A Real Estate Stock Plan
by Dan Auito
This report attempts to weigh the pros and cons of active real estate investment
versus passive stock investment alternatives. Let me first begin by saying one
word to you: Enron. Well, what did you expect? Yes, this report is pro real
estate, con stocks. How appropriate!
This report is going to explain or attempt to give the stock market investors a
basic one-on-one interview with a real estate portfolio manager who has
consistently made a profit on 100% of the investment products that were actively
chosen and managed. Never a loss, always tax advantaged and sheltered.
This report will not contain any high-tech, gobbly-gook, stock market charts,
graphs, trends, analyst picks, projections, company reports or insider tips. In
real estate, you personally have the power to develop and create all of those
things yourself and I for the life of me could never trust other people’s second
hand opinions or publicly disseminated information to get the jump on the herd.
Now if I were a company officer, or majority voting shareowner, or a paid agent
of those individuals, I might think differently, for the simple fact that I am
getting the jump and I can make some dinero if I know something the majority
does not. Overall, people are told to build companies so they can sell it to the
public through offering pieces of their company to the public in the form of
stock. So I know from the very beginning that the owners of companies are
selling me a piece of paper which they say is worth a certain amount of whatever
value a dollar is worth at that time.
Let me see if I understand this. I transfer my hard-earned cash and I pay a fee
and/or commission to do this, and you give me a fancy certificate and a promise
that this represents a solid investment decision. No way!
I’ve seen people lose their life savings counting on other people’s paper
promises. I am not comfortable sitting on the sidelines rooting for everyone
else to make money for me. Who are we kidding? I would be last in line and get
paid after all of them. And just how are they getting paid? Well, I see it as
this: They get me to buy more fancy certificate paper, backed by more promises,
while at the same time encouraging me to hold onto the previous certificates.
All the while, the value in those is slowly liquidated to pay salaries and
expenses of the inside corporate raiders of my blind faith and trust.
Boy, am I a skeptic. Let me shift gears here and take everything back I just
said because often what I just said is dead wrong and two words will prove me
wrong quite often. Those two words are “Blue Chips.” Many companies do provide
value, dividends and growth opportunities. Who am I to talk bad about the stock
market? Don’t get me wrong. It’s an awesome institution and a complex and
intricate financial function of the world’s economy. Everyone feels the effects
of this juggernaut and many people are afraid to upset the world powers by
saying anything that will get the ire up of the kings of Wall Street, so they
just clam up and slump into obscurity.
To heck with that attitude! Take control people. Actively manage your own hard
assets and get off your *#!, and quit rooting for the other guys out there to
make money for you. I’m not saying if you’re 60, 70 or 80 years old, that I
expect you to go out and start swinging hammers and saws. That’s not necessary.
Use your brain at any age to control directly the events that are going to add
to the bottom line. With real estate, you can use relatively simple math and
your two eyes to see the whole picture. No charts, graphs, prospectuses,
opinions or guesstimates. You invest less than ten miles from home in your own
neighborhoods so you know all about market activity and current local economic
conditions. You know prices and demand for your investment, as the local
classified section of your newspaper is an instant picture of your markets
fundamental outlook. Your competition advertises its position and you react
immediately.
I’ll tell you this: I don’t stay up late reading small print, trying to find all
the loopholes in company reports and federally mandated quarterly and annual
filing and disclosure documents. That is a total waste of my time because in the
end, nobody makes any promises to anyone. You in the end invest at your own
risk; that is made clear.
Even when they catch the bad guys that use fraudulent accounting procedures and
cook the books and shuffle assets and count them twice or commit some other
white-collar crime, the fact remains that the money is gone and your out of
luck.
Well folks, I’ve never been out of luck and I never will because I decide what
is a good deal. I buy my houses below market price, add value to them in a
hundred different ways and capitalize on those assets in many different ways.
