Investing in Real Estate Tip - Leverage

I believe that people have an innate desire to own something solid and substantial that they can actually touch.[.1] Real estate is great for this type of investor.[.2] It is one of a small group of investments where an investor has the potential to impact the profitability through good management, hard work and smart negotiating. As you look at all of the types of real estate available for investment, I believe that Multi-Tenant investment real estate deserves a special look. It has the unique ability of allowing you to leverage a group of tenants with a single transaction. A single apartment complex may contain from as few as 4 units to several hundred apartments. Each one can be purchased with a single contract and is treated as a single transaction.

Leverage, as a term used in real estate investment or in fact any investment, allows you to multiply the return on the money that you have invested to get even greater returns. "Give me a lever and a place to put it, and I can move the world". [.3] A great quote! This is truly the power of using leverage in real estate. You can invest a small amount of capital (say 20% of the total purchase price) and see huge effective returns on that capital on an annual basis. This is what we are talking about when we talk about leverage in a real estate transaction.[see my video below!]

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[.1] There is plenty of competition, be ahead of others by having a good relationship with your local bank and an experienced realtor.

[.2] There are no "no risk" investments, even if you can touch this. Make sure you've done your homework.
[.3]Archimedes of Syracuse

Getting Started in Investing with Confidence

Confidence is the key critical factor to be successful because without it many investors would not move beyond their first initial property.

If that first property turns into an “alligator” and cost them a ton of money, they would have sold it at a loss and never purchased another property. It takes lots of courage to begin an investment and it is this that needs to also sustain you when things are tough. Courage to sustain you when you get calls for unplanned expenses. Courage needs to sustain you when you must evict tenants for non-payment of rent, illegal activities, etc. And finally, courage needs to sustain you to complete your business plan as well as facing the true expenses / income numbers that demonstrate how your property is performing.

Confidence keeps you making the tough phone calls when you would rather stick your head in the sand and hope that the problems go away. The confidence allows you to hold your head high and celebrate when things are going well and you know that you have faced every challenge head on.

This reminds me of a familiar passage: 1 Corinthians 9:24-27a.

"Don’t you realize that in a race everyone runs, but only one person gets the prize? So run to win! All athletes are disciplined in their training. They do it to win a prize that will fade away, but we do it for an eternal prize. So I run with purpose in every step. I am not just shadowboxing. I discipline my body like an athlete, training it to do what it should."

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THE SHEEHY TEAM: Empowering Investors To Do More Deals!

Laying the Groundwork - Investing in Real Estate

“It takes a bigger foundation for a courthouse than it does for an outhouse”. I can remember reciting this phrase when people would make fun of size of my feet. There is a similar principle: a large building needs a big foundation in order to support the structure, similarly you need to build a strong "investment" foundation as preparation to build a strong real estate investment portfolio.

Therefore, you must begin your investments by creating a strong financial foundation that will carry you through your investment deals.

Here are some of the basics:

The 80% rule. It is imperative that you maintain a good credit score and the easiest way I have found to do this is to live beneath your means. In general you should live on 80% (or less) of your take home pay. If you have overspent and are unable to live at that level, you have two options. One, begin spending less immediately (pay off debt, etc) or two you can make more money. Professionals in all fields who excel at the basics are successful in athletics and investing and in life. Being diligent with your finances and saving a portion of each paycheck is simply a pre-requisite to successful living--throughout your life.

Keep Your Day Job: In the initial stages of investing in real estate it is nearly impossible to live on the excess cash flow. Property expenses and debt service take up nearly everything that you have coming in every month. Additionally, if you take money out every month it is difficult to build up the cash needed for the occasions when capital repairs or improvements are needed on the property. The benefit in the early years is that you are building equity in your investment that will allow you to live on in the later years. Remember the child’s fable of the tortoise and the hare. The hare-type person wants to take money out of his investment immediately, while the tortoise-type person is content to wait and roll all of the cash into the property each month. The tortoise is the one that crosses the finish line first in the fable and the tortoise-type in real estate investing

Cash Is King: Banks love to see a borrower with cash on hand. My recommendation is that you build up $100K (or more) of cash as soon as possible and have it on hand with your local bank. It seems like a lot of money but it is a great way to rapidly get a banker working for you in completing your deals. In most of your deals you should not need to leverage this cash toward individual transactions.

