Dearborn Trade Publishing Secure Your Financial Future Investing In Real Estate_1 ppt

Secure your financial future investing in real estate / Martin Stone and Spencer Strauss... 35$& 7here are more than 5,000 books listed on Amazon.com on thesubject of real estate.. The

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional ser- vice If legal advice or other expert assistance is required, the services of a com- petent professional person should be sought

Vice President and Publisher: Cynthia A Zigmund

Senior Managing Editor: Jack Kiburz

Interior Design: Lucy Jenkins

Cover Design: Design Solutions

Typesetting: Elizabeth Pitts

© 2003 by Martin Stone and Spencer Strauss

Published by Dearborn Trade Publishing

A Kaplan Professional Company

All rights reserved The text of this publication, or any part thereof, may not be reproduced in any manner whatsoever without written permission from the pub- lisher

Printed in the United States of A merica

03 04 05 06 07 10 9 8 7 6 5 4 3 2 1

Library of Congress Cataloging-in-Publication Data

Stone, Martin

Secure your financial future investing in real estate / Martin Stone

and Spencer Strauss

or e - mail trade@dearborn.com

0$57,16721( To Aaron, Chris, and Adam—in the hopesthat they use my experiences and words to accomplish all theirdreams

63(1&(5675$866 For my brothers Larry and Steve—who have always been my best friends and biggest fans

Time Costs Money 2

The Stats Don’t Lie 3

Inf lation: Friend or Foe? 4

Inf lation and the Fixed Income 6

The Tax Man Cometh 9

Determining Net Worth 22

Assets versus Liabilities 23

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Spending Habits 24Back to the Future 27Dream a Little Dream 30

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Striking It Rich 33 Three Groups of Investors 34

Group #1: “Got Plenty of Time” 35Group #2: “Too Busy Just Hangin’ On” 39Group #3: “Worried It May Be Too Late” 42

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Real -Life Example Property in 2002 52Real -Life Comparable Property Sale from 1977 52Proof in the Pudding 58

Your Yellow Brick Road 61The Five -Point Plan 62

Step One: Learn 63Step Two: Research 64 Step Three: Plan 65Step Four: Invest 66Step Five: Manage 67

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Cash Flow 70

The Income 70The Expenses 71

Loan Reduction 73Appreciation 74Tax Benefits 77

Modified Accelerated Cost Recovery System (MACRS) 78

Putting It All Together 82

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Your Winning Numbers 85Sharing the Secrets 86Components of Your Plan 90

Goals 90Cash- Flow Requirements 91 Your Future Net Worth 92 Tax Benefits 92

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Cash Withdrawal 93

Other Goals 94

The General Plan 94

The Detailed Plan 98

Follow -Up and Goal Review 102

Methods of Valuing Property 124

Comparative Market Analysis 125

Reproduction Cost Approach 128

The Gross Rent Multiplier 135

Finding Hidden Value 136

The Highest and Best Use 138

Residential Loans: One to Four Units 147

Commercial Loans: Five Units and Up 148

Fixed Loans 149

Private -Party Financing 154

To Sum Up 155

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Open for Business 158HUD Housing 161Discrimination 163Utilities and Insurance 164The Apartment Owners Association 165Who’s Doing What? 165

Determining Vacancy Rates 166Determining Rental Rates 167Filling a Vacancy 168

A Policy on Pets 170Happy Tenants 171Raising the Rent 172

Conclusion 175Appendix 179Glossary 193Recommended Reading 199Index 201

About the Authors 205

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7here are more than 5,000 books listed on Amazon.com on thesubject of real estate By reading any of them, you can learn how tobuy property, manage it, fix it, trade it, and sell it, as well as a host

of countless other savvy maneuvers Regrettably, what’s missing inthe lion’s share of these books are chapters devoted to teaching thereader about the most compelling reasons to invest—that is, recog-nizing the long - term financial benefits to owning property andthen, and most important, learning how to use those benefits tofund the kind of life and, ultimately, the kind of retirement every-one truly desires Our plan is to tackle these aspects of the real es-tate game head-on

The birth of this book came about from lessons we learned intwo distinct areas The first was in our everyday business as realestate brokers, selling investment property to people like you formore than 30 years The second was in the reaction to our first pub-

lished book, The Unofficial Guide to Real Estate Investing (Wylie,

2000) We were confident that if that book did its job, then

every-[ 35()$&(

one who read it would beg, borrow, or steal enough money for adown payment and run out and buy a small set of units Why? Sim-ple, because we know through experience that investing in realestate is a truly effective route to a secure financial future Youdon’t need a wheelbarrow full of money, a string of hot stock tips,

or a Harvard MBA to succeed in this arena Rather, you just need awillingness to learn and a modest amount of gumption to agree toput your feet in the water

