Investor

Once you own a home you can afford (economic developments of the last few months forced me to qualify that), you’re ready to start building wealth.

Real estate investing is a long-term (again with the italics) strategy.  Speculators get burned when they try to time the real estate market through short-term strategies (e.g. “flipping”).

Don’t over think, and don’t try to outsmart a system that’s probably smarter than you. Just:

Buy the right property.

Buy it for the right price.

Hold it.

Remove your emotions from the equation.

 

Making Money with Lease Options

November 14, 2011 1 Comment

Modified from the original article first published at ControlYourCash.com 

Here’s what you need:

1. 20% of the price of a house, condo or townhome.
2. A few months’ worth of patience.

Welcome to the lucrative world of lease options. They’re a way to increase your wealth with almost zero downside.

A lease option involves you buying a second home, renting it out, and giving the tenant the choice (or option, if you will) of buying the home once the lease expires. What makes the lease option so wonderful for the average landlord – correspondingly less so for the average tenant – is that you can charge above-market rates throughout the lease. After all, you’re doing the tenant the favor of letting her own the house after a year (or whichever term) expires. It’s like a layaway plan for what the hackneyed expression calls “the biggest investment you’ll ever make.” You let your tenant lock in a price for the house, essentially saying “You can buy the house for $x a year from now, regardless of what the market does. What’s a better deal than that?”

Meh…I don’t know. I’d have to charge an awful lot more than market rents to make it worth my while, if I’m going to have to surrender the asset within a year.

First, kudos for understanding that the house in question is an asset, and can help you grow your wealth regardless of what market conditions are doing.

My pleasure. You do realize that I’m not an actual person, and merely a device of your own creation that you use to clarify your thoughts, right? You’re talking to yourself.

Anyhow, you can typically charge at least 10% above market rent on a lease option. But that’s not really important. What’s important is this:

Most tenants never pick up the option. When the time comes for them to exercise it, it turns out they didn’t spend the previous year saving the requisite cash for a down payment. That’s one reason why they’re renting instead of owning in the first place. Renters, by and large, aren’t as bright as landlords. (Hopefully the smart-but-sensitive renters reading this can comprehend the phrase “by and large”.)

A lease option is similar to stock options, or commodity futures – you’re assuming market risk for the tenant. Real estate prices might rise 50% in the next year, but you’re offering the tenant a chance to lock in a price today. If your $100,000 house ends up being worth $150,000 a year from now, you, the landlord, will have forgone $50,000.

Of course prices could fall, too. Should they, even by just 1%, you’re protected. Obviously your tenant isn’t going to exercise an option to buy a $99,000 house for $100,000. Which means free money for you: you just received a year’s worth of premium rent payments that went well beyond covering your mortgage payments. That’s the ultimate hedge against a declining real estate market.

And if the market rises, rather than declines, you as the landlord still won’t necessarily get screwed. Again, the typical tenant doesn’t plan far ahead enough to take advantage of the lease-option. If the house does indeed rise in value 50%, and theoretically turns into an immediate $50,000 bonus for your tenant, she still needs to exercise the option. That isn’t easy. For an FHA loan, she’d need to put down 3 1/2% to buy the house from you. If she can’t put the necessary down payment on the house together once the lease expires, her opportunity will disappear and she’ll be back where she started, with no equity in a home and a rent payment due at the end of the month. (Actually, the tenant will be several steps behind where she started; now with 12 months of rent payments gone forever.)

Let’s see how this works in practice.

Say you buy this house for  $50,900 with 20% down. We’re assuming 20%, so you won’t have to pay mortgage insurance. With a 30-year fixed rate non-owner occupied mortgage at 5%, that means you’d be making monthly payments of $244.16. You find a tenant who wants to own a home one day, and offer her a lease-option. Once you do, there are two ways you can do this.

Get the lease-option money up front, or
Spread it over the course of the lease.

