rich. You
should too!
Real estate and note
investors have a unique investment entity that they can use to shelter profits
from taxes. The Roth IRA is a new (1997) form of individual retirement account
with a unique feature. All
profits that the Roth earns are tax-free and all qualified distributions are tax
free to the recipient.
To qualify as a
tax-free distribution, you must satisfy a five-year holding requirement, which
begins the first day of the year in which you make your first IRA contribution.
This is a good reason to start a Roth IRA account this year. You must also reach
the age of 59.5, or meet one of the following requirements:
1.
Become disabled
2.
Activate your estate (die)
3.
Use a $10,000 distribution to buy your first home (also applies to
parents, children, grandchildren, or ancestors of you or your spouse)
The disadvantages of a Roth are that contributions are not
deductible, and contributions are limited to $2000 per person per year. Proposed
legislation would increase that amount.
There are limits on
how much income you can earn and qualify for opening a Roth. Currently a single
person can earn up to $95,000 and a married person can earn up to $150,000 and
make the full contribution. Both
figures are modified adjusted gross income. If you are over this limit, arrange
to have one lower income year and open your Roth account. Once a Roth exists,
you can earn as much as you want. You simply cannot make more contributions
unless you meet the income requirements.
Two other significant
advantages are you can contribute after age 70.5, and you do not have to begin
to take distributions at a certain age. The Roth is an asset that you would plan
to leave to your heirs, as there is no income tax due on the earnings. This
income tax can decimate a traditional retire plan when left to heirs.
FOCUS ON THE
POTENTIAL – NOT THE SMALL CONTRIBUTIONS
A $2000 contribution
may seem insignificant, but consider how it could grow if you used it to buy an
option on a well-located property. Suppose you buy a ten-year option to purchase
a house worth $100,000 today for a price of
$120,000. That option has little value today, but what if the house
appreciated during that time to a value of $160,000. Now your $2000 investment
would be worth $40,000. This is an over simplified example of how an astute real
estate investor could use a small amount to build a significant Roth account for
retirement.
In
my volunteer work with Habitat for Humanity, I have had the experience of
traveling and working in many third world countries.
I am always in awe of how much the hard working people in these countries
can accomplish with such meager resources.
While we take for granted running water, electricity,
working telephones, and transportation, these things are rare in much of
the world.
We
have taken our children on trips abroad and they have experienced living first
hand in houses without electricity, running water, and telephones.
It helps keep things in perspective so that when little things go wrong
(like your computer gets finicky), you can laugh and think about what
life would be like without electricity.
Our
real estate market is strong, simply because there are many buyers and renters
with increasing incomes.
When this trend reverses, and it will, there will be more opportunities
for those who are prepared to buy.
Now is the time to hone your buying skills.
I use lease-options combined with loans to acquire houses that have loans
in default. Even
in a good market there are foreclosures.
I have bought five houses in foreclosure in the past two years.
OPPORTUNITY SPRINGS FROM UNCERTAINTY
November and December
are always good months to buy property as other buyers get distracted by the
seasons and celebrations at hand. Now with the added distraction of the hung
election, good buys are available, even in hot markets.
The coming year looks
like a great one for the country. Neither the Republicans nor Democrats will be
able to pass many new laws and this is a great comfort to most. Regardless of
which candidate becomes President little will change, which is good for
business.
BUYING AND
SELLING WITH LEASE OPTIONS
One of my favorite
ways to buy and sell real estate is to use a lease with an option. I have taught
thousands the right way to use these techniques in my classes. There is a right
and wrong way.
Some use lease
options to take advantage of buyers who have no chance of ever purchasing a
home. They charge too much rent and take a non-refundable deposit.
I have used a
lease-option to sell nearly every house that I have sold during the past
twenty-four years. I began teaching others how to use lease options to improve
profits while helping others to buy houses since 1976.
I teach a course focusing only on lease-options.
In this full day course I teach you how to both buy and sell using lease-options. Some of the best deals I
have ever made I have purchased using a lease-option. The course will include my
latest contracts, checklists, and ads that help you sell quickly without paying
commissions. The paperwork is important. You need to know how to protect
yourself and your option. Thousands of dollars in profits can be lost if you
cannot exercise your option.
A DIFFERENT VIEW OF ESTATE PLANNING
I was asked today
“what is the best way to pass on your wealth to your kids, tax free?” It is
a great question, but first you have to define wealth. If it is real estate,
cash, and securities, then you have to devise an intricate plan to avoid
government taxes on these assets. This strategy encourages accumulation, not
spending.
My philosophy differs
from the mainstream. I am passing on my wealth to my children every year by
showing them the world and teaching them how it works. I spend a lot of money
taking my children places and doing things with them. This is drastically
reducing my estate, and giving them a wealth of experience. Our trips have
included nearly every state including my favorite Alaska. We have traveled to
the rain forests of Peru, traveled down the Amazon, climbed the ruins at Machu
Picchu, and we are just getting started.
By spending money
today to show my children the world, and by spending time with them to talk
about things that are important, I am passing onto them real wealth. If they
understand how to make money, I don’t have to give them mine, they will make
their own. It’s a lot more fun making it than having someone give it to you.
