When is the right time to refinance?

Your current interest rate is 6.25% and you have heard that rates might get as low as 4.5%. Does it make sense to refinance now or should you wait until interest rates drop again? The truth is, there is no “golden rule” that applies to everyone but in this market there are some general rules of the road.

 

Know the NEW Rules: It used to be that if you could fog a mirror, you could get a loan. The rules have changed quit a bit and the loan you may have used to finance the purchase of your home may no longer be available. If you used a low or no money down loan to purchase your home this can impact the rate that you are eligible for based on the programs that are now available. Working with someone who can help you understand the new rules and how they impact you is now more important than ever.

 

Know your target interest rate: A target rate helps you determine when it is the right time to refinance. Your target rate is a benchmark rate that establishes your minimum monthly payment savings necessary to make up the cost of a refinance within 16 months. Usually it starts to make sense considering a refinance when market interest rates are 1-1.25% lower than your current rate. Once you determine your target rate your mortgage professional will make sure you don’t miss it when rates drop.

 

Know the value of your home: Some areas of the Front Range have seen their home values decline. You need to get an idea of what the accurate value of your home is to see if you are eligible to refinance. Many people try to use websites like Zillow to research the value of their home. Those people make assumptions about the value of their home based on the information that they find and don’t find out until later when they are in the process of a refinance that their information was wrong. Work with a good, local real estate or mortgage professional in order to help you determine the value of your home because they are going to be the most familiar with local real estate trends in your area or subdivision.

 

Bill Rodriguez is a Certified Mortgage Planning Specialist with Cherry Creek Mortgage and part of the HomeWISE Team. The focus of the HomeWISE Team is to help their clients build and maintain their Wealth through Real Estate and to provide Investment Strategies and Education for the Mortgage industry. Contact Bill today at 303-877-6323 or go to www.DenverHomeWise.com

 

 

Wealth Strategies Investment Series Part 2

Creating WealthBy Bill Rodriguez, Loan Consultant Cherry Creek Mortgage Company 303-877-6323 

            Thank you for joining me for this month’s edition of Creating Wealth. In the last article, I discussed the current climate of the Colorado Real Estate market and its impact on investors who employ either a fix-and-flip or buy-and-hold investment strategy. I have talked many times in previous articles about becoming a team player and bringing value to your clients as a market expert who offers sound advice. For some of you, your market expertise helps you find the right property for investors and land for developers. This is one level of service, but in order to really distinguish yourself and truly add value, you need to step in and develop success strategies with your clients and help them execute on these strategies. This month I am going talk about 2 of the 4 phases of successful fix-and-flip and development strategies. Welcome to Part 2 of the “Wealth Strategies Investment Series.”

 “I love it when a plan comes together…” 

            The most successful investors have a plan and a particular approach that they use over and over to ensure success. In the development of any plan it is important to break down a task into its smaller parts to understand how each piece fits together to form the whole. In the case of fix-and-flips there are 4 phases that an investor needs to be aware of in order to fulfill on his/her end goal of making a profit. The same applies to development projects. The 4 phases are: Market Research, Negotiation/Acquisition, Construction and Marketing and Sales. An in-depth understanding of each phase is crucial to the success of a project and as a realtor you maximize your potential to become a valued member of this team when you can help your clients understand the intricacies of each of these phases.

 Phase 1: Market Research 

            The market research portion of this process is the foundation for all other decisions concerning the project. This process is much more than simply selecting a neighborhood to buy in and understanding the overall health and condition of the market. This process begins with a question: “Why would someone want to live here?” For instance, your client’s desired target audience is willing to pay $400,000 for the purchase of their new home. You as the realtor have found two potential investments: Home 1 is in an up-and -coming urban neighborhood and the market value after repairs is $400,000 for a 1,000 square foot house.  Home 2 is in a suburban neighborhood with good schools and has the same after repair value but is 2,000 square feet. Both are great homes for a specific type of buyer. One type of buyer is a working professional who works downtown. He wants his house to be in close proximity to work while having easy access to the night life when the mood arises. Since he does not have a family, having a place where he and his friends can hang out is more important than additional bedrooms. But take this same buyer a little later in life. He has since settled down with a wife and a child going to school and another one on the way. Suddenly that house in the burbs is looking like a better fit for him. Whoever you choose as your target audience will dictate the location you choose, have an impact on the design, layout and your level and quality of finish. This is just one example of many so make sure you have addressed all of the needs of your audience properly. Oh, and by the way, trends change so make sure you’re up to date!

            Another important detail is to make sure that you have firmly established your after-repair value with comps that are the same as the subject property. If you have a hard time finding a 2 bedroom home in a neighborhood where everything on the market is a 3 bedroom, 2 bath, then you might have a problem property. Don’t think that just because it is cheaper than everything else in the neighborhood, it is a good deal. You also need to account for the “number of days on market” and seller concessions. “Days on market” will dictate your holding time and impact your financing strategy. If necessary, you should be pricing in concessions as part of your marketing and sales expense, which affects your bottom line as well.