Let’s assume a 1-year lease, and that fair-market rent is $750 a month. That’s what you’d charge an ordinary tenant who has no intention of buying the place. That ordinary tenant would pay $1,500 up front (1st month’s rent + security deposit).

With a lease option, you could ask for an extra $750 payment up front, and let the security deposit apply to the down payment if the tenant exercises the option (which she probably won’t.) Now you get a total of $2,250 up front, $750 of which the tenant will never see again, after a year expires and she’s nowhere near amassing the down payment that would guarantee her the house.

Or instead of getting an additional $750 up front, you could just raise the monthly rent. Using our rule of thumb from above, of charging a 10% premium, that means you’d collect monthly rent payments of $825. Now you’re netting an extra $787 per year simply for getting the tenant to sign one additional piece of paper. Your cash-on-cash return goes from an impressive 15.29% to an astronomical 20.25%. Even better, your lease-option tenant is going to be a little more motivated than the average tenant to keep the place looking nice and in good repair. After all, the lease-option tenant hopes to own the place, and relatively shortly.

By the way, that $75 premium applies to the option only. Technically, it’s not even part of the rent even though you’re collecting it every month. If the tenant doesn’t exercise the option, you keep the premium payments.

Imagine test-driving a car for a year, and paying for the privilege.

Again, like in any deal, you’ve got to look at the potential downside: the tenant might be one of the responsible few who actually exercises the option. In this unlikely case, at the end of the lease you’d credit the tenant $1,650 (or $1,500, if we’re using our initial scenario of getting the lease-option money up front.) Now the tenant only has to scrounge up closing costs and qualify for an FHA loan to take title of the house.

And even if that does happen, you’ve still got a year’s worth of above-market profits to show for it. Plus, you won’t be obligated to your mortgage lender for the next 29 years. Then you can buy another house and do the same thing again.

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Math, Math. (And only then, Location).

October 11, 2011 3 Comments

These are the (new) three most important words in real estate today.

In preparation for my class of the above name on Thursday, I scoured the Las Vegas Multiple Listing Service for residential resales to use as examples.  Here’s what I found:

Property 1:

3 bedrooms/3 baths, 1180 square feet in northeast Las Vegas just 4 miles from Nellis Air Force Base.
Seller is a bank or finance company.
List price is $50,900. Year built, 2007
Based on photos, the property is in good condition with artificial wood floors, clean carpet and new paint, but no appliances.
At list price with a 20% down payment, 6% in closing costs, $1800 for appliances and a 5% 30-year fixed loan, the property is estimated to cash flow at $2,221 before taxes.

If you could get the seller to discount the price to $46,800, the annual income jumps to $2,739.

Property 2:
3 bedrooms/3 baths, 1598 square feet in Henderson, Nevada, near the intersection of two auxiliary interstate highways.
This is a short sale.
List price is $79,900. Year built, 2001
Based on photos, the property is in good condition with carpeted floors throughout and all appliances.
At list price with a 20% down payment, 6% in closing costs and a 5% 30-year fixed loan, the property is estimated to cash flow at $3,941 before taxes.

I thought the list price was high so I also ran the numbers with a sales price of $69,900 (a 12.5% discount).  The reduced price brings in $4,456 before taxes.

Property 3:
3 bedrooms/2 baths in Henderson, Nevada within one of the top school zones in the county.
This is a short sale.
List price is $95,000. Year built 1985
Based on photos, the property is in fair condition.
At list price with 20% down payment, 6% in closing costs and a 5% 30-year fixed loan, the property is estimated to cash flow at $3,753 before taxes.

At $90,000, the property would cash flow $4,010.

An embarrassment of riches.  Each property flows positively.  Each would make a great investment. If you were investing, which property would you choose and why?

