Good news!

The investors that will be funding my next LLC have sold their property in California. It's scheduled to close escrow on Dec. 13. At that point, the funds will be used to finance my LLC and we can start flipping properties!

My Views Are Confirmed By Professionals

I recently received an email from Diane Kennedy’s free e-mail list that confirms what I have been saying for a couple of months now. Diane is a CPA and founder and owner of DKA, a tax strategy and accounting firm in the Phoenix area. She is also a co-author of a couple books in the Rich Dad series of financial education books. Many of her clients are high net worth individuals. Her website can be found at www.taxloopholes.com (you can sign up for the free newsletter there as well).

In her newsletter, she talks at great length about the declining value of the dollar and how to position yourself to profit from it. One suggestion she makes is investing in real estate outside the U.S. This is beyond the means of most people reading this blog (and myself). However, she also states many of her clients are moving towards cash. Why? If the dollar is declining, this doesn’t make sense! They are doing it because they are expecting an increase in U.S. interest rates of around 2%. When this happens, the real estate market will become flooded with newly available properties for two major reasons:

Novice investors have been buying real estate like crazy for the last year or so. The low interest rates helped those properties be cashflow positive, despite the inflated prices paid for them. When rates rises, the investors will start losing money and will need to dump their properties quickly.

Homeowners have been encouraged by banks to get as big of a loan as they can qualify for and to buy an expensive house. Again, while interest rates were low, these homeowners could make the payments without any problems. With rates rising, more people are going to default on their mortgages, which will lead to more foreclosures.

These two situations have one thing in common – the end result of both will be a glut of cheap houses on the market for those ready to swoop in and snatch them up. That is why her clients are beginning to position themselves in cash.

It’s nice to hear a professional echo the same sentiments I wrote about here two months ago!

Remember, when there is a big change in the direction of a market, there is money to be made. When the predicted increase in foreclosures happens, expect newspapers and television news shows to be filled with doom and gloom stories of bursting real estate bubbles and how everyone is bailing out or losing money hand over fist. Ignore them! Smart money will go against the trend during this time and pick up properties at substantial discounts. Start positioning yourself now to take advantage of this opportunity!

How To Get Started In REI For Under $400

I often see messages from people who have decided they want to get involved in real estate investing but they don't have any money, or don't have much money. They don’t know where to start. Here are my suggestions for getting started in real estate for under $400.

(Note: This post was originally written in 2004. It is now 2008 and I've gone and updated the prices. The new total works out to just over $400.)

1. Make a commitment to invest your time. This is the most important step! Educate yourself. Read books and websites. I spent over a year reading the discussion boards almost daily at www.richdad.com before I bought my first rental property. I still made some mistakes, but I felt much more confident and less scared. If you become active on the boards, they also double as a support group. Cost: $0.00

2. Read Rich Dad, Poor Dad, by Robert Kiyosaki. This is NOT a how-to book. Treat it as an inspirational book and you'll get much more out of it. Cost: $11.86 $16.95

3. Read The Richest Man In Babylon by George S. Clason. This is the classic book for money management. Entertaining and educational, it's a small book that contains invaluable lessons. For example, one recommendation it gives is to always set aside 10% of your income for investing purposes, before any other bills are paid. I've been doing this ever since I read the book and it's amazing how fast the money accumulates. You'll also be surprised on how little you miss that 10%. (This book also makes a great gift for grads.) Cost: $6.99

4. Read Rich Dad's Guide To Investing by Robert Kiyosaki. This book provides the basis for becoming a successful investor, from the terminology to strategies. Cost: $13.97 $19.95

5. Read Who Took My Money? by Robert Kiyosaki. If you needed any more reason to stop parking your money in a mutual fund and hoping it will increase, this is the book for you. It explains how to keep your money moving to generate higher returns. Cost: $11.87 $16.95

6. Buy CashFlow 101. This is the ultimate game of investing and will teach you tons about accounting, finance, and investing. The board game version is $195 and the electronic version is $99 (but for multi-player on-line games, you'll need a subscription, which runs around $100 a year). I recommend starting with the board game first because you are forced to write down figures and do your own calculations. You also have to play face-to-face with other people, which encourages discussion. Play this game AT LEAST 50 times. Play with different people. Play until you can win using any of the supplied professions. Finally, play the game using YOUR real life profession and YOUR real life paycheck and savings. See how you can get out of the rat race using your very own real life data. The board version includes a video tape and several audio tapes. The electronic version features these in electronic format. Cost: $195.