 Phase 2: Negotiation/Acquisition 

So, you have selected your buying segment and done your due diligence on researching the comps in the neighborhood. You even have an idea of costs associated with the project based on hold times, concessions (if any) and grade and level of finish. Now it is time to go to bat and talk about the acquisition costs associated with the property. Costs vary depending on the condition and financing used to acquire the property, but your bottom line is what’s important. Here are some tricks of the trade:

 

The Magic Number: My magic formula for successful fix-and-flips is 80% of the after-repair market value minus cost of repairs and seller concessions. Example: after-repair value is $200,000 – 20%= $160,000 – $20,000 in estimated repairs and 3% in seller concessions for a total of $26,000. My bid price is $134,000.

Supply and Demand: Foreclosures are an obvious source for properties that are worth 70 cents on the dollar, but have you thought of estate sales?

On Your Mark…: Your ability to pick up the good deal is based on how ready you are to pull the trigger. It is easiest when you can pay cash because it constitutes a stronger offer over someone with financing concessions. If you don’t have the cash or lines of credit, make sure to speak to your lender before going on the hunt.

Let’s Make a Deal: As you walk through these properties, keep a watchful eye for repair issues. This will help you estimate the cost of repairs as it relates to your bottom line. Also identify items that you can use to further reduce the price on inspection resolution. Tip: If the house was built before the 1960’s, pay to have someone inspect the sewer line. Also always ask the seller for the market retail value of repairs. He doesn’t need to know that you can get it done for cheaper!

 

Need more information? Feel free to contact me at any time @ brodriguez@ccmc-net.com or (303)-877-6323. You can also access information online @ www.investtaxfree.wordpress.com.

Creating Wealth “Wealth Strategies Investment Series” Part 1

By Bill Rodriguez, Loan Consultant Cherry Creek Mortgage Company 303-877-6323 

            Thank you for joining me for this month’s edition of Creating Wealth. In the last article I discussed creating your own real estate investment club as a way to pool resources and grow your business. I received a lot of positive feedback from this article. Many of you loved the idea of creating a network that added value to your investor clients and established you as the expert, but many of you were also hesitant because you lack some of the basic knowledge of how to evaluate the potential benefits and risks of a real estate investment opportunity. Take heart, my friends, because this edition of Creating Wealth is the first in a series that I have dubbed “Wealth Strategies Investment Series.”  I am here to teach you how to evaluate those deals.

Survey says?…. 

            If you were having your doubts about a rebound in the Colorado Real Estate market, you might be happy to hear that the numbers tell us we could be turning the corner in the right direction. Transaction activity is up 3.6% as of March ‘07 over August of ‘06. From February to March of this year, Denver Metro witnessed a rise in retail home sales of 38.8% – the largest spike since March of ‘05. While these numbers are encouraging, we are not out of the woods yet as the month-over-month increase in foreclosure rates puts downward pressure on real estate prices, and changes in the Sub-prime and Alt-A markets exacerbate the foreclosure problem.

            So what impact does the current climate of the real estate market have on your investor clients? Good question.  Here’s my take: The foreclosure problem and the shake down in the Sub-prime and Alt-A markets is going to have a huge impact on whether we have seen the end of our stagnant real estate market in
Denver or we still have further to go in weathering the storm.

If your client’s interest is in buy-and-hold real estate, you will be watching this issue very closely in the coming months to time the market for maximum appreciation over the long term. In the short term, these investors will enjoy a slight decrease in vacancy rates as ex-homeowners return to the rental market. This will put upward pressure on rental rates, allowing for greater cash flow.

Investors employing the fix-and-flip strategy are challenged by this marketplace. As real estate prices drop, the emphasis is put on the trendier areas as the smart investors shy away from the unstable and depreciating markets. The increased demand for these neighborhoods increases the acquisition costs for property, which puts the pinch on profits. In markets like this, it is tough for a new investor without a lot of liquid cash to get the ball rolling because many of the real “gems” require so much work that financing becomes impossible. For the seasoned veteran, cash is still king and they have a better chance of staying profitable.

Choose, but choose wisely… 

            Whatever investment strategy you or your clients choose to employ, whether it be buy-and-hold or fix-and-flip, you need to understand the potential pitfalls in the marketplace. There are some rules of thumb that you can use to gauge the profitability of a potential real estate endeavor. I will share some of these with you here. Others you will need to look for in Parts 2 and 3 of this series.

Buy-and-hold: 

            Buy-and-hold real estate in the
Colorado market is tricky because property comes at a premium. Smart investors commit anywhere between 20-30% of their liquid cash to create cash flow, or in some instances just to break even. There are, of course, exceptions to every rule, but the days when an investor could get into an “investment property” at 95 or 100% LTV and still cash flow are over – at least for now. The changes in the mortgage arena have made these loans harder and harder to come by, and those that do exist are cost-prohibitive in my opinion. I advise my clients who are interested in buying income property to put some cash into the deal – both to insulate them from the potential for depreciation in the short term and also so that the rents can cover the carry cost while they wait for the market to turn. Where many investors go wrong is that they fail to do a proper market rent analysis. They assume that just because the current owner of a $150,000 property with some deferred maintenance has a tenant paying $1,600 a month, that they can take over, continue to be a slum lord, and laugh all the way to the bank. Rents are all over the map depending on the neighborhood, and many landlords don’t have a clue as to what the market benchmark is for their area. Therefore, what the seller is currently getting in rent could be well below or above the market. Obviously, if it is below the market, you have a better chance walking into the deal described above and making it work, but please be careful.

