New with Real Estate question

[trumpeting_angel]

Hello -

I've been lurking for about a week and finally registered so I could ask a question. The briefest of intros: I am 50, newly self-employed (I'm a psychologist), working part-time after many years in a high-pressure situation and just beginning to wind down. I'm divorced, have one child (14), and I don't see myself retiring until she's out of college. But I've significantly downscaled already, and that will do for now.

The real estate question: I'm thinking of investing in a two-family home or something similar, and would like to read a decent book about investing in residential real estate. Not "How to Make a Million Your First Week in Real Estate with No Money Down." Instead, a real book, written for sane people.

Anyone have suggestions?

Nice to meet you all!

Anne

[cute fuzzy bunny]

I dont have a good reader for you, but my dad invested in two families the entire time I was growing up; he bought the one I was born in and went through several more.

They were all universally good investments, but somewhat trying in the landlording department. Its the same issues and problems with being a landlord, only a lot closer.

Sometimes thats a good thing, as when a pipe breaks.

Sometimes it was a bad thing, as when a little domestic violence spilled over into our house one evening. The nicest couple on the planet had a fight and it got out of hand and we all ended up involved.

So if you have the stomach for direct involvement with another couple or families life, and the interest in the general issues of landlording, a two family/duplex can be a good starter real estate investment.

Only other thing I can throw in is that all of his were fixer uppers on the fixier end of the scale, and he was good with a box of tools.

[trumpeting_angel]

Thanks for your reply, TH. My landlording problems would be the somewhat-remote type, because I wouldn't be living in the two-family, but renting out both units. I'm in a nearly-paid-up single-family myself.

A friend owns a two-family, and had one tenant call HER about the domestic violence going on upstairs. "Why didn't they call the police?" I asked. I guess people think the landlord can solve everything. This is the downside of owning residential real estate, I'm sure. One of the reasons I want to read up.

I'm addicted to this forum already. But I still need to sleep! I hope someone knows a good book; there is so much nonsense out there.

Anne

[cute fuzzy bunny]

Well this was a nice canadian couple with twin girls, who I was friends with...I think we were all about 5. They had a little fight, one of the kids got knocked over when they got in the middle, she got mad and smacked him, pushing and shoving ensued, and she ended up at our front door in a panic with him in hot pursuit. Hilarity ensued.

Sounds like you know what you're getting into.

Sleep is overrated Besides when you're ER'ed, who cares if you're well rested!

By the way, as a psychologist, you should bring an interesting perspective to investing, which is a lot more about mass psychology and lot less about finance than some people think...

[Nords]

The best book I've ever read on real estate accounting & management is
Investing in Real Estate, 3rd edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions).

The second-best is Real Estate Loopholes: Secrets of Successful Real Estate Investing by Diane Kennedy. She's a CPA who works with Robert Kiyosaki, but she writes well anyway and she gives good advice with less details than Eldred. (Ignore all the Kiyosaki stuff.) You'll want to pay close attention to setting up your separate businesses to protect your assets and to insure your liability risks, but if you're self-employed then you already have more experience than me on that subject. Hopefully you'll be able to find both books at your library.

I guess you've already encountered a few gurus. John T. Reed's website can help you sort the wheat from the chaff. This bookmark http://www.johntreed.com/Reedgururat...l#anchor529971 should pop up on the Kiyosaki link but Reed lists them all. (For the rest of the board, the website reviews every get-rich-quick guru you've ever seen on late-night TV. It's a great rundown of the "industry".)

Your town/city Chamber of Commerce or Better Business Bureau can point you toward the publications that provide landlord/tenant legislation & rights guidance. Some parts of the country are more hostile to landlords than others; I don't have a particular side on the issue but it may be lopsided enough that you'll decide to avoid the whole project entirely.

If you're near a military base, call their Housing Referral Office and try to rent exclusively to military tenants. You can set their rent at their housing allowance and you'll be reasonably assured of decent tenants who will pay their rent on time.

Good luck!

[unclemick]

I didn't like being a landlord, but owned a duplex for 15 years (2 yrs living in half, 13 renting both sides). Tax break, positive cash flow, good tenants - all the same, the the garbage disposal, A/C, and plugged toilets always 'knew' when we were busy or going on vacation.

Once you commit, then you will know if your mental makeup is ready. Mine wasn't so I never scaled up - ie bought more - even though it's a viable method of getting to ER.

[Martha]

If you haven't already found it, I also suggest reading the recent posts in the Investment Strategies section. Follow Zuki's thread on rental homes as a source of income.

Martha

[trumpeting_angel]

Martha: I HADN'T already found it, but I'll go hunt it down now. Thanks.

Mick: I am concerned about the grittier details of landlordhood. (We psychologists call made-up words "neologisms." Generally a sign of psychosis.)