Tax Deductible Land Donations

"Without adversely affecting current enjoyment of real property, a land owner can achieve significant economic benefits (enhanced value of surrounding property and income tax savings) by dedicating an interest in land for conservation purposes."

Curtis L Brown suggests that dedicated the entire interest in land can result in great benefits than the what is more frequently used - the conservation easement. This is because donors favor being able to retain title and use. However, simply by executed a land lease with a related entity and donating the land to a land trust (subject to lease). Brown adds that you can "achieve the same rights of use of land for [himself] and successors".

Some Highlights:
1) House Bill (HR 1831) "The Conservation Easement Incentive Act" would make permanent the special tax rules applying to all qualified conservation contributions of entire interests and remainder interests, if passed.
2) A landowner with a conservation easement can give the title (with a lease back) of the land (in part or whole) to a Land Trust and generate a second deductible contribution for the same land.
3) The same can give an undivided interest, remainder interest, or a remainder interest in an undivided interest in land subject to a conservation easement and still qualify for another contribution deduction on the same land.
4) Land dedicated for conservation purposes enhances the value of surrounding land
5) a larger tax write-off for dedicated the entire interest in a smaller tract, than for an easement on a larger tract.

Qualified Purposes
1) outdoor recreation by, or the education of, the general public
2) the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem
3) the preservation of historically important land are a or a certified historic structure.
4) the preservation of a historically important land area or a certified historic structure

HR 1831
-introduced in March 31, 2009
-limits on deductions for conservation contributions for farmers and ranchers was only 30% with a carryover of 5 years before 2006. These before mentioned benefits were signed into law by President Bush. The expiration on this benefit is Dec 31, 2009.

Court Case Precedent(Kiva Dunes Conservation, LLC vs Commr.)
- the Tax Court allowed a $30MM federal income tax charitable contribution for a conservation easement on a golf course.

Source: Curtis L Brown (contact him 254.829.0064 or Curtis@CurtisLBrown.com)
You can learn more at CurtisLBrown.com or SustainingLandTrust.org.

Curtis Brown has over 33 years of experience in tax, business and estate planning, litigation, and trust and estate administration. Curtis Brown was born in 1951 in Dallas, Texas. Mr. Brown received his B.B.A. in Accounting from Texas Tech University in 1972. He earned his JurisDoctor degree in 1976 from The University of Texas School of Law. He also studied international comparative law at the University of Oxford, Oxford, England.

TexaPlex - what you probably aren't hearing about Texas

David Winans coined the term “Texaplex” to describe the triangular region of Texas that contains 75% of the state’s population. Watch the video and see why everyone is talking about the Texaplex.

This video is about 8 minutes long, but keeps your interest.

My only criticism, is that it doesn't talk much about Waco (or McLennan County for that matter). So to supplement, read below the video for information you may not know about Waco.



Source: texaplex.com

Some Interesting Waco TidBits

The Waco Indians

1) Waco is named after the Huaco Indians, the first inhabitants of this area. The Huacos (some sources spell it 'Huecos') were a branch of the Wichitas and were closely related to the Tawakonis. The tribe lived in beehive shaped huts, 20- to 25- feet high, made of poles, buffalo hides and rushes. The Huacos had approximately 400 acres of land under cultivation, planted in corn, beans, pumpkins, melons and peach trees.
Source: www.wacocvb.com

2) In 1886, Baylor University moved to Waco from Independence, Texas and merged with Waco University. Founded in 1845 under the Republic of Texas, Baylor is the oldest continually operated university in Texas.
Source: www.wacocvb.com

3) Waco Texas is home to the ALICO Building & Dr Pepper Museum. In 1885, the soft drink Dr Pepper was invented in Waco at Morrison's Old Corner Drug Store.
Source: http://en.wikipedia.org

4) I-35 is the major north-south highway for Waco. It directly connects the city with Dallas (I-35E), Fort Worth (I-35W), Austin and San Antonio. State Highway 6 runs northwest-southeast and connects Waco to Bryan/College Station and Houston.
Source: http://en.wikipedia.org

5) In 1845, Baylor University was founded in Independence, Texas, making it the oldest institution of higher learning in the state of Texas. It moved to Waco in 1886 and merged with Waco University, becoming an integral part of the city. The university's Strecker Museum was also the oldest continuously operating museum in the state until it closed in 2003, and the collections were moved to the new Mayborn Museum Complex (which opened in 2004).

Source: http://en.wikipedia.org