Fix-and-flip: 

            As I mentioned, the fix-and-flip market is a tough market to play in right now because there is so much competition for the undervalued property. Investors with the ability to pay cash have a distinct advantage because they have no financing or time constraints.  This gives these investors leverage in negotiating for the right price and terms. For investors without this cash advantage, it is critical that they sit down with a lender before looking for property and work out the details, so that when the right deal comes along they are ready to pull the trigger. I would also suggest picking a lower purchase price to start out with, and setting realistic expectations for rates of return on time and money, because there is a steep learning curve to this process. The biggest mistake I see investors make is that they bite off more than they can chew. They chase after the higher priced properties expecting the bigger margins, when in effect they have put all their eggs in one basket. It is much wiser to start out at a lower price point, tie up less cash in the acquisition of each property, and keep some cash aside for the next hot deal that presents itself. This allows the investor to stay nimble throughout the process by budgeting for unforeseen circumstances and helps to diversify risk. More to come on these strategies and others in parts 2 and 3 of this series.

Creating Wealth “Pooling Investment Resources”

Creating Wealth By Bill Rodriguez, Loan Consultant Cherry Creek Mortgage Company 303-877-6323 

            Thank you for joining me for this month’s edition of Creating Wealth. Last month I talked about some of the ins and outs of prohibited and non-prohibited transactions in relation to the rules and regulations that govern Self-Directed IRAs. This month I am going to discuss wealth creation through the pooling of investment capital as a means to:

1.) Establish a network of investors. 2.) Add value to a newly formed investor community by: a.) Creating a lower point of entry for potential investors with limited capital. b.) Providing hands on educational opportunities for newer investors. c.) Diversifying the risk on investment opportunities. In short this month’s article will be dedicated to exploring this approach to building business as a real estate professional.

Creating Your Niche: 

In previous articles I have discussed the benefits of creating a network of investors in order to build momentum in your real estate career. Typically this market segment is characterized by a higher quality of buyer who buys more frequently. Whether you are just starting out or looking to reinvent your real estate career, having a network of investors is, in my humble opinion, a must. But how does one go about attracting investors, you ask? In addition to being able to find a good deal, one of the easiest ways to attract investors is to create a seminar platform that educates potential investors on the variety of subjects associated with real estate investment and its potential pitfalls. There is an enormous number of people conducting seminars on how to invest in real estate. I have attended my fair share and have found that the seminar portion of this platform has turned into a commodity business in and of itself. The focus tends to be more on selling the audience on the next 6 week intensive training, DVD package or book rather than providing solutions to real world problems. This has created a real opportunity in the marketplace for more of a high touch, hands-on approach that allows potential investors to pool capital, expertise and diversify the risk on investment. My suggestion is to create your own investment club or mastermind group.

Build It and They Will Come: 

Potential investors trying to navigate the marketplace may find it exceedingly difficult these days. On one side you have the seminar gurus touting high risk, no money down options for acquiring real estate. On the other side you have the media threatening the impending doom of the bottom dropping out of the real estate market and the dubbed “Colorado foreclosure problem.” Not to mention the upset in the Subprime/Alt-A world that is threatening to pull all high LTV and low doc loans out of the market. Investors see the opportunity of a buyer’s market and the surplus of homes for sale, but they are hesitant to tie up $30,000 or more of their liquid cash. Herein lies your opportunity to turn the potential pitfalls into opportunities for your would-be clients by providing them the safe environment they need to grow in their knowledge of the real estate game. By putting together an investment group, you become the field person that does the due diligence on the quality of an investment opportunity. You can educate your clients on the different approaches to real estate investment from buy and hold to fix and flips to development. The merits of each opportunity can be explored without risk. The value of the educational aspects of this platform is reinforced with each deal that gets brought to the table. Instead of being fearful of the marketplace and allowing fear and ambiguity to keep them in the dark, you may find that your members really start getting engaged and bringing periodicals for discussion. Creating a club or a masterminds group like this creates a forum for people to explore different investment approaches and opportunities while simultaneously finding their own path to Creating Wealth. The group will eventually take on a life of its own.

I Get Buy With a Little Help From My Friends: 

One of the aspects that I really enjoy about the investment club/mastermind approach is that mentorship for new investors occurs naturally. New investors typically don’t have large pools of liquid funds available and the risk tolerance is usually lower than your seasoned veteran. But when you pool investment and intellectual capital, you create more opportunity for everyone.  Risk diversity is also another benefit from this approach because in this case you have incorporated broader intellectual capital which provides a level of comfort and education to your less seasoned investors while tying up less liquid cash that can then be leveraged for other investment opportunities. When these endeavors are wrapped up and completed successfully, you have given your newer investors the confidence and operating cash to potentially go out on their own.

An example of this is one that my girlfriend and partner in the mortgage business has created with a realtor partner of hers and a handful of women investors inBoulder.  As a group they are pooling resources and expertise to invest small amounts of money in a number of buy and hold investment properties in Boulder County. She and the realtor bring a certain level of expertise that the other women appreciate and draw on.  Some of the other women are seasoned investors who enjoy pooling resources to diversify their portfolio and others are new investors who have wanted to invest but were hesitant to go it alone.  By working together, they are able to invest in more properties, diversify their risk and share ideas, knowledge, resources and opportunities.  Everyone wins.

