Addicted to Real Estate – Why I Can’t Stop and Why You Should Start
The technique of all money down
So how does the pay off all cash buy home with cash technique work? First, let me reiterate that I really didn’t have any money, but I did have a significant portion of the equity in Terry’s home and several homes I owned combined to give me a significant cash down payment. Banks and mortgage companies will accept money from a home equity line of credit as cash for a home purchase. At least they did in 1997 according to the financial guidelines of the day. The thing to remember about mortgages and loans is that guidelines are constantly changing, so this technique I used in 1997 may or may not be used in the future. Whether or not it can be reused doesn’t really matter to me as I believe there will always be a way to buy real estate with limited cash sooner or later. There will always be a technique to acquire real estate, but exactly how that will play out in the future, I’m not entirely sure.
I started buying homes in the Mayfair area of Philadelphia with prices ranging from $30,000 to $40,000 per home. I would like to purchase a three bedroom, one bathroom home on the second floor with a kitchen, dining room and living room on the first floor and a basement. What we call a row house in Philadelphia will consist of a front porch and a back yard the width of the house. Most row houses in Philadelphia are less than twenty-two feet wide. For those of you who are not from Philly and can’t imagine what a regular house in Philly looks like, I suggest you watch the movie Rocky. Twenty-two houses on each side of each block will really test your ability to be a neighbor. The things that usually cause an argument with your neighbors in Philadelphia often stem from parking, the noise your kids make, where you put your trash cans, parties, and the appearance of your home.
In 1998, my girlfriend and I moved together to a suburb of Philadelphia called Warminster. Having lived on a street in Tacony, like Rocky, I really looked forward to having some space between my home and the neighbor. I told Terry not to even think about talking to the people who lived next door to us. I told her that if one of them came with a fruitcake, I would take it and kick it like a soccer ball right into their backyard. I believe I was suffering from regular house syndrome in Philadelphia. My new neighbors in Warminster turned out to be wonderful people, but it took me eighteen months before I wanted to learn that.
So you just bought your townhouse for $35,000 in Mayfair, and after $2,000 in closing costs and $5,000 in renovation costs, you find yourself a good tenant looking to rent the home. After renting the home with a positive cash flow of $200 per month, you now have $42,000 of outstanding debt on your home equity line of credit that will need to be paid off. I didn’t get a mortgage when I bought the home because I just bought a home for cash, as they say in the business. All the money I spent on this house was spent on the home equity line of credit.
The move now is to pay off your home equity line of credit so you can do it again. Now we go to a bank with your fixed property and tell the mortgage department that you want to refinance your real estate investment. It helps to explain that the neighborhood you’re buying your property in should have a wider price range, like Mayfair did in the mid-1990s. Home pricing in Mayfair is quite unusual as you will see a $3000 difference in home values from one block to the next. This was important when I’m doing a payoff refinance because it’s pretty easy for the bank to see that I just bought my property for $35,000, despite the fact that I’ve done a lot of renovations. I could justify the fact that I spent more money on my home to fix it up, and by hiring a tenant, it was already a profitable investment property.
If I was lucky, as I have been many times doing this home buying system in Mayfair, and the appraiser would use homes a block or two away and come back with an appraisal of $45,000. Then there were programs to allow an investor to purchase a home with 10 percent down or stay as equity, doing a 90 percent cash-out refinance, returning me roughly $40,500. Using this technique allowed me to get back most of the money I put down on the property. Basically I only paid $1500 for this new home. Why did mortgage companies and appraisers keep giving me the numbers I wanted? I guess they wanted the business. I would just tell the bank that I need it to come in at $45,000 or just keep it financed as is. They always seemed to give me what I wanted within reason.