If you want to learn more about these properties and similar ones; how to calculate rates of return for real estate investments; and how to find, negotiate and close on great real estate deals, come to my class:

Thursday, October 20th, 2pm
Keller Williams Realty Las Vegas
3090 S. Durango #100 (at Sahara)
RSVP KMcMurray@KW.com

**This article is featured in theHow to Make Money with Real Estate Blog Carnival: December 1, 2011 Edition**

 

 

 

 

Filed Under: Appearances & Seminars, Investor Tagged With: , , ,

My 7 Links Project

August 11, 2011 Leave a Comment


Thanks to Financial Uproar, this link round-up is the perfect post to reintroduce my site.  I hope you enjoy these classic posts.

Your Most Beautiful Post:

In 2 parts:

Photo:

How often do you see this?

Text:

“We plan our lives according to a dream that came to us in our childhood, and we find that life alters our plans. And yet, at the end, from a rare height, we also see that our dream was our fate. It’s just that Providence had other ideas as to how we would get there. Destiny plans a different route, or turns the dream around, as if it were a riddle, and fulfills the dream in ways we couldn’t have expected.”

Ben Okri

Your Most Popular Post:

The Underdog Advantage, #5 in my Lessons from the Lemonade Stand series about turning obstacles into opportunities. It’s all about the importance of your story in positioning your company for success.

Your Most Controversial Post:

I wrote about guns and abortion. In the same article.  How does it not have 200 comments?

Life Liberty and the Pursuit of Happiness

Your Most Helpful Post:

Here are 2:

Learn how to create a personal investment policy in A Peek Behind the Curtain and what 3 numbers you need to know in What’s in a Number.

A Post Whose Success Surprised You:

Reading through my old posts, I realized that I talked a lot about the weather and taxes.  This one is about the latter.

Irony in the wake of tragedy

A Post you Feel Didn’t Get the Attention it Deserved:

Everyone says we need more good news.  Here it is. Sort of.

We need a Hero

The Post that You are Most Proud of:

A totally self-serving, self-promoting post about my first book.  It should be first on this list.

It’s finally here.

Umm….Tag, you’re it!

Part of the rules of the My 7 Links project is to tag 5 other bloggers that you think should share some links. Here are the bloggers I’d like to see participate:

Len Penzo

Control Your Cash*

Ken Jennings

Notorious Rob

The Pioneer Woman

Traffic Generation Cafe

*Even more shameless plugging

Filed Under: Entrepreneur, Investor, Politics Tagged With: , , , , , ,

No Strings Attached?

December 21, 2010 Leave a Comment

From a utilitarian perspective, giving gifts makes no sense. Generally speaking, you buy gifts for people who are likely to buy you gifts – hence the term “exchanging”. Receive a gift from someone you had no intention of buying anything for, and you’re selfish and inconsiderate. Do the opposite and you’re a sucker or a suck-up. And if you do buy something for someone who buys something for you, custom dictates that the gifts can’t be of disparate value: hence the ludicrous practice of removing price labels. After all, nothing ruins the joy of receiving a thoughtful and apposite gift than finding out the donor spent too little on it.

Think about it: you spend money to get people things that you hope they’ll like. If they don’t, you’ve wasted your time and resources. Thus the most useful possible gift is the one perfectly adaptable one: cash. But again, the suitability of cash runs into the brick wall of decorum. ‘Tis the season to be gauche. And again, if the recipient adopts the same logic about gift-giving, you end up exchanging cash for cash. Reduced to its fundamentals, the transaction is easy if quotidian: instead of you buying me a $150 gift and me buying you a $160 one, I should just give you $10. Then we can spend the next year discussing how I’m tacky and you’re cheap.

If you’re the parent of a young adult, or otherwise have someone in your life whose net worth isn’t yet where yours is, here’s a mutually beneficial idea for a decidedly American gift that isn’t cash: the next best thing, credit.

The average college graduate receives that bachelor’s degree with a five-digit Sallie Mae obligation. As for the prudent and responsible students who manage to graduate with no or minimal student loans, doing so usually means there’s hardly enough money remaining to create any kind of nest egg. The wealth-building years have begun in earnest, but there’s almost nothing to lay a foundation with. Renting an apartment for the next few years (an investment with a guaranteed rate of return of -100%) wipes away much of the equity a young person could be building.

