Deedless real estate investing
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Yeah, it does. And while tenants are greatly loved by the novices at the Reddit subgroup, they are generally considered a necessary evil for those on whom the novelty of being a landlord has worn off. Outside-the-box thinking Maybe tenants are not necessary. I had them for 23 years. And I invested in real estate without tenants for 47 years.
I also invested in a single-family home jointly-owned by one of my sons who lives in it since Believe me, honey, without is better. At the Reddit subgroup and maybe most real estate investing groups, tenantless properties are outside the box. But outside-the-box thinking is good. Well put! It singled out the railroad industry for thinking they were in the business of operating trains and thereby thinking of motor vehicles, ships, and planes as competition. Instead, said the author, they should have realized they were in the transporting-of-goods business and partnered with the other modes.
Nowadays, we recognize the shipping container as the defining object and trains as just one way, along with trucks and ships, to move goods. The typical container now probably travels part way on each of the three. Increasing net worth through real estate I have long defined real estate investing as increasing your net worth through real estate.
You can do tenantless investing in many ways. You can do residential tenantless investing in many ways. You can do deedless real estate investing. You can invest with less than a fee simple relationship to the property. I do not get the impression readers at Reddit are really against increasing net worth through real estate. Rather, that is the sort of inside-the-very-tiny-little-box assumption there. Which weighs more, a pound of feathers or a pound of lead? Which person has the higher net worth?
In initially made that mistake—for 23 years. I am a slow learner. I started buying single-family principal residences in and have done that for 42 years. I would now argue that 2- to 4-plexes are better investments than buildings with five or more units in them for reasons having to do with political risk and financing. But owner-occupied, single-family are infinitely better. KISS and holistic I am Are year olds smarter than younger people?
In some ways, yes. Owning your home is a simpler form of real estate investment than owning one or more rental properties. Owning the home in fee simple is simpler than owning it in an LLC. It sounds sophisticated, shrewd, clever. The young tend to see their lives divided like the tab dividers in high school and college binders—English, math, house, rental property, spouse, and so on.
Older people see it more as a single, interrelated entity where whatever you do in one affects all the others, which is the more accurate view. Every new activity you adopt—getting married, having kids, buying a home, buying a rental property, adopting a hobby—takes time away from the other activities.
That includes real estate investing. Managing residential property takes about 3. No one can or does. Most money was made from good luck On the other hand, most of the money that most recent real estate investors made was made by being in the right place at the right time—good luck. So whenever possible, you want to be in a position to profit from good luck, if it happens, like all real estate values going up in your market. But you also need to be protected against all real estate values going down.
Just a year or two of bad luck can wipe out a lifetime of hard work and good luck if you fail to protect yourself. There are various ways to do that. Real skills you can learn The skill and luck chapter contains lists of those aspects of real estate investment that involved acquirable skill and those that involve luck that you can neither forecast nor control.
The vast majority of investors have been told, and many believe, that by taking seminars or reading get-rich-quick books, the entire process of getting rich in real estate will then be entirely within their control.
Not even close. As the great philosopher Clint Eastwood once said, "A man's got to know his limitations. For example, you can get very good at tenant screening, and you'd better if you become a landlord. There are other ways to invest in real estate than being a landlord.
But you can never acquire any skill at timing markets or forecasting market-wide appreciation. Risk and reward All investments consist of two main components: risk and reward. But all real estate investment books that I know of consist of only one component: reward. What's that? That would be the possibility that home values all over the U. They cannot.
They never did any risk calculations. They would not know how to do risk calculations. I learned how to do them at Harvard Business School, over my year career in this business, and from financial engineering and other studies. Risk management, which is absolutely crucial to any investment program, including real estate, is an acquirable skill.
The 4th chapter of my book Aggressive Tax Avoidance for Real Estate Investors , now in its 19th edition, shows how to use decision trees to calculate risks. There are also other ways. List of risks and management strategy for each First, you need to make a list of the risks to which you are exposed by whatever investment strategy you are pursuing. Then you need to manage them one by one. There is no single step that manages all risks in one fell swoop.
