Creative Real Estate Investing

Millionaires Invest in Real Estate

Do you want to invest in real estate but short on cash? Not having to deal with tenants?

Real estate investing does not require lots of your own money. Not only that. You can pay down your 30-year mortgage in less than 10 years, use OPM (other people's money) to invest in real estate AND generate a stream of "passive" income. Income that goes automatically to your bank account without you doing anything or lifting a finger.

Sounds pretty good. I can see you putting on your skeptical thinking hat.

Don't worry. I was in your same position when I first heard of this strategy and was skeptical too. But after I learned what it is, the light bulb in the head just light up.

This is exactly what I've been looking for. I was looking for a way to finance my current mortgage so I can have access to my equity because I realized early on that in a traditional mortgage (the one that you and I have) accumulates equity, which is a good thing. But you can't use that money until you sell your property. That's why some homeowners are "home poor" because most of our money are locked in our homes.

I have always wanted to make some real estate investment, but I don't have the cash available for the down payment. All my cash is tied up in my home equity. And I don't want to take a home equity loan, because that means another loan I have to pay every month.

I started looking into selling my property, which has accumulated quite a bit of value in just 5 years (of course, it is in the highly-sought after Waikiki neighborhood), and purchased another residence with extra units for rental income.

One day while talking to a friend who is in similar situation, she mentioned about "off-set mortgage". Apparently, it is something that has been around for years in Australia and United Kingdom. According to Investopedia, the reason why off-set mortgage is not available in the United States is because of our tax law, which translates to "banks does not reap much profit from off-set mortgage". That's why it be banded by our tax laws.

Investopedia explains the off-set mortgage in a very simple and easy to understand way. You should check it out here.

Then I started asking my real estate broker, who has been in real estate business for over twenty years if he had heard of off-set mortgage. Of course, the answer is no. I asked banks, loan officers, etc. They all gave me a negative answer.

Out of nowhere one day, another friend of mine called and want my opinion about a property she and her husband are contemplating whether to buy or not. And during the conversation, she mentioned some kind of financial education that helps people with their mortgage and it's called "Sweep Strategy". I have no idea whatsoever. But I looked it up anyway per her recommendation.

Voila...the information on the website caught my attention. I attended the introduction presentation, which is totally and purely informative. No pressure or obligation whatsoever to buy anything or sign-up.

After the presentation, I was like "God just answered my prayer". This is exactly what I was looking for.

How funny?

I always say be careful what you ask for, because you always get what you ask for.

Visit www.sweepstrategies.com to learn more. And if you're curious, schedule to attend an introductory class. They have offices in Ward area and Aiea.

Disclaimer: I have no financial ties with the Sweep Strategies other than being one their potential clients and partners. I'm just a purist who loves to spread the joy and any good information that I have to my friends and family. It surely would be nice if you mention my name as the one who refers you to them. They will treat you exceptionally well.

Here are few creative strategies to help kick start your real estate investing career:

Honolulu Homes and Condos Sales Market Stats September 2016

Honolulu Homes Sales Stats September 2016

During September 2016, single-family homes sales were flat compared to September 2015, while condominium sales increased by 6.7 percent compared to September 2015.

The median price paid for single-family homes in September 2016 increased by 2.7 percent from the same month last year to $750,000. The median price for condominiums increased by 4.7 percent from September 2015 to $383,250.

According to the Days on Market indicator, the median days on market for single-family homes and condominiums was 16 and 20, respectively.

"Oahu’s housing resale market in September indicates that there was no slowdown in demand as the summer came to an end,” said Kalama Kim, 2016 Honolulu Board of REALTORS® President.

“While single-family home sales were flat compared to last year, the median days on market of just 16 days show homebuyers are still aggressively seeking opportunities. Another indication that demand is still strong are the pending sales figures, which show increases of nearly nine percent for single-family homes and 14 percent for condominiums, compared to last year. We are concerned about a drop in active listings for both single-family homes and condominiums during September, as more inventory is needed to satisfy the demand for housing, which has been the case for some time."

For Sale by Owner Makes Perfect Sense

Where Buyers Find their Homes

Did you know you do not need a real estate agent or broker in a real estate transaction?

If you think about it, buying and selling real estate property is like buying and selling a car, you can do it yourself.

Real estate agents and brokers are just car sales men in the real estate. They just want to make money from you.

For sale by owner makes sense and saves you lots of money.

And here’s how.

