For those of you who have invested in the stock market, built up a 401K, put money into mutual bonds, the last two years has been, for many of you, a financial nightmare. So you are probably sitting on your money, or trying to find safe havens where the return may be small but guaranteed. Is there an alternative that can give you safety and higher yields? The answer is yes, and the answer is rental property in Oklahoma. In my home city of Oklahoma City, buying opportunities abound, and the renter pool is large. 

First, it is possible to own a three-bedroom home, fixed up, for under $40,000. Second, that home can rent for up to $775 per month. Even with property management, over a seven year period, you can achieve an annualized after tax profit of over 20% return on investment, and this is a conservative investment more akin to savings account rather than a stock share. 

Historically, Oklahoma's real estate market and economy crashed with Penn Square Bank in 1982. Since 1989, the state has slowly recovered, and has had a steady 5% average increase in real estate values. Even in 2002, this still translates to Oklahoma City being the least expensive real estate market of any large city in America. For the rental market, this means positive cash can be easily achieved. 

What about the renter pool? Recently, the two agencies that handle section 8 housing, a government rental subsidy that helps low income people, announced that currently over 7,000 people were qualified and looking for eligible properties. Using the three-bedroom example, the government guarantees almost all of the $775 per month payment. Can you have problems with low income renters? Absolutely, but remember this, if they mess up they are out of the program and they must face full rent prices. This is a good incentive to play by the rules. 

To be successful in investment real estate you cannot just purchase one or two homes. There is a need to spread the effect on down time, as well as to build income. To illustrate let me give you a success story. I worked with a couple in their late fifties who decided to build retirement income through rentals. They had normal jobs, and not a lot of cash to invest. They started by buying V.A. repo?s. Since they are zero down payment purchases, they could buy homes with less than $1000. They reinvested their profits, and seven years later, they own twenty homes. Their cash investment to purchase and fix up was $100,000, the mortgages total $600,000, but the important figures are the $10,000 per month positive cash flow and $1.3 million real estate gross value. 

If you are interested in wealth building through real estate investment, and want to make a commitment for five properties or more I would be glad to assist you. If you are out of state, and would like to buy, I can provide you with full resources including property management, general contracting, and familiar with the agencies handling section 8. I am also educated in 1031 tax deferred exchanges if you are reinvesting. I will provide you with written return on investment estimates to better guide you in your decisions.
 

Definition of Investment Terms 

In investing in real estate it is always helpful to know what the definition of terms mean when evaluating whether a particular property is worth your hard earned money and time. The following are the most commonly used phrases in real estate investment. 

Cap Rate: Capitalization Rate is a ratio that gives you an idea of the value of property. It is the net operating income divided by the sales price. Operating income is a function of reducing expenses from the gross income. If you are buying a going concern with existing rental income, this ratio can help you determine if the asking price is reasonable for the income you could receive. 

Gross Rent Multiplier: This is a calculation that measures value in a different way that Cap Rate. It does not take into consideration the operating expenses. It is more a measurement of potential income and desirability of the area. It is probably the first estimate that you will want to do before refining you property search. If a property is being mismanaged, or the seller was not willing to bring it to a standard that would bring full occupancy, this is a good measure to look to for future value. By taking the sales price divided by full income we have a number that we can now use to evaluate the real selling price. It is not a substitute for more comprehensive data. 

Leverage: When you are starting out with you first purchases, your potential net worth can be enhanced by financing versus paying cash for your first property. For instance, If you pay $50,000 cash for your first property, your gross first year income based on $775 per month rent is $9300. If you used leverage via a 10% down mortgage and with closing cost included bought seven properties, based on a gross rent after mortgage payment of $350 per unit, your yearly income would be $25,500 estimated. You would also be building equity by the appreciation of seven versus one property. 

