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General Real Estate Tip: Leverage Investments, Maximize Profits

Often I am asked, “Is it better to buy properties using all cash or to finance with a loan?”  The answer is, “Both.”  The old saying, “Cash is King” is true… IF you never run out of cash…  but, since all of us, even the wealthiest people in the world, are on some kind of finite budget, having the ability to secure vast amounts of loan financing is often more valuable than having only an exhaustible amount of cash.  Knowing when to use your own cash or when to use someone else’s cash is the question you need to answer.  This blog is dedicated to maximizing your return from your income properties by recognizing the pluses and minuses to using cash versus loan financing.

When you purchase with cash, you will receive five distinct perceived advantages, but are they really advantages or just popular myths?  First, you will qualify for any type of sale that you are entertaining, i.e. REO properties, HUD properties, VA repos, Short-Sales, Conventional Sales, Courtroom Steps Auctions etc…  A seller may reject your offers on the grounds of price and terms, but, it’s a guarantee, no seller in their right mind is going to tell you, “hmmm…I don’t know if cash is going to work for me”… unless you’re our own government (there are certain government attached properties that give preference to certain types of financing).  When financing a property purchase while using a loan, your options can be restricted based on the type of sale, seller requirements, and property condition (many lenders will not lend funds if property condition is not at a certain expectation which is noted in the property appraisal).

Secondly, cash financing has an advantage in that it can allow for a quick closing.  That means, usually, less chance of a long; strung out, escrow process, hence less stress.  It also means you, as the savvy buyer, can quickly start making income from the property by renting or reselling it.  Furthermore, as a seller, your eyes light up because cash financing looks like a ‘sure thing’ and it’s perceived that a seller will be able to accomplish their goal of selling their property… at least in theory.  Therefore, a cash buyer usually receives preference from a seller, as long as the terms and purchase price are similar, over all other forms of financing (again some government sales this generalization is not true).

 The third major advantage cash has over financing is there is no risk of failing to finance.  Therefore, not only is the seller going to feel more at ease, but you, as the buyer, can too, which will free up time and energy to move onto other investments or concentrate on other aspects of your life.  Time is money.  Too often buyers fail to finance for many reasons, a property appraisal comes in low, a property condition comes in unsatisfactory to the lender,  or the buyer owns too many other liabilities such as other properties or vehicles that have loans on them also and the lender now feels uncomfortable issuing another because of the ‘debt to income ratio’ risk looks unsafe to the investors backing the new loan.

Fourth, it’s cheaper to use cash…really?  On one hand, yes, using cash can save you money on your closing costs, usually about 1% of the property purchase price and it can save you and the seller time.  However, on the other hand, your cash is now tied up in that property, upon purchasing, for usually a minimum of six months if you plan to refinance or about 30-90 days for if you choose to sell.  If you ever want the cash out of the property, you will need to commonly, sell, take out a home equity line of credit, or do what is called a cash-out- refinance, two of the three will cost you many more percentage points than the 1% extra you pay to use a loan during your original purchase.   So, perhaps, because of its rigidness, cash is not the cheapest way to go, figure out your own homework and keep track of your own bank account to know for certain.

