Do you remember the story of the little red hen?  It’s definitely one of my favorites.  In the story, the little red hen had a found an opportunity when she was just going about her day-to-day routine of clawing around in the dirt.  She found grain seed.  Lots of it. 

In a moment of inspiration she had a vision of growing that seed into a nice crop of grain.  She could then grind the grain into flower.  The flower could then be made into many loves of fresh, tasty bread. 

How many times have you found opportunities while “scratching around in the dirt”?  I love the “acres of diamonds” philosophy which states that by far our best opportunities are right here, under our noses.  If you are short opportunities, you’re either not seeing them, or you aren’t looking in the right places.  You never have to travel 5,000 miles to find your diamond mine.  There’s almost always one right around the next corner. 

The little red hen was a realist.  She realized that the entire process of cultivating the ground, planting the seed, tending the crop, harvest, milling the grain, and making the bread was going to take an enormous amount of effort. 

It’s been said that opportunity usually shows up dressed in work clothes.  That’s definitely true when it comes to real estate investing. 

Don’t ever be fooled into the “something for nothing” philosophy of money making because it doesn’t work.  Never has.  There is always a price to pay for success. 

The little red hen decided that she would try to create a partnership so she wouldn’t be the only one stuck with all this work.  So she started sharing her vision of fresh, tasty bread with her farmyard companions. 

They all decided that the little red hen’s idea of fresh, tasty bread was sheer genius.  They all wanted there fair share of that bread.  But when the little red hen talked about everyone’s fair share of responsibility to do the work required to carry out the plan, suddenly all of her farmyard friends had reasons as to why they wouldn’t be able to help out. 

Isn’t it funny how we want the rewards but aren’t willing to pay the price for that success?  Let’s face it, every single one of us would like to have tens of thousands of dollars of passive income that comes to us without us having to work for it.  oqwe

When it comes to real estate, the secret recipe for passive income and building a very high net worth is neither secret nor very complicated. 

The first step is finding your grain.  What are the opportunities that are right in front of your right now, almost staring you in the face?  What are the opportunities that you’ve been avoiding?  Nothing coming up for you?  Keep scratching around in the dirt.  You are bound to find something.  Are they in that list of REO properties that your realtor sent to you last week?

Once you find your grain, you’ve got to get it into the ground.  You’ve got to secure financing for your deal and close on it.  Do you have a source of financing established so that when you come a across a great deal scratching around in the dirt you can take advantage of it? 

Once you get it into the ground, you’ve got to tend to your crop and harvest it.  That means you  need to put that property into service.  Get it fixed up and creating cash flow.  Do you struggle with managing your properties so they produce for you? 

The little red hen decided to go ahead with the project, and do the work herself.  At every step along the way, she offered her farmyard friends the opportunity to participate.  But they were all too busy taking care of there immediate concerns.  They all declined her offer. 

It’s so easy to find reasons to “not participate”.  When you are too busy being caught up in taking care of your immediate needs, you loose sight of some of life’s sweetest rewards. 

I’ve seen many, many people stuck in mode or another wanting to do their first deal.  They want the reward of passive income, but there is some reason that always stands in the way.  Every day is a new opportunity, but in the end the reason wins out every time. 

When the little red hen had harvested the wheat, ground the flower, and baked the bread, the sweet smell of the fresh, tasty bread filled the farmyard.  As you might guess, all of her farmyard friends wanted to share in the reward. 

Her farmyard friends had fallen pray to the “something for nothing” philosophy.  They had opportunity each step of the way, but they steadfastly refused to pay the price.  Therefore, when bread was baked, they received none of the reward. 

Be among the red hens in real estate who take the long perspective.  See life for what it is…new opportunities coming every day to participate.  Learn how to say “no” to the reasons, and “yes” to opportunities. 

Scott Nachatilo

http://www.replaceyourpaychecknow.com

I’m reading this book right now called “Mastering the Rockefeller Habits” by Verne Harnish.  He points out the three habits John D. Rockefeller felt were critical to his success in business. 

I’ll talk about how I feel the first of those habits – Priorities – comes into play for real estate investors in this blog post. 

Harnish talks about finding the top five priorities, and then isolating the very top priority from your top five priorities.  According to Harnish, you need to start with what he calls a “BHAG” (Big Hairy Audacious Goal).  This is your vision for 15 to 20 years down the road for your business. 

I have to admit I’ve got a fairly clear goal for 3 years into the future, but I didn’t really have a vision for 15 years into the future.  After I read the article, I realized I needed a BHAG to direct my short-term decision making. 

So I sat down with pen and paper.  I did an exercise I learned from Brian Tracy in which I imagined it was 15 years into the future.  I imagined that everything had gone right in my business.  I have to say the vision I came up with for my company was quite compelling. 

The interesting thing is that once you have a clear vision of your company, the priorities to create that vision start to be apparent. 

