High Yielding Investments
If you want to create value in real estate and keep some of it, how do you do it?
Find a neighborhood where the trend is toward larger homes, say 2,000 square feet or more and values are $500 to $1,000 per square foot. In beach cities, these values are common. Add 500 s.f. to a small home there and the value increases by $250,000 or more, in the marketplace, at a cost of only $100 per square foot. That leaves $200,000 of profit, before paying realtor, investor and partners.
Retailers get a markup of about 50%. They buy for $5 and sell for $10 and they would envy you if you can buy for $5 and sell for $25. That’s very hard to do in retail. When they buy for $5 and sell for $10, their profit is only about $1. When you buy for $50,000 and sell for $250,000 your profit is much more than $1.
Now, what keeps others from competing with you?
When you buy for $5 and sell for $10, you have a lot of competition. That’s because everyone has $5 to invest. If you want to eliminate competition, you have to get up into the stratosphere of investments. Fewer people have $100,000 to invest. Just as the atmosphere gets thinner at high altitudes, investors thin out when you get into the stratosphere.
Good Neighborhoods/Bad Neighborhoods
Almost everyone would prefer to invest in good neighborhoods and those who can afford it, often do, but what if they can’t afford it? They don’t! Capital requirements keep them out. So they are forced to take investments in neighborhoods where the demand is lower and living space is less desirable. Average neighborhoods are where average people live and homes don’t sell for $500 per square foot there. How much does the average home sell for in your neighborhood? You can contact the closest real estate office for some fresh statistics and find out. You can ask them about the size of the average home sold. You can ask about price per square feet or you can take the average price and divide by the average home size and get the dollars per square foot. Then you can contact a contractor or two and ask him if he does room additions and ask him if he’s done one recently. Ask how large it was and how much he charged. If he’s done three this year, you might ask about all three. If the value of the average sold home is far higher than the cost of a room addition, there might very well be an opportunity to profit by adding square feet to an existing home, if you can find some small houses in a neighborhood where the trend is toward larger homes.
I expect business to be good for a long time, because there will always be places where prefer to live. Those more desirable places will cause prices to be higher. Higher demand results in higher prices. With too many buyers, the price goes up. Too many sellers and the price goes down. Stable prices result when there is a balance between buyers and sellers. If a contractor spends a day of his time at each of two locations, you can’t say that his time is worth more in the better area, can you? We’re not comparing two different contractors, just two locations. One location is a highly desirable neighborhood, the other is average. The contractor’s rates should be the same in both places, but the value created is different. If one location is Manhattan Beach or Santa Monica and the other location is an average place, like Downey or Van Nuys, the same two-by-fours, the same plywood and the same ceramic tiles have variable values, when installed in each location. In short, they’re worth more in Manhattan Beach or Santa Monica, because houses sold in these areas sold for $800 per square foot or more. Homes in average neighborhoods might be worth less than half, per square foot. What contractors charge in Downey or Van Nuys is what you expect them to charge for the same size room addition in Manhattan Beach, unless you use better materials. Negotiate the price on a home in an average area and then switch properties, after the contractor has made the deal. If he can afford to work in the average area, he can also afford to work in the better area. He might even prefer to move up!
We don’t want to over-improve. If the trend in an area is 3,000 to 4,000 square feet and sales are brisk, say three months or less, we look to find a 1,300 square foot home, so we can add 2,000 square feet to that home to stay within the range of the going trend of 3,000 to 4,000 square feet and make a profit. As long as homes that size, sell quickly at $500 per square foot, we should be able to do likewise and it’s worth taking the risk.
Let’s summarize: We have homes that are selling for $500 per square feet in an area that is preferred and the trend is toward larger homes. We found a small home among the larger homes. Our plan is to buy it and add 1,000 square feet or 2,000 square feet, if we won’t be over-improving the home. We plan to pay $100 per square feet for the additional 1,000 square feet and sell it for $500 per square foot, to make a profit of about $400,000 less our expenses.
We might have to pay a realtor to bring us a buyer, but a sign on the house could also produce a buyer too. If someone else puts up the money to do this project, we might have to lavish money on them, because we don’t have any capital yet. We always want to count our money, not theirs. If it’s profitable to do it, we’ll do it, regardless of who else benefits and how much. We don’t want to attempt the impossible, like structuring a deal where we are the only ones who make money. We have taxes, escrow fees and title insurance to consider and a spreadsheet would be nice so that we can use everything we learn on one project, on the next and the next. We program the computer to do the math and all we have to do is plug in the new figures and look at the bottom line.