Need more information? Feel free to contact me at any time @ brodriguez@ccmc-net.com or (303)-877-6323. You can also access information online @ www.investtaxfree.wordpress.com.

Creating Wealth “Prohibited and Non-Prohibited Transactions”

By Bill Rodriguez, Loan Consultant Cherry Creek Mortgage Company 303-877-6323 

            Thank you for joining me for this month’s edition of Creating Wealth. Last month I talked about how our attitudes concerning money directly impact how we choose to grow and sustain wealth. I then talked about the importance of building a team of professionals who will help guide you on the path to financial freedom. Since I began researching Self-Directed IRAs, I have been trying to understand why these transactions only represent about 1% of a 13 Trillion dollar market. My best guess is that people are concerned that these transactions will be too complicated for them to understand and facilitate. The truth is there are things you need to be aware of in structuring a Self-Directed IRA transaction to avoid some potentially serious tax consequences. If you take my advice and build a network of experienced professionals around you to help you mitigate the risk, you will find that “the rules of the road” become self evident. In this article I will begin to explain some of the basic rules of Self-Directed IRA investing.

 

Death and Taxes

            As the saying goes, there are two things that you can always count on: death and taxes. The IRS wants to ensure that you do not personally benefit from any of the proceeds from you IRA account until the appropriate age of 59 ½. For this purpose the IRS has a strict set of guidelines regarding with whom you may do business and how these transactions are to be structured to ensure that all transactions set in motion are for the benefit of the IRA, not the individual who owns account.

 

The best way to know if a transaction is allowed, or non-prohibited according to the IRS terminology, is to understand the what and whom of a prohibited transaction. When we discuss the whom, I am referring to the list of disqualified persons who cannot participate in a transaction with the IRA.

 

There are three things that need to occur for a prohibited transaction to take place:

1.)    The self-directed transaction must take place as part of your individual retirement plan which includes one of the following: Traditional IRA, Roth IRA, Keogh Plan, Simple IRA and SEP IRA.

2.)    The transaction must involve a disqualified person

3.)    The transaction must be between a disqualified person and the plan (the IRA).

 

So who is a disqualified or qualified person according to IRS guidelines?  

 

Disqualified Person(s)	Qualified Person(s)
Your spouse	Your spouse’s brothers and sisters
Your natural parents or adopted parents	Your spouse’s parents
Your natural grandparents	Your spouse’s grandparents
Your natural or adopted children	Your step-children
The spouses of your natural children	Your spouse’s step-children
Any Fiduciary of your IRA such as an employee of your IRA Administrator	Your grandparent’s spouse (if not your natural grandparent)
Anyone providing services to your IRA such as your stockbroker	Your aunts, uncles and cousins

 

Some Scenarios:

            Your client wants to buy an investment property in
Pueblo as a long term hold and finance the purchase using her Self-Directed IRA. She plans to lease the property back to her parents who want to retire there. Is this a prohibited or non-prohibited transaction? Answer: Prohibited because she cannot do business with any of her lineal decedents. If this investor wanted to rent this property to her spouse’s parents this transaction would be fine. Understanding who the disqualified person(s) are makes this a very straightforward transaction.

            You and a buddy own equal shares in an LLC that specializes in fix and flips. After hearing about Self-Directed IRAs you note that between the two of you, you have $400,000 of additional capital to invest. The plan is to write a note from your IRA to the LLC to pay for the property in cash. After the work is done and the property is sold, you pay back your IRA with interest and your LLC keeps the profits. Is this a prohibited or non-prohibited transaction? Answer: Prohibited because you have majority ownership in the LLC (50% or more) and therefore would enter into a transaction where you would personally benefit. A solution: You and your buddy would be better off becoming partners with your IRA instead of running that money through the LLC. Say you and your partner have a property you would like to buy for $200,000. To leverage your IRA dollars, your IRA puts up $50,000, your partner’s IRA puts up $50,000, and you each individually put up $50,000. As in any partnership, all holding and refurbishment costs would also be paid by each of you and your respective IRAs equally. When the house sells, you each receive one quarter of the proceeds and each IRA receives one quarter. There is more than one way to ensure that this scenario is a non-prohibited transaction, but this is the easiest and most straight forward solution.

 

In Closing:

            While it might seem like there are too many nuances to Self-Directed IRA transactions, don’t let this dissuade you or your customers from using this powerful real estate investment vehicle. Over the coming months I will be discussing these nuances in great detail, so make sure to catch subsequent issues of Creating Wealth and as always you can contact me at (303)877-6323 or brodriguez@ccmc-net.com. Or check out the following books:

 

IRA Wealth Revolutionary Strategies for Real Estate Investment  by Patrick W. Rice

How to Invest in Real Estate and Pay Little or No Taxes  by Hubert Broma

Creating Wealth “Building a Wealth Team”

 

            Thank you for joining me for this month’s edition of Creating Wealth. Last month I talked about strategies you could employ to start you down the path of growing your wealth if you had limited capital by using your self directed IRA. When you read a good idea in a book or article such as mine, it often seems too good to be true. The concepts often seem to be created in a vacuum and don’t acknowledge that real world applications come with pitfalls. This is precisely the reason for this month’s discussion on the value of building a team. Contrary to the idea of American individualism, there are no self-made millionaires. In this article I will briefly explore why I think people do not naturally seek out a team to help them build their wealth. I will also explore many of the benefits of having a team of qualified professionals around you to share in the process of building wealth.