Fifth, as a cash buyer, many people argue that you receive the ‘peace of mind’ of not having a monthly mortgage payment to cover.  This can be true.  Much like the time aspect pointed out in number two, having peace of mind and decreasing your stress level will allow you to think more clearly and focus on other things.  However, if you take a moment to contemplate life, you’ll see, often, you’re only kidding yourself.  Each year inflation, taxes, college tuition, retirement, entertainment, food, gas, and other ever climbing life costs grab a piece of your pie faster than your salary is probably increasing (in the last 10 years the average United States worker has actually had a 10% decrease in their salary/wages and an increase in their taxes).  You’re currently fighting a losing battle and need to find new ways to bring your income and quality of life back up to where you desire it to be.  When you purchase real estate using cash financing your return on your investment differs dramatically from the return on the investment you would receive when purchasing using loan financing.   A cash buyer may be receiving a 12% gross return on your investment if he/she purchases a property for 97K (estimated 3K closing costs equals 100K total) and the property rents for 1000K per month.  On the other hand, a loan buyer that has the same 100K in his or her bank account, purchasing the same 97K property (estimated 3-4K closing costs) places about a 20% down payment (20K) to receive their loan of about $600 per month on a 30 year fixed mortgage (figure roughly includes taxes and insurance in Las Vegas).  This would allow them to purchase five properties instead of only one for the same 100K.  As long as they receive a loan with a good percentage rate (today’s general investor rates are about 5%) they will come out far ahead in the game.  In this scenario, with five cash producing properties instead of just one, the actual dollar figure they would come out ahead would be rough $1600.00 (4 X $400) per month (That’s almost 20K per year), and that figure does not include possible tax write offs or property appreciation!  There you can easily see, if you’re limited on cash, cash becomes queen and leverage is king by using your good credit to obtain more financing from loans.

So, for all those pessimists and worry warts out there who are about to pipe in and say, “What happens when my properties are vacant or rental incomes drop and I now have to cover a mortgage?”  Remember, first, a savvy investor always ensures they purchase cash flow positive properties or have hard and fast rules for selling a losing investment when they do buy.  Second, with the rising costs of your daily world, doing nothing about it is really not an option and most people’s quality of life is currently continuing to deteriorate without solid investments. Third, you’re making $2000.00 per month positive cash flow when you are renting all five properties (5 X $400).  In a scenario where two of the five properties sit vacant for long periods of time (minus $800 from your cash flow and add $1200 to your expenses by covering your vacant mortgages out of your own pocket), you will still be at a breakeven point which can actually usually still be pushed into the green with tax incentives claimed on your “depreciating,” “losing”, “investments” when tax time comes around.

 For those of you who are still worried and want to play it ‘safe’, buying with cash will at least allow you to cover some of your everyday losses from economic inflation, however, remember, if your one and only property goes vacant, then you will have no income coming in at all.  The bottom line, all investments have risks, mediating those risks is key and doing nothing is really not a viable option unless you want to accept a lesser quality of life in the future.  If you don’t believe me and would like to verify, next time you drop by the grocery store, take a look at the prices of everything.   As a practical exercise, pick out a handful of your favorite items you used to purchase as a kid and compare them to the prices you used to purchase them for.  My example is Starkist Tuna fish; I used to buy these cans as part a staple diet all through college less than 15 years ago for 38 cents a can.  I just saw them at Sam’s Club, a usually ‘cheap’ vendor, last week for just over $1.00 per can.  When you conduct this experiment, if you notice one or more of your examples has not shot up in price, I challenge you to then check the quality.  Usually you’ll notice the quality dramatically went down if the price did not shoot up.  For those of you who still feel purchasing property is too much of a risk, perhaps real estate investing is not the right type for you, perhaps you would like to continue contributing to a 401K that ‘someone else’ overlooks, because we all know those ‘safe’ investments all preformed so well in the last few years.

Lastly, please notice how nowhere in the above paragraphs have I ever mentioned that cash will give you a ‘discount off the property.’   Sometimes people argue with me until they are blue in the face that, strictly because they are purchasing with cash, that entitles them to a huge discount on every property they deem interesting.   It is true the a cash buyer has a greater chance of creating a ‘low-ball’ scenario, however, this absolute ‘must be’ opinion is one of the biggest myths in the real estate industry as a ‘discount’ off a property has to do a lot more with the motivation of the seller than any kind of financing that is ever used for the purchase.   For example, at the courtroom steps auctions, banks liquidate their distressed property holdings for immediate cash.  They are willing to sacrifice money, in offering a discount to quick cash buyers, in exchange for saving the time and energy it will take to place a property onto the retail market and then waiting for a buyer to come.  On the other hand the buyer is willing to risk certain protection concessions and incur more liability.  Again, time is money on both sides.

