Buy Real Estate Better than a Billionaire
Good morning, Live Better than a Billionaire-a-Holics!
Are you feeling motivated this morning? I certainly hope so. I know that I am!
What advice have you heard about buying real estate?
For some, it's location, location, location. For others, it's buy low, sell high. For others, it's buy, rent and hold.
What if you found out that those aren't the best rules? Would that change your mind about how you look at real estate?
Billionaires have to do large deals. Can you imagine Donald Trump looking into buying a $100,000 lot?
They also have a certain image to maintain. Most won't buy a boarding house.
You have a lot more flexibility. Although you won't be able to do the biggest deals, those deals often don't have the best returns.
How can you use that flexibility to your advantage?
Observations
Most real estate investors feel like they always need to be buying real estate.
There's a problem with that approach. You will end up buying when prices are high and potential returns are low.
In fact, the reason that many real estate investors go bankrupt is because they buy in with too much debt at the top of markets.
A better approach is to be a contrarian real estate investor.
By that I mean you do the opposite of what most real estate investors do.
What are most Americans doing right now? They are buying homes and condos with adjustable rate mortgages while using as little equity as possible. That's a recipe for disaster.
Recommendations
1. Buy where interest rates, tax rates and inflation are about to fall after having spiked to historically high levels.
There's almost always a better country to buy real estate in than your own. If you only buy real estate where you are a citizen, it's like going to Baskin-Robbins and only ordering vanilla ice cream. You're missing out on a lot of better choices.
When interest rates, tax rates and inflation drop, real estate values soar. That's when you make the most money in real estate.
The higher the previous peak in interest rates, tax rates and inflation . . . the better for you.
Those shifts will also trigger a huge inflow in investment capital, so the currency will usually strengthen versus your home country's currency. That's more icing on the profit cake for you.
Where's this going on? Think Brazil.
2. Pick real estate investments where the land value is a high percentage of the total price.
Buildings deteriorate. Styles change in what people want to do with buildings. If your property has a high percentage of land value, someone can bull-doze your building and put something more valuable on it. This means that you have little downside risk.
For example, in our little town in the countryside, people only want to build mansions now. But there aren't many building lots. Most houses in town are over 50 years old. But they are in good condition. You can buy one of these houses for the value of the lot alone. If you rented the house out, you would cover your cash flow costs from the property while easily enjoying a gain on the underlying land. When someone wants to build a mansion on it, you can sell for top dollar if you own a mansion-sized lot.
3. Borrow more money when prices and interest rates are low and pay down your debt by selling properties when prices are high and before interest rates rise.
Borrowed money is what brings down real estate investors. Interest rates soar just when they are having a hard time selling properties. Central banks don't like it when real estate prices go up too fast. They will raise interest rates to stop that (like the Federal Reserve is doing in the U.S. now). Those rising interest rates reduce the number of potential buyers, real estate is harder to sell, prices fall, and those who cannot make their mortgage payments lose their real estate.
4. Whether you use borrowed money or not, sell when interest rates have fallen to very low levels relative to inflation.
Interest rates usually don't lag inflation for very long. Eventually, interest rates reach well above inflation. Going from interest rates being well below inflation to well above inflation can deflate real estate prices by 50 percent or more. You don't want to sit out such a trough. And you want to be able to buy back in at the bottom of the price drop. Even having to pay capital gains taxes to become liquid will be worth it.
5. Buy income-producing real estate.
You can make money on raw land, but you'll also end up putting a lot of cash into paying for interest costs, property taxes and maintenance (such as keeping the weeds down). Income-producing real estate doesn't have nearly as many cash flow problems.
6. Where possible, legally avoid taxation when you sell.
Find a tax attorney who regularly works with the income tax treatment of real estate transactions before you think about buying or selling. They can tell you how your choice of property and sale method can be done to eliminate, postpone or reduce income taxes. Note that most attorneys and accountants don't have this knowledge. They will claim to be able to look it up, but chances are greater that they will mislead you unintentionally.
If you are thinking about buying abroad, you'll need two such attorneys -- one for your home country and one for the country you want to invest in.
7. Find the most volatile markets to invest in.
Real estate prices cycle inversely to interest rates and economic growth. But some areas cycle more than others. My favorite example can be found in the condominiums that line the water on the Kona side of the big island of Hawaii. In the past, I've marveled at how those same condominiums go from way underpriced to way overpriced . . . while still offering the same great weather and view of the water.
8. Be diversified outside of real estate.
Have 70 percent of your net worth in something other than real estate. That way when you find a great opportunity or need cash to cover a temporary bobble you'll be fine. Listen up, Donald!
9. Avoid personal guarantees on your debts for real estate.
Real estate developers are expected to pledge their personal assets to lenders for their developments. That's why many real estate developers you'll meet have been through bankruptcy court proceedings. It's not pleasant. It also magnifies your risk of loss. Instead of losing just your equity, you can lose much of the price of what you spent plus the development costs you added. Does it feel good to imagine that you're taking these risks?
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N.B. As you can tell, I'm experimenting with color. Let me know what you like and what I should change about my use of color. Many thanks to Linda Grace for her suggestions which I am following!
Please let me know what else you would like to learn, and I'll do my best to help in future blog entries.
Here are some upcoming subjects:
Monday, I will share with you billionaire secrets for visiting mansions and seeing what most people miss.
On Tuesday, you and I will look at the best ways to party with the stars.
Wednesday, we'll look at new places to enjoy grand historic buildings.
Thursday, let's take a close look at the beauties and ironies of nature with Ansel Adams.
On Friday, we will look at better ways to enjoy outdoor living before the weather turns cold.
Saturday, join me to look at how you can create a collection better than a billionaire.
August 31 was the most frequently read blog entry to date. Be sure to check it out!
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Remember to check out
Live Spiritually Better than a Billionaire at http://livespirituallybetterthanabillionaire.blogspot.com/,
Be More Successful than a Billionaire at http://bemoresuccessfulthanabillionaire.blogspot.com/,
Enjoy Mansions Better than a Billionaire at http://enjoymansionsbetterthanabillionaire.blogspot.com/,
Enjoy Football Better than a Billionaire at http://enjoyfootballbetterthanabillionaire.blogspot.com/ and
Be a World Hero Better than a Billionaire at http://beaworldherobetterthanabillionaire.blogspot.com/.
I offer individual on-line tutorials and in-person seminars on living better than a billionaire on five dollars extra a day, creating 2,000 percent solutions (20 times the results with the same effort), developing more profitable business models and designing strategies that work regardless of the business environment. For information, contact me at ultimatecompetitiveadvantage@yahoo.com.
I am available to you as a professional speaker. You can find my background at http://livebetterthanabillionaireon5dollars.blogspot.com/2005_08_30_livebetterthanabillionaireon5dollars_archive.html/.
May God bless you.
Donald W. Mitchell, Your Dream Concierge
Copyright 2005 Donald W. Mitchell
posted by Donald Mitchell @ 7:17 AM
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