Nords: What a wealth of information. THANK YOU. There is a military base near me, but it's in a state (Massachusetts) and a housing court district that has been considered hostile to landlords. More research needed.

As a psychologist, I OUGHT to be able to overcome the mass hysteria that surrounds investing and go by the science. Thanks to these boards, I am reading Swedloe; I was already partially in Index funds for the right reasons, but have leftover 401(k)'S in various assorted actively managed funds.

I have recently inherited money, which has caused me to get serious about the whole thing and quit ignoring it. When your net worth more than doubles, it's time to quit ignoring the details. Once I stopped ignoring the details, I realized that ER might be a possibility. Now THIS is something I am not going to ignore! 6 months of watching my sister get sicker and die at 47 was also a powerful motivator to change my life; I'm a recovering workaholic.

Thanks everybody. I'll be reading voraciously and hanging around, probably with more questions.

Anne

[Nords]

... as a psychologist I guess you're familiar with all the pop research on inherited wealth (and its potential for inheriting all the emotional baggage that goes with it).

On the money-management side of the equation, other than paying off credit-card and maybe home-equity debt, there's no need to hurry. Some of the books advocate taking up to a year (leaving the funds in a money market) to decide how you "feel" about the inheritance, what you want to do with it, and (last but not least) how you plan to do it.

Many start with the planning first instead of working through the whole process-- and then they discover they really wanted to do something else with the money.

There are a lot of tremendous real-estate resources out there and you can learn how to be a landlord. If you're motivated, it won't be very hard to be a good landlord. However all my landlording experience has been in warm-weather climes. I'm not sure you want to be a landlord in an area where a careless tenant can freeze the water pipes and ultimately destroy the property. Most insurance companies are scared to death of stachybotris (mold) liability and will no longer cover water damage. You'll have to have a good cash-flow analysis (Diane Kennedy's book walks through this) and defensive liability/property-damage insurance.

Depending on the size of your inheritance, you may also want to protect your personal assets (and your psych business) by separately incorporating the property-management business or (at the least) forming a LLP. While you can handle the landlord part on your own, it's probably best to seek professional help on the accounting/corporate side.

[cute fuzzy bunny]

Excellent advice Nords.

[wzd]

A few more thoughts on real estate. I liked the book "Every Landlord's Legal Guide" for reference. I also used a nolo press book on LLC's from the library.

One thing to note is that you can make a profit/headaches trade off and hire people to do some of the work. For small buildings this can be costly, but as your equity grows and you trade up to a larger building, it is more practical.

I had a 4-plex that I (actually 2 4-plexes and 3 owners including me) managed. We did most work ourselves for the first few years and then hired a management company. Management companies are costly, but we didn't want to do the stuff ourselves, and wanted to keep the buildings. Rents had gone up enough that the property cash flowed even with the management company's bill.

When I took the early retirement buy out package, I also sold the building and did a 1031 exchange (anyone selling rental property and buying another, read up on these!!) into a 20 unit building. I do some work myself, but over the year plus that I have owned it, I have found a resident manager and a resident maintenance person. They deal with a lot of the headaches for me, and I deal with them...which can be a headache at times. The manager is bi-lingual, and that really helps since there is a high hispanic population in the area. My building is often fully rented when neighbors still are looking for tenants.

The cash flow on larger buildings is also better. The larger buildings are priced on cash flow, where smaller buildings are priced between cash flow based prices and single family home type prices. This means that you can afford to hire more stuff out after you manage to build up your investment to a large building.

You may think that employees equals tax headaches, but if you require them to live there as a job condition (and this is acually required for a resident manager in CO unless they are a licensed real estate professional) then any discount on the rent is not taxable as income. If you limit the compensation to their rent you don't have to deal with the tax stuff, although you still need workmens comp insurance. However I recommend that you check on the details for yourself before taking this as advice.

A LLC is simple to setup in Colorado, and in most other states. It cost me a few hours drawing up an operating agreement, and then $50 to register with the state. A single member LLC and a husband/wife LLC can be clasified as "an entity disregarded for tax purposes" if you want to keep the tax reporting simple. They can also be used for estate planning with limited investors such as your children. There are ways to keep control of cash distribution and have the children actual own most of it over time. I haven't done this yet, and would have a lawyer/accountant review it if I did.

Wayne

[trumpeting_angel]

So much help, and all of the advice excellent! Thanks to everyone. I can see that there is a wealth of experience and expertise on these boards.

I've been reading up, in library books and on the investment choices thread, about real estate, and it seems like a potential choice for me. I found an older book in the library (Money Making Real Estate, by Caroline Janik) that appears to be very sensible and sober. I'm still hunting for cheap/free copies of the books you folks recommended.