Don’t be fooled, often a buyer using financing has received a better ‘deal’ than the cash buyer; it’s all in the motivation of the seller.  Remember also, terms of sale are more important than the purchase price itself.  If you get fixated only on price, you will always fail to maximize your profits.  As a true investor, you should be willing to buy absolutely anything as long as it provides the correct terms of sale.  Ask yourself, if you knew of a prospective rental property would provide you a 100% return on your money for many years to come, would you feel comfortable buying that property for more than it is worth (appraised value) or do you feel the need to buy a property at a 20% discount no matter what even while it may currently rent for a 5% return on your money and looks to be dropping in value?  I know your answer is, “I want both the discount and the return,” all investors say that, but the reality is, there are 24 hours in a day, seven days in a week, and 365 days in a year.  If you’re always waiting for the ‘perfect deal’ to come along, you just missed several ‘good deals’ that would make you a lot more money than the one perfect one that may never even come.  Furthermore, a sale type like an auction that provides very little safety measures for your money may end up being a money pit for you instead of a safer retail market investment that usually affords luxuries such as title insure and other contractual safety nets.

Thank you very much for reading my blog, I hope this information helped you out.  For this blog and other helpful tips and tricks please visit our tourism and real estate website http://PlacesInLasVegas.com or, for all aspects of general real estate, our parent website http://LasVegasRealEstateConnection.com.

 

Sincerely,

 

 

James Bellile

Phone: 702-222-0815

*All blogs are personally written by James.  Although we encourage and are grateful for sharing, all information is copyrighted by James and needs to be given credit.  Thank you.

 

This blog was originally written 11-18-2011

Las Vegas Real Estate: Renting VS. Buying : The Truth: Why Buy Now?


We’ve all heard the cliché, “It’s better to own than to rent,” but is that always true?  NO!  This blog is the real scoop of when it makes sense to buy and when it makes sense to rent.   In these times of an economy that constantly spews doom and gloom, it’s hard to imagine why anyone would buy any ‘investment’, but that’s actually a pretty narrow sighted idea.  No matter what the economy atmosphere, buying a home can make perfect, logical, sense.

Why Buy?