If you can afford it, lend your upwardly mobile kid enough to cover the down payment on a modest little domicile. Even buying the tiniest of townhomes gives him or her the opportunity to build equity, and to exercise the care and consideration for one’s things that renters have no incentive to.

Say you find an $80,000 condo that requires a 20% down payment to avoid private mortgage insurance costs. Financing the remaining $64,000 at today’s 4.24% 15-year rates means your kid would write monthly checks for $481.13, which makes far more sense than spending $800 on a larger rental house in a fancier part of town.

Remember, this isn’t a gift in the traditional sense. As the giver, you’re expecting something in return – regular payments, with interest. If you can give your kid a 100-basis point break on market rates, she could pay back that $16,000 loan back to you in $112.35 monthly installments. Which should be pretty easy to do, especially if she’s collecting rent from a roommate. Of course, we’re assuming she’ll be making gradually more money throughout the life of her concurrent loans.

The real “gift” in this situation is something intangible but vital: an introduction to real-world finance, and a chance to exercise responsibility. It’s the ideal meeting of a recipient whose ambitions outweigh her wherewithal, and a donor with the ability to make the recipient’s transition into the world of commerce run a little more smoothly.

Filed Under: Investor Tagged With: , , , ,

What’s in a number?

July 24, 2010 Leave a Comment

The first number you need to know is your net worth. Calculate it by adding up all of your assets and subtracting your liabilities. You increase your net worth by taking your cash flow and buying assets. You decrease it when you take equity and buy consumables (e.g. cars, clothes, vacations.)

Track your net worth each quarter. Make it your goal to increase 3% per quarter, which translates to 13% per year. Do that and you’ll double your net worth in 6 years.

Which leads to the next number you need to know. Cash flow is the difference between your periodic income and expenses. This number must be positive. If it isn’t, increase your income and/or lower your expenses. You should probably focus on the latter. Positive cash flow can be invested in assets that will increase your net worth. Living beyond your means leads to consumer debt and decreasing net worth.

Finally, you need to know your FICO score. FICO stands for Fair Isaac Corporation, the organization that conducts statistical research on the probability that a loan will be repaid. Factors that affect your score include available credit, payment history and credit inquiries. Your FICO score determines what it’ll cost you to borrow money. The higher the score, the lower the rates you pay.

Net worth measures your investment strategy.
Cash flow measures your budget skills.
FICO score measures your ability to manage cash.

These numbers paint a picture of your financial health. Track them consistently and work to increase all 3.

Take control of your future by taking control of your cash.

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It’s finally here!

May 10, 2010 1 Comment


Here it is. I’ve attached a picture.  See it does exist.

Create weelth, get rich,debt free

It’s called Control Your Cash: Making Money Make Sense, and it’s a 326-page primer on how to avoid being poor.

It explains how to get your bank accounts and credit cards to work for you, not the other way around. Teaches you the right way to buy a car (with the salesman cursing your name as you drive away.) Shares the secrets of where and how to invest, and what all those symbols, charts and graphs mean. How to turn expenses into income, quit living paycheck-to-paycheck, realize whom the tax system is stacked against (it’s most of us) and use that to your advantage.

Read this book, and I swear it’ll pay for itself multiple times over. Heck, the tax chapter alone will do that. Because earning money is nice but building wealth is better

Here, I’ll even give you a free chapter:
That’s 10% of the book, right there.

Did I mention it’s available on Amazon? It’s also available on my companion site, ControlYourCash.com.
If you’ve got a Kindle, you could have downloaded it and started reading by now.

The book tour starts this summer. Consider this to be the series of intimate club shows before the stadium dates begin.

Filed Under: Control your Cash, Entrepreneur, Homeowner, Investor Tagged With: , , ,

Are you in control?

March 24, 2010 Leave a Comment

“They used to call me valued customer, now they are sending me hate mail.”

 

Becky Bloomwood Confessions of a Shopaholic

Every year, 1½ million Americans file for bankruptcy.