It's been over a year since I began inheriting this estate (I am the executrix and I'm not finished transferring the assets for other reasons too complex to go into). You are right about the "take a year to think about how you feel" advice that's out there. I am of the read-first, think-next, decide-how-I-feel, then take-action school. I'm still in the early reading stages about real estate. The decision to work less became clear during the past year, but quitting my job and working for myself seems to mean that I can work less and earn more, happily.

So I would certainly second that advice, to wait a year before one makes any major decisions about an inheritance (or other windfall). Our earliest impulses are not necessarily the best ones, particularly when emotions are running high.

wzd, your words of wisdom are very welcome! Happily, your advice about setting up a LLC comes right on the heels of my accountant's advice to do the same (for my private practice). I will probably do the same when the time comes for any real estate investment.

It's funny: after reading about all the ways people make money (and lose their shirts) investing in real estate, all the same old buildings and houses and tract developments I see all the time suddenly look different. Potential opportunities - some riskier than others. But it has opened my eyes: real people own these buildings, real people (not shadowy invisible corporations or the super-rich) invest in multi-family houses, small apartment buildings, even (shudder) land and commercial buildings. It's not something I'm ready to dive into, but it's not some vague impossibility, either. Just something that requires a lot of education and good sense.

Thanks to all of you. I'll keep reading!

Anne

Hi Anne! Real estate has been good to me. Even now,
50% of my net worth is in real estate. I am comfortable
wiith this, but others would not be. I have been
enamored with real estate for many years. I owned
a bunch of raw land which I sold over the past 2
years. Now, this money is moved into Texas real
estate which carries much higher costs, but also has
more potential. Bottom line; I have lots of options
vis-a-vis this money. Looking on the upside. Very
important in investments and in life.

John Galt

[unclemick]

Throw in the house, about 10% of our net worth is real estate. Like Joe Domingez of YMOYL who got(I think) got burned on stocks thus liked bonds, my real estate(except for the duplex) efforts have been less than stellar over the years. But I read Scott Burns and he periodically publishes articles on how much the average American's net worth (mainly the house) is in real estate. The REIT index in my portfolio(?about 15%) is real estate enough for me. But the itch resurfaces from time to time.

[BigMoneyJim]

When I was younger I had plans to build up to 3 rental houses, and at one point I was considering a duplex where I'd live in half and rent the other half. (I never bought anything, though.)

I eventually realized the exra work is basically like a second job, except I would have no control over the schedule. Water heater goes out? Tennant moves? Time for work, no matter what my other plans were.

I decided that if I wanted the extra work I could probably come out better doing IT work on the side and investing the income, although I haven't done that yet, either, because I really like my free time.

I'm not knocking real estate for anyone else, but it just doesn't seem to fit with my life very well. I'm enamored with mutual funds because I can completely ignore them for months or years at a time and then have the ability to exchange them when it's appropriate for my situation. (Example: during a job scare last year I moved $10k to money market to be sure it was available for debt elimination and a move if I got laid off; just a couple of weeks ago I decided the job scare was over and wanted to increase my bond holdings to mellow out my portfolio a bit, so I put the $10k in VBMFX.)

[trumpeting_angel]

Uncle Mick, That's the second reference I saw to Scott Burns since I began reading these boards, so I went to see what all the fuss was about. Wow! What a great columnist! Through reading Burns, I found not only his Couch Potato Portfolio (hmm, tempting!), but the Coffeehouse Portfolio (Coffeehouseinvestor.com) and read of Bernstein's Coward's Portfolio. (All referred to at http://www.uexpress.com/scottburns/?..._date=20040111 ).

I'm getting ready to cancel the appointment with the financial planner and call Vanguard. Well, not actually cancel it. I'm getting advice about LTC and disability policies, and some tax planning for next year.

Joe, I appreciate your thoughts. These are just the sort of issues I want to think through before I act on this real estate impulse.

Anyone here have experience buying foreclosures at auction? It's one of my recurring fantasies, since I've seen two beautiful historic homes in my town sold that way in the dozen years I've been here, and I have been haunted by the thought of the bargain.

Thanks again, everybody.

Anne

[Nords]

Before I ramble on about foreclosures, check out Doris Havens' SEC complaint on Vanguard. It's tough to slog through the links but it gives a great perspective on how even the best-run & most-ethical (?) fund companies can fall on their customer-service swords. If you're investing five-figure lump sums instead of DCA'ing a few hundred a paycheck, then you might be better off with a discount broker and a few index ETFs.

http://www.fundalarm.com/spec_1.htm

As for foreclosures, you can make a pile of money but you'll earn it.