 

The Marlboro Man

            The Marlboro Man is a classic icon of
Americana and in my mind symbolizes rugged determination. He is the embodiment of American independence and encapsulates the spirit that tamed the West. He also sells cigarettes and was one of the most successful advertising campaigns that Phillip Morris ever launched. So what does the Marlboro Man have to do with “Creating Wealth” you ask? It is ironic that the original Marlboro Man died of cancer. Now this symbol of American independence has come to show us not only that cigarette smoking is bad but that rugged individualism might kill you!

 

Perception is Reality

            In every financial self help book you read these days, authors comment on how our view of money has an effect on our financial reality. The subject of money is taboo in our culture. It is not appropriate to ask your neighbor or friend how much money they make. I have friends that don’t even know how much their spouse makes. For most of us there was no class that we took in high school or college on “How to become financially savvy.” Most of what and how we think regarding financial matters was passed down from our parents.  These belief systems govern our actions and can be stumbling blocks for us as we try to create wealth. When you begin to create open conversations about money the knowledge and input of others will begin to reshape your attitudes about investing, growing and sustaining wealth.

 

Who Wants to be a Zillionaire?

            Whether you want to create and sustain your own wealth or become an advisor to others, you will need to examine your attitudes around money. It is important for you to know your risk tolerance and understand where your ethical and moral boundaries lie. These belief systems will govern your own investment practices and those of your clients. You need to educate yourself continually, from refreshing (or learning) the basics to exploring the concepts of arbitrage, real estate funds, private placement memorandums and the 6 benefits of self-directed IRAs vs. 1031 Exchanges.

This is not a journey that you can make alone. The most successful people in the world have a team to support them, while the Marlboro men (and women) everywhere die of rugged individualism. Every successful wealth team needs to have the four basic components and in my opinion 2 ancillary components 1.) Your CPA will work alongside your lawyer to create the proper entity structuring to minimize loss of capital through taxation. 2.) Your Realtor is someone who will help you find the right location, location, location. 3.) Your Lawyer will help you mitigate loss and maximize tax benefits through legal entities. 4.) Your Financial Planner will help you properly diversify your risk and make sure that you have the proper insurance. 5.) I also recommend having a good Mortgage Banker who can show you the basics of arbitrage in regards to leveraging real estate as an asset to perpetuate wealth faster. 6.) Your IRA Administrator will show you how you can leverage your retirement plans to grow your wealth tax deferred or tax free. If one of your strategies is to buy and hold real estate, I think it is also important to also consider a Property Manager. A good Property Manager will alleviate a lot of the management hassles that accompany real estate so that you can focus on growing your wealth. Your team will vary depending on your investment strategy and risk tolerance

            You are the captain of your own financial ship. If you choose to navigate these murky waters alone, you may be lost at sea. By creating a team of professionals around you, you will have access to more financial opportunity because your shipmates will (hopefully) stretch your knowledge and perception of how to create wealth. When you rely on your team of trusted advisors to help you achieve your financial goals, your need to “know everything” disappears and you can focus solely on steering the ship.

 

Resources:

IRA Wealth; Revolutionary IRA Strategies for Real Estate Investment: Patrick W Rice

Creating Wealth: Robert G Allen

The Millionaire Maker: Loral Langemeier

Secrets of the Millionaire Mind: T Harv Eker

Ordinary People Extra Ordinary Wealth: Ric Edelman

Creating Wealth “Intention of Success”

Bill Rodriguez

Cherry Creek Mortgage Company

“Building community one home at a time.”

(303)-877-6323

brodriguez@ccmc-net.com

 

 

Introduction: 

For those of you that are becoming fans of the site you will notice that this article has a specific target audience in mind. It is typical for this time of year for those of us in the sales profession to celebrate or lament the previous year. So while I think much of the same information applies to you budding investors out there you are not going to find the same “nuggets” that you may be used to from my previous articles. But just wait I have a lot of good news to report. Enjoy and Happy Holidays!       

 

         There is always a sense of nostalgia for me during this time of year. All of my efforts have come full circle and as the commissions come in for this final month there is a general period of reflection. My ritual for last months of the year is to not only count my blessings but assess my failures in my business and personal life. I find that the end of the year occurs one of two ways for me. Either I am engaged in that last big push to meet my projected goals for the year or I am hibernating until the spring! This year I am happy to report that there is a flurry of activity for me as I rise to meet my personal and some of my business goals but like many of you I have not seen all of the financial success that I had envisioned for 2006. This is why I believe that it is important to be grounded in the basic principles of success while taking the time to plot a course for the coming year. So this article is dedicated to what I think are the most important elements of creating a successful 2007.

