There are 3 basic ways to make money in real estate:

1) Appreciation: If you are fortunate enough to own property in a strong uptrend, you can make a lot money. Strong appreciation covers up mistakes & makes everyone look like a genius.

2) Bargain Purchase: This is the favored approach by many Real Estate gurus. The “motivated seller” sells you their property for significantly below what it is worth, due to some stress, lack of education, lack of information, etc. I define a bargain purchase as at least 20% below fair market value minus repairs.

3) Change of use: This is where huge amounts of wealth can be generated. When you can create a higher & better use for a piece of land or building either by repositioning i.e. rezoning Farm land to commercial, converting a warehouse into lofts, etc. There can be tremendous leaps of value. This is where I focus most of my efforts these days & where my intention is to become an expert.

Ideally I like to have 2 out of the 3 conditions in order to proceed with an investment. I am the kind of guy that wants to focus on both managing risk as well as creating potential upside profit.

We are witnessing an economic cycle where too many people focused on the potential profit & not the downside risk.

These are unfortunate times for many & also exciting times for SMART & DISCIPLINED investors.

My intention is to share my knowledge, experience, & current activity as a full-time professional investor.

Ellis San Jose

We are in the beginning of a what I believe will be a very painful correction for those that haven’t played the investment game smart.

The basics for surviving & actually thriving are critical.

Get rid of bad property: this is not the time to hold anything that doesn’t make sense. You can not predict the turnaround & it will be painful if you own a negative cash flow property that is decreasing in value.

Find Cash: Keep your powder dry, raise cash, connect with investors & lenders that you can tap for cash when you see a great deal. The key to building a huge fortune in the next few years is to seize opportunity when it presents itself… and there will be many chances if you have the resources ready to pounce.

Get educated: You better know how & what to do to find the best deals. Appreciation is not going to bail you out of a bad deal. You better have the edge by using your smarts. Develop & refine your deal making skills.

Find a steady stream of deal flow: Don’t follow the crowd, you need to develop a niche on how you will spend your time & marketing dollars. This will increase your chances on making a deal that makes sense.

Create multiple streams of income: Don’t be in a position where you have to make a deal to put food on the table. Create steady bread & butter cash flow to keep you in the game.

Network Network Network: relationships are important to develop more than ever. Know what is going on in your market & who the players are. I call it staying in traffic. You will find out what is happening in your market & follow the money. Find out what people are buying & make sure you are selling .

Be patient: this cycle may take a while so buckle up & don’t be in a hurry. The bottoms are hard to time. Make sure you have multiple exit strategies for everything you invest in.

If you want learn more about how I am expanding my network & creating an additional income. Drop me a line at ellis@moonlightcapital.com

Happy Investing !

Fact: Lenders use a number of facts to make credit decisions, including your FICO score. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high.

Fallacy: A poor score will haunt me forever.

Fact: Just the opposite is true. A score is a “snapshot” of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Lenders request a current score when you submit a credit application, so they have the most recent information available. Therefore by taking the time to improve your score, you can qualify for more favorable interest rates.

Fallacy: Credit scoring is unfair to minorities.

Fact: Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed.

Fallacy: Credit scoring infringes on my privacy.

Fact: Credit scoring evaluates the same information lenders already look at – the credit bureau report, credit application and/or your bank file. A score is simply a numeric summary of that information. Lenders using scoring sometimes ask for less information – fewer questions on the application form, for example.

Fallacy: My score will drop if I apply for new credit.

Fact: If it does, it probably won’t drop much. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called “inquiries”) will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.

As a comparison, let’s take a look at some other investment options and how they compare. Let’s say you have $50,000 to invest. If you put that money in the bank at 5% interest, you will receive a $2500 return. If you put that money in the stock or bond market and it grows by 10%, you will receive a $5,000 gain. If you buy a $250,000 property with 20% down and it goes up 7% in value, you will receive a $17,500 gain.

Be careful. Appreciation is a difficult thing to predict accurately. Past performance is no guarantee of future results. With a little research and investigation though, you can choose areas that are the most likely to show appreciation.