The Positives

  1. Security— Your rent will never go up (as long as you have a fixed rate loan), but it can end (except for the property taxes).  Being a history major in college, I found it astounding that many people discourage others from purchasing real estate for the fear that it will no longer go up in value.  If you are talking about the short-term, then the idea of not buying is absolutely true, however, if you are referring to the long term, I have two questions for you, first, have you ever taken a glance at the history of homes in the United States?  If you did, you’d notice, in the 1920s, people discouraged buying of real estate because home values were a whopping $300.00 average across the nation.  In the 1950s, it happened again, this time the finger pointers boasted a $3,000.00 average.  In the 1970s, it happened again, this time in the tens of thousands.  Now in the 2010’s, just like every other year in the history of our country prior, it’s happening again.  This time average home values are in the hundreds of thousands of dollars.  In Philosophy, they call this negative way of thinking the theory of ‘Counter-Induction’, the idea that if X happens more and more times, the chances of Y happening becomes greater and, at some point in the future, Y becomes the only possible outcome.   In contrast, the theory of “Induction,” is the idea that if X happens more and more times, the chances of X continuing to happen into the future grows greater.   Unfortunately, although most economists would agree that Induction is their theory of choice, neither one of these theories have ever been proven to be fact, thus, I’ll take you into question number two, that being, are we creating more land?  Even if you are truly hard headed and argue with me that we are, in fact, creating more useable land through irrigation and new inventions which allow human beings to adapt to harsher climates, the reality is, even if we, as a global society, became wildly exuberant and expanded into space, the development all land costs money and this increases the prices of the end product housing tracks.  Using these advanced technologies to make land more appealing or, even, inhabitable, in some cases, is expensive, so this would push the price point of real estate even higher.   The bottom line, even if you don’t believe in Induction, supply and demand is going to prove eventual booming housing prices in any country that maintains a growing population and a stable government.   In the late 1980s Southern California home prices fell like a rock.  They became less than half their value in only a few years.  People thought it was the end, however, in only two short years; prices rebounded to what they had fallen from, and then proceeded to climb 10%-15% annually for the next 15 years!  One question, do you think rents remained the same rate during this time?  After all, if an investor (aka landlord) now is put into a situation that, in order to buy property at all, they must pay a whopping 200% more for property, can that investor even afford to keep rents the same as they once were?  Remember, even in a best case scenario that the investor paid cash for the property and does not have a mortgage to cover, increased purchase prices increase the tax burden on the property purchaser as well, therefore, they must raise rent just to offset the tax increase.  Now what if they had a mortgage on that property they had to cover the expenses of paying for as well?  Don’t forget, higher costs of living demands higher wages for all to have a comfortable lifestyle, now the cost of contractors and materials is higher for repairs.  Hence the reason why southern California’s rent more than tripled in the last 20 years.
  2. Stability— Your place of residence has stability i.e. no more hassling with changing your address: moving expenses, time spent finding a new place, mail missing, etc…  There are many things that can be said about living with stability.  Knowing where you will sleep, how you will live day to day, and where you can be found by others has a large amount of benefits.  Buying a home may increase your social network or, at least, allow you to occupy your mind with other things that need your attention now that the basic need of shelter has been met.
  3. Tax Benefits— Your ‘rent’ is now a tax write off.  Yes, the interest on your primary residence now has certain tax benefits for you.  I won’t go into it in detail, please speak with a licensed accountant for that, however, you will have an annual write off for the interest you pay on your loan each month and, in the future, should your home value go up and you should want to sell your property, provided you have lived in your home for more than two years (or three of the last five years) you can shield up to $250,000.00 of that appreciation from paying any capital gains tax.  If you have a spouse, that number is doubled, yes that’s right, a half million dollars.
  4. Creativity & Bragging Rights— With your home, your level of restriction for how you adapt and maintain your home is far different than should you rent that same property.   Make it YOUR castle.
  5. Buying is Less Expensive than Renting— Did you know, right now, today, in the Las Vegas Valley, you will pay 10-20% less to on your monthly mortgage payment to buy the same home as to rent it?  That’s across the board with almost no exceptions and this discount does not include your tax benefits and possible future appreciation.  Yes, for the first time in a very long time, pending you have no major maintenance issues, it is far cheaper to own than it is to rent.  Enough said.

The Negatives

  1.  Getting trapped by Falling Prices— Let’s face it, losing your freedom along with your wallet SUCKS!    If a tens of thousands of dollars loss doesn’t get you down, then, more than likely, the inability to move at your leisure will.   However, the reality is, if you’re a renter, you face these same exact fears.  First off, unless you are in a rent controlled environment, with the exception of some age restricted communities (Las Vegas currently does not have rent control) you’re landlord can choose to raise your rent at the end of your lease term.  Your landlord might also choose to evict you leaving you out looking for a new place, at which point, luck better be on your side to find ‘the one’ or you’re forced to settle for what’s out there.   Lastly, God forbid, you get into trouble with your home if you did purchase, there are plenty of viable solutions out there for you to alleviate this aliment; four of the most common are, one, rent your home out, two, short-sale your home, three, proceed with a loan modification or, four, claim bankruptcy.  Guess what?  All four of these options can have you escape from your situation and moving on with life in a reasonable timeframe giving you the freedom to move around or the buying power you need to enjoy other ventures.
  1. 2.       Maintenance issues— Unexpected expenses come up and you’re forced to make the hard decision to use your valuable money to repair your home.  Hey, such is life, stuff happens.  At the same time, you’ll find people like me; I’ve owned my home for over seven years at the time of this blog.  Thus far, I’ve replaced a tile floor ($550 for materials, I installed it myself), water heater ($550 installed), I’ve painted ($300 for material, I painted it myself), had the carpets cleaned ($300) and I had a dishwasher that needed to be repaired ($80).  Besides a simple light bulb here and there, that’s it.  Therefore, for just $1780.00, I’ve kept my house up to my standards for over seven years, that’s $21 dollars per month!    Considering, if you purchased right now, your monthly mortgage payment on a 30 year fixed note will average at a 10%-20% discount from what you would pay in rent on the same exact property, this maintenance expense is really offset quite well.  What you’re really telling yourself when using maintenance as an excuse is, “I don’t want to use the time to do it myself or I don’t want to use the money to pay someone else.”  Realize by the above examples, however, even if you are a renter, most landlords have you fix the smaller end stuff so you could throw out my costs of carpet cleaning, dishwasher repair (it’s less than $100 and many leases state this dollar figure to be the tenant’s expense), and the paint as these would all be expenses you would be responsible for as a renter as well.  Tiling was a personal choice so that one could be thrown out too, bringing my ‘extra’ maintenance costs of actually owning my personal home from $21 dollars per month to $6 dollars and 50 cents!  Many leases also wrap tenants into paying landscaping, trash, sewer, and even the HOA, so what becomes the big savings as a renter now? Therefore, using maintenance only as an excuse, it’s just impractical, what you’re admitting by default is really that you’re not responsible enough to save a nest egg just in case something should go wrongThis may be a much larger issue you need to address with yourself, which leads me to number three.

