Madtown

 In my mind Madison WI has been the #1 place to purchase my first rental property.  I lived in Madison for a little over a year and have spent many a summer between those beautiful two lakes that make Madison an isthmus.  I also had my real estate license and worked for a property management firm for the year I was there, meaning that I have a lot of confidence in what I can expect from Madison when it comes to where to buy and what kind of rent to expect.  Each day I live outside of Madison is a day that I become farther away from the reality of its’ market because frankly, markets change, but I still have some eyes and ears there.

When it comes to my research for Madison I have a couple key things in place, I know some good property management companies, I have a Realtor I trust and I know some people who I would be interested in obtaining financing from.  Madison is a college town which is great because you are going to have strong rental market from the school.  There is also quite a few strong employers including Spectrum Brands, American Family Insurance, American Girl, and Epic, (a company I once applied to work for!).  The rental market there runs on an interesting rental schedule: most leases start on 8/16 and end on 8/14 leaving the city with a homeless day, 8/15. This information is critical in knowing where and what you can expect for a rental. 

On the flip side I also understand that there are some negatives to purchasing in Madison.  I do not plan on living there in the near future and if my family moves there is less of a reason to travel.  Also I think there property taxes are high!  It ends up being around 4% of what I would buy the property!  That is a serious drawback for me.  Since I would be an out of state landlord that can also be dangerous and more costly but I also see this as a benefit because I don’t have to deal with the problems.  Yet, my options in Madison are narrowed then to buying downtown or near east Madison.  Now I just sit and wait and watch the listings my Realtor sends to me…… even with the negatives, I really like Madison!

The Coastal Consideration

Southern California was one of my top options for where I would buy my first rental primarily because I live here.  Regardless of that bonus, I still need to do research on the market.  To begin, I really enjoyed reading the book “The ABC’s of Real Estate Investing” by Ken McElroy.  It is part of the Rich Dad Poor Dad series but it gives good insight into how to research a market.  I like to begin by reading recent articles.

New York Times had an article out this past week about real estate companies and where they are focusing their purchases, specifically California, Florida and Arizona where the market hit the hardest.  http://www.nytimes.com/2012/12/09/business/financiers-bet-on-rental-housing.html?pagewanted=all  This article tells me that there are some big buyers looking at California, while the following article shows a little more local insight. http://www.kpbs.org/news/2012/dec/05/san-diego-rents-show-no-hint-falling/   and another http://www.utsandiego.com/news/2012/dec/04/rents-are-down-san-diego/  shows me how smaller buyers like myself are faring.  I find that the local articles are the best and pertain to me more than major news outlets.

Regardless, I take articles with a grain of salt because journalism is always skewed but the information is still helpful.  The best thing to do is to talk to local property management firms, owners and renters.  After doing so I found that the articles were correct, this is a great market if you have the capital.  Southern California’s market did drop but the coastal homes didn't drop as low in price because no matter what happens people want to live on the coast.  The rents are staying stable because of the higher number of military bases, multiple colleges and thriving businesses.  Overall, I feel confident in an investment here because the economy does not rely on a single business/entity for its strong economy.

Who? What? When……..Where?

Where or where is the best place to purchase a rental property?  A reader recently asked me where am I going to purchase my first rental and I am going to answer with more than one option.  My philosophy starts with some wisdom from Warren Buffett who says "Never invest in a business you can’t understand."  Instead of business, I would insert city or area of the country.  For example, I have no idea about the east coast.  I have no family or friends there that I have visited and the culture there is  very different from my own.  So I will not invest in the east coast for my first property. Places I do know: the Midwest, the South and California. 

Now that gives me a lot of options.  I like to then narrow my buying options to travel access, family and market.  I have to travel quite a bit to see family every year so if I am already making these trips, why not mix a little business in there as well.  That means California, Wisconsin, Colorado, Florida and Nebraska are the top of my list.  When it comes to accessibility by plane or train that leaves me with California, Wisconsin and Florida.  I then narrow it by market.

When I say market I mean factors including property taxes, rental prices, demand and purchase price.  California is where I live so if I can find a multifamily home that gives me a place to live and make some rental income that is the number one option!   But California has an incredibly high purchase price for a mobile home, let alone a multifamily home. 

