Big Profits from Small Properties: How to Achieve Financial Independence by Investing in Real Estate

Big Profits from Small Properties: How to Achieve Financial Independence by Investing in Real Estate

by Michael E. Heeney


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Product Details

ISBN-13: 9781475961119
Publisher: iUniverse, Incorporated
Publication date: 12/07/2012
Pages: 234
Product dimensions: 6.00(w) x 9.00(h) x 0.53(d)

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iUniverse, Inc.

Copyright © 2012 Michael E. Heeney
All right reserved.

ISBN: 978-1-4759-6111-9

Chapter One

Create Investment Goals

Create Investment Goals

If you believe in yourself and have dedication and pride—and never quit—you'll be a winner. The price of victory is high, but so are the rewards. —Bear Bryant, football coach

Establish Your Investment Goals

You may ask, "What is the future of real estate?" Rest assured, your chances of making money in real estate are still very good. In recent history it is almost impossible to find any ten-year period in which real estate did not increase in value. Consider that the US population is predicted to increase nearly 30 percent during the period from 2000 to 2030, according to a 2005 report by the US Census Bureau (Figure 1). In Northern California, where I live, the population is predicted to increase almost 37 percent over the same time period. In most urban areas there is not an abundance of new rental housing under construction. Our population and income growth, in conjunction with the ongoing deterioration of existing buildings, will create plenty of opportunity for those who are interested.

There are dozens of ways to make money in real estate, including brokerage, trading, building, and fixing and selling (flipping), to name a few. Some ways are easier and more interesting than others, but the most remunerative way is to increase the value of buildings that you acquire by making them more attractive and up to date, thereby improving their potential for bringing in higher net rental income. Net rental income is what you put in your pocket after property expenses are paid. It is by far the fastest way to create wealth and independence. Your first objective should be to buy income property. Income property is, simply put, property in which you can generate income.

Implementing the fundamentals mentioned in the Introduction will offer you the most direct way to create a yearly income in investment real estate. Your goal could be to create a $200,000 annual income; this is the net profit, after expenses, on the properties you acquire. A net income in this range would establish your net worth to be in the range of $2 million—a 10 percent return on your investment. Consider this important comparison: Suppose you bought and sold real estate and made $100,000 in one year, or earned $100,000 in some other business, or got a salary of $100,000. You would pay about $30,000 in taxes, leaving you with $70,000. If you invested it in a high-yielding bond, for example, with a return of 4 percent, you'd earn $2,400 a year. This is the long way to create a yearly income. It is difficult to earn a substantial sum beyond your salary. Even if you do, you can keep only part of it.

This book will show you a much easier and quicker way to create a worthwhile income. You will be surprised at the ease with which someone can build annuities in income-producing property.

Anyone with the confidence to take aim at the objective of financial independence has a good chance of success. Most experienced big-time owners expect a minimum operating net of 20 percent on their rents, after making their mortgage payments. The operating net is the net return from rental payments received while running the property; this is discussed further in the upcoming chapter on how to buy income property. In order to accomplish this objective, try to acquire property for which, within six months of purchase, the mortgage payments will equal no more than 45 percent of the scheduled gross income. In other words, after you improve the property and increase the rentals, your mortgage payments plus expenses (normally about 35 percent of the scheduled gross income) will leave you with 20 percent net (profit) of rents in your pocket.

In order to achieve a desired goal of $150,000 to $200,000 per year in operating net, you must have somewhere between $600,000 and $900,000 gross income from rentals. Since, for example, most buildings sell for six to nine times their gross income, you would need buildings valued at $5 million or more. In order to acquire buildings of that value, you would need approximately 25 percent down payment, or nearly $1.5 million, which is considered a normal transaction. The chapter on financing your acquisitions will show you how to minimize the down payment. A big bankroll is not necessary to get started; however, you will need lots of persistence.

Most of the concepts included in later chapters are simple to grasp, although they are not always easy to implement. You will need to overcome many obstacles, up to and including your own emotions. It has been said that the character of the would-be millionaire is more important than that person's type of business. There is no doubt that it takes a little imagination, persistence, and enterprise to accomplish your stated objectives of financial independence.

However, real estate lends itself to leverage like no other business. Leverage is using mostly other people's money to finance your properties. Most lenders will lend up to 70 percent loan to value (LTV) on your income property. As much as money wholesalers like banks need savers to provide them with funds, they also depend on investors to borrow that money. You and I can use this for highly profitable enterprises.

As an example, I once met a family of four brothers who operated a handsome twelve-story high-rise office building in a nearby city. They had built the property in the mid-1960s for a cost of about $4 million (most of which was borrowed). Today their heirs benefit from the substantial income that the building produces. The value of the building now is about $35 million.

Consider real estate operator Joseph Kennedy's 1945 purchase of the Merchandise Mart in Chicago. At that time, the Merchandise Mart was the world's largest commercial building. Kennedy bought the Merchandise Mart for approximately $13 million. He was able to obtain a $12.5 million insurance company loan, which made his down payment only $500,000, or less than 4 percent.

Marshall Field, the Chicago retailer and original owner of the Merchandise Mart, sold to Kennedy at a sacrifice because his firm, strong in merchandizing, was rather rigid as an income property operator. Field was afraid of heavy vacancies that might come from the impending loss of government tenants, who occupied about a third of the building at low rents. To an imaginative income property investor like Kennedy, this presented an opportunity. Under his management, the Merchandise Mart leased to commercial tenants at considerably higher rents.