We have told our
children that whatever assets are left when we die will go to charity. We
don’t want them to depend on inheriting our wealth, we want them to experience
life to its fullest.
BORROWING RIGHT
Borrowing money is one of the most important things you do as an investor.
You can save or give away hundreds of thousands of dollars in interest over
your career. A really bad loan may cost you all of the profit in a property.
Many times the lender will make more profit from the loan than the borrower
will make from the property, and the borrower does all the work!
When you borrow money, most lenders will tell you about their products: the
latest variable rate loan or negative amortization or reverse loan. They
rarely ask you the personal questions that you should answer before deciding
which loan is best for you; both today and for the term of the loan.
The immediate result of borrowing money is to reduce your net worth. It is
not something you should do, unless you can use the borrowed money to
increase your net worth or cash flow. If you can borrow and use the money
borrowed to pay off a loan with higher payments and interest rate, or pay
off a loan at a discount, then you can justify the expense and trouble.
Buying another property at a significant discount with the cash from the
refinancing, is a good use for the cash. Have the new property under
contract before you refinance to get the cash. The new property should
produce enough cash flow, so that after the refinancing and the purchase you
have more cash flow than you had before these transactions.
However, if you are borrowing to have cash on hand to buy another investment
or to buy a toy, like a new car, then your net worth will drop, by at least
the cost of refinancing. You may yield to the temptation to use the cash on
hand for non-investment purposes, dropping your net worth more. Borrowing to
put the money in the bank for future use is weak strategy. You will soon
become frustrated, because you will be paying more for the money than it is
earning in the bank. This puts pressure on you to buy something, and you
never want to be in a hurry to buy. This tip is from the current issue of
John's Strategy and Solutions Newsletter - To subscribe call Dottie at
800-237-9222
Call today, save 20% off the current subscription rate ($38.00) and I will
send you as a free bonus my new special report Buying and Building New
Houses)
BUYING BARGAINS FROM NON-OWNERS SELLING PROPERTY
Today I received a call from a bank employee
who is in charge of selling a probate property in my town. The property is a
problem to her personally, and she is anxious to sell it. It is an older house
that costs much to maintain and would cost a bundle to make modern. She wants to
sell it as is with no warranties, and she wants to sell it quickly, before
something else breaks.
Have you ever owned something that you
really wanted to sell, that was
sucking up money on a daily basis? You wanted to sell quickly, before it broke
again, and you had to throw good money after bad.
That is the position this banker is in.
Even though it is not her money, she is
anxious to sell and solve the problem. The owners are out of state heirs. They
don’t even want to hear about the problems with maintaining or selling the
property, they just want their money. They will likely take far less than the
property is worth if they can get it in a hurry. I will give them that option.
A while ago I received a different call from
another property manager who was afraid of the tenants and their pets (pit
bulls). The owners were paranoid about potential liability issues and instructed
the manager to get rid of the property. The manager was just afraid for his
life.
The owner agreed to give the property away
(it was free and clear) if another would take them off of the title, now. The
new owner ran the tenants off and sold the then empty, and therefore less scary
property, for a handsome profit.
Non-owners may be employees, managers, or brokers. Partial owners, like an
heir who has the full thrill of management for only a fraction of the proceeds
can also be eager seller who will make you a great deal on a property that is a
problem to them. Look for these situations and make offers on properties when
you know you can make a profit.
BEWARE OF MULTILEVEL TAX AVOIDANCE SCHEMES
A
New York Times News Service article dated September 14, 2000 exposed a new
“scheme” to avoid taxes. An outfit called Tax
People, is teaching its multilevel disciples to avoid taxes by forming
businesses and even hiring their kids.
Certainly
there is nothing wrong or un-American about operating a business or hiring your
kids. How else would future Presidents get job experience?
What irks the IRS and the reporter is that a business with no potential
for profit can deduct expenses which may offset other taxable income.
Actually a business can lose a lot of money for a long time and continue
to deduct it expenses. Witness Amazon.com., many newspapers, and pick any
railroad. A business simply cannot
exist only as a tax strategy.
Two things
about the article bothered me. One, the statement made by past IRS Commissioner
Sheldon Cohen. Mr. Cohen said “ I would have issued a summons for the names of
everyone who has paid for the system (Tax Peoples System) and then we would have
mailed each of them a letter saying
that this is not legitimate, but if you file an amended return, that would be
the end of it….If you do not, we
will come after you. Of course we now have a kinder and gentler
IRS so this couldn’t happen today.
The
IRS has a history of targeting taxpayers who push too hard. They target
aggressive CPA’s and tax preparers, auditing their clients. It does not pay to
associate yourself with a too aggressive tax preparer or any group that openly
defies the IRS.
The
second thing that bothered me was the price that Tax People charge for this revolutionary tax advice (hire your kids
and deduct expenses) $100 per month.
This does include audit representation, but only if you have followed all of
their advice to a T. I suspect if
the IRS decides to audit the whole clan, that the guarantee may be hard to
collect on.
For
$100 a month, an individual can
hire excellent tax advice. You could even take my Graduate Seminar (only $595)
in which we discuss for three days, legitimate ways to both make money and avoid
paying taxes. Think at least twice before you buy in or try to sell all of your
relatives on this latest tax fad. It may cost more than advertised.