Madison, WI is a college town and has the benefit of always needing rentals in a large portion of the city.  A downside is the high property tax.  Florida, specifically Fort Lauderdale and Miami are beneficial because of the high number of immigrants and a popular travel destination.  Also Florida’s home prices are currently lower which benefits me as a buyer, not as an owner.  Currently I am focusing on my future research on these three locations! Stay tuned for updates on those markets and thank you for the questions.

Crunching The Numbers

This past weekend I started looking for a new place to live, even eyeballed some properties to purchase but I am always hesitant to buy something for myself to live in, to much commitment.  These current generations are such commitmentphobs and I love it because I believe there is a profit to be made.  If someone lacks the gumption and commitment it takes to purchase a home it doesn’t negate the fact that they need a place to live, thus brings about the rental.

When I eyeball properties that I have an interest in purchasing I like to have a formula to put them in to see if I should walk inside.  The attached spreadsheet was found on biggerpockets.com and was created by blogger J Scott.  What it shows you is how much profit you can expect to make on a Single Family Home in a given situation.  All you need to do is insert the purchase price and it will adjust the outcome.  The numbers in red are important because you probably will have to change them based on your city and state.  This makes you take into account insurance, property taxes, vacancy, etc.  You can answer a lot of the questions from the MLS sheet a Realtor will give you.  Again this is only for a single family home. 

I suggest for fun that you drive around your neighborhood and see what’s for sale.  Take what numbers you see and plug them in.  Maybe there is a potential gold mine in your neighborhood, especially if you are in a city with low property taxes! 

http://www.biggerpockets.com/files/user/JasonScott/file/20-sfh-rental-analysis    (you will have to create an account to download, but if you want me to email it to you send me your address!)

I Have A Dream!

So the dream is forming. I need to get myself some rental property!  But how do I fund this?  Well the authors I read and shows I've watched all suggest investors.  AKA, don’t use your own money, or in my case, ask mommy and daddy.  I say NO!  This is my first investment and although I see myself mixing business and family in the future I don’t want to work the kinks out with them now.  This first one is on me. 

There are multiple ways to purchase rental property outside of how the big boys do it.  You can purchase a home for yourself, live in it the required 1 to 2 years and then rent it out.  If that is not an option, then you need to put aside 20% of the purchase price, plus closing costs, which could easily add up to 25%-30% of the purchase price.  Another option is to find one of the Fannie Mae or Freddie Mac investment properties which require 10% down.  Regardless which of the paths you choose you need good credit and some m-o-n-e-y.

This might seem overwhelming but I find making someone else money more overwhelming.  If the property I am looking at is listed at $150,000 I need to have $45,000!!  YIKES!!!  So enough writing and time do some action: By March 2013 I will have a solid timeline in place of when I will purchase my first rental property.  Why March you ask?  Because for the past year I have kept a solid budget and stuck to my savings goal, but in March I will have to find a new apartment and living situation.  That means I will have a better idea then what I can save.  In the time leading up to March I will be researching lenders, homes, agents and more ways to bring in money quicker! 

Rich Dad, Poor Dad? Real Scam?

So in my previous post I let you know that I read all the Rich Dad Poor Dad books by Robert Kiyosaki and proceeded to quit my job and take a new path.  When I moved to San Diego I had the opportunity to attend one of the free seminars and was impressed with the local speaker they invited.  He talked about this “Coaching” program that would teach the rookies what they need to know.  I love mentors and coaches so I had to get more information which I garnered through a phone call.

The conversation followed a pretty typical sales pitch of asking me how committed I was and letting me know the costs, around $10,000. The promises: I would have bought a property within a year.  So when I said I would have to think about it the “Coach” freaked out on me.  I thought this was odd because if you have a good product you shouldn't have to pressure sales someone.  Also when someone starts yelling you should realize you hold all the power, and I don't respect Coaches who don't have more power than me!  Yet, I'm a dreamer so I talked to my inner circle about it and my favorite response is from my dad “I’ll take $10,000 from you and buy a house too Emily!”  