This entire process took three to four months, during which time I may have saved several thousand dollars. Between the money I saved from my job and my investments and paying off a refinance, I had topped off most or all of my home equity line of credit, which was now almost back to zero, to start the process all over again. And that’s exactly what I intended to do. I used this system to buy four to six homes a year, using the same money to buy home after home after home over and over again. In reality, technique is technique with no money or little money. At the time, I had maybe $60,000 in available funds to use for home purchases from my HELOC, so I would buy a home and then top up the money. It was a great technique that was legit, and I could see my dream of being a full-time real estate investor coming true, even though I wasn’t there yet.
During the years from 1995 to 2002, the Philadelphia real estate market made a gradual increase of perhaps 6 percent each year. I started tracking my net worth, which was 100 percent home equity, which meant I had no other forms of investments to consider when calculating my net worth. Generally speaking, the first five years of my real estate career didn’t go well due to poor decisions I made in buying buildings and the downturn in the market. Also, my lack of knowledge and experience in repairs made it rough. The second five years of my real estate career, which I just finished explaining, didn’t make much money either. I supported myself primarily through my sales career, but I could definitely see the writing on the wall that real estate down the road would be my full-time gig.
American Real Estate Professionals
I own an office building that has a real estate company as a tenant called Realty Professionals of America. The company has a great plan where a new agent gets 75 percent of the commission and the broker gets only 25 percent. If you don’t know, that’s a pretty good deal, especially for a new real estate agent. The company also offers a 5 percent sponsorship fee to the agent who sponsors them for every deal they make. If you refer an individual who is a broker to the company you sponsored, the broker will pay you a 5 percent broker sponsorship, so the new broker you sponsored can still earn 75 percent commission. In addition to the above, Realty Professionals of America offers a broker’s commission increase of 5 percent after achieving cumulative commission benchmarks, up to a maximum of 90 percent. After reaching a commission benchmark, an agent’s commission rate is reduced only if the following year’s commissions do not reach a lower base amount. I currently retain 85 percent of commissions on all my trades; in addition, I receive sponsorship checks of 5 percent of the commissions earned by the agents I have sponsored. If you would like to learn more about being sponsored into the great Realty Professionals of America plan, please call me directly at 267-988-2000.
Getting my real estate license
One of the things I did in the summer of 2005 after I quit my full time job was to make plans to get my real estate license. Getting my real estate license was something I always wanted to do but never seemed to have the time to do it. I’m sure you’ve heard this excuse a thousand times. People always say they’ll do something soon as soon as they find the time, but they never seem to find the time, do they? I try not to allow myself to make excuses for anything. So I decided before I quit my full time job that one of the first things I would do was get my real estate license. I enrolled in a school called the Real Estate Institute of America for a two week full time program to get my real estate license in the state of Pennsylvania. Two great guys with a lot of experience taught the class and I loved my time there. Immediately after completing the Real Estate Institute of America course, I booked the next free day offered by the state to take the state exam. My teachers’ advice to take the exam right after class turned out to be an excellent suggestion. I passed the exam with honors and have since used my license many times to buy real estate and cut costs. If you are going to be a full-time real estate investor or commercial real estate investor, then you pretty much need to get a license. Although I know a few people who do not believe this, I am convinced that this is the only way.
I worked on one $3 million deal where the commission for the buyer’s real estate agent was $75,000. At the time my broker took a stake, I was walking $63,000 in commission on that deal alone. With the average cost per year as a realtor running about $1,200 per year, this deal alone would have paid for my real estate license for fifty-three years. Not to mention all the other added benefits like access to the multiple listing service offered to too many brokers in this country. While there are other ways to access Multiple Listing Services or another program like it, a real estate license is a great way to go.
Some of the negatives I hear over and over again about having a real estate license is the fact that you have to disclose that you are a realtor when buying a home if you represent yourself. Maybe I’m missing something, but I don’t see it as a negative at all. If you are skilled in the art of negotiation, this is just another hurdle to overcome. I imagine you could end up in a lawsuit where the court would assume that because you are a realtor you should know all of these things. I don’t spend my life worrying about the million ways I could be judged any more than I worry about getting hit by a car every time I cross the street.
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