Thursday, April 14, 2016


(This is a sponsored post...)


Mortgages are something we often fight for. We’re looking around for the best possible mortgage we can get our hands on, and then, when we finally have it, we can’t wait to get rid of it. 

Yes, it may be one of the most obvious examples of the paradoxical nature of finance, but here we are.

Mortgages are a great way to get into the house you’re dreaming about for you and your family. 

However, finding a good mortgage deal depends on the way we strike a deal with the lender or bank that grants us the mortgage. If the mortgage is barely manageable, we might have a problem on our hands.

A bad mortgage deal is not the only thing that can get us down in the long run. Even if you get the best deal possible and have a credit score of 800 points, you might fall victim to unforeseeable circumstances down the line. The newest example being the housing crisis of 2007.

What is a bad mortgage?

The obvious answer to the question “How to get out of a mortgage?” is to pay it off. However, if you find yourself with a bad mortgage, this might not be so easy anymore. The phenomenon of negative equity has taken over the consciousness of many homeowners in the US.

Negative equity occurs when the value of an asset (in this case a house) is lower than the outstanding amount you owe on the loan given to acquire the house in the first place. 

For example, you bought a house at a price of $200,000 and that house is suddenly worth only $120,000, your negative equity is $80,000. 

So, you still have to pay the whole sum of $200.000 to pay off your loan, although the real value of the house is now much lower.

This is considered a bad mortgage because you are not able to pay off the mortgage even if you decide to sell the house. You would still owe $80,000 to the lender, which is probably not fair, but, on the other hand, inside the boundaries of the law.

How to get rid of bad mortgages?

If you’re able to pay off the loan as agreed upon, DO IT. This is the most obvious answer, but it is also the thing that will keep you in the green once you’re done with it. However, if the mortgage becomes unbearable, there are other solutions that you can use in order to get rid of a bad mortgage.
Walk away from the mortgage. 

Yes, you heard me. 

Walk away from it, and let the lender deal with the decreasing value of the property. This will of course force you to leave that house, but if you see no alternative, you should be prepared for this.
However, once you decide to do this, be aware that your credit score will go down by some 150 points immediately (use to check your free credit scores instantly).

This might do much more damage than walking staying with the mortgage, as no other lender will ever look at you the same way once you walk away from a mortgage you already signed.

The second solution is maybe a bit more awkward than simply walking away. TALK TO YOUR LENDER. See if there is a possibility to refinance the whole thing so everybody gets something out of it. 

If a mortgage is granted due to be paid off in 35 years, for example, maybe it can be refinanced to prolong it to 45 years, for example. 

In the best case scenario, you might strike a new deal with the lender, making it much more realistic in the current context you’re living. You might not get the deal you would get if you’ve been applying for a new mortgage, but at least you will take off some pressure from your current situation.


In the end, it is always better to strike a good deal, than to strike any deal. If a mortgage is not ideal, there’s sometimes little you can do about. However, if a mortgage is absolutely horrible, it’s better to be patient until a better deal comes along.

Tuesday, August 05, 2014

My eBook is now available for the Kindle on Amazon!

OK, I know last time I said I was done updating this blog, but I just wanted to pass on one more bit of news:

My eBook, which I was previously selling myself, is now available exclusively for the Kindle via Amazon!

I've dropped the price down to $3.49. If you are a subscriber to Kindle Unlimited, the book is available for free as part of your subscription. If you are an Amazon Prime member, the book is available for free as part of that service via the Kindle Owner's Lending Library.

Monday, July 07, 2014

Closing One Door, Opening Another

With the end of the Houston apartment investment, I think it’s time to bring this blog to a close. I’m still going to be investing in real estate, but it will most likely continue to be via hard money lending and, quite frankly, blog posts along the lines of “I made another loan” and “Another loan got paid off” don’t really make for the most exciting reading. I am going to leave this blog up though, because I think it provides some good reference material. I also am starting a new project that puts into practice the lessons I’ve learned in REI. More details on that at the end of this post.

I started this blog almost exactly ten years ago, in the midst of the big real estate bubble. In those ten years, I’ve flipped a couple properties, owned a couple rental properties, made dozens of hard money loans, invested in a commercial property, and invested in an apartment complex. So what did I learn from my ten year real estate adventure?

Flipping / Rehabbing

Of all the real estate investing methods I’ve tried, flipping provided some of the biggest returns. And truthfully, I actually enjoyed it the most. I really liked taking a property that was beat to hell and fixing it up so someone could live in it again. However, rehabbing requires a lot of work, even if you aren’t the one doing the actual rehab. You need strong planning and organizational skills. You need a good handyman / contractor (or more than one). You need knowledge of the area to make sure you buy in neighborhoods where you can make money. It helps to have a good Realtor you can work with for all your deals and who will give you a discount on commissions. It’s difficult, but not impossible, to flip properties on the side while you hold another job. (That’s what I did.) It helps if your job is flexible and you have the ability to take off at a moment’s notice when emergencies arise. Flipping is a cash-intensive business and you need to have enough money available to cover those unforeseen problems that always come up.