7. After you've mastered CashFlow 101, buy CashFlow 202 and play it many times. This expands the world of CashFlow 101 and teaches you how to handle all kinds of market conditions, how to use options and is much harder (but teaches you more). Again, this comes in a board version ($95) and an electronic version ($49). Both versions require the purchase of the corresponding version of CashFlow 101. It also includes 4 new audio tapes. Cost: $95.

8. Read Flipping Properties: Generate Instant Cash Profits in Real Estate by William Bronchick. "Flipping" has gotten a bad rap lately due to many people illegally and artificially raising housing prices (and as a result, the term "quick turning houses" is starting to replace "flipping houses"). Bronchick distinguishes between legal and illegal flipping and gives detailed instructions on how to get into this area of investing, including how to get started with no or very little money. This is the book where you will find some detailed instructions on what to do. Cost: $13.27 $12.89

9. Read The Millionaire Next Door by Thomas Stanley. This book was written based on interviews with many millionaires and talks about how they made their money and how they live life. The results are surprisingly mundane and show that becoming a millionaire is within anyone's grasp. The book is a bit heavy on statistics, but the analysis backs up the conclusions and is worth wading through. Cost: $10.50 $10.20

10. Buy 50 sheets of Avery printer postcards, 4 x 6 inches, two per sheet, and one 100-stamp roll of postcard stamps. Perhaps the quickest way to get the cash needed to buy rental properties is to start by flipping properties, or being a "bird dog." And one way to do that is to buy houses that are about to be foreclosed. Your county recorder publishes a list of such properties, probably daily. Find out how to locate them (and many offices have internet sites where you can search for this data from the comfort of your home). Learn to identify good candidates, and mail them a postcard. The Bronchick book has samples, or you can see the ones I used here and here and here. Response is generally low, so this is a numbers game. Don't get discouraged. Cost: $43.67 $41.55.

Total cost: $402.13 $415.48 (OK, it’s not under $400, but it’s pretty close. Skip eating out one or two meals and you'll have saved the difference.)


As you can see, I put a fair amount of emphasis on Robert Kiyosaki. It's important to realize that he does not provide you with step-by-step instructions on what to do. Rather, he teaches you to think in new ways - like the rich think - and he details the advantages of real estate over many other types of investments. Changing the way you think is the most important part of being successful. You need to train your mind to think differently and to stop listening to the noise of others around you telling you why what you are doing will never work. (Are they rich? Then why listen to them?) The other items in the list follow this theme, with the exception of the last one, which is needed for taking your first steps towards actual investing. And that is an important step! Don’t fall into the trap of “analysis paralysis!” You will never know everything there is to know about real estate investing, so at some point you need to stop reading and start doing! Then your education continues!

Good luck! I’m always interested in following people’s progress, so feel free to leave comments sharing your experiences!

I Just LOVE Passive Income!

I got home yesterday and found a nice surprise waiting for me in my mailbox – a check for just over $1,000! This was a semi-annual disbursement from a private, closely held company I have invested with. The company buys foreclosures in the San Francisco area, fixes them up, and resells them. The principles raise a couple million dollars from private investors then form an LLC. The LLC exists for a period of three years, after which it is disbanded and the investment capital is returned to the investors (assuming there haven’t been losses). Disbursements of profits are made every six months. This was the fourth disbursement for this particular venture and with it, they have just topped the one million dollar total profit mark in this LLC. I have received a total return of 33.9% so far, which works out to an annualized return of 16.95%. Not bad for a completely passive investment!

I’m currently invested in two LLCs with this group. Each distributes profits every six months, so I receive a check approximately every three months. I hope to be able to increase the number of LLCs I’m in to six and that the disbursements remain staggered (something I have no control over), so that eventually I’ll be receiving a check each month.