Imagine a widow with infant triplets who renews her health insurance policy the minute her old policy expires. She can’t get an internet connection, and she doesn’t want to risk being uninsured, so she gets up from the chair, only to trip over the power cord and fall headfirst onto a hardwood floor. She breaks 8 teeth and dislodges her lower vertebrae, requiring tens of thousands of dollars of dental work, surgery and rehab. She works as a model, so now she can’t draw a paycheck for the year. Two years ago, her husband died when he happened to be driving along a faultline as an 8.0 earthquake hit, so his life insurance didn’t pay out because it was an Act of God. The triplets’ grandparents all live in the Czech Republic, and the woman lives on a ranch in southern Oregon, miles from any neighbor who could help her get back on her feet. So she declares bankruptcy.

How many of last year’s bankruptcy claimants have similar stories, and how many bought too much junk on credit and never bothered to budget?

This might not sound kind, but most people in bad financial straits are there because they chose to be. Not in the sense that they said “I can’t wait to be broke,” but in that when they were buying cars with 8.9% financing and spending $100 a week on cigarettes, they didn’t think about where it would inevitably lead.

No one wants to die in a car accident, but if you drive through enough stop signs while talking on the phone, you can’t be surprised if it happens. (Of course you can’t be surprised, the part of your brain that senses surprise[1] is now on the asphalt next to your cerebrum and your hippocampus.)

Personal responsibility is neither quaint nor outmoded. When enough people fail to exercise it, it leads to macroeconomic calamity. Of all the financial disasters of the last few years – the subprime mortgage crisis, the monster budget deficit, the stock market losing half its value, centuries-old investment banks going out of business – every last one happened because people who could have taken responsibility for their money chose to do something else instead.

 

“People tell you life is short. Life is long. Especially if you make the wrong decisions.”

-Chris Rock

Come check out Control Your Cash for one reason: your relationship with money is almost certainly dysfunctional. You don’t know what you don’t know, probably because nobody ever taught you.

Join, read, comment, share ideas. You can stop letting money act on you – and actually take charge of it.

[1] The amygdala, if you care.

 

Filed Under: Control your Cash, Homeowner, Investor Tagged With: , , , , , ,

Stupid for profit

December 16, 2009 1 Comment

 

**UPDATE #2**

Is this a good idea?

**UPDATE #1**

Economist Brad DeLong did the math calculating that the author and his wife saved spent $90,000 in equity, unpaid rent and tax benefits.  A comment in this same post reveals that a $30,000 advance was paid for the book which I’m sure the author immediately sent to his mortgage company.

Boy meets girl.
Boy marries girl.
Boy and girl buy a house they can’t afford.
Boy writes a book about the evil mortgage company that made him buy a house he couldn’t afford.

I’m leaving out a few pesky details (two divorces, two bankruptcies, four kids, the inability to either control their spending or tell the truth), but so did he.  The author doesn’t let the truth stand in the way of a good story or an advance that will pay his delinquent mortgage payments.

Seriously, DON’T buy this book.  Rewarding the author’s stupidity is like giving your money to a failing auto company. (Well, you’re doing the latter whether you want to or not. With the former, at least you have a choice.)

Instead, let’s learn from this reprehensible person’s mistakes:

#1: He got married. Twice.
If you charge your wedding expenses, you’ll be in the hole from day one of your marriage. Even if you don’t, you can still screw yourself over financially.

Divorce, long–term health problems and job loss are the top 3 underlying reasons cited in bankruptcy cases.  The author feel in love with a woman who: 1) he wasn’t married to; and 2) didn’t work , which led to alimony & child support payments.  This didn’t leave much money for the second wife, who was unwilling to forgo a dream house, Starbucks habit and name-brand clothes.

#2: He didn’t talk about money with the second wife.
He knew his wife had declared bankruptcy during her previous marriage, because her ex-husband (allegedly) failed to file (or pay) taxes.  Did the author read the bankruptcy filing?  If he did, did he have absolutely no questions about it?  Here’s one he could have asked: why were so many consumer loans included in the bankruptcy if it was only to clear tax liens?