Chapter 5 of my book has that list then discusses how you manage the various risks. Some investors say, "Oh, I'm covered. I have an LLC. I'm sorry. That's incorrect. But thank you for playing. An LLC does not protect you from the risk of interest rates going up, or property values going down, which are probably the two biggest risks.
It may not even protect you from the risk its knowledgeable advocates claim it protects you from: tort lawsuit judgments. In most lawsuits against thinly capitalized LLCs, like little old you and your best friend and your wives owning a duplex. The plaintiff's attorney will sue both you individually and your LLC and throw into the complaint a boilerplate clause about the LLC being your "alter ego" and about your "commingling the LLC funds with your personal funds" and all that.
If the judge buys the alter ego, etc. In some cases LLCs or corporations can hurt you by forcing you to include your children in your pension account or by forcing you to hire an attorney for every nickel-and-dime legal matter that sole proprietors handle without an attorney in small claims court.
Other investors wave away all questions of risk management by saying, "That's why I have insurance. The list of real estate investment risks is far longer than the list of risks you can buy insurance against. Indeed, an LLC and insurance are somewhat redundant. You do not want to manage the same risk twice and pay double to manage it twice.
Each management technique has its costs. Redundant risk management is a total waste of your money. Other investors think they got risk all covered by diversification. That would protect you from municipal risk like rent control. But most states pre-empt municipal rent control so, again, you're wearing both suspenders and a belt to keep your pants up.
Redundant risk management. Waste of time and money. What about county? Do you own more than one property per county? They're all in the same county. Well then you are not diversified against adverse county laws like slow evictions. Nor are you diversified against adverse state laws, like no rent-control preemption or federal laws like the passive loss limits or regional or national economic downturns or international interest rates or property type risk like too many office buildings.
Diversification only protects you against risks unique to the jurisdiction you are not in twice, in your case, just town government or school-district risk. Deedless real estate investing How do you manage those risks in the real world? One way is deedless real estate investing, which is the subject and title of Chapter 6. They basically taught a Benjamin Graham Intelligent Investor approach to real estate investment analysis.
That is, the value of an investment property is the present value of all the cash income streams that will come at you as a result of buying the property, namely, cash flow, amortization of the mortgage, tax benefits, and appreciation realized when you sell the property.
That made sense, until I left the seminars and returned to the real world. In the real world of real estate investing, property values often went up, or down, by more than just the changes in the cash flow, amortization, and tax benefits. What was that about? What it's about is the subject of Chapter 7, "Bad instincts for investing.
My explanation of it is that human brains evolved during caveman days to deal with the best practices for the intelligent cave man. Those best practices included safety in numbers, flight is usually better than fight, better safe than sorry when it comes to physical injury if you have no HMO, if something happens twice it's best to assume it's a permanent pattern, vivid dangers like being stomped by a mammoth are more important than abstract dangers like interest rates going up, and so on.
What is logical for investors is often the opposite of what is logical for being a caveman. In the caveman world, all the dangers were physical: poison plants, attacks by animals or other tribes, falling off a cliff, fire, etc. In the investment world, caveman best practices like the herd instinct can be very bad. Behavioral finance experts call those caveman instincts that are incorrect when compared to more sophisticated analysis biases. You need to know all of your caveman biases that cause you to make incorrect investment decisions, like Enron employees investing their life savings in their company stock because it's, "what I know best.
Real estate investment is most definitely NOT so simple that even a caveman could do it. Those caveman biases also explain why property values sometimes rise or fall more than the fundamentals that seemed to make so much sense in Benjamin Graham's book or the CCIM courses. Behavioral finance experts are also often contrasted with traditional economists. Traditional economists speak only a "rational man.
You figure he's logical, well-informed about what he is about to do and always acting in his self-interest? Behavioral economists therefore come closer to the correct analysis. Economist and author Robert Shiller, co-author of the currently primary Case-Shiller Home Price Index, wrote a book called Irrational Exuberance which is a phrase he got from former Fed Chairman Alan Greenspan that describes crazy run-ups in the stock and real estate markets.