Getting past the millions of reasons that homes end up in foreclosure brings one to the fact that the owners no longer have any motivation to maintain the property. In fact, they'll usually neglect or even damage it in their frustration. Since the foreclosure process can take months, it gives the property a long time to slide into disrepair. Vandalism is common.

While the vast number of foreclosures occur from a lack of cashflow (too much mortgage or not enough job), some are caused by a lack of capital to handle serious property problems-- zoning, toxic waste cleanup, archaeological finds, stachybotris (there's that mold thing again), erosion, subsidence, dried-out wells, water leaks, sewage/septic problems, or even electrical/ventilation infrastructure problems. This makes even a bitter divorce look like a simple situation. In other words, the owners probably wish they could sell the place but haven't been able to for a very good reason. Disclosure is not necessarily forthcoming, maybe not even to the bank holding the mortgage.

A bright, energetic realtor will be able to sense your commitment and find you a foreclosure long before you read about it in the newspaper. In addition to their "finder's fee", you'll also want a full afternoon from a licensed home inspector (one who's familiar with the age of the house if it's antique) and perhaps a civil (land), structural, water/seware, or electrical engineer. You'll also want the title search from hell to verify that the property is accurately described, owned by the foreclosing bank, not claimed by New York's Oneida Indian tribe, and can be conveyed free of legal issues or contractor's liens. (As far as they can tell!) Hopefully it's not hostage to a divorce battle. You may even want your own lawyer to handle the title search instead of some overworked title-company clerk.

If you get to the point where you think it's actually a good idea to buy the property (say on the 15th or 20th one) it might be worth making an offer directly to the owner or the bank before the auction. This may help the bank avoid the expense of an auction, so you'll have to know all the details of the current mortgage & the property's value-- and avoid lowballing or they'll ignore you and go straight to auction.

How do I know all this stuff? I wish I had the experience, but I learned from a local full-time property buyer who's always looking for venture capital. He, of course, has developed contacts throughout the local finance & realty businesses and he's usually a week ahead of us average homehunters. Many times the banks send their delinquent mortgagees to him before they initiate foreclosure, so we'll never know about it until it's over. He's able to call upon his contractor network to check out all of the above details and produce a reasonable offer. Then he asks his investor network for money. If they invest, they share in his profits. If they don't invest, he moves on to the next name on his list. Usually the investors are putting up a substantial chunk of cash ($50K min) within 24 hours in the hopes of flipping the property in a year or so for a 20-50% return. The buyer turns the property over to a general contractor who supervises all of the repairs-- usually pretty serious infrastructure problems or major work-- and then he flips it to one of us bottom-fishers to finish off the minor work & décor details.

So perhaps to get in on the ground floor with the professionals, you could watch for those "We buy houses!" ads and start developing contacts. While you might initially be viewed as an investor, the buyers might also contact you when the property is getting ready for resale.

Anyone else?

[panhead]

Mmmmm, foreclosures, yeah, I got a story on that. My current house I bought as a foreclosure, although not at auction. I don't know all of the details and I question what I was told by the realtor, but the story was something like this. The couple that lived there bought the house, lived there for about two years when the husband lost his job. Same old story, money got tight and the house was foreclosed on. It apparently was vacant for at least a year. The house was owned by a bank in South Carolina or somewhere, and they got in touch with the realtor to sell the house. I don't know if it auctioned first or not, and failed to sell. The bank had quite the inflated idea of what the house was worth and they had only seen it in pictures.
So, I see the house in an ad, and call and go look at it. The place is ROUGH !!!! 100 years old, horsehair plaster
crumbling, kitchen is beyond disgusting, and most normal people would not want to walk in the bathroom, plus there is some rot on the sills, about 8 feet of it ! So I look a little further. Upgraded electrical panel with circuit breakers, upgraded wiring (knob and tube removed). Sewer, not septic, no worries there, Older, but workable forced hot water oil fired furnace, flat low
maintenance small yard, paved driveway and garage in
nice shape. All in all, a pretty solid start, but basically needed complete interior gutting. I made an offer 25% below the asking price and it was accepted. I had a house inspection done and they found some other stuff and I had another several thousand knocked off, and the offer was still accepted. I am STILL in the process of fixing it and probably will be for another year or two as I don't spend much time there. I have roomates who help with the work and pay me rent as well. I do pretty much everything myself, or this house would not have been a great deal, even at what I paid for it. Not sure what the moral of the story is, except maybe you just don't get sometin' for nuthin' !!!
-pan-

Hello panhaed! The moral is that you should have offered 50% of the asking price. Been down that
road, more times than I can count.

John Galt

[artist59]

trumpeting_angel

A good site to get info on foreclosures, tax liens, short sales, etc., is www.thecreativeinvestor.com.

You can register free for a month and read all the info in the forums.