The median single family homes in Hawaii is $750,000. The average commission for a real estate transaction with a real estate agent or broker is 6%. You’re paying $45,000 for a random joe to sell your home. If your home is worth a million (which is majority of the homes in Honolulu), you’re paying this random joe $60,000 to push papers for you.

How about you save the $60,000 and hire an attorney, who can draft your purchase contract and give you legal advise about your estate planning and tax at the same time.

People are afraid of lawyers because they think they cost too much, which is true. They do charge a lot for good reasons, they have your ass cover when the time comes.

My attorney charges $400 an hour. The $60,000 commission you pay for your real estate agent, who does not provide any legal advice because they don’t know anything, will buy you 150 hours of attorney time.

My attorney went to 4-year undergrad, 2-year law school and passed his BAR exam, and is entitled to charge $400 an hour for legal fee, which is consider expensive.

A real estate agent (may or may not have a college degree) went to real estate agent prelicensing course for 60 hours and passed the real estate salesperson license test.

Say your real estate agent spends 50 hours for your listing…I don’t know, they may do 1 or 2 open house (4 hours each), writing listing description, etc, etc. Let’s say 50 hours, that’s $1,200 an hour.

Seriously?!

Unless you make more than $1,200 an hour, I would do it myself.

Did you know how easy it is to sell your home on your own. The hardest part is marketing.

Read “How to Market Your Real Estate Property?”

Chances are if you’ll need your attorney to draft the purchase contract and go over your trust and estate planning stuff, you’ll probably needs a few hours of your attorney’s time, which probably would cost you a few thousand.

Even if you use a lot of your attorney’s time chit-chatting, say 50 hours, you’ll still come out only $20,000 on attorney fees.

Remember, the commission you pay your broker or real estate agent is just one of the closing cost. You still have more to worry about when you close.

If you used a real estate agent or broker, his/her only tasks are writing you listing description, list in MLS, find a new agent to do open house for them, answer calls from other agents about showing. Most of the time, it’s the buyer’s agent who show up to showing, so your agent just sits pretty in the office waiting for an offer to come through, and get you to say “yes” to the first offer that come through, so he/she can close and pocket the commission.

Once you have an agreement with the buyer, signed the contract and start escrow. There’s not much left to do - schedule home inspection, and just wait.

Real estate agent or brokers are not allow to give any legal advice. The standard Hawaii realtor’s Purchase Contract specifically provides that your real estate agent is not providing you with legal advice, and you should seek legal counsel. So, you are might as well hire an attorney from the beginning.

You know what’s worst?

Of course in Hawaii, everyone knows a friend or a relative who is a real estate agent. Hiring a Hawaii realtor is especially inefficient when the sale is between family members, and both sides are using a family friend to be the dual agency broker. That “family friend or relative” may receive a six percent (6%) commission for processing paperwork, even though as a dual agent they have probably utilized the standard “Dual Agency” disclosure which provides that he/she cannot really take sides. So who does he/she work for?

They can't give legal advise, and they can't take sides. So why are you pay this person?

Related article: Real Estate Agent…Absurd?

Anyway, if you decide to sell your real estate property on your own and put up a for sale by owner sign in your front yard, the process is really simple.

Advertise your real estate property like you would selling your car. Seriously, do you hire someone to sell your car?

Write a very descriptive ads from your property.

Show your property to potential buyers. You can do a open house event or private showing.

When you have a potential buyer, contact your real estate attorney to have him/her draft your real estate purchase contract.

Have both parties signed.

You’ll contact an escrow company to open escrow. Actually, the buyer opens escrow. When I purchase my last real estate property, I went to Downtown to the escrow company myself. My agent did nothing.

Your buyer should contact a home inspector for home inspection. This is a buyer’s expense. It’s up to the buyer to have an home inspection.

If you’re a condo owner, you’ll contact your property manager to have condo doc send over to your buyer.

The escrow and title company will make sure the transaction goes smoothly and both parties get what they agreed upon.

The other advantage of selling the real estate property on your own is that you know the property best. You get to meet the buyer directly, interact and negotiate with them directly without a third or fourth person involved.

According to the National Board of REaltors, 44% of buyers find their homes online (not from an agent).

Related article: Simple Home Selling Tips to Sell Your Home FAST.

There are many available sites to market your real estate property for sale. Here’s are a few that I use. If you type in “for sale by owner” in Google, more sites would show up.

Craigslist

Owners.com allows your listing to be posted in your local MLS.