Shiller also speaks of irrational despair, which is where investors and home buyers get stupid in the other direction, like valuing a company's stock so low that its market cap total number of shares x current price per share is less than the amount of cash it has in the bank. Or valuing a home so low that it costs less to own it than it would to rent it. You have probably read a number of books on real estate investment and attended some seminars. I'll bet what you just read above doesn't bear much resemblance to what the get-rich-quick gurus said in those books and seminars, does it?
That's because I have been trying to understand real world real estate investment all these decades, and tell you what I learned. The get-rich-quick guys have been trying to figure out how to get you to give them your credit card. I have found that hard study and experience works best for figuring out what really goes on in real estate investment and how you can maximize your chances of profiting from it.
Layer cake of values The main focus of real estate investment is the value of the property and its hoped-for or deliberately-caused increase in value. Yet the vast majority of investors do not know where value comes from in real estate. In fact, the value of a property is like a layer cake. Investors have generally heard about the "bundle of rights" that comprise legal ownership—right to occupy, lease, improve, sell, etc. They need to know about the layers of value. They got a harsh lesson about one of those layers—the availability of cheap, high-loan-to-value financing—when the early 's bubble burst in response to subprime lending being taken away.
Chapter 8 of Best Practices for the Intelligent Real Estate Investor makes sure you understand all the value layers that can dramatically affect your net worth and equity. Where's the profit? If you think about it, hardly any real estate investment books discuss making a profit. They just assume that owning property is profitable—because of market-wide appreciation in prices. Chapter 9 of Best Practices Double-digit cap rates is a sort of Benjamin Graham Intelligent Investor value passive strategy.
What the vast majority of investors actually do is a passive or non-strategy I call "buy and hope. In , millions of buy and hope investors are lamenting the loss of a large chunk of their net worth. You don't have to hope for profits in real estate. Indeed, you should not just hope for them.
You can make them happen on purpose by using your skill and simultaneously protecting yourself from bad luck beyond your control. If it's vacant, you have to move at a frantic pace Many real estate investors own vacant properties, usually because they are fixing them and hope to turn them over quickly. It better be real quick as explained in Chapter 10 of Best Practices The carrying costs can very quickly eat up all your profits.
More to leverage than infinite returns Newbie real estate investors love to talk about the infinite returns they get from nothing-down purchases. As Chapter 11 explains, it ain't that simple. For one thing, there arguably are no true nothing-down deals because you have to spend extra amounts of your time to get them and time is money, too. Then there is the risk. Almost all other gurus are trying their best to keep you from thinking about the risks. Best Practices The Leverage chapter also makes sure you can calculate the situations where leverage is positive and where it is negative loan constant exceeds cap rate.
It also explains what almost all investors do not understand, but need to. That is, inflation, contrary to what everyone thinks, is not necessarily good for real estate investors. For one thing, high inflation tends to raise mortgage interest rates which depresses resale values. Only when inflation is combined with a fixed-rate mortgage does your equity grow in real adjusted for inflation terms as a result of inflation.
Free-and-clear buildings do not increase your real equity from Consumer Price Index increases in value. Chapter 11 also explains why use of lots of leverage proves your ignorance more than it proves your manhood. Experience matters Experienced people understand things better than inexperienced people.
Deedless real estate investing distributed crypto magazine
If I Had to Start Over in Real Estate in 2022, Here's What I'd Do
You may be shocked at how strict and varied some of the above examples are.
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| Speedway european championship betting tips | He's a renovator from Cali, likes the place for his own residence. Chapter 12, "The History of Real Estate Investment," gives you much needed artificial experience if you lack the real kind. It will also be rather difficult to remove any of these rules; even extremely strict deed restrictions are typically upheld by the courts. Best Practices Construction, external forces It also requires expertise in complex building systems like heating, air-conditioning, plumbing, roofs, electrical systems, and so on. |