Equity is the difference between what your property is worth and what is owed on it. For example, if you own a property that is worth $250,000 and you have a loan for $100,000, you have equity of $150,000. This equity can be pulled out by refinancing or adding an additional loan or line of credit. It is important to note that this is not considered income for tax purposes because the IRS does not recognize loans as income because they need to be paid back in the future. Please consult with your tax professional before making finance decisions.

One strategy for investing in appreciating properties is that you buy a number of properties and hold them till they have increased in value. You can then refinance them in order to pull out money to live on, or invest in other properties. Be careful if you use this strategy. There is never a guarantee of appreciation, and the interest rates can change, making it more expensive to pull equity out of your properties. You will also need to be able to raise your rents enough to cover the increased debt load. Otherwise you can end up with large amounts of negative cash flow. Negative cash flow comes out of your pocket each month.

Another concern is debt over basis. Basis is the value assigned to a taxpayer’s property used for determining gain or loss from a transfer of property. Basis is calculated by what you paid plus improvements minus your depreciation. If your basis is less than your mortgage amount, you will be taxed on the “gain”. For example, you have a property worth $200,000 with a basis of $100,000. You owe $150,000 because over time you pulled money out. Realtor fees are $12,000 if you sell the property. You will owe taxes on $100,000 not on the $38,000 you will receive from the sale. Depending on what tax bracket you are in, this scenario could possibly leave you with nothing in your pocket after taxes. If the property is foreclosed on you will still owe the taxes.

All investment property purchases need to have due diligence conducted prior to the purchase. To develop a systematic approach for due diligence, asking the following questions is highly recommended:

Property Management

What is the vacancy factor?
What is the economic rent?
How long will it take to rent?(estimated)

Economic Area of Influence
What are the guiding economic factors that drive the value?
What is the sustainable source of economic growth in the area?
Who are the potential tenants, i.e. high tech, professional, blue collar, etc?

Demographics
What has attracted the prospective tenants to this area? (job growth, retirement)
Is this a resort community or a stable sustaining community?
Are your tenants students; singles; families w/children?

Analysis of Income/Expenses
Follow-up on selected strategy for investing
Determine your property analysis indicators
Strategy for increasing income/ decreasing expenses.

Appeal of Property
General feeling about the area
Convenient driving distances to work/school/recreation
Possibly family oriented

Due Diligence Checklist

Here is a list of things you will want to know before signing a purchase agreement. Not all of the items will be pertinent to every property. If you have questions, don’t hesitate to call on professionals to help you. This is an important step in your purchase decision.

1. Current rent roster with paid to dates
2. List of security deposits
3. Mortgage payment information
4. Personal property list
5. Floor plans
6. Insurance policy and agent information
7. Maintenance and service agreements
8. Tenant information: leases, ledgers cards, applications, smoke detector forms
9. List of vendors and utility companies, including account numbers
10. A statement of structural alterations made to the premises
11. Surveys and engineering documents
12. Commission agreements
13. Rental or listing agreements
14. Easement agreements
15. Development plans, all plans and drawings
16. Governmental permits or zoning restrictions
17. Management contracts
18. Tax bills and property tax statements
19. Utility bills
20. Cash receipts and disbursement journals for property
21. Capital expenditures for the last 5 years
22. Income and expense statements for two years
23. Financial statements and tax returns for the property
24. Termite inspection reasonably acceptable to the buyer
25. All other records helpful to the ownership of the property
26. Market surveys or area studies
27. Construction budgets or actuals
28. Tenant profiles
29. Work order files
30. Bank statements for operating accounts
31. Certificates of occupancy
32. Title abstract
33. Copies of surviving guarantees and warranties
34. Phase I environmental audit

Enjoy your investing and do you DUE DILIGENCE!

Once you know why you want to invest, you can start to look at different markets. If you focus is appreciation, you will want to find those areas that are expected to grow and appreciate. If you are looking for cash flow, you will need to find those areas or properties with the highest cash on cash returns. Either way it is important to know the market you are looking to buy in.