It’s hands-on, eyes and ears open, active, direct control. There’s no guessing,
no hoping, no cheering, voting or scanning for loopholes in incomprehensible
legalese boilerplate.
I circulate, select and direct. I negotiate and use my own strategies and
tactics. I rehab valuable hard assets and use them to generate income, build
equity, access tax-free cash, shelter other income from taxation and lower my
tax brackets. Almost everything in my real estate business is deductible, so my
gains are my gains. I can defer paying gains with 1031 exchanges and a host of
other legal and ethical, easily understood ways to secure my future profit
picture. You don’t need a license to do this, just a pulse.
If you feel real estate investing is more difficult than stock market investing,
I believe you are wrong. It’s much safer to the average individual who doesn’t
have all kinds of crazy options, puts and calls, true insider tip-offs or hours
and hours of time to hopefully understand more than the next guy in order to
sell your stock to the next person for more than you paid for it. Unless you’re
accredited, you should be institutionalized.
With real estate, if I buy my investment property with owner occupied, 10% down
financing, I am using 90% loan-to-value leverage. I don’t suggest you do that in
the stock market. If you make a little timing error, your investment career
could be over.
So to put it in general terms, $1,000 controls $10,000 and $10,000 controls
$100,000. Now if I buy a house that costs $100,000 and I put $10,000 down to
control it and the market appreciates 10% the first year, I get my $10,000 back
and keep the asset. It becomes a perpetual money machine and I don’t have any of
my own money at risk.
There are closing costs but they are deductible as expenses. Here is another
point. My rich Uncle Sam wants me to provide housing for his citizens to live
in, so he let’s me take depreciation on my investments to encourage me to
rent them out to others. This explains a tax benefit in real estate that helps
us common people who actively participate in the management of the investment
who are not making over $150,000 a year in adjusted gross income.
For example, if you pay $100,000 for a house, Uncle Sam says that this house
will slowly disintegrate to dust in 27.5 years and for non-residential real
property, 39 years. The land will always remain so they say 20% of the purchase
price was land. So you only depreciate the house’s value. In this case, that
would be $80,000 and $80,000 divided by 27.5 years = $2909.09 per year for 27.5
years. That benefit can get you in lower tax brackets by reducing your taxable
income on other income, such as your regular job or other investments.
Thus, you save today’s dollars, and when you sell the house years later Uncle
Sam recaptures that amount but it is later on, after your investment has
increased in value and the dollar hasn’t. Believe me, it helps you a lot more
than it ever hurts. A good C.P.A. will use it to make you money now. Note: A
1031 tax deferred exchange can delay repayment of capital gains indefinitely.
Here’s how to play a decent game of real estate investment! Buy something at 20%
below its market value. This is not hard to do. It may take you, as a new
investor, 3-6 months to find it.
You’re learning curve will let you acquire under market value property at faster
and faster rates from months to weeks to days. It takes practice. Use the book,
Magic Bullets, to move fast.
So you find a $100,000 property and you put down 20% (investor rate) as the down
payment plus $2,500 in closing costs. The bank loans you $80,000 to buy it. If
you’re getting older, then pay someone to clean it and paint it. Get the bank to
reappraise it for its true value of $120,000 or more. Take out an equity line
and get all your money back, tax-free. Now let the tenants pay it off for you
while it goes up in value and throws off positive cash flow, and shelters itself
from taxation. This is not hard to do – www.magicbullets.com will walk you
through it.
I personally believe the hardest thing to do is to hold on to the real estate
investments that you do acquire. What people tend to do is get tired or itchy
and they sell the goose. When you sell, you do get a lump sum of cash but now
you have to go out and find more. This can become like a revolving door. You
have to keep going in and out of the market buying and selling again and again.
Sound familiar?
If you just buy and don’t sell your investments they will grow in value through
inflation, appreciation and equity accrual/mortgage reduction. Eventually, you
will own them free and clear, and with 4 or 5 houses throwing off $1,000 or more
each month, you will have approximately $60,000 a year in retirement income. I
know my parents could live on that…how about you?