Four years after Kennedy's purchase, the increase in value enabled him to get a new $17 million insurance company loan. This gave him $4 million over his purchase price to use for some property improvements and for further investment. In 1998, the Kennedy heirs sold the Merchandise Mart (the only building with its own postal zip code) for approximately $369 million.

You can emulate big-time realty investors, as in the examples above, by adhering to certain key objectives:

• Buying property with a proven history of rising rents

• Putting up as small a down payment as possible and arranging for monthly payments that you know you can make

• Improving the property in ways that will increase its rental value

• Refinancing the property to fund your expansion when your equity grows to 50 percent or more

If you use the methods described in this book you can obtain an initial goal of $1 million net worth in as little as ten years. Your progress will depend on the economic cycle during the time you choose to implement your plan. Since competition makes it difficult to acquire property during good economic times, the methods outlined here work better during slow or recessionary times. For example, during the real estate bubble years of 2001 to 2006, making sensible acquisitions was difficult because of the tremendous demand for just about any kind of real estate. So, as you can see, your progress could be slowed at times when demand for real estate is high. During contracting economic times, you can expect acquisitions to speed up.

When you invest in real estate, you can see and control what your dollars are doing. Very little luck is involved in your profit and loss. Nearly all the factors can be examined ahead of time, so your own efforts and common sense count heavily.

You make money by going into debt when you invest in real estate. Common strategies for profits include

• staying as deeply in debt as possible with safety (As Walt Disney once said, "I must be rich, I owe five million dollars.");

• making maximum use of depreciation allowances and other tax saving methods (Depreciation benefits can shelter a good percentage of your operating net income.); and

• improving your property and refinancing it as soon as you can.

Even if you are not looking to be a millionaire, real estate may still provide very positive benefits. For instance, you may create a side income that will supplement your salary or wages. You could progress to one small apartment house and concentrate on paying down the mortgage and getting the property free and clear of debt. Real estate can serve as a part-time job. This business is easier than most to keep within whatever limits of time and capital you have available. You can put all of your capital into it and work full-time, or you can invest just a little money or time. You'll have to study real estate enough to know whether or not brokers and managers are offering you good advice. The novices who do well in real estate are those who put some time into it.

Most find it an alluring endeavor as well as a road to financial security.

Chapter Recap

Due to population increases, demand for real estate should expand in the future.

• Concentrate on properties in which you can easily generate income.

• Continue to build up your rental income by making acquisitions year after year until you accomplish your financial goals.

Chapter Two

Selecting Your Investment Property

Selecting Your Investment Property

On Confidence: Self-assurance is two-thirds of success. —Unknown

What Type of Property Should You Buy?

The first step in all of this is to determine what type of property you should buy. Should you buy commercial property or residential apartments? Commercial property could be classified as retail, industrial, or office property. Residential dwellings would include duplex housing, fourplexes, and small to large multiunit apartment buildings.

Some of the advantages of commercial property include limited management responsibilities. There are not as many "people problems" as there can be with residential dwelling structures. The big difference is that there are people living in residential structures 24/7. And as the owner, you are responsible for the property at all times. If the air conditioning goes out in the middle of a hot summer, you are the one that the tenants call. A residential owner must stay on top of the property's upkeep because you have entered into a contract with your tenant to do so. You need to know that most municipalities require residential owners to comply with a lengthy list of habitability issues.

This is not true with most commercial properties. Most commercial tenants are tied to long-term leases, which can be another benefit to the landlord. Many commercial businesses, if they are successful, want to stay in their locations for many years. This makes for much less tenant turnover for the owner. Some leases are written so that the tenant is responsible for property taxes, insurance, utilities, and maintenance. In other words, the tenant—not the landlord—has to carry the burden for the ever-increasing operating costs.

Some of the disadvantages of commercial property include long-term leases that limit your ability to increase rental income. Residential dwellings have more frequent turnover, allowing the owner the opportunity to make selected improvements while increasing the rental income. Apartments, therefore, lend themselves more readily to selling for capital gains. Also consider that land costs cannot be depreciated. Depreciation is a method by which the IRS allows you to recover a portion of the cost of your building during your ownership. However, the land cost of your purchase price is excluded. The fact that land costs cannot be depreciated is a drawback to commercial property ownership. Commercial property land costs are proportionately high compared with most building values. With apartment buildings, where land values are usually much less, a much higher proportion of total costs can be charged off as depreciation. This goes a long way in reducing taxes owed on your operating income.

Commercial property can be very slow to sell and just as slow to lease, with vacancies sometimes lasting for very extended periods of time. You would need a large surplus of income to sustain the property during these periods.


Excerpted from BIG PROFITS FROM SMALL PROPERTIES by MICHAEL E. HEENEY Copyright © 2012 by Michael E. Heeney. Excerpted by permission of iUniverse, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Table of Contents


1. Create Investment Goals....................9
2. Selecting Your Investment Property....................21
3. How to Negotiate a Good Deal....................33
4. Financing Your Acquisitions....................55
5. Improvements & Operations That Make You Money....................83
6. How to Buy Income Property....................109
7. How to Manage Your Apartments....................171
8. How to Buy a Single-Family Home....................197
9. A Word on Taxes....................225
10. Estate Planning and Other Things to Consider....................235
About the Author....................365

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