Quality of life Analysis

Many of those in the baby boomer generation are looking to relocate to areas where the quality of life is high. Many of the areas that qualify as quality of life will have smaller populations. They are usually centered around community living. The baby boomers will be the industry in some of those places. Many service businesses will be created around the needs of these retirees. Along with a good climate, quality of life areas will have low crime and good adult education. Good health care and cultural amenities will be very important. These areas are usually abundant with recreation and natural beauty.

Rental Market Analysis

One of the most important aspects of choosing a market, is knowing who your renters are likely to be. Some of the best renters come from Military installations and colleges. Medical centers and tourist areas are also great places to have properties located. Large manufacturing plants can also supply a large number of renters. Be careful here though as many manufacturing jobs are going overseas.

You must also consider your time horizons, both for yourself and your goals. Do you know how long you will own the property? How many years till retirement, college, etc. Maybe you need different time horizons for different properties. Everyone will have different needs based on their individual time horizons.

What resources do you have available for investing in Real Estate? Will you have enough for a 3 to 6 month reserve? How committed are you to your goals? What do you qualify for?

One of the most important questions is why do you want to invest. Is it for retirement? Are you looking to accumulate wealth? Will you be facing college expenses? Perhaps what you want is financial freedom, caring for aging loved ones, etc.?

What do you want real estate to do for you? Are you looking for cash flow? Are you anticipating increases in value to grow your wealth? Do you have some income you wish to shelter from taxes. Perhaps you have a need for all three. In this case you need to combine several strategies. I am going to talk in general terms for a moment. It will be your job to apply the following information to your own personal situation to help you determine what types of properties you should be looking for. The best strategy I have found for choosing a property to invest in is too first determine what area to invest in. Hopefully you now have a good idea of where you want to look based on the information already covered. You will then want to do your research. Call some property managers in those areas and ask what the demand is for rentals in the area that you wish to purchase in. Whatever the vacancy factor, make sure you adjust for it when analyzing a property.

I always like to ask property managers what kind of properties are in demand. Are renters looking for 1, 2 or 3 bedrooms? Are they looking for apartments or houses? Who are my renters going to be? Where do they work? Are the industries that employ them going to continue? Are there military bases or Universities near by? Is the area maintaining or declining? Are there any new companies moving into the area? Get to know the market and how your property will fit in that market before you buy.

So what kind of property should I buy? Here is where I have to speak in general terms. If you are looking for capital appreciation, I typical recommend one to four unit properties. These are single family homes, duplexes, triplexes and fourplexes. You can usually get lower down payments loans that will allow you to use greater leverage. Your cash flow may not be as good, but if you are in your peak earning years, it may not matter as much to you. This strategy also works well if you are just getting started or you don’t have a lot of capital to invest with. When you are ready to retire you can exchange your highly appreciating properties for properties with greater cash flow.

If you have a little more money to invest you may want to look for larger buildings or commercial properties that will cash flow better. They usually require more money down. Your capital will not usually grow as quickly, but you will more than likely receive greater income from it. It’s important to buy properties that are consistent with your goals.

Millionaires are not extravagant – Many millionaires live a simple life. They do not spend frivolously and they are not concerned with impressing their neighbors. To them their true worth does not come from their outward appearances.

Proof can be found in the best-selling book, “The Millionaire Next Door,” by Thomas Stanley and William Danko. You’d never guess that the subject of millionaires could have anything to do with simple living, but it does.

Millionaires are savers – Most millionaires were not born wealthy, nor do most of them have high-level, exotic jobs. What they do have are simple lifestyles! It’s the simple lifestyles, not the big paychecks that turned these people into millionaires. According to the book, their wealth is the result of hard work, perseverance, planning and most of all, self-discipline. If you do not have the willingness to save, the seeds of financial success are not in you. Wait till you are a millionaire before you try to live like one.

Why are we not rich? – We regularly and continually give our money away to other people so they can become wealthy, while we live paycheck to paycheck. Very few people pay themselves first. We buy the latest cars, biggest houses, full wardrobes, daily espressos, high-tech gizmos and gadgets of all kinds. As a result, we never allow ourselves the opportunity to create the kind of lifestyle we want. We spend way to much time shopping and very little if any time investing. On the other hand, the millionaires are described in the book as “compulsive savers and investors.”