Once you have this technique developed, you can do one new project per month and earn perhaps $100,000 per project. Investors can earn 10 times their investment in five years and 100 times their investment in ten years. A $200,000 nest egg can grow to $2.3 million in the first five years and the same nest egg grows to $26 million in the second five years. If you have a Roth IRA, you already paid the taxes on it and you can roll it over, without additional taxes. If you choose to retire in ten years, your income is over $1 million monthly and that income is TAX FREE! That’s the benefit of using a Roth IRA.
The investors I’ve been working with for the past twenty years or so, are ‘trust deed’ investors. They lend money and get a recorded deed of trust. If the borrower doesn’t pay, they have to go through the foreclosure process. I think it’s better to avoid that process and so I designed this investment differently. We offer investors title to the property, not a trust deed mortgage. The investor owns it from the onset. We are secured, by recording an ‘Option to Buy’ against the property, so the investor can’t sell it out from under us. Everyone is secured and therefore, nobody can do anything without consequences. If the investor tries to sell the house, the title company picks up the option and won’t issue title insurance. If we try to sell the house and exercise our option to buy the home, we can do so, but only if we settle with the grant deed holder.
Terms of the Contract
The grant deed holder is entitled to 50% interest on his cash investment. We are paying him a high rate of interest on his cash, because he provides not only cash, but credit as well. There is no way to provide him with compensation for the use of his credit, other than paying a high rate of interest on his cash. At first, you might be shocked to see what we pay investors, but consider that cash is not all they put into the partnership. They own the house, so when we apply for a loan, it’s the investor’s loan. Who makes the monthly payments? The investor! When we exercise our ‘Option To Purchase’, we reimburse him or her, at the rate of 4.167% per month, which is 50% interest, divided by twelve months. We pay interest upon interest, so the compounding is monthly. This boosts the annual yield from 50% to about 63%. We lavish money on those who make us money, so they open their vaults and give us access to their cash.
Demographics and Opportunity
The demand for housing in California is strong and the population is growing faster than any other state. The more people who move here, the more profit can be made by any type of business, because there are more customers to buy. How much can you make in a ghost town? You need customers to make money. No matter what you sell, you can’t sell to everyone. If ten percent like it, you can sell to one in ten. If there are only 100 people, you might make ten sales, but if there are ten million people, your potential is one million sales. The larger the population, the more customers and the more profit you can earn. Land is scarce in great neighborhoods, because it’s all used up. We want to find houses that have potential for profit and enlarge them, making better use of the land. That’s the logical thing to do. If the population didn’t grow, we’d still have 50 years of work ahead of us, just converting each house into a larger one and finding a more useful use of the land. In real estate, you consider the highest and best use of land and it changes with time. Those changes are the source of opportunity.
Spend it all, before you die and let others make their own.
There is so much money made in this type of endeavor that those who do it, don’t do it for long. They make their money and get out. How much can you spend, before you die? At some point, you have to say, ‘I have enough! If I earn more, what will I do with it?’ You earn money to spend, not to pass on to others.
There are many who need capital and are glad to pay for the use of your capital. Some of them are skilled at creating wealth, others are not. Some are honest and others are not. As long as you discuss your ideas with others, before you invest, you should be O.K. Your reasoning skills must be excellent or all bets are off. Talking to experts is only useful, if you have the capacity to process the information and reach the correct conclusion. If you have to pay for advice, it’s expensive, but it’s no more expensive than putting your money at risk and losing it all, is it?
Discuss your ideas with qualified people, if you can and don’t make the mistake in reasoning of thinking that a lawyer is an expert in business. They are not, most of the time. Are lawyers smart? Sure! Doctors are smart. Engineers too, but do you think of asking an engineer for business advice? How about your doctor? Like engineers and doctors, lawyers are not trained in business. They are simply advocates of the law. If your lawyer also attained a degree from a business school, then I take that back, but if you’re asking him or her for advice on business and they never attended school for business, then you’re making a fallacy in reasoning. Being a lawyer doesn’t automatically qualify anyone to field questions on real estate investment. Discuss your ideas with real estate professionals, especially those with lots of experience in that particular vehicle and make sure you select someone who knows about the subject. Just because a guy is really good at throwing a ball through a basketball hoop, doesn’t mean that he can be trusted to recommend a breakfast cereal, but the cereal manufacturers have made plenty on our weak reasoning skills.