Then as you get older, sell one, preferably the one you have spent two of the
last five years in as your primary residence. The reason for this is because
Uncle Sam says that you don’t have to pay any capital gains on the sale of your
primary residence until you have exceeded $500,000 in sheltered gains.
For example, lets say you just sell one home. You’re in your early 60’s and you
have had the house for 25 years. Lets assume you paid $100,000 for it and it has
appreciated at a moderate rate of 5% each year on average. For those 25 years,
its present value now would be $338,635.31. That is a capital gain of
$238,635.31. You pay zero, nothing, in taxes on your profit, using your
exemption up to a $500,000 lifetime cap for married couples or $250,000 for
single folks.
The entire $338,635.31 is yours to do with whatever you please. It is 25 years
later, so your buying power as a result of 3% inflation has eroded your buying
power but think about all the people who have no real estate to fall back on.
Ouch! That’s no way to live.
No surprises here. You can actively manage your own properties for years and if
you do it right and use my methods of acquiring tenants, you just might get
lucky and get a lifetime tenant. I’m not going to let you say that it’s
impossible because I’m going to agree with you that it’s probably not going to
happen.
Here’s what the statistics say (no charts or graphs). People move on average
every 5 years so you should reasonably expect to have at least 5 different sets
of tenants.
That’s fine because every 5 years, you can update your properties appearance and
raise the rent to match current market conditions. Long-term tenants always seem
to keep you from achieving a true market rent if they stay for 10-15 years, and
they do stay. I see it all the time and I still get market rent…you’ll see!
The figure that says people on average move every 5 years applies to you too. If
you get itchy to move or sell, then do the following: Don’t sell anything! Just
use equity lines to acquire your next, nicer house and don’t move further than
10 miles away from your investments. Even the pros blow it on this one.
If you pay attention to what I just said, you should retire comfortably, with
more money than the average person ever needs. You have a choice.
I will use a true story to illustrate my point. My wife’s uncle bought 2 ½
acres, in what his buddies from his telephone company job used to say was no
man’s land. He bought it for $15,000 in 1972. He financed his 3 bed/2.5 bath/2
car garage, ranch style, block home construction for an additional $32,000, for
a total of $47,000.
Well, he sold that house in 2001 for $365,000. He paid no commission (I showed
him how) and he paid no capital gains. That’s a real life story of a $318,000
tax-free gain or profit on a $47,000 investment. He did hold it for 29 years but
he has no money worries and lives a life of ease and comfort.
So my point: Collect a few houses and don’t sell them. That is the Magic Bullet
of this story!
I’ll admit to you that I’ve shorted the stock market a few times and never lost
on stocks either, but there are way to many closed-door conversations that I’m
not allowed to listen to. I have a feeling that there is a reason for that. Can
you guess what it is?
I learn more, make more, have more, do more and help more by actively managing
my investment from less than ten miles away. I know all the players and there
are no closed doors. My business associates are true friends, who help each
other make money by providing excellent value for our customer’s dollar, and
that customer is my tenant.
My rentals are superior to my competition, to the degree that my wonderful
tenants remain tenants for life, or they buy it from me if I decide to sell.
Rental real estate is a rewarding investment. It is not just the money; it’s the
value that you personally deliver.
I choose to live with purpose, passion and desire. I can’t do that in the stock
market. How can I help you personally by investing in stocks?
Bio:
Dan Auito is a dual-licensed real estate agent and appraisal assistant. In
addition to being a 20-year veteran of the United States Coast Guard, Dan has
also founded a non-profit drug prevention corporation, a real estate consulting
group and is the author of “Magic Bullets in Real Estate.”
Dan lives with his wife Kimberly and their two children, Brandon and Briana, on
the emerald isle of Kodiak Island, Alaska.