Forget about which table to sit your ex-felon uncle at or whether to serve fish or chicken; the conversation you and your betrothed need to have is the one about money.  Who has what, who owes whom and what goals you’re going to pursue.
If one partner is profligate and the other a spendthrift, that’s a far bigger discrepancy than any black/white or Christian/Jew marriage.  If your fiancé has current money problems, think with your brain instead of your heart and don’t marry him/her.  If the thought of such irresponsibility hasn’t turned you off, you can still date the person. Just don’t set a wedding date until the debts are paid off and the credit cleaned up.  If you’re a man, she’ll either get it together or find another sucker.  Either way, you’re now free to build a future with someone responsible.

Mistake #3: He didn’t pay attention to his fiancée’s spending and saving habits.
He either didn’t know or didn’t care that his wife was carrying debt that she either couldn’t pay or didn’t feel like paying.

I have a friend who peeks at the signed check at the end of a first dinner date. She swears she can tell everything about a man by how much he tips. Our relationship with money is often wrapped up in our self-worth, which can lead to overspending or stinginess.  People with money issues often lie, too: about how much they spend, what they owe on their credit cards and what they buy.

Mistake #4:  He treated his wife like a child.
Other than to request or demand things, she wasn’t involved in the financial decisions.  He made the money and paid the bills.  His wife isn’t even on the loan documents for the house, which might mean she’s not on the title either.  When money got tight, he didn’t tell her she had to stop spending. When he finally let her in on the stress he was feeling, she didn’t care – probably because he’d always taken care of things and she expected him to continue.

Do you want an equal partner?  Why would you think about marrying someone who isn’t willing and able to handle his or her own finances?  Your partner to be should be self-sufficient in every way, but especially financially.  A marriage should be between equals who create something greater than the sum of its parts.  If you’re a dependent partner, you’re setting yourself up for disaster. Not only do half of marriages end in divorce, the average woman’s net worth declines 27%* after one.

Mistake #5, the most annoying one of all: He presented himself as a victim.

The primary determinants of everything you are and everything you have are your daily actions. Until you claim responsibility for creating your own destiny, you’ll always feel victimized.  Own your life, and demand that the people you love own theirs.

*National Marriage Project, Rutgers University 2001

Filed Under: Homeowner, Investor Tagged With: , , , , ,

Ty Pennington’s petting zoo

November 19, 2009 3 Comments

The moment you step through the gate of The Grand Canyon Deer Farm you’re inundated by does and their fawns hoping for a treat. When they realize you didn’t pay $5 for a souvenir cup containing 2¢ worth of corn, they turn away and have nothing more to do with you.

However, you can snicker when the deer greet the next suckers visitors who show up holding corn.

At Old McDonald’s Petting Farm just outside of Mount Rushmore, the goats congregate around the machine that dispenses feed and look at you with hungry, soulful eyes. Even the pot-bellied pigs rouse from their midday naps, lumbering over to the food chute on the chance that an altruistic tourist might be packing apples.

To see a stark example of the major difference between captive animals and wild ones, drive a few dozen miles west to Wyoming. Offer some grain to a wild pronghorn. Not only will it reject your gift, it’ll turn tail and show you why it’s the fastest mammal in the Americas.

Captive animals equate people with food. They forget to instinctively forage for food and fear predators, making it impossible for them to survive in the wild for very long.

The same thing goes for humans. Like Sharon Jasper of New Orleans, who complained that the taxpayer-funded Section 8 apartment she moved into after Hurricane Katrina is a “slum.” Instead of thanking those taxpayers for saving her from sleeping in the park, she complains that she still has to pay her utilities and security deposit.

Jasper’s newly renovated apartment features wood floors. And that big TV must cost as much as a year of utility bills.