ForSaleByOwner.com

For Sale By Owner on Zillow

Don’t forget social media. Share your postings on Facebook, Twitter, Instagram, wherever your people hang out.

Having hard time selling your real estate property? Let us help

Related article: Sell Your Home Fast

Honolulu Real Estate Market Stats July 2016

Honolulu Real Estate Market Stats July 2016

“While sales of both single-family homes and condos dipped compared to the previous year, the increase in prices year-over-year for both indicates the housing market is still very strong,” said Kalama Kim, 2016 president of the Honolulu Board of REALTORS®.

“The drop in condo sales is typical of the cyclical nature of the real estate market. Historically, we’ve seen a peak in condo resales during the summer, followed by a slight dip the following month.

As for prices, a decrease in the number of sales with a corresponding increase in prices usually means buyers are being more aggressive with their offers.”

Honolulu Real Estate Market Stats June 2016

Honolulu Home Sales June 2016

During June 2016, sales of single-family homes were flat compared to June 2015, while condominium sales increased by 9.8 percent compared to June 2015. The median price paid for single-family homes in June 2016 increased by 8.6 percent from the same month last year to $760,000. The median price for condominiums increased by 19.6 percent from June 2015 to $405,500. This represents new record highs in median price for both single-family homes and condominiums. According to the Days on Market indicator, the median days on market for single-family homes was 14 days, and 20 days for condominiums.

“The demand for single-family homes was especially high in June with the median days on market setting a record pace at just 14 days,” said Kalama Kim, 2016 president of the Honolulu Board of REALTORS®. “Both single-family homes and condos surpassed the previous high marks for monthly median prices. However, a closer analysis of these figures shows that the median price for single-family homes was skewed a bit by the sale of 20 properties for $2 million or more. Affordable homes are still available, as 124 of the properties sold were for under $700,000. As for condos, 267 units were sold for under $400,000. Despite rising prices and increased competition for properties, we continue to recommend that potential homebuyers should consider widening their search for housing that best meets their needs and budget.”

Read more...

Honolulu Real Estate Market Stats May 2016

slow but steady growth

During May 2016, sales of single-family homes increased by 3.2 percent compared to May 2015, while condominium sales increased by 6.0 percent compared to May 2015.

The median price paid for single- family homes in May 2016 increased by 3.0 percent from the same month last year to $719,000.

The median price for condominiums decreased by 0.5 percent from May 2015 to $373,000. According to the Days on Market indicator, the median days on market for single-family homes and condominiums was 17 and 15, respectively.

Fee Simple vs Leasehold Homeownership

Fee Simple vs Leasehold

n most areas of the United States, land is owned in fee simple. A fee simple owner has ownership of the entire property, including both the land and buildings. Fee simple ownership is the most common and complete form of land ownership.

Leasehold ownership was a very common method of ownership on Oahu 30-40 years ago with most residential homes being owned in leasehold. It enables homebuyers to purchase a properties at far lower cost than if the properties were purchased as fee simple.

A leasehold interest is a rental agreement created between a land owner (the lessor) and a lessee, who is leasing the land from the fee simple owner.

This rental agreement is called a ground lease. It is usually written for a period of 55 years with 30 or 40 years at a fixed rent and then a slightly higher rent for an additional 25 or 15 years. The lease rent is usually renegotiated every 5 years. Lease extensions or renewals are common so leasehold homeowners or buyers could obtain long-term mortgages for refinancing or purchases.

A lessee acquires leasehold rights similarly as fee simple rights. However, the leasehold interest does differ from a fee simple interest in the following five aspects:

(1) The buyer of residential leasehold property does not own the land and in almost all cases, pays a ground rent to the lessor.
(2) The use of the land by the lessee is limited to the remaining years covered by the lease.
(3) When the ground lease ends, the land returns to the owner or lessor. If there is a surrender clause in the ground lease, the buildings and other improvements on the land may also revert to the lessor.

NOTE: Most of the ground leases on Oahu contain a surrender clause; i.e., the buildings and other improvements revert to the lessor at the end of the lease.

That’s why I prefer to purchase leasehold properties in buildings that have a mix of fee simple, leasehold or fee available. This way I know the building will continue to exist when the grand lease expires, and the fee is available for sale.

(4) The use, maintenance, and any alterations made to the leased land are subject to local ordinances as well as any restrictions contained in the lease.
(5) a lessee can sell or transfer the ground lease to another party, referred to as an assignment of lease; however, the sale or transfer is usually subject to the review and approval of the lessor.