 3.       Saving Up For the Down Payment— Short on cash?  Sure you are everyone is; even the wealthiest Americans always seem to ‘need’ more every year.   The best business book I ever read is The Richest Man in Babylon.  At a mere 125 pages (very small pages at that), it really breaks down how simple it is to save.  Just 10% of your earnings every month will have you on the path to financial security sooner than you think.  I know what are thinking “10%, are you kidding,” but, like the book states, you usually won’t even feel it.  However, if you are short on cash, right now, and what to still purchase immediately, there are three low down payment loans that may work for you.   If you served in the military and were honorably discharged, a Veteran’s Administration loan (VA) is a dollar down loan.  If you buy certain types of properties you can qualify for a government loan known as a Homepath loan.  This loan requires a 3% down payment.  And, finally, there is the Federal Housing Administration loan (FHA).  This loan requires a 3.5% down payment.  Still need more cash just for this down payment?  Then ask a friend!  That’s right, a friend, business partner, employer, or, preferably, a family member can ‘gift’ you funds for a down payment.  Remember, however, although there are a wide variety of reasons you may be short on your funds to begin with, developing a good financial education is key to avoiding future pitfalls no matter if you are a buyer or a renter.

 

  1. My work is Unstable— the average American now changes jobs every three years.  If you’re work is ‘unstable’ welcome to the club.   If you’re work really is unstable, or, at least, the perception is to you that it is, and this force is so powerful that it is changing your major life decisions (buying a house aside) you may want to consider other companies you can jump to for greater stability or shifting into a new line of work all together.
  1. 5.       Because I like paying more— Because your pockets are so heavy they are constantly getting in the way, weighing you down, and make life tough to navigate.  Perhaps you are not an extraordinary wealthy individual and are, in fact, a radical hippy that believes, “possessions are the devil man.”  Perhaps you are an individual within the population that does not have any self worth and, rather than seeking counseling to correct this behavior, have planned to drink the spiked cool-aid yourself at any moment, removing yourself from the genetic pool and rendering the rest of us free of your infectious stupidity for generations to come.   In any case, I applaud you.  Be yourself!  However, using the “reasonable person’s test”, as it’s commonly known by in our court system, by studying the facts above, if it makes sense to YOU, then give me a ring, ask some questions before proceeding further,  and then start identifying yourself to the world as a ‘buyer’ and, eventually, an ‘owner’.

Thank you very much for reading my blog, I hope this information helped you out.  For this blog and other helpful tips and tricks please visit our tourism and real estate website http://PlacesInLasVegas.com or, for all aspects of general real estate, our parent website http://LasVegasRealEstateConnection.com.  My team offers several services; buyers, sellers, distressed sellers, renters, and property management.  Honest and truthful professionals to a fault.  Call us direct @ 702-222-0815.

 

Sincerely,

 

 

James Bellile

 

*All blogs are personally written by James.  Although we encourage and are grateful for sharing, all information is copyrighted by James and needs to be given credit.  Thank you.

 

 



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