So I sat down with pen and paper again.  I put together a list of the top priorities for my company to create the conditions for my vision to become reality.  From that, it wasn’t hard to come up with the top five top priorities for my company.

My company does mostly buy and hold, and my plan is to focus on that business.  Here are the top five priorities I came up with for my business. 

1)      Having access to a reliable source of financing, both from commercial banks and from private lenders. 

2)      Having access to properties I can buy at $0.50 to $0.60 on the dollar.

3)      Having management systems in place to result in less than 10% vacancy. 

4)      Having systems and operating procedures that allow the business to operate smoothly.

5)      Having a skilled rehab and maintenance crews that operate under minimal supervision. 

I believe if I have these bases covered, my business will grow organically over the years into my vision. 

This is the second article in a series about no money down deals. 

Something that is implied by the term “investor” is that you use money to make money.  The problem with this approach in real estate investing is that most people I know have finite amounts of money.  Hello! 

If you put a 20% down payment on every piece of real estate you buy, you will soon be out of money. 

It’s even worse if you have to do a bunch of repairs to the property.  That’s even more money that you will have tied up in the property.

So how do the pro’s get arround having down payment and repair money tied up in the property? 

An alternative approach that’s I’ve used for years is to have some working capital that I recycle.  The beauty of this approach is that I don’t have my working capital tied up for very long. 

Phase 1 of this plan is to buy a property with cash.  Usually it needs work.  Sometimes, it needs LOTS of work.  Again, that requires money.  I’ll get that work done on the property so it’s move-in ready. 

Phase 1 takes anywhere from 2 to 6 months to complete. 

Then I’ll move to phase 2.  During phase 2, I’ll refinance the property once the work is done.  I’ll usually do this with a small, local bank.  True, that does mean that you have to have some decent credit to make this one work. 

But once you’re finished with phase 2, you have your original working capital back all over again. 

Not only that, but you have a property that is making you money. 

In Part 3 of the series, I’ll be telling you all the ways that you can expect to make money on this type of cash flow property. 

My first exposure to real estate investing came almost 15 years ago from a “No Money Down” course.  At the time, I thought it was the best thing since sliced bread. 

The most important thing that course did for me was to open my mind to the possibilities of what real estate could do for me. 

The reason I was attracted to the material in the first place was that – you know what – I had no money.  Since I couldn’t borrow money from a bank or mortgage company, this concept was VERY compelling. 

The central idea in their no-money down system is calling property sellers from the classified advertisements in the newspaper.  Target sellers who are looking to carry the note for the seller.  In addition, ask the seller if you can pay out the down payment. 

I actually ended up with a few properties using this method.  The problem was that using this way to find sellers was actually attracting very unmotivated sellers to me.  Their goal was to find a sucker like me who would buy the types of properties no one else was willing to buy. 

This brings me to three conditions that must happen for a no money down deal to make sense for you as a buyer. 

1)      You need a truly motivated seller.  If you don’t have the right seller, someone who is just looking to dump a piece of property, forget it.  They have to be in pain over the property or they will not be willing to make a deal with you that makes sense from your prospective  as a buyer. 

2)      The property must have enough equity built in.  Most people live in homes that are overleveraged.  They plain owe too much for it to make sense for you to buy their property.  Even if you can go in and get 100% financing, it still usually doesn’t make sense to buy the property unless you have at least 20% equity right away. 

3)      The underlying financing must be favorable.  Remember the days of subprime loans?  You know, the ones with outrageous interest rates.  I turned down many sellers who begged me to take over their payments.  Why would you want to take over somebody else’s problem?  If you can’t get a monthly payment that allows you get a decent positive cash flow, don’t do the deal. 

The first of the three traits is the ability to find great deals. What is a great deal? I define a great deal as at least 30% built-in equity the day you close on the property.
The only exception to this rule is if the terms you are getting with your deal are so good that they negate any price considerations.
The consequences of not having that built in equity are obvious when you look at the exit strategies:
1. For buy, fix, and flip, if you don’t have at least 30% equity, you will not show a profit when you sell the property.
2. For wholesale flip, if you don’t have at least 30% built-in equity, it’s highly unlikely you will be able to find a buyer you won’t be able to pass off the deal at a wholesale price.
3. For buy and hold, if you don’t have at least 30% built-in equity, you won’t be able to get decent financing on the property because banks want you to have at least 20% to 30% equity. Also, it’s going to take you a long time to pay off the property.
What you need to do in order to buy deals with built-in equity are motivated sellers. That’s not ALL you need. You also need to be able to present offers that make sense to this guy.
What is ironic is that most of the techniques that are taught to real estate investor who just don’t know any better actually attract mostly unmotivated sellers.
For example, the first real estate investing course I bought was the Carlton Sheets “no money down” system. The number one way they presented in that system for finding motivated sellers was by calling for sale by owner advertisements in the classified section of the newspaper.
Don’t get me wrong, you can actually find deals from the classified advertisements in the newspaper. But you will find a much higher concentration of sellers who are just not motivated enough to take an offer that will land you 30% built-in equity.
Bottom line is, if you can buy the deal with at least 30% built-in equity, don’t bother buying it.

