It's going to be wild

This fair bodes to be a wild one. First, and foremost, we have an almost new staff. Of 22 employees only six have worked for us before. Second, the new fair management has seen fit to rearrange the layout. This means that the traffic pattern will change and, most importantly for us, it means that our competitors may have been placed in front of us. The only thing we still have going for us is that our product is unique. We sell fresh fruit and all natural smoothies to which we have added a whole line of chocolate dipped products. Oh well, at least the set up is done almost. And we are experienced at this. But on the other hand, as we've gotten older we have grown to like the idea of managing rather than working the fair.

Today, by the way, is the fourth day of my use of the fair as a way to diet and exercise. Volumetrics. Lets see how its gone. I started out with weighing myself. 201 at 5'11''. We have been working every day, lifting, sweating, and putting in 10 hour days. Unfortunately, the eating plan has been sketchy. Since we're busy setting up, someone usually just runs to a fast food place and then we scarf down whatever we've ordered and get back to work. Then there are the old friend's meals. Since we only see these people once a year, we usually spend our evenings with one group or another eating a big meal and drinking a lot of iced tea. So four days in and I'm at 200 lbs. But no worries mate, at least I'm thinking about it.

And on another tack, there have been some more interesting developments in the real estate purchase we are pursuing. As everyone knows the lending market is in the throes of resizing itself. What this means is that the loan offers keep coming but the guarantees are less valuable. Almost every thing the lender promised at the beginning of this process has been restated to the lenders advantage. The lock-in rate is really not locked because our finances have to be verified at least twice. It seems that we will need extra insurance even though we are putting 20% down and the rental property we are buying is for sale way under appraised market value. And now that the wheels of the deal are moving, we are fair bound and less willing to spend extra time renegotiating what we thought was a done deal. I keep saying we've done our part and now lets let escrow do theirs but T is a worrier so I have to let her. Oh well.

Buying a Rental Property, pt.2

So things are moving a pace, Watson. Our lender, a very friendly and hardworking guy, has added a new wrinkle to our tax write-off question. Just as we were about to enter escrow, he suggested to the agent that we would like to roll the approximate non-recurring closing costs into the loan. He figured them at @ $3000. So now a quick calculation at www.bankrate.com shows us that this will increase the amount of the interest we might pay over the life of the loan to $7200 at 7%. We are just ball parking here because the lender has told us already that he is looking to use a stated income basis for the loan because of our son's credit history. His FICO is 730 but for real estate, especially these days, since he has only about a year of payroll background, the FICO is not as important as it normally is. The question for us though is the value of the tax write-off this year. If we pay the closing costs, we get to claim them now. However, since this property will be a cash flowing entity, the $20 a month interest will decrease our income from the property and so affect out tax basis that way too. Now, I have to think about this property from its other purposes (retirement income, early mortgage reduction value, property appreciation, etc.) point of view.

Today, we meet with the lender. It will be interesting to hear his perspective. I'll get back to you.

Money Matters

The other day a friend called up to talk about his son's new job. The son is 22 years of age and has been working for the last six months with a real estate company that specializes in the foreclosure market. As you can imagine, business is great what with the bank re-sales averaging 10 a month and the foreclosure listings up to 1500 since January. They can barely keep up. Meanwhile, the son is making a ton of money which is driving him slightly crazy because of how much he is going to have to pay in taxes. His anticipated 1099 salary is $100,000 for the year. Yes, you heard me, the employer has all of his staff on 1099s. If I understand it right that means he gets to write them off as an expense but doesn't have to contribute anything to their social security, etc. Right now that means the kid could be looking at paying out well over 50% of his income in taxes. So far, he has come up with the following strategies to deal with this: He has formed a sole proprietorship and leased a car for his real estate business, and he bought into a rental property with his parents that they are going to let him claim on his income tax this year. He's also spent $6,000 on deductible improvements to the rental property. The big question that seems to be looming on his financial horizon is whether he should buy more rentals or buy his first home?

Lets look at the rental idea first: Because of the unique position he finds himself in, he has ongoing access to a tremendous amount of property listings. And because he still has 6 months in the year to find and make a purchase, he can be patient and select the best option available. An unfortunate aspect of this is that he works in San Diego County where the median home price is currently around $500,000. Rentals, however, should produce cashflow income so his tax situation might get worse instead of better.

In several ways, the situation is similar if he decides to purchase a home. Lot of listings, half a year to make a choice, and an average home price $500,000. However, since the money he will use for the down payment is not tax deductible, the only tax gain he will get is in the interest write off and the property tax benefit. One detracting factor here is that if the real estate market changes or he loses his job he could find himself in the very same boat as his present clients.

I don't find either of these options to be perfect but the fact that the rental property uses other people's money (the renters) to pay the costs has me leaning in that direction.

Meanwhile, I don't think he's done anything about IRA or emergency funds or for that matter long term investing. I told my friend that it is an interesting situation that I am going to have to spend more time thinking and researching about before I can say I really have some good answers.

Ready to Rent, pt. 2

Yesterday I posted about how much we have learned about the rental market through this experience. After I wrote I went for a long bike ride, and as often happens, my mind didn't stop thinking about it just because I written out some thoughts. So here are a couple more observations we had about this. First, just like with solving problems with computers, two minds are better than one. It occurred to me while I was riding up a very long hill as the sun stroked my back and the sweat began to drip, that since the number of renters was going to increase as more and more foreclosures came on the market, this would be the ideal time to buy more rentals. The first thing my partner T said to me after she kissed me hello when she returned from work was "You know, I was thinking about how fast this unit rented and it seems to me . . ." Second, people who have been paying a monthly mortgage of two or three thousand are not going to blink at a rent of one thousand to stay in the same area. Especially, if we continue with our plan to upgrade our current unit. What I really like about this idea is that we have already budgeted the money for the improvements and we have chosen to really improve the quality of the unit. Tile replacing linoleum, new and stylish bathroom mirrors and cabinets, resurfaced sinks and tubs, added storage and landscaping, and replaced and painted fascia, all improvements that will outlive the current renter and give us future options for improvements now that these are done.

To rent or Sell

that is the question? Whether it be wise to lose the cash flow or wait out the down turn, these are some options. On the rent side, we are up against an over supply of competition in the same price range. The neighborhood has taken on a slightly untended look. And there are already 8 places for rent within a couple of blocks. Doesn't look good. But we are willing to upgrade the ammenities, and polish the curb appeal for the renter that fits our model. Another plus is that we aren't feeling any pressure from this because we have a backup account for up to six months without a renter.

On the sale side, the market for these units could continue to slide especially since there are newer options built and being built for the buyer that may or not be now willing to buy. We will still have to prep the unit for a sale. At least, externally. T. really thinks we should try a Lease Option sale. She likes the idea of holding a note that is secured by the property and that increases the cash flow, too. I, on the other hand, worry about all the details that doing something different entails. Ah well.

Fore Closure . . .

So what can I say. This, if you're a real estate invester, is a hot topic right now. Our son who works in a local real estate office in the foreclosure department tells me the number of foreclosures has gone up 1000% since December. And at the last three real estate/financial seminar presentations my partner and I attended the topic of foreclosure purchasing was the loss leader that heated up the signups. Last night one of our friends called to tell us she will be going to Vegas next week for a four day real estate symposium on, you guessed it, foreclosures. T. and I talked about this last night and came up with the following comparison. Investors who take bear market puts are similar to investors who shop for properties when the bubble bursts.