Unfortunately, our experience showed that it was mostly thosewho possessed a true entrepreneurial spirit before they bought ourbook who were the ones who took the risk and invested after theyhad read it Their backgrounds and situations varied, but one com-mon denominator stood out: The f lame of ambition and desire totake control of their finances had been lit long before they had everread our book Our first book simply gave them the road mapthey’d been searching for

Sure, we managed to reel in a number of additional convertsalong the way In fact, we personally helped to create more than afew small empires over the years for some readers who were com-mitted to someday retiring from the rat race But by and large, evenpeople who raved about our content, wrote glowing reviews on theInternet, and came to learn from us at book signings often con-fessed that they just hadn’t made up their minds to invest yet Thiswas troubling

Walk into any bookstore and you’ll see shelves full of books(including ours) promising to make you wealthy using this system

or that In fact, lots of books offer sound advice on how to buildwealth in many arenas, not just real estate We concluded that theproblem is most books on this subject are offering a road map toriches to people who aren’t truly committed to the trip To thatend, our number one goal in this book is to help light your f lame ofdesire, to spark a burning ambition in you to take control of yourfuture We truly believe, especially in this post–WorldCom, post–

it on bills and pleasure, and because they’re young and energetic,they’re confident that they can keep that train running for as long

as necessary Hopefully, something kicks in —let’s call it maturity—and they realize what a dead - end merry-go-round they’re on Now,investing a portion of their salary toward a fruitful future becomes

a top priority Better late than never, right?

At this point, most working people willingly turn over thecritical component of retirement planning to someone else—usually

a stranger — whether it’s the government through Social Security,their company’s pension plan, a 401(k), or a similar arrangement ad-ministered by some expert Regrettably, even a cursory look at anynewspaper over the last year will show that most of these retirementvehicles administered by so-called experts come with serious prob-lems The Enron and WorldCom debacles speak volumes for the se-curity (or lack thereof) of any company pension plan As for SocialSecurity, when our turn comes, at best it will provide us with a mod-est supplement to what is needed; at worst it will be nothing but acruel joke

What we’re getting to is this: Unless you were born with theprivilege of, for example, Prince William, you absolutely need tobegin investing to protect you and your family in your retirementyears Statistics show that for almost 95 percent of all retirees,there’s no golf club membership, no exciting vacations to thoseplaces you saw in the travel posters at the credit union, and no restfor the weary You’d like to help your kids with college or to helpthem purchase their first home, but the truth is you’ll be lucky tokeep yours Sadly, the blessing of abundance in our country has cre-

profitabil-Everyone has read about the “golden parachutes” that tives get when they leave major companies Those executivesplanned for those parachutes when they started their jobs In fact,without a guarantee of one on the way out, they refused to take thejob Now check with the human resources department whereyou’re working; did anyone create a golden parachute to help pro-tect you when your tenure is over? The truth is there probably is theequivalent of a small umbrella set aside for you, if anything Twoweeks severance pay for years of service is hardly what we’d call

execu-“golden.” As mentioned, you’ll get an even smaller umbrella fromSocial Security— not very comforting after a lifetime of work Ourplan here is to show you how to create your own golden parachutevia investments in real estate It can be done We’ve done it for our-selves, and we’ve helped countless others do it for themselves Stickaround

Take this simple illustration: Many people would agree thatthe most successful investment they have ever made has been thepurchase of their home Over their years of ownership they’ve seenhow their equity position in their house has magically f lourished.They didn’t need to do anything special; they only had to stayinvested for the long haul For these same people, however, the

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light has still never gone on That is, they never seem to equate thisprofitable piece of real estate with the rest of their investment port-folio What’s more, they fail to recognize how a few additionalsmart real estate purchases over the next few years could set them

up financially for a truly plentiful future If you did so well owningyour house for 10 or 20 years, think of the nest egg you could haveaccumulated by now had you just bought a few additional smallunits along the way

This kind of thinking is the best way to prepare yourself forfinancial security and, ultimately, your eventual retirement We’renot talking about getting rich or making a killing f lipping fixer -uppers or buying foreclosures There are plenty of other books onthe market to help you do those things What’s more, we’ll tell you

up front that this is not a get-rich-quick book This is because realestate, by nature, is not a get-rich-quick investment Our purposehere is to help you create something much more real and tangiblethan that—long -term security for you and your family We’ve done

it for ourselves, we’ve helped others do it, and with this book we’regoing to teach you how to do it