So, what happens when the ground lease on a condo expires where the fee has never been offered?

Well, no one knows.

The ground leases on the first two leasehold complexes expired in 2007. It was hoped that a precedence would be set by these first two complexes, but that did not occur. Both complexes were quite small. The first lessor reluctantly caved-in to community pressure and agreed to sell the fee interest to the leasehold owners. The second lessor went to court where a judge ruled early in 2008 that the lessees would have to surrender their homes. Unusual circumstances existed with each of these complexes, but similar unusual circumstances are likely to exist with other complexes.

Leasehold ownership on Oahu has become increasingly unpopular in view of all the uncertainty. If the fee is available, many buyers will purchase it simultaneously with purchasing a unit in leasehold. Therefore, the leasehold value for a unit is usually the fee value for a comparable unit less the cost of the fee and fee closing costs. The cost to buy the fee is a combination of the unencumbered value of the land offset by the remaining years on the lease. As the lease gets progressively shorter, the fee price usually gets progressively higher, particularly near the end of the lease.

Mortgage financing also becomes an issue. As the lease gets progressively shorter, it becomes increasingly more difficult to find lenders that make loans on the property. When there are less than ten years remaining on the lease, the leasehold property is virtually unsellable except to a buyer that is willing to pay cash at a very discounted price.

There is also a 30-year requirement on the land lease for a leasehold property to qualify for a 1031 exchange, which means there must be at least 30 years remaining until the expiration of the lease (not renegotiation).

If you are the owner of a leasehold property, we advise you, in most cases, to buy the fee as soon as practicable, as the cost of the fee will continue to increase with time. If buying the fee is impracticable, in most cases, you should sell your property in leasehold as soon as practicable, as the leasehold value will likely continue to decline with time. If you decide to wait to sell for the next period of rising prices on Oahu, you may find that the cost of the fee has increased more than the increase in value of your leasehold home; i.e., you will net less from the sale. This general advice obviously varies with the leasehold property and the owner’s situation.

So are there good buys in leasehold?

Leasehold is considerably less expensive than fee simple, with the value decreasing toward the end of the lease. But some buyers are more concerned about what they’re able to do today than what may happen tomorrow.

The fact that a home is leasehold has no impact on the rent that it produces. So, some investors opt to buy in leasehold because leasehold properties can generates a pretty handsome cashflow.

The mortgage payment for some leasehold homeowners (offset by tax deductions) is less than the cost to rent a comparable home. So, some homeowners also opt to buy in leasehold. It may enable them to own in a complex that otherwise would be too expensive.
As long as you understand the implication of owning a leasehold property, there are many good buys in the leasehold to generate a good cash flow for investors.

Read more on Why Buy Leasehold Properties from Cash Flow

Why Buying Rental Properties Makes Sense?

Landlords grow rich in their sleep

6 Benefits of buying rental properties that you don't want to miss.

1. Cash flow

The most important reason for buying rental properties. Some people buy rental properties with poor cash flow, and hope that they'll either make even or appreciation will cover their loss. But you, as an educated real estate investor, should evaluate each property carefully to determine your CAP rate, return on investment and cash flow.

My strategy is if the property gives me good cash flow, I'll keep as rental property. If it does not have good cash flow, I just fix and flip it for a profit.

How to find real deals in Honolulu real estate market?

Related article: Invest in Leasehold Property for Cash Flow

2. Tax Deductions

The Federal government provides many tax benefits for rental properties owners. As a small business owner, you can deduct all operating expenses, such as property management fees, utilities, insurance, property tax, etc.

Another benefit that not many people realize. Say, you have a child attending college in Southern California and you purchase a rental property in San Diego. Each year you visit Southern California to check on your rental property, just to be sure your property manager is doing a great job. Each time you visit your rental property, you also visit your child. The whole trip can be written-off as a tax deduction as it is considered a business-related trip.

Ha...that's what I plan to do when my daughter goes to college.

We're not done yet. You also benefit from what is called "paper loss". Your rental property incurs depreciation, which you can write-off on your tax. This depreciation is calculated by dividing your property market value by 27 years. This is a "paper loss" because it is a loss that happens only on paper. Your rental property does not just vanish after 27 years.

This greatly reduces the income tax you pay each year.

Related article: Tax Deductions for Rental Properties.

3. Mortgage Reduction

This one is self-explanatory. As you, or should I say "your tenants", pay down the mortgage, you own less and your equity accumulates.

