Constructing Future Finances

So while this may seem a bit out of place, I would like to preface this blog post because I think it helps one think forward about finances at a higher, more strategic level that makes money work for him or her. Noticing a common trend and coming from an Asian household with immigrant parents, this ideology of having money work for you is even more important in strategically preparing oneself and a family up for a better future. In a sense, this is a more personal version of people consulting. That being said, let's move onto the "beef."

Once I was capable of understanding finances and being a "grown-up" (According to my father), I was told that one job is not enough to sustain the future I want to live and growing my wealth. If I really wanted to become wealthy (note that I do not write "rich,"as being rich is having money and being wealthy is knowing how to make money), I came to understand that I needed to construct a financial plan for my future.

The answer to my desire of wanting to build a financial plan, thus creating wealth: real estate investing. More specifically, as of right now, residential real estate investing. While my father has some investments in real estate and having learned a bit from him, I wanted to gain some knowledge from others' experiences from The Book on Investing in Real Estate with No (and Low) Money Down by Brandon Turner.

I'd like to approach this by using creative real estate (Not having cash but still financing deals) and understanding investing methods to make it happen.

Creative Investing Rules

1. Find the best deals to drive the best returns with minimal cash risk.

2. Be extremely conservative when planning and budgeting.

3. It requires sacrifice that requires real, strategic mental effort.

4. Since bad events are bound to happen, make sure that with a great deal you have a financial cushion, relative to property and its respective risk.

Investing Methods

A. Owner Occupied Properties

1. Essentially, you buy a property (Single family or small, multifamily) as an investment but you also treat it as a primary residence.

2. With the property, there is the option of living in the house and 1) holding it to sell later or 2) renting out a portion of it.

3. With good credit and stability, you can get a low-interest loan (203k, FHA, VA, USDA, and more) and keep expenses (If properly accounted for) down. And with enough revenue from renting especially, you can have positive cash flow every month.

B. Partnerships

1. This is about identifying another's and your weaknesses, and using each others' strengths to help improve the weaknesses.

2. To do this properly, brand (Knowledge, experience, and reputation) and networking are key to finding partners.

3. Four different types of partnerships: 1) partner funds using own cash and taking a cut of profit (Full equity), 2) partner pays for downpayment and takes mortgage in name to eventually split profit (Down payment equity), 3) partner lends you money for principal and interest (Private lending), and 4) partner uses creditworthiness to get loan under name and receives split of profit (Credit).

4. Be wary of differences in opinions, running decisions past the partner, and setting expectations.

C. Home Equity

1. In this area, there are two equations you need to know: 1) your equity and 2) Loan to Value (Also known as the LTV).

2. In home equity loans, it's a mortgage secured by your home's equity. If you do not pay the loan back, the lender will take and resell your home to pay down all debts.There is the normal Home Equity Loan (HEL; get money upfront) or Home Equity Line of Credit (HELOC; think of it like a credit card).

Example of Equity Loan:

Example of Aftermath of HEC or HELOC Default:

3. If LTV is higher, equity is lower; it is an inverse equation. The lower the better.

4. Now to the strategy, you can use an HEL or HELOC to purchase a property without any loan on said purchased property or to pay the downpayment of a mortgage on the property that is being purchased. Can even do this on multiple properties to buy a single bigger property.

5. There are risks of too much leverage and adjusting rates.

D. Hard Money

1. Comes from private peoples or organizations (Who are professionals) for the purpose of real estate investing that you meet through networking. While it is faster to obtain loan through this method without verifications, it usually has higher interest rates and truly depends on the strength of the deal.

2. Usually used to purchase a property, renovate it, and then refinance the property with a normal bank. Thus, paying off the hard money loan with a high interest rate and being able to then quickly sell or lease the property.

3. Hard money investors want to win and want to make sure you have something to lose if the deal falls through, thus ensuring same goals.

4. LTV matters here too, and it is usually between 50% - 70%.

5. Risks if property is hard to sell or refinance with a traditional bank.

E. Private Money

1. Comes from non-professional lending individuals. Real estate investing is just a way to diversify their investments, but agendas differ. Can really be anyone who is comfortable investing with you. Make sure to LISTEN to their needs and cater to them.

2. Make sure to be fully prepared (Mission statement to track record) when meeting.

3. Can be short-term to long-term loans.

4. Make sure to have a stream of deals to help lenders commit; have them pay for upfront closing costs to prevent walking way.

5. Make sure you're not soliciting (It's illegal); so treat it like regular networking.

6. Biggest risk is people and their personalities with their money.

F. Lease Options

1. Lease a unit with a legal agreement that gives the option to the lessee to buy the property within a certain period of time. Property owner cannot sell the property to anyone else during this time. A lease purchase is similar but requires the purchase of the property.

2. Benefits both sides: gives time to lessee to better afford the property (From saving cash to credit scores) and stability and gives the lessor (Usually) a better tenant and saves closing costs.

3. Can do a straight lease option or do a Lease Option Sandwich (A lease option within another one), which helps generate extra cash flow for the first lessee. For the latter, be open and honest with the original property owner. Also, make sure all involved win; don't be rude.

4. A Master Lease Option is like a normal lease option but the lessee pays all the expenses and rents the property out and collects the the difference in cash flows. Leasers are more likely to accept this since it is less work forr them.

5. Risk of Due-on-Sale clauses (Please understand this and make sure it is not the original contract of a mortgage on a property) and changing legislation on residential properties.

F. Seller Financing

1. Owner / seller of property sells you property but also acts like a bank and lends you money to finance the deal.

2. It is easier and can require a lower down payment compared to traditional loans. Also, does not hit the credit score.

3. Provides seller monthly income, provides a better ROI, and helps spread out the taxes on the sale.

4. Can be partial or full.

5. Find them by asking, direct mail, or Googling.

6. Risk of higher interest rates and the Due-on-Sale clause.

G. Whole Selling

1. Middleman/woman that connects a retailer to the product source, while collecting a fee. They find deals and connects a retail buyer with the deals, thus getting a fee. Must market the deals, negotiate the best discounts, make a solid contract, and then sell it for a markup.

2. Steps

a. Find a great deal from a motivated seller.

b. Negotiate a price that makes sense for both parties.

c. Sign an agreement with the seller.

d. Find a cash buyer.

e. Legally connect the buyer and motivated seller.

f. Collect the difference.

g. Reinvest in marketing while taking some cash home. Marketing is key to finding new, great deals from sellers.

3. This is all about solving a problem (Identify them) for the seller.

4. The difference between the seller price and the buyer price should be determined through the After - Repair Value (ARV). This is the estimated fair market value if the property were in good condition (After repairs) and compared to other houses in the local market. Can calculate this by the difference in price of features or on a square footage basis. Be conservative.

5. This affects the Maximum Allowable Offer to pay the seller.

70% Rule:

This is iffy because it doesn't work with low or high value properties.

Fixed Cost Method:

Costs can be estimated online and in-person conservatively.

6. Make sure to properly understand and estimate all rehab. costs. Be as close as you can.

7. To get the best offer from the seller, make sure to negotiate, get rid of their pain points, and be fine with walking away, if need be.

8. Please make sure the contract is legal and correct. Get a lawyer if need be.

9. A good wholesaler only needs a handful of cash buyers to really do well. All that needs to happen is great deals. So find them, and make sure to be prepared with all information when presenting.

Finally, creating a passive income stream is the true route to financial freedom. One method, in addition to market investing, is real estate. This can be done through all the methods this post has mentioned and truly being creative with it