 

Success is Not an Accident

            True, sustainable success is never by accident. All of the most successful people take the time to map out a plan that includes attainable short and long range goals. The answer to the question of “how do I make a million dollars a year in real estate?” is similar to “how do you eat an elephant?” The answer: “one goal at a time.” Goal setting allows a person to break down large tasks into bite size pieces. Each goal met is a positive step toward the completion of a larger goal or vision. These small steps become milestones as you continue down the path of your career.

 

Have a Plan

Having a goal without a concrete plan to attain your goal is like expecting to win a marathon that you never trained for. Creating a business plan helps you achieve the goals that you have put in place by quantifying your business activities in dollars and cents. For example let’s say that you have a goal of making $150,000 in your real estate career in ‘07. Your average transaction is $250,000 therefore your average commission is $7,000 if we assume your take of 2.8%. This would mean that you would need 22 transactions next year to meet your goal. Knowing the numbers helps you control expenses, which are a real part of any business, because you can see the impact to your bottom line. It also allows you to create an attainable goal because you know how many transactions it takes to get you to your magic number. It is my experience that knowing these things will help you focus in on only those things that bring you the biggest return on your investment of time.

 

 

Coming into Focus

            Believe it or not but your ideal customer is Not anyone who happens to be looking to buy or sell a home. One of the biggest mistakes that I see realtors make is not choosing to focus their marketing efforts. Identifying your market segment is one of the most important functions of a business owner because it creates your identity in the market place. McDonalds is not known for having the best tasting hamburgers but that is not why people go to McDonalds. The only time that I eat at McDonalds is when I absolutely need to eat in a hurry! So what is it that you offer your customers that sets you apart from your competition? Find an area of expertise and master it.

 

Become a Spin Doctor

            Once you have selected your area of expertise the next level of mastery is to establish your brand. Once you have identified your target audience you need to stand out among your competitors and capture a share of the market place, branding helps you do this. Create your “elevator pitch.” Your elevator pitch tells your prospect everything that they need to know about what you do and how you do it in the time it takes to go from one floor to another. I usually think of Starbucks for my example of branding. You can be in anywhere in the world and walk into Starbucks and it seems familiar. Every Starbucks has a similar look, feel and experience every time you walk into one of their stores. Branding establishes a consistent buying experience for your customers that distinguishes you in a crowded market place. Your customer need to know that you will deliver that same level of consistency every time before they send you a referral.

           

Resources

            For those of you that like to read I am including some of my top picks to add to your list of “recommended reading” for 07.

 

Blue
Ocean Strategy: W. Chan Kim and Renee Mauborgne

Love is a Killer App: Tim Sanders

Never Eat Alone: Keith Ferrazi

E Myth Revisited: Michael Gerbers

22 Immutable Laws of Marketing: Al Ries and Jack Trout

Positioning: Al Ries and Jack Trout 

 

Since the close of 06 is upon us I am going to part with these words from Aristotle and wish you a happy and joyous holiday season!

 

“With regard to excellence it is not enough to know, but we must try to have and use it.”

 

To Your Continued Success,

 

Bill Rodriguez

Creating Wealth “Ivestment Strategies: Building a Nest Egg”

             Thank you for joining me for this month’s edition of Creating Wealth. Last month I spoke about Self Directed IRAs as a strategy for investing in real estate so that all of your gains are either tax deferred or tax free. In order to fund these transactions however, the IRA needs to have enough money to not only pay for property in cash but also to fund the necessary refurbishment and applicable management costs. Wow! Depending on the cost of the property, that could equate to a lot of $$$. What about those of us who want to take advantage of this opportunity and don’t have a sizable nest egg? Not to worry. I am going to answer this question and provide you with additional ideas that you can use to build your investment capital using your Self Directed IRA.

A moment of truth…

            I discovered Self Directed IRAs earlier this year while on one of my monthly reading binges. Then in July my fiancée and I went to an investment conference in Las Vegas where we learned more about how powerful they can be as investment vehicles – especially when investing in real estate. We walked out of that weekend inspired to supercharge our wealth and take advantage of all of the new information that we had acquired.  In taking the first step towards our “financially free” free future, we had to look at our current reality. Needless to say, it was a little disheartening. In gathering my financials, I found that I only had about $1,800 in a Roth IRA, $1,600 in a mutual fund,$27,000 in a 401k from another life, and $800 in a 401k from a more recent past employer. When I considered my desire to start acquiring real estate through my Self Directed IRA, I can honestly say I had no idea how to make it happen at that time. 

Bridging the Gap…

            The truth of the matter is that many of you are like me. More importantly, many of your customers are like me. The concept behind the Self Directed IRAs creates a strong argument for true self managed wealth where each man (or woman) is the captain of his own financial destiny. The problem is that if you are just starting, or started late in your retirement planning, you don’t have the robust retirement dollars to invest in a Self Directed IRA. Or do you?

