TEXAS Multi Family Units with High Cash Flow

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Financing for Real Estate Investors in 2015

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Is a Hike in Interest Rates Coming in 2015?

GDP-GrowthMore economic reports hit the market on 12/23/14 than are generally seen in an entire week, with the most important report being the revision to US GDP (Growth Domestic Product – measures growth of the economy) for the 3rd quarter of 2014. The report revealed that our economy had in fact seen a 5.00% growth in the 3rd quarter. To put this into perspective, the reading of 5.00% quarterly growth is the largest reading our country has seen since the 3rd quarter of 2003 and is a clear indicator that our economy is ready for a higher interest rate environment in 2015.

Mortgage backed securities (mortgage bonds) have sold off as a result of the higher than expected 3rd quarter GDP results but have held ground at their 25 day moving average as a much poorer than expected Durable Goods Orders (This survey measures current industrial activity and provides an indication of future business trends) revealed a -.07% reading when market expectations were a reading of +1.8%. This, coupled with the bond market being closed for the holidays, will ensure that money stays parked in bonds. Investors tend to keep their money in the bond market during the holidays when the markets are closed to hedge against any unforeseen domestic or global issues that could cause a sell-off in our equity markets. This will keep bonds trading at current levels and mortgage rates holding ground at current levels until the market opens after the holidays for standard trading activity.

Interest rates are up today by .00125% on all fixed rate products (15, 20, 25 and 30 year fixed) and the bond market will be closed on Christmas Day. We still have 2 major employment reports hitting the market on 12/24/14 (Initial jobless claims and continuing jobless claims) that could have significant impact on mortgage rates if we see a surprise like we did in Q3 GDP growth, but for now the census is these reports will be in line with market expectations and pricing has already been factored in.

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Buying Outside California Comparison Infographic


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Average ROI Based on Investment Types Infographic

Infograph- Average ROI Based on Investment

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Technology Replaces Jobs Infographic


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Austin, Texas Real Estate is BOOMING

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Helpful Calculations to Know and Understand

The following basic formulas are essential for every single real estate investor to know and understand. Being able to crunch the numbers and evaluate the bottom line of any real estate investment is what separates the novice from the pro.

To calculate Cash-on-Cash Return, divide the conservative net annual income from the investment after expenses (include maintenance and vacancy reserves) by the total investment capital you spend to buy the property. Investment capital includes down payment, closings cost, and any make-ready costs.  Example: If you plan to invest $25,000 and over the course of a year expect to receive $2,500 net income, you divide 2,500 by 25,000 to determine you will make a 10% Cash-on-Cash Return before tax benefits.

ROI, or Return on Investment, is calculated after the sale of the asset and takes into account changes in asset value that may increase or decrease the projected yield. This is calculated by taking all net cash flow received over the life of the asset and adding to that the net profit from the sale (after paying realtor fees and any buyer closing costs). Take that dollar amount and divide that into the original investment cost. The answer will be a percentage rate and is a more accurate look at the true yield of your investment. ROI differs from Cash-on-Cash Return by accounting for value changes during the time of ownership and sales costs.

The power of compound interest: This calculation is often used to determine what the value of your 401K will be at retirement. If you contribute the $5,500-$6,500 maximum permitted annually and you plan to work 40 years until you are 60, your 401K will have an estimated future value of $433,063 based on actual contributions of $230,000! In this example, we took contributions of $5,500 for 30 years @ 3% compounded + $6,500 for 10 years @ 3% and came up with the total of $341,617. Then we took the $265,896 accumulated over the first 30 years at 3% compounded for 10 more years which is an additional $91,446. This comes to a grand total of $433,063.

The value of compounding interest, that is interest paid on cumulative principal and interest, almost doubles your money in this case. It is a combination of time and interest that makes this such a powerful tool. If stock market returns are higher, your 401K will be worth more. Inflation is another factor that can vary value.

Your goal should be to grow your net worth a little bit each and every day. It all starts by reducing existing debt and beginning an investment program. The earlier in life you can become debt free (except for your primary residence) and start investing wisely, the faster you will build your Net Worth and in turn your long lasting wealth. Taking the necessary steps to get out of high interest credit card debt and learning to live on 80% of your take home pay is the right place to start. Tomorrow is NOT a better time to start!

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The True Cost of Home Ownership

When most of us calculate the costs of home ownership, we only take into account the bare minimum monthly costs of Principal, Interest, Taxes and Insurance (PITI) that we have to pay the bank. You may also be paying an association fee which covers all exterior maintenance as with a condo or townhome. However, there are many other costs associated with home ownership that most people don’t consider.

Think of your home like a car, it has many component parts. The newer your home, the less likely these component parts are to need service or replacement. Everything has a life span. Roofs for example, last about 20 years but may need seals replaced around vent pipes or shingles replaced after a storm. Most appliances have a 10 to12 year life before needing replacement. Depending on the amount of use and care, some will need replacement before that and some will last longer.

I live in a home I purchased brand new in 2004. It is amazing to me the items I have already had to replace. I had to replace a fan motor and capacitor in one of the A/C condenser units. I had the compressor go out on the other. Both of these expenditures are considered premature. I had to replace the kitchen faucet recently. Over time I have had to replace 5 out of 7 of the irrigation control valves. I had a leak in the roof and had to repaint the ceiling. These may sound like little things, but they all add up. You must have a budget for these maintenance issues that will come up over time. The older the home, the more frequently you will have repairs.

Ongoing regular maintenance is also expensive. Whether you choose to cut your own lawn and shrubs or hire a gardener to get it done, it is an ongoing expense. There are also utility costs to consider: water, trash, sewer, gas, electric, cable, phone, etc. Keeping the lawn green and the house cool in the summer can run hundreds of dollars a month. Pest control is another ongoing expense.

Since most of us live in Southern or Northern California, which is in the top 10% most expensive markets in the country, saving up for the down payment and closing costs can be very expensive. Calculating 20% down to avoid paying PMI would equal at least $100,000 or more. Even at 10% down with higher monthly payments, you’re still looking at $50,000 or more down, plus closing costs of about 3%. Don’t forget your moving expenses, new furniture and landscaping if necessary.

Consider this option instead before spending all your cash and increasing your debt several hundred thousand dollars. Owning rental income property out of state and living where you want to live is really the best of both worlds. Renting allows you to live where you want to live at a reduced monthly rate. You don’t have to wait to save as big a down payment to buy out of state. You can take advantage of appreciation in out of state markets and get a tax break while doing it, not to mention own 5 much newer properties for the price of one here. Most importantly it gives you time to have your nest egg grow to a significant amount which will allow you to comfortably purchase the home of your dreams in the neighborhood you like down the road.

But what if you miss getting in on the next real estate boom where you could make appreciation on the house you buy?  If you like, consider buying newer investment income real estate in another state where the market is going up in value. It is much less expensive, therefore requires less down payment and produces monthly positive cash flow. Use this monthly cash flow to supplement your savings. You can also take advantage of tax shelter savings the IRS allows on rental income housing. This is a legal way to get back some of the taxes that are deducted out of your pay check each month. It’s like getting a raise at work without having to ask for one.

The biggest single mistake most first time buyers make is buying more house than they can afford because they don’t calculate all the additional costs of home ownership. Renting, saving, and buying income producing property in affordable markets can significantly accelerate your road to wealth.

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