Wealth Tips Eletter July 31, 2006

Hi Everyone,

The Maui Millionaire Wealth Weekend in Phoenix on July 22 and 23 was incredible. Not only did I get the chance to meet with several hundred of you, but together we raised $300,000 for charity from the event. Thank you all for your support of these great causes.

This week’s wealth tips are on real estate investing. I decided to write one more on the types of real estate markets and strategies for each (geared to single family home investors) because so many of you invest in real estate and the markets you are in may be in the process of shifting up or down.

Enjoy!

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The Three Markets You’ll Be Investing In Over the Years: Hot, Medium, Mild

There are three main real estate markets and you need to know how to be able to make money investing at each of them. Hot markets… medium markets (aka: slow and steady markets)… mild markets (aka: buyers or flat markets.)

Let’s get one thing straight, you can make money in any type of market. Many other investors have before you. The key is to know what type of market you are investing in and adjust your buying and selling strategies accordingly.

In a hot market you are going to have fewer deals for you to buy, however, with the strong appreciation and high demand for property the property you already own and the new property you are acquiring will make you a lot more per deal.

In a hot market you typically are buying for time. This means any way you can acquire a property at or below value in a hot market that requires very little of your own money and in which the payments are low enough that you can make it cash flow while you hold onto it for a few years you are going to come out of it way ahead.

The key thing in a hot market is to realize that this is the riskiest market of all to buy for cash or with a bank loan that you are personally guaranteeing.

The reason that this is so is because you never can tell how long a hot market will stay hot. The market could be tipped by rising interest rates, by a major employer in the area going bust, or any one of a number of factors. And if you are buying for cash or with a loan in your name that you personally guaranteed you might not be able to wait any downturn in the market out. Especially if you caught the speculation bug and bought for cash (and remember that buying with a loan that you personally guaranteed is the equivalent of buying for cash) where you didn’t get a cash price, you are vulnerable to forces outside of your control.

I want all of you to learn to do your investing the right way, with sound fundamentals. If you do it the way I have been teaching you over the years, you will rarely get caught in spot you can’t step back from. I’ve personally bought a lot of houses from investors who got caught up in the excitement of a market and didn’t remember that you make your profit in a deal not when you sell…but when you are buying.

So the bottom line for a hot market is that if you are buying for all cash to the seller then you need a fair cash price—at least 20-25% under the current market value. If you are buying on terms, then don’t worry so much about price. Instead go after a monthly payment that will give you a cushion of cash flow, and go after a long term that you can hold the property with little of your cash into the deal. (This means lease options, owner carries, subject to deals, etc.)

My favorite two buying strategies in a hot market is to buy either subject to the seller’s existing loan or to buy on a long term lease option. Both of these strategies can be utilized in a hot market to reap huge profits with very little cash or risk.

Now if you are investing in a medium market then you have a stable, steady growth to rely on. But if you are buying on terms and the property is only appreciating at 3 to 5% per year you are going to need to find one more strong sweetener to make the deal a keeper. This could be negotiating 12 to 20% of the purchase price you are paying so you build some equity in from day one. This could be negotiating a lower monthly payment to the seller so that the property cash flows well over the years. The key is to find a way to build a more substantial profit cushion in the deal to be safe. The biggest mistake I watch investor make in a medium market is give to much to the seller when negotiating and not have it be a win-win.

As for a slow market, the key here is to remember to pick and choose carefully because you’ll have a ton of sellers willing to practically give you their houses when you use the strategies and techniques we’re teaching you. The biggest mistake I watch investor make in a cold market is to get excited by all the sellers who are willing to do a deal and take too many deals all at once where some aren’t really smart deals.

Remember that in a cold market you don’t just need a motivated seller who is desperate to sell, you need a seller with a situation that will also allow you to make a conservative profit on the deal you are structuring. Usually this means one of two things, either the seller has some equity in the property and you can negotiate a winning price, or the seller’s financing is attractive so taking over the property will still allow you to make a healthy cash flow.

Again I want to make sure that you understand that investors make a lot of money in all three of these markets. For example, a friend of mine was investing in a hot market in California. During one six month period when other people kept telling him that the market was “too hot”, he’s purchased 3 apartment buildings and 5 houses using exactly these ideas.

Of course, in that same cities there were many other investors crying about how the market was too hot to find any good deals. As you can imagine, they were right. The market, when combined with their limiting beliefs about the market, was too tough for them to remain true to their dreams and they quit. Remember, right now in your home town, some other investor is making a lot of money investing, why not you?

Which Is the Best Market for You to Invest In?

So which market is the best one to invest in?

The answer is ALL of them.

Personally I prefer investing right before a market takes off into a hot phase, but there is really no reliable way to accurately predict this. Also, it’s not something you control. I don’t want you to look at real estate as a function of being in the right market at the right time. While this can mean extra profits from sky-rocketing appreciation, does this mean you have to go to different areas of the country to do your investing? I don’t think you need to do this.

Instead, over the years I have worked hard to share with you the skills and knowledge base to capitalize on the advantages of any market while mitigating the risks in those types of markets. The key is to understand that you can make a consistent profit in any market because you are intelligently INVESTING not indiscriminately speculating.

So just what is the difference between investing and speculating? Well speculating means buying a property with no profit margin built in from day one, and hoping that the property goes up in value so that you can sell it for a profit down the road. Most speculators end up losing. Their like the gambler who walks into Vegas and lays down a big bet on Red Seven. Now they may come out a big winner, but someone is paying for all those fancy lights on the Vegas strip!

Instead I want you to be like the casinos in the sense that no matter what time of year they are making money. When you learn the basics of investing you can make them work in any market. Obviously this will take some effort on your part to master the fundamentals, but the reward is a lifetime of profit from your investing. Profits you earn in any market, in any area of the country.

When you are an investor you build a profit into the deal from the day you put it under contract. I don’t want you guessing or wondering if you’ll make a profit. I want you to KNOW you will. For example, in a medium market you may pick up a property with $35,000 of equity the day you buy it, and with a tenant already lined up for the property who will be paying you $275 more per month than the monthly payments.

Or in a hot market you could be buying for full price, but doing it with very little money down and the owner financing the purchase for 5 years with payments that cash flow.

Or in a cold market you may find a seller who just wants you to stop the foreclosure he is struggling with so that he can walk away from the property with his credit intack. And in exchange for you making up $6,000 of back payments the seller deeds you the home and you now have a solid investment property with 20% equity and a great loan already in place.

The common thread for all investors is that they understand that they make their profit when they buy; they harvest their equity when they sell; they grow their net worth when they reinvest in more real estate and in themselves.

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Wealth Blog Update:

I posted three updates to my wealth blog earlier last week. Two are audio posts on why earned income is one of the worst predictors of financial success, and what one ratio is the most important predictor of financial freedom. I will be posting a few more times this week and each week. It’s located at www.GetRichGetReal.com

Safe Senders List

Just to make sure you never miss out on this eLetter. I plan on sending it bi-weekly for now and may move this to weekly later this fall. Make sure you add my email address to your email program’s “safe sender’s list” so it is never blocked.

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That’s it for this letter. Make sure to keep checking weekly on my wealth blog (www.GetRichGetReal.com) for more updates and ideas on creating wealth.

I hope your week is a GREAT one!

David Finkel