The plan is to educate you in the same conservative investmenttechniques that we have espoused to our readers and clients for thepast quarter of a century Here, we’ll teach you that success in realestate doesn’t take smoke, doesn’t include mirrors, and doesn’trequire luck Rather, success here simply requires a well -thought-out road map The good news is that the nucleus of your road map

is now resting in your hands These techniques have helped to vide a cushy retirement for many an investor

pro-Thomas Jefferson once said, “Most people believe that they’llwake up some day and find themselves rich.” Actually, Jefferson got

it half right — eventually people do wake up, yet, unfortunately,when they do it’s usually too late Our hope is that you grab theideas in this book, couple them with your own dreams, and makesomething fantastic happen before time runs out

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7he authors would like to express our most sincere appreciation

to the following people: Lori Stone, Sandi Strauss, Maria Strauss,Larr y Strauss, Blake Mitchell, Robert Fagan, Seymour Fagan, KirkMelton, Adam Feldman, Tony Picciolo, Kerry Daveline, Aaron Cook,Ben Walton, Hans Harder, Valerie Decker, Jeremy Laws, ShellyStone, and our agent, Sheree Bykofsky You all helped in so manyspecial ways Thank you

The following real estate professionals also lent a hand and tothem we are grateful: Kathy Schuler at Prestige Realty in Ingle-wood, Colorado; James H Marr at Marr Real Estate in Winthrop,Massachusetts; Larr y Lick at Rental Housing Online (rhol.org) inPort Huron, Michigan; Carmen Martinez at Cardinal Pacific Escrow

in Long Beach, California; and Mel Samick at Excalibur Mortgage inHuntington Beach, California Thanks to all of you

We would also like to extend our appreciation to all the staff atDearborn Trade Publishing, including Cynthia Zigmund, Paul Mal-lon, Robin Bermel, Leslie Banks, Kay Stanish, and Jack Kiburz We

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would also thank Mary B Good for her initial interest in our ideaand then by introducing us to the great Don Hull Speaking of DonHull, we would like to thank him for championing this book andsupporting us every step of the way What a great guy

Finally, a special thank you goes out to Steven D Strauss, GlennBozarth, Chris Stone, and Jay Treat We thank them for their edits,charts, rewrites, contributions, ideas, friendship, and never -endingsupport

Back -cover photographs are courtesy of Jeff Eichen at EichenImagine Photography in Los Angeles

imme-In those years the possibility of failure and of not being richnever even entered our minds Sure, our parents and mentors tried

to warn us about what lay ahead But in truth, most of us went onliving our lives thinking and acting as if we always knew best Be-cause we were so much smarter than our parents, we had littledoubt that we would succeed

Eventually, we came to understand that becoming a mature andresponsible adult wasn’t as easy as we thought “Why,” we ask,

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“didn’t the folks hold our feet to the fire on some truly importantthings that would have made a real difference to us?” Where werethe lessons about savings and investing for a safe future? Perhaps itwas because our parents had their own troubles They were proba-bly so caught up trying to salvage their own dreams they didn’t haveanything left to help us with ours Even more likely is that after leav-ing their own youth and dreams behind, they spent the remainder

of their lives in survival mode In reality, most parents probably justlacked the money to pay for the things that they would have liked to

do or have (for themselves and for us) Empty bank accounts assenior citizens simply left them drained, both emotionally andfinancially

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In Lionel Bart’s musical Oliver!, Fagin sings, “In this life, one

thing counts, in the bank, large amounts.” Truer words, especiallyfor anyone who has hopes of hanging up his or her hat for good oneday, have never been spoken It’s ironic, however, that most of thetruly important things in life are usually free: watching a sunsetwith someone we love, having the time to help coach our child’ssoccer game, or being home when the kids get out of school to helpwith homework MasterCard calls these things “priceless.” On theother hand, do any of us have fond memories of the countless hours

of overtime we put in over the years at work?

So what’s the message? Salesmen say, “Time is money.” In thisinstance, time costs money, for it takes money to pay for the time weneed to achieve the things that are truly important Second, andequally important, if we don’t take the time early on to plan to makethat money, nobody else will The money isn’t going to magicallyappear from the company pension plan, government and SocialSecurity benefits won’t make a dent, and winning the lottery is noth-