How about the Harper family from Georgia? They were chosen from thousands of applicants to appear on the ABC show Extreme Makeover: Home Edition. They received a new $450,000 home (their old house was razed) – plus a scholarship fund for their kids and a home maintenance fund, totaling $250,000. They also got an all-expenses-paid week in Disneyland while other people built their house.

Now they’re getting a foreclosure notice from the bank that gave them a $450,000 line of credit without asking them what they were going to use the money for or how they planned to repay it. Darn that ABC, why didn’t they tell us we’d have to pay back any money we might borrow?*

Evelyn Adams won the New Jersey lottery in consecutive years and managed to squander $5.4 million. She donated much of the money to slot machines in Atlantic City, and actually said “I wish I had the chance to do it all over again.”

Apparently her financial strategy is to win the lottery a third time.

These are the deer (or goats, or pigs) we create when we give people what we think they need instead of expecting them to work for what they want.

People are not forged by their circumstances so much as they are by their choices. If circumstances dictates destiny, there would never be a Sheldon Adelson, J.K. Rowling, Chris Gardner nor Oprah Winfrey, all of whom rose from modest beginnings. And all of whom chose to change their circumstances and accept the sacrifices that go along with that choice.

Self-sufficient people don’t have the luxury of being victims. They take responsibility for their actions, choices and life – and get freedom in return.

*ABC did arrange for the Harpers to meet with a financial planner.

Filed Under: Investor Tagged With: , , ,

A peek behind the curtain

July 27, 2009 2 Comments

Have you ever missed out on a great investment because you didn’t know how to quantify its risk and return? Or even worse, because you didn’t even know what to ask to make an informed decision?

If you fancy yourself an investor, you need written investment criteria you can refer to when someone offers you an opportunity.  Here’s a sample.  Once you fill it out, answer these questions:

What type of investment is it?

If I buy it, how will it affect my allocation distribution?

What is my estimated Return On Investment?

A simple description of the investment:

The above sample real estate investment includes multiple scenarios that affect the ROI, including varying rents and whether you (or your business partner) plan to live in the condo. If you do, you can include the federal $8,000 first-time homeowner credit if you buy before December 1.

Here are 2 ways you can construct a joint venture between you and whomever’s bringing you the proposal:

#1: Bought by owner-occupant. This is perfect for a parent who wants to help her kid buy a home, yet still reap an ROI.

You lend the entire price of the condo, without interest.
Say the monthly market rent is $700. You’d charge 80% of that to your daughter, which is $560.

-$490 goes to you
-$70 goes to a reserve account for property maintenance.

Your daughter saves 20% off fair market rent. In return, you get to write the property expenses off on your tax return instead of she.

#2: Bought by LLC. Investment partners would use this proposal when one partner (the Finder) has the time & expertise to find the property and the other (you) has the money to finance it.

Again, you lend the entire price of the condo, without interest. However, you’ll rent it out to some stranger at the full market price of $700.

-$490 goes to you
-$70 goes to a reserve account for property maintenance.
-$140 goes to the Finder.

Always describe the worst-case scenario and decide if you can survive it:

-Property values may continue to fall. You might have to hold the condo for 5 years to break even.
-If the condo doesn’t rent immediately, the return will decline.
-The condo could get damaged. (So you need a security deposit.)
-You and your partner might disagree on management or sale of the property. (So you need a properly worded operating agreement.)

Since you’re creating a partnership, I recommend an operating agreement clarifying these issues:
•    Whose name will the condo be in? (You can own it outright, your partner can own it outright, you can own 63% and your partner 37%, etc.)
•    When you sell, how will you split the profits?
•    Who will manage the condo and rent it out?

The answers depend on whether your partner will be your kid or someone else.
If you’re setting this up as a business arrangement, create an LLC to hold title to the property.  In the LLC’s operating agreement, you can set out details such as who gets to write the property expenses off and what each partner’s duties are.  The LLC also protects against liability if your tenant or a visitor gets litigious.

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**This post has been featured on the Calvacade of Risk carnival**

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