            There are two ways that you can self direct with your IRA 1.) through a Traditional IRA and 2.) through a Roth IRA. The difference between the two types of IRAs is based on retirement growth that is tax deferred vs. tax free. A Traditional IRA is tax deferred, which means that pre tax dollars go into this account to grow your retirement dollars tax free until you start making withdrawals. The money is then taxed as ordinary income when you take it out. A Roth IRA is funded with post tax dollars, which means this money grows tax free since it has already been taxed before you put it in the IRA. If you remember my retirement inventory, I only had $1,800 in my Roth IRA. I knew from past experience that with a 401k rollover you can combine like accounts. So I combined my mutual fund and Roth IRA for a total of $3,200, because they were both funded by post tax dollars. I then combined both 401ks for a total of $27,800 because they were both funded with pre-tax dollars. I then had a choice; I could roll my 401k dollars over to a Traditional IRA or convert it to a Roth. I opted to convert it to a Roth because it is not a large sum of money to begin with, so I paid tax on that money to convert it to after tax dollars. I now had money to play with and it is all going to grow tax free!

Creating Wealth…

            I was able to fund my Self Directed IRA by taking an inventory of idle retirement money tied up in my stranded 401ks and mutual funds. I then converted my pre-tax accounts into post tax dollars so that I have more money in my Self Directed Roth IRA account. Then I started looking into prohibited and non-prohibitive transactions in regard to loans made through your IRA. As it turns out, since my fiancée and I are not married yet, I can loan her money from my IRA at a reasonable interest rate and she can combine it with her Self Directed IRA for more buying power. (More to come on prohibited and non-prohibitive transactions!)

 

Here are a few more suggestions for those of you with limited investment capital like us:

 

Tax Liens: Are a good way for you to build your IRA investment dollars for two reasons: 1.) Tax liens require less money to buy than real estate because you can buy liens anywhere from a couple hundred bucks and up. 2.) Tax liens are safe because they are secured against real property, so if the owner never pays, you have the right to foreclose.

Tenants in Common: So you found a property that promises enormous wealth, but do not have the cash to fund it solely with your IRA? You might consider getting your friends together to create a tenants in common agreement. A tenants in common agreement allows two or more partners to own undivided portions of the same real estate without the right to survivorship. This means that if the person dies his/her ownership interest in the property goes to his/her heirs, not the other partners.

Non recourse loans: Allow a potential investor to partner with his/her IRA. The IRA puts forth the capital for the down payment and owns the property. A bank or a private party carries the note for the remaining balance. There are very few banks that will do these loans and their terms might not be as favorable as terms that can be negotiated with a private party. (More to come.)

These are just a few of the many strategies that can be employed by a potential investor to build investment capital. Look for up coming issues of Creating Wealth for more information or drop me a line:  303-877-6323 or brodriguez@ccmc-net.com.

Creating Wealth “Investing in Denver Real Estate”

            Many realtors I speak with share their experience of the current Denver Real Estate market as pretty much one of “feast or famine”. While there are always the fortunate few who perform well in any market, many are experiencing the impact of the local recession economy. Seasoned veterans speak of the value and opportunity of “market cycles,” so then the challenge becomes anticipating the real estate curve and understanding how to teach buyers why now is a good time to become a real estate investor.

Local Market Reality:  Sales of previously-owned homes are down 1.6% as of June of this year compared to the first half of 2005. “Meanwhile, June inventory hit a record high of 31,900 homes, up from 30,457 homes in May.”  This increase in local inventory is a classic example of strong supply with relatively weak demand. On the bright side, the median sales price of a single family home in Metro Denver increased 6.3% in June to $335,111.

While it may seem buyers are hard to come by and a significant percentage of the ones that do appear seem to be credit challenged and non committal, I was encouraged by these statistics because they show an appreciating market. Also, Colorado is outpacing the 1.8% expected national average for job growth at 2.8% and is ranked 10^th in the nation for year-to-date employment growth. With rising interest rates making it more difficult for buyers to qualify for mortgages, the local rental market is becoming stronger every day. The glut of homes on the market also means investors can find value now and expect appreciation over time.  If you consider all of these factors, investing in local Denver real estate with a buy-and-hold strategy is a smart business decision.

Finding Investors:

1.                  Participate in local investment groups – CAREI, eRealEstate and IRR are a few of the local groups.  Ask around for others in the area. 

www.carei.com

www.irrofcolorado.com

www.erealestate.com

2.                  Sponsor or teach a seminar about real estate investing

3.                  Share the statistics here with your current market sphere – get them excited about investing in the
Denver market.

Finding the Money:  The challenge many investors face is where to find the cash to invest.  There are ways to access additional capital your buyers may not have considered:

1. An equity reposition:  your buyer may have untapped equity in his home that would be better used investing in more real estate.  Consider this example:  Your buyer owns a home worth $300,000 with a mortgage of $150,000.  When his home appreciates 5%, he earns $15,000.  Not bad, but he could be doing better:  Using a cashout refinance, he taps 80% of the home’s total value or an additional $90,000.  He uses this money to buy 3 investment properties at $150,000 per house with a 20% downpayment on each.  With good financing, including rents received combined with expenses and depreciation that help him increase his annual tax savings, he can hold onto these rental properties indefinitely with little or no negative cashflow.  When the market appreciates 5%, he makes $7,500 in appreciation on each rental property and increases his wealth by $22,500 in one year!
2. Self Directed IRAs:  The Dow Jones Industrial average is up less than 1% for the year, and returns on other traditional investment vehicles such as annuities are averaging about 6% – barely keeping up with inflation.  What better way to accelerate wealth than to take control of orphaned 401ks and IRAs and roll them into Self Directed plans where you can invest in real estate and other higher yield investments? Having more control over your retirement funds can grow your wealth faster.  Self Directed IRAs and other retirement plans have been around since the 1980s and are gaining attention in the market today as a viable way to invest in real estate. 