Finding these types of deals is the challenge here. To find out how, check out some of the blog posts on finding deals.

What is your favorite way to find motivated sellers? Leave a comment below.

Answer: “The answer is maybe. The most important thing is whether or not the seller is willing to allow you to do that.

If you take over the payments on the loan, the seller will still be legally responsible for the debt.

You will almost certainly not be assuming the loan. Loan assumption are a situation in which the lender gives you permission to assume the loan. If the loan was written after 1989 through some type of lending institution other than a private individual, you will not be allowed to assume the loan. At that time, institutional lenders like banks and mortgage companies stopped doing loan assumptions.

If the seller is willing to let you do it, you can buy the property subject to the existing mortgage.

Buying a property subject to the existing mortgage is taking over payments of the mortgage. In other words, you don’t pay off the mortgage. It is different than assuming the loan because you aren’t getting formal authorization from the lender to assume the loan.

How good is the loan in place? You ONLY want to use this method of purchasing a property when the loan is very good. It needs to be low interest (less than 8%, preferably less). Many times, these loans are amortized over 30 years.

If you are going to take over a loan in this manner, you need to follow your criteria in terms of what type of offer you make. Buy the property with built-in equity (go to www.replaceyourpaychecknow.com for more information on how to do that).

Another big advantage of taking a property subject to the existing mortgage is that you don’t sign personally for the loan. That doesn’t mean if get into the deal you are going to let the property go back to the lender.

If you are going to buy a house subject to the existing mortgage, the house needs to be in good condition. If it needs more than carpet and paint, it’s probably too much of a fixer upper. Sometimes you even find a move-in ready house.

Buying a property subject to the existing mortgage is an easier sale to a homeowner who more needs to sell (not wants to sell) a property. Usually, they are either behind on payments or about to be behind on payments, or perhaps they need to move out of state. For whatever reason, they just want out from the responsibility of the property.

For example, I bought a house worth $75,000 subject to the existing mortgage of $55,000. It was an FHA mortgage with a 6% interest rate. We sold the property on lease option ($75,000) for $650 per month and $1,995 down. The payment was enough to cover the mortgage payment and get a good positive cash flow. The buyer later got his own FHA loan and purchased the property. That was a nice $20,000 pay day!

The beautiful thing about this type of deal is that the only work it needed was steam cleaning the carpets and touch up painting. We paid the seller nothing, and the payments were current on the mortgage.

Answer: “I feel your pain. It’s not easy to decide exactly where to start buying investment properties.

When I first got started, I was literally driving all over the city looking at properties. I didn’t have any business looking at some of those homes.

It is best to pick what is called a “farm area”. This is a neighborhood where you put your stake in the ground. Where you seriously concentrate your efforts on finding deals.

A farm area is an geographic area in which you intend to buy and lease properties. Why would you want to concentrate your efforts on certain neighborhoods at the exclusion of others? One of the major reasons is so you can learn your market very well. When you do business over and over in certain areas, you learn what properties are worth. You learn what your leasing customers in those areas are looking for. What they are willing to pay.

Another advantage is operational. When your properties are concentrated within a small area, it is easier to manage than if you have properties scattered all over your city. Maintenance becomes easier for your workers to handle when all your projects are concentrated. Making trips to properties becomes easier. Hopefully, your neighborhoods will be within a manageable distance from your home. We recommend that distance be less than 10 miles.

How large should your farm area be? Our recommendation is that you start out with an area of 1 to 10 square miles. Your farm area does not necessarily need to be within one contiguous area with neat boundaries. You may have many islands within one main area.

Here are few pointers on finding that ideal neighborhood: Have you ever heard any of those “You know you are a redneck jokes”? In many senses, you will know you are in the right neighborhood for good rentals if you see some of the telltale redneck signs in the neighborhood: For example, cars parked up on blocks, or old beater cars and trucks.

Some other clues are that it’s an older neighborhood. Even though newer construction is good in terms of being lower maintenance than older construction, the price per square foot of newer construction is also higher. Anything newer than mid-1970’s is questionable in terms of getting a strong enough rent to obtain adequate cash flow from the property.

In fact, a good rule of thumb is that the rents should be 1% to 2% of the total price of the property. Once the rent gets lower than 1%, its cash flow potential is dubious. If you can find a number of properties in a neighborhood that meet that criteria, you have found a good candidate.

Look for rental properties in neighborhoods where average, blue-collar families want to live. We stress families, because you want long term tenants. Turn over is expensive. That is why we don’t like student rentals, room mate situations, or other arrangements nearly as much as average, blue-collar families.