I hope you are catching on, I didn't sign up.  After being hounded for days by the Rich Dad Poor Dad Coaches, I learned a big lesson from that phone call- Robert Kiyosaki is doing just what his books teach people to do, make money.  The thing is I don’t want to make him money; I want to make me money!  So why can't I take that timeline and what he promised, pay myself 10 G's and make it happen.....No longer will I ask someone else to take care of my money.

Talking the Talk

I feel that by nature teachers are like little entrepreneurs:  you have your own classroom, you create your own lessons, and you control your own little world, only instead of making money you make adults!  I was tired of making adults; it takes to long.  Therefore, in my final year of teaching I started expanding my reading to include authors like Robert Kiyosaki, Timothy Ferriss, Donald Trump and anybody they recommended.   These authors sell an idea, a lifestyle that honestly gave me the gumption to quit my job.   Once I joined their little cult way of thinking my friends and family surely thought I had jumped off the deep end, and I had. 

I didn't really know where I was going when I quit teaching.  I just had one realization-I needed to create my own paycheck.  Just like those fanatical books sell, I had an idea that I still hold onto today:  I can create a monthly cash flow that covers my expenses with minimal work on my part.  Here are my options to making this happen: rental property, dividend yielding investments, interest off of a lump sum of money, and a business.  

A business was instantly out of the picture seeing as I didn't know what to sell and that meant I had to do all the work with a high chance of failure, too similar to teaching.  I need to be able to step away from my investment and a business will take some time while my learning curve is always a little longer than normal people.  Living off the interest of a lump sum of money takes the longest amount of time.  Saving $10,000 a year is really what I've been able to do since teaching which means it will take me another 98 years to have a million dollars.  That amount of interest would give me enough to have about $50,000 a year to live on.  But by then with inflation and my age, that wouldn't work.  So that leaves two options: dividend yielding stocks and rental property.  I know which one seems less risky in this market-rental property.  So now the decision is made, it’s time to stop talking and start walking the walk.

Hanging on the Cliff, Not So Bad

Fiscal Cliff……. Do you all of a sudden feel fear, dread and anxiety at reading those two words?  Does scary movie music seem to play in the background every time you hear a news anchor talk about it?  Well the media has once again done a great job at coining a new phrase that gives them something to put on their morning headlines.  What is the big deal about this fiscal cliff and what is really going to happen?  All I can see is that not to long ago our Congress was in the same situation they are in now, not getting along.  The problem is that back then they never did come to a conclusion on the national budget so to prevent this from happening again they set a law in place to force future Congress to get along or else extreme measures would be taken to drastically reduce the national deficit.

Wait a second; you're saying that if Congress doesn't create a budget the law that will come into place will require us to pay our debts down by half in about a year?  That doesn't sound like the worst thing ever.  The overall consensus I hear is that this would create a recession, but that we would recover…… So again is that so bad?  A little pain now so that we can feel better down the road?  That is so un-American. But how awesome would it be to hear Barrack Obama call Dave Ramsey in about two years and say “We’re Debt Free!”

Sharks In The Water

Yesterday I saw the show Shark Tank for the first time, it was awesome!  Its about people who have startup companies pitching their ideas to 5 "sharks" who are successful businessman and who will invest in their company if they believe in it, which is where they become sharks because they rarely buy in!  What is fascinating about it is that the sharks ask great questions that quickly get to the heart of the investment, "Has it made any money to date?"  "Why do you think your product is better than everyone else's who makes the same thing?" "You're a scam artist."

Ok the last one wasn't a question, but this Socratic Method of business is so awesome!  When you ask the right questions you quickly figure out whether one risk is better than another.  Everyone takes risk but not everyone takes an educated risk.  For little people like me who grew up not as a natural entrepreneur it is imperative to find people who I can glean insightfulness from, which is why I quit teaching and followed a crazy path into real estate.  I was definitely led to an opening as an Executive Assistant with a development company where I daily see the "sharks" do business.  What can I tell you about the wisdom I am learning, is that a shark is a shark not because they bite, but because they always seem to know where to take the biggest bite!

http://abc.go.com/shows/shark-tank