Related article: Pay Off Mortgage in 7 Years

4. Appreciation

Even though I listed appreciation as one of the benefits of buying rental properties, it should be looked at as the "icing" on the cake. Real estate market ebbs and flows, no one can guarantee that your local market would grow forever. So don't bank all your money on the property appreciation. The most important thing is cash flow. If you have a rental property that is giving you a positive cash flow every month, you're already making a profit.

5. Avoid Risk of the Stock Market

I'll let this South Park "It's all gone!" video explains the point.

6. The IRS Hobby Loss Rule does not apply to rental properties

The IRS Hobby Loss Rule states that business should make a profit in 3 out of 5 years, which means it's okay if you lose money the first two years during your startup, but by the third years, there should be some profits showing.

This is why rental properties make such great business. Rental properties are immune from the IRS Hobby Loss Rule.

With all these benefits, buying rental properties is like wealth building on autopilot. It's a no brainer!

Buy Leasehold Properties for Cash Flow

Leasehold Properties for Cash Flow

Hawaii real estate is unique in that many land on which building stands are owned by separate owner. The Bishop Estate owns many land in Hawaii, and so are many private owners.

What is leasehold properties?

Leasehold properties are buildings or structure that stand on a leased land. The owner of the building or structure own all of the structure on the land, but pays lease rent for the land on which is the building or structure sits.

Most home buyers shy away from leasehold properties because they are afraid of the lease rent and lack of control. Most home owners wants to own their home AND the land under it free and clear. Besides, lease are renegotiated every so many year, so there is chance that the new negotiated fees may be more than what the owner wants to pay, and this makes many people uncomfortable with purchasing leasehold.

Besides, it is generally more difficulty to get financing from banks, especially if you don’t have the cash, and needs financing. Most banks require the leasehold properties to have at least another 50 years remaining on the lease.

Some banks may be able to finance your leasehold properties purchase with portfolio lending.

At lease expiration, it is up to the lease fee owner to either extend the lease for or take the land back. In the case, where the lease fee owner decides to take the land back, that means the building on the land has to go “poof” or demolished or the lease fee owner may take the building and do whatever they want.

This is the biggest fear of leasehold properties purchase.

But Why You Still Want to Buy Leasehold Properties for Cash Flow?

For a savvy real estate investor, purchasing leasehold properties make sense. If you ask 10 people, 9 of those would tell you Honolulu is a horrible place for real estate investors because real property price is too high to provide good cash flow.

These people are missing out on a big lucrative market.

The purchase price of a leasehold property is usually a lot cheaper than fee simple. Of course, you’re not buying the land. You’re only paying for the structure. You pay the lease rent, or should I say your tenant pays the lease rent for you. But YOU write off the lease rent as tax deduction as operating expense.

This is how you can get properties with CAP rate of 6% or more. If you manage your property well and put it into good use, you can get even up to 30% CAP rate.

I can show you how.

If you get yourself a good deal, and you recooperate most of your initial investment before the lease expiration date, you’ll not have to worry about the lease fee owner taking the land back because you would have made your money back many times. If the lease fee owner extends the lease, that’s even better for you, your property continues to generate cash flow for you.

Here's another trick, I generally look for condo buildings where the lease fee is available to purchase. This gives me more control, and I know it will be my choice to give up the condo when the lease expires.

The other benefit is that when I'm ready to refinance, I can purchase the fee and own the condo free and clear.

The best time to buy a leasehold condo is when the condo AOAO just purchased the lease fee for the building and selling to the owners. This usually put pressure on the condo and many would choose to give up and sell their condo as leasehold. This makes them motivated to sell as many does not have the mean to purchase the lease fee or to get financing to purchase the fee.

Leasehold Property and Sandwich Lease

The concept of using leasehold property for investment is sort of similar to a sandwich lease.

In sandwich, you, the investor rent (lease) a condo from the owner, and you turn around to sub-lease the unit to a renter.

Say, you found a really nice rental property in a nice, highly desirable neighborhood with good school. The owner is asking for $2,000 a month rental income. You know you can rent this for $2,200. You rent the unit from the owner for $2,000, then you find a renter who is willing to pay you $2,2000 per month for this same unit. In this case, you cash flow with none of your own money $200 per month. No maintenance on your part either, because you’re not the owner.

Before you to start doing this, you need to be sure that the owner is okay with you sub-leasing. Just common courtesy.