What is there to learn from this? Network! I never would have found out about this investment group had it not been for someone on the richdad.com message boards. Of course, I did my own due diligence before deciding to invest with them and the investment is not without risk – I have a half-inch thick prospectus that details those risks in exquisite detail. However, so far it has turned out quite well for me. The returns are less that what I would get flipping properties on my own, or even renting a property on my own, but given that the total time I have invested in this is the time it took to read the prospectus and write a check (a couple hours, tops), I think this a good return.

Step by step guide to buying preforeclosures

Many people just starting out in real estate investing work at buying preforeclosures (meaning they contact people whose house has had a notice of foreclosure filed against it and attempt to buy the house and pay off the mortgage before it goes to foreclosure auction). This is mainly due to the fact that large amounts of capital are not needed - you just find a good deal, get it under contract, then sell your contract to an investor who does have the money to buy the place. People who do this are called birddogs, since they find the deals and bring them to the investor, who pays them for their work (usually a couple hundred to a couple thousand dollars, depending on the deal). Since the birddog never buys the house, he or she doesn't need any cash. Easy though it sounds, people still have questions about exactly what they need to do.

Some time ago, on the discussion boards at richdad.com, a poster named UtahInvestor gave instructions on how to do this. Unfortunately, his posts often contained lots of typos, grammar errors, and tended to jump around. Often, all the pieces needed were scattered over several different posts. I went through and gathered these posts and distilled them down to a series of steps the birddog needs to follow. I wrote out the steps for two scenarios: buying the preforeclosure yourself and selling your contract to an investor.

This information is powerful! This is all you need to take your first steps towards getting out of the rat race of your 9 to 5 job. You can thank me later :-)

For buying a preforeclosure and reselling it yourself

1. Check Recorder’s office for Notice of Trustee Sales filings. Find properties where first deed amount divided by the fair market value <= 75%. Don’t worry about second mortgages.
2. Send out postcards or call owners found in step 1.
3. For those people that are receptive, set up a face to face meeting.
4. Before the meeting, search court records for the owners – find out about divorces, criminal charges, etc. Anything that might create a need for them to sell. Use this information to stop you from offering too much.
5. Before the meeting, get a preliminary title report on the property from a title company to verify your findings of step 1.
6. At meeting, find out their pain – listen to them, determine what they need, and offer solution. Also check out condition of house and verify that your FMV appraisal in step 1 is appropriate.
7. Get quit claim signed by people on title. This should be notarized. Do not provide payment to owners at this time. They should move out immediately. Do not record the quit claim.
8. If there is a second mortgage, negotiate with mortgage holder to buy it.
9. When they have moved out, pay them. Meet them outside with their moving van. They give you the keys, you give them their money (or whatever they needed).
10. Get place cleaned, carpet shampooed, etc.
11. Place for sale ad in paper, post signs, get lockbox on door. (Or list with Realtor.)
12. Make sale. Fill out sale contract. Sign and notarize contract.
13. Take quit claim and sales contract to title company. Let them do their thing.

All above should take place in 30 days, more or less, to avoid getting more negative items on the owner’s credit report. If you need to do major repairs, you should insert step 5A where you find out the costs to bring the loan current, then make it current and keep it current until sold. In this case, you should not drag this out as the owners will not be able to get a new loan until their old one has been paid off.

For buying at preforeclosure and assigning contract to buyer

1. Same as steps 1-6 above.

7. Get sales contract with people on title. Buyer should be “your name or assigns”.
8. Notarize document.
9. Contact investor and negotiate price for contract.
10. Write assignment contract assigning your rights of the sale contract to the investor. Contract does not list amount you are being paid. Notarize.
11. Take both contracts to the title company.
12. Investor pays you either when the assignment contract is signed or when escrow closes.

This method assumes you trust the investor, as there is no document forcing him to pay you. If you do not get paid, you can file a Notice of Interest or Notice of Lien against property. If you do not trust the investor, you can have a non-circumvent agreement stating you get paid x dollars at the close of escrow. In this case, give that document to the title company as well and they will pay you directly. But keep in mind, there is usually no reason not to trust the investor - he's in it to make money and the more deals you bring him, the more he makes. Thus, it is in his best interest to treat you well.

The most important step is step 6!!!! You must establish a rapport with the home owner. Be a great listener. Find out their pain, what they need from you. These people are being deluged with offers from other people like you. Make them feel comfortable with you and you will beat out all the other people trying to get their home.