After surveying 1,115 millionaires around the country, authors Stanley and Danko came up with seven common denominators among those who successfully build wealth:

1. They live well below their means.
2. They allocate their time, energy and money efficiently, in ways conducive to building wealth.
3. They believe that financial independence is more important than displaying high social status.
4. Their parents did not provide economic outpatient care.
5. Their adult children are economically self-sufficient.
6. They are proficient in targeting market opportunities.
7. They chose the right occupations.

Nowhere on this list was “buying a luxury car or boat”. Spending money on “toys” and things gets you nowhere. You must have an investor’s mindset. I don’t like to buy things that don’t pay me rent. Simple living is about living conservatively and with a purpose. This means being in control of your money and your spending. When you save and invest your money rather than spending it, you are control of your future. Then you have the decision in how you’d like to spend your time. For me, I had better things to do than to sit behind a desk for 10 hours a day.

Eventually after a period of time of investing and saving you will reach a point where your investments are growing more than the income you bring in from working full time. This is where your life will have new choices. You have the ability to work only part time or not at all. This is vastly different from living paycheck to paycheck. You now have the ability to decide and live the rest of your life on your terms. What lifestyle do you dream about? Do you want to spend more time with your family? Do you want to donate your time or money to a worthwhile cause? It becomes all about choices at this point. Choose wisely.

The millionaire next door – “The flashy millionaires glamorized by the media actually represent only a tiny minority of America’s rich,” Stanley and Danko say in the book. “Most of the truly wealthy in this country don’t live in Beverly Hills or on Park Avenue — they live next door.”

The authors say that the typical wealthy individual is a businessman or woman who has lived in the same town for all of his or her adult life, and owns a small factory, a chain of stores or a service company. He or she lives next door to people with a fraction of his or her wealth. Their survey indicated that while the paycheck to paycheck crowd drives new cars, most millionaires don’t. They’re not wearing expensive clothes and watches and their houses are relatively modest compared to their financial status. Not everyone who has wealth chooses to display it.

If you really want to be a millionaire, you have to get into the habit of spending less and investing more. Eventually you may get to the point where you see the value in investing and you won’t want to spend money on anything that doesn’t give you a return. It really is fun to watch your wealth grow It happens faster than you might think. The key to success is to get started.

-The task in hand is overwhelming -The task in hand is unpleasant

Many times procrastination goes hand in hand with fear and doubt. Far too often people set up goals, plans and even strategies to overcome their procrastination when the reality is that the real issue is never being addressed.

Here are ways to beat procrastination resulting from an OVERWHELMING task:

-Start by planning – breaking the overwhelming task into manageable chunks.
-Get started on the task right away by taking a small slice at a time.
-Use a time slice as small as five minutes and start on the easiest part of the task. (Often, once you are involved, the momentum builds and procrastination retreats!)
-Get more information about the overwhelming task. Speak to others. Gather more details. The more you know, the overwhelming task can shrink and get more into perspective.

The real task must be head on and the emotional issues must accompany the goal.

-Start repeating to yourself all the benefits that will come from completing the task.
-Describe in graphic terms the worst possible consequences from NOT completing the task.
-Setting a deadline can kill procrastination as the mind gets locked on to the ‘mission’ to complete the task in a pre-determined time span.
-In planning, write out the steps in advance. As you come towards the end of one step, you automatically have the next step in mind, making it more difficult to put the task off through procrastination.

Here are ways to beat procrastination resulting from an UNPLEASANT task:

-Deal with the task immediately. Just meet it head on.

ACTION always kills fear!

-Repeat to yourself the greater unpleasantness that will result from not carrying out the task.
-Build enthusiasm for the results from the task, which will overshadow the unpleasantness of actually completing the task.
-Seriously ask yourself: “What is the price of procrastination in this case and am I willing to pay it?”
-Reason, “If I am going to do this job eventually anyway I might as well do it now and get it out of the way!”
-Think of ways to reward yourself at various stages through the task.