Given the current state of the market, it is important to develop alternative marketing strategies and be a resource for your customers by helping them grow their wealth.  Hopefully this article has provided you with some helpful information so you can take advantage of the growing real estate investing market in
Colorado.  For additional information, feel free to contact me at 303-877-6323 or visit the websites I have provided. 

**Statistics quoted are from the following sources:

http://www.denverchamber.org/ecdev/index.asp

http://www.metrodenver.org/

http://www.metrodenver.org/DataCenter/RealEstate/RealEstate.icm

http://www.metrodenver.org/DataCenter/DenverEconomy/MonthlyEconSummary.icm

http://www.bloomberg.com/markets/stocks/movers_index_dow.html

Creating Wealth “Self Directed IRAs”

 Welcome to another addition of Creating Wealth. This month we are going explore some of the benefits of using a self-directed IRA as a real estate investment vehicle. In the last article I discussed some of my thoughts on the current condition of the real estate market in Denver and why I thought that
Denver was a good buy-and-hold market. I am sure there are some that would disagree with me. The truth is, the real estate investment community is actively participating in a host of long and short-term investment strategies in the
Denver market, and those I have spoken to are not spooked by the doomsayers.  So how do we get the attention of this savvy market segment that typically has liquid cash and good credit? We show them how to finance property without using their liquid cash or their credit and then take a profit without paying taxes!

            The IRA or Individual Retirement Account was created in 1975 by the Employment Retirement Securities Act of 1974 to provide similar benefits to employees that did not have a pension or were self-employed. IRAs allowed employees without a pension plan to make pretax contributions to grow tax-deferred in their IRA account. Then in 1997 the Taxpayer Relief Act was passed and the Roth IRA was created. Roth IRAs are established with after tax dollars and grow tax-free. Now almost 3 decades later, IRAs make up 27% or 3.5 Trillion of 13 Trillion of retirement holdings in the U.S. Believe it or not, since the inception of the IRA, there has been the ability to self-direct IRA funds for real estate investment.

So what is the Buzz about?

            The Self-directed IRA as a real estate investment tool offers a number of advantages to investors. Control: Over the past decade it has been real estate that has out- performed the stock market, and Mutual Funds are performing at about 6% – barely keeping up with inflation. I currently have an investment partner who employs the fix and flip strategy for investment real estate and is making anywhere from 14-70% cash on cash depending upon the hold time and how we do the financing. Tax Deferred or Tax Free: With those type of returns if our properties were financed through our self-directed IRA or Roth IRA our gain would be either tax-deferred or Tax Free! (See the Special Insight section below regarding specific advantages of self-directed IRAs over 1031 Exchanges.) Protects credit and liquid cash: There are two things that investors run out of when playing in the investment real estate game 1.) The cash to fund and maintain property. 2.) The credit to finance additional property. By funding property with proceeds from your IRA or Roth IRA you can protect liquid cash reserves for other endeavors, and since the IRA owns the property outright it has no impact on your credit score unlike traditional financing.

Your competitive edge

            Armed with your new knowledge of the self-directed IRA as a viable real estate investment vehicle, you can see why this would benefit the local real estate investment community. However, an additional benefit that you may not be aware of for you as a real estate professional is that all of the coaching and resources currently available on this topic instruct potential investors to build a team of qualified professionals around them to ensure the success of their endeavors. These partners include but are not limited to a residential real estate broker, commercial real estate broker, CPA, Financial Planner, IRA Administrator and real estate attorney. If you do not have contacts in these other fields of expertise, I would recommend making some. If you are able to refer your potential clients to your partners, you are not only able to add tremendous value to your potential clients but also effectively create the opportunity for reciprocity from your other team members which will grow your business!

Resources

            The complexity of this topic does not allow for me to cover all of its nuances in this article, however I would like to offer you some good reading on the subject.

IRA Wealth Revolutionary IRA Strategies for Real Estate Investment Patrick W Rice; Square One Publishers Copy Right 2003

How to Invest in Real Estate and Pay Little or No Taxes Hubert Bromma; McGraw Hill Publishers Copy Right 2005

www.iracoach.com

www.iraresource.com

www.irs.gov

Special Insight 4 Benefits of a Self Directed IRA vs. 1031 Exchange

1.) Taxable gains on IRAs are not realized until you retire. Since Roth and Education IRAs are created with after tax dollars these vehicles are tax exempt. In a 1031 Exchange your taxable gain is only deferred until you sell your last property.

2.) When you sell a 1031 Exchange property you will immediately be taxed on your gain. When you sell your IRA property it is either tax deferred or tax exempt.

3.) A 1031 Exchange requires you to replace real estate within 45 days of close on a previous property in the exchange. Your IRA does not require you to replace sold property.

4.) A rule of the 1031 Exchange is that the replacement property is higher in value then the previous property. An IRA does not require this