Owning rental property was also fun. It’s nice having checks mailed to you each month, especially when you have good tenants. The problem is finding tenants that will mail you a check every month! Tenants that don’t pay really suck the fun out of the process :-) Evictions are also no fun. I was lucky to find a company that handled the process with minimal input from me (and I never had to actually evict anyone – just threaten some tenants with eviction), but even so, it’s one more thing you have keep track of and worry about. Then there’s the property repair and clean up after each tenant moves out. It’s normal and you plan for it, but it’s still work. Property management companies can help with some of the details, but they cost money and never do things the way you would, nor do they seem to be as concerned about expenses as you are. They can also be quite unresponsive if you only have 1 or 2 properties listed with them. On the other hand, as a rental property owner, you get some nice tax breaks - you can lower your taxes via depreciation write-offs and even delay taxes indefinitely using 1031 exchanges. Still, being a landlord requires a good amount of work, not the least of which is paperwork. It’s nowhere near as easy as people like Robert Kiyosaki would have you believe. You’ll likely need to hire an accountant if you own rental property, or at the very least, use one to prepare your taxes to get the full benefits of the tax breaks.

 Hard money lending

This is my preferred method of real estate investing – I’ve made over 30 hard money loans. It is perhaps the most passive way to invest in real estate. If you are doing it on your own, the risk is inversely proportional to your knowledge: You will need to become familiar with the real estate values in the areas you are lending in. You’ll need to become proficient at estimating not just the current value of a property, but what it will be worth after it has been fixed up. You’ll also need to be good at estimating what it will cost to fix up, so you can determine the maximum amount you will be willing to loan. You’ll need to develop a network of reliable borrowers.  If you can partner with others, as I have, you can mitigate some of this risk by relying on their knowledge and experience. My partner and his assistants do all the tedious work of property and loan analysis and he has his own network of borrowers. He just presents me with the loan deals and asks if I want to invest in them. (In return for his work, he gets an extra 3% of the returns.) Hard money loans are typically short term, so your exposure on any one property is brief, which is nice in a volatile market.  But you have to be willing and able to foreclose, finish the repairs, and sell the property yourself, should the borrower fail to pay. With hard money lending, you give up pretty much all of the tax benefits associated with owning rental property. On the other hand, you still get the joy of receiving monthly checks in the mail. I'm continuing to invest in hard money loans and will likely continue to do so for years.

Commercial property

I’ve only had one experience in owning commercial property (not counting apartment complexes) and it wasn’t a good one. I did not lose money, but I did experience what it was like to deal with partners whose investing objectives were not the same as mine. The property I was invested in was being rehabbed and I was out of the investment before it ever was completed, so I don’t know how things turned out. An advantage commercial renting has over residential renting is that many commercial leases are “triple net”, meaning the renter pays for all property taxes, maintenance, and insurance. Commercial renters also tend to stay longer and sign longer leases than residential renters.


Investing in apartments is probably my second favorite method of real estate investing. To get into this, you will most likely need to partner with other investors, so it’s important to find ones that share your goals for the investment. Location, as in all real estate investing, is the key here. The economy plays a huge role as well. If the economy tanks, as happened during my period of apartment investing, your apartment can go into the red real fast. Depending on the length of the economic downturn, it can take years for things to turn around and you may have to inject more money into the property to keep it afloat until the economy recovers. You will also need a management company that knows how to run and market apartment complexes - handling all the details of a large apartment building is a full time task for several people. And, of course, they will need to get paid as well, reducing your profits. Buying and selling apartment complexes is also not as easy or quick as selling single family homes, so it can be harder to bail out of an apartment investment if you need to. Really, investing in apartments is more like investing in a business than in real estate. You’ll quickly learn how to read financial statements, if you don’t already know how. 

All in all though, I am convinced of the benefits of investing in real estate. Besides the tax benefits to owning rentals,  real estate is a unique investment in that you can make improvements to a property to help you sell it or rent it at a higher price and increase your ROI. That’s something you can’t do with stocks or savings accounts. Real estate also provides more opportunities to invest money in under-priced assets than investments such as stocks do. In real estate, your money is made when you buy, not when you sell and lots of people have lots of reasons for selling properties below market value. Real estate is also one of the best vehicles for generating cash flow and ...

Cash Flow Is King

The importance of cash flow is the biggest lesson I have learned from all my real estate investing. You need positive cash flow when renting property and you want positive cash flow when you invest your money. Ten years ago, my idea of investing was to either put money in bank and watch it accumulate pennies in interest or invest in stocks and hope the price per share went up over time. Now days, I look for two things in an investment: the amount and sustainability of the cash flow it gives me and the safety of my original investment amount. Real estate investing, done properly and with careful analysis, is one of the best options for maximizing both those criteria. 

My journey into real estate investing started when I picked up a book by Robert Kiyosaki a decade ago. I now see the flaws and gross simplifications in his arguments and have, in some respects, outgrown him. However, he did instill in me one important lesson on how to think like the rich – I no longer look to buy things outright. I look for investments that will give me cash flow that I can, in turn, use to buy things. I want my money to work for me. If I buy some doodad outright, my money is gone. If I invest and use the cash flow from that investment to buy something, I not only get that doodad, but I still have the original principle for use later and can buy more things with the cash flow it will continue to generate. That’s how to get rich – by buying assets with your money instead of buying doodads.

Ten years is an eternity for a blog. Almost all of the other real estate bloggers I used to read have disappeared. They either got flushed out during the real estate crash or discovered that real estate investing was harder than they thought and it is not a means to get rich quick. I often wonder what they are doing now. Did they learn anything from their experiments in REI? If they did, what was the lesson they learned? Was it the same one I learned?

The Next Project

My next project is one that will likely take several years to come to fruition: I plan on buying a Tesla Model S using only passive income. Well, I’m planning on paying a 20% down payment but the overall goal is to have a large enough passive income stream to cover my car payment. I’ll be blogging about that, as well as general financial topics, at my new blog – RoadTo A Tesla. See you there!

Wednesday, June 25, 2014

Apartment Investment Final Analysis

First off, for those of you that were wondering, this is the apartment complex I was investing in.

My distribution check arrived yesterday. I got the return of my principle and all of the accumulated interest since the last payment. Looking back in my records, I see that I received five payments in the first year after we bought the property, then nothing until now, as the economy soured and investor distributions were halted. So, if I've done my math right, factoring in those previous payments with what I received today, I earned an annualized 9.05% return over the 6 years that I was invested in the property. Another way to look at it is I earned a 55.05% total return. That number may inch up a bit after the investment company is closed and the funds that were held back for expenses are released. (The number is slightly elevated from preferred 9% return because back in August 2008, we earned some interest while our funds were sitting in the bank waiting for the initial purchase to be completed.)

Our investment agreement with management specified that the investors receive a preferred 9% return. This means that, on sale of the apartments, all profits would go to the investors until they received an annualized 9% rate of return. After that, the profits would be split 50-50 with the investors and the management company we used (or 70-30 in the investors' favor if the property did not reach a specific ROI goal). When I first invested in the property, I did so with the intent that this was an investment more for capital gains, rather than the 9% return. Things obviously didn't go they way I planned in that regard, but that doesn't mean I'm disappointed. A 9% return is nothing to sneeze at - that is also the rate I earn right now on my hard money loans. Originally, I had hoped for a return in the 30% range and, had the economy not tanked, I think this was possible. Actually, with the way the property has been performing the last 9 months or so, I think if we held off on the sale for another year, we could have come close to that figure.

So why did we sell now? The main reason was that the majority of other investors wanted to sell. They likely got sick of the lack of quarterly distributions. Additionally, the property was getting to the point where additional funds would be needed to add improvements and do an overall facelift of the buildings - similar to what we did when we bought it. That would mean another cash call to investors and I don't think people were willing to pony up more money. In fact, I know the new buyers are planning on spending about $1 million on improvements.

For the sale, we had offers from two buyers. One was an unrelated party and the other was the current management company. The management company was the winner. I was a bit concerned about a possible conflict of interest here when I found out they were one bidder because, obviously, the management company knew the details of our investors agreement. This meant that theoretically, they could figure out exactly how much to offer to exactly meet our 9% return and not offer a penny more. Of course, it also meant that, due to the nature of the agreement, any amount they wanted to offer above that amount could basically be doubled - because they would get half of that amount back at closing due to the 50-50 split clause. This would make their offer much more attractive than another party's at a lower cost to them.

But in the end, that wasn't why they won. They got the sale because they were willing to assume our loan. The other party was not going to do that. Our loan had a $1.5 million early termination fee, so the assumption saved us a ton of cash. It was also what delayed the closing for a couple months. We had to get approval from the lender for the loan assumption.

All in all, I'm glad I made this investment. It was a great learning experience. Apartment investing is really more like investing in a business than real estate. I would definitely do it again in the future, but probably not soon. Right now, I'm more interested in cash flow and I think my hard money loans are providing a more consistent return.

Thursday, June 19, 2014

Apartment is sold!

I received word that the sale of our apartment complex finally and actually closed on Friday. Hooray! Our group of investors received net proceeds of $4.39 million on the sale. (Note this is net proceeds, not profits!) Four million of that is being distributed to us next week, with the rest of the funds being held back to cover any remaining company expenses that might come up during the closing of the company formed for the investment. Any funds left after that will then be distributed to investors. We made enough to cover our preferred 9% return.

I'll post a more detailed analysis of the final investment returns once I receive the check. However, I'm also going on vacation next week. Even if I receive the check before I leave, I doubt I'll have time to do a write up before I go, so the final report on this investment probably won't happen until the beginning of July.

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