Return on Investment: Like Cap Rate, this is an essential calculation because it brings in multiple variables like holding time, appreciation, closing cost, expenses, property management, vacancy rates, and tax and expenses on point of sale. There are computer programs that I can use to show you what an estimated annualized after tax return will be. It is important to use conservative figures when evaluating this. Appreciation, vacancy rates, and expenses can change over the course of say ten years of holding the property. In conjunction with other evaluations it can give you valuable insight to the quality of the investment. However, for the bottom line depend more on positive cash flow that in appreciation. Appreciation is the icing on the cake. 

1031 Tax Deferred Exchange: The government does allow you to sell a property, reinvest your money in like kind rental property, and defer any capital gains and recapture taxes. It is important that you know the rules, so please read the articles written by Stewart Title’s Asset Management division in my investment section.  

Non-conforming 10% Down Investor Loans: The typical “Conforming Fannie Mae Loan” requires a 20% down payment. 10% down loans are not a standard Fannie Mae product. The advantage of 10% loans is they can double the number of properties purchased by comparison. You should be aware that mortgage insurance will be normally involved. Some non-conforming loans do not have mortgage insurance but may have a higher interest rate. To compare, have your mortgage banker do a truth in lending estimate to compare yields to see which one is best. Non-conforming loans are usually subject to a 1% origination fee. 

Real Estate and Your Estate 

Thoughtful money management now can help you achieve your goals of 1) a comfortable retirement and 2) preservation of your assets while minimizing taxes for both you and your heirs. You may not be aware of the ways in which real estate investment can enhance your financial position. Here are some strategies to consider. 

Investment in Real Estate 

Real estate investing can be advantageous in a number of ways. These include: 

Rental Properties 

1031 Tax-Deferred Exchanges  

Another advantage of owning a rental property may be realized when you sell it. If you sell an investment property (not your primary residence) and buy a “like-kind” property within 180 days, Federal and State capital gains taxes on your sale proceeds are deferred. This means that the entire gain on your sale may be re-invested. This is called a “1031 tax-deferred exchange” because it’s detailed under Section 1031 of the Internal Revenue Code. 

Capital Gains Treatment – Primary Residence 

Under the current tax rules, you can sell a principal residence once every two years and exclude up to $250,000 (or $500,000 for a married couple) of the gain from taxes. As long as you reside in any subsequent homes for the minimum two years, you can exclude the same amounts from capital gains taxes when you sell that principal residence. 

Real Estate Investment Trust (REIT) 

A Real Estate Investment Trust, or REIT (pronounced “reet”), combines the capital of many investors for the purpose of acquiring or financing various kinds of real estate, including offices, hotels, shopping centers, and apartment buildings. REITs generally don’t pay Federal corporate income tax and often aren’t required to pay state income tax. They must invest at least 75% of their assets in real estate and must pay out 95% of their income as dividends, which can be 10% or more.  

A REIT is managed like a mutual fund, with a professional manager and diversification in many types of properties, and is usually traded on major stock exchanges. 

Think You Don’t Have Investment Funds?  

If, like many of us, you just don’t have the cash left over from your everyday expenses to invest in real estate, other sources of funds may be at your fingertips. Some of these include: 

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Let’s review real estate investing as a strategy for your future financial security. I can also help you find the appropriate professionals to advise you on how to manage your estate wisely. As a certified Seniors Real Estate Specialist (SRES), I’m part of a network of competent professionals, knowledgeable about the unique needs of mature Americans, who are ready to work with you. 

Investing in Real Estate 101 

We have seen the infomercials, and visited the web sites. The headlines scream “Invest in Real Estate with NO money down. You are promised untold wealth in a short time, big homes with gorgeous pools, and a Ferrari in the garage. All you have to do is buy the tapes, CDs, and books. You can even do this with bad credit they tell you. The truth is the only people making money are the ones selling you the hyped promises. Even worse, some of the advice could cause you to unwittingly commit fraud in our state and elsewhere. Investing in real estate requires money, hard work, and the patience to be a landlord. Let’s look at the facts. 

First, repossessed properties require a down payment for investors. The three primary sources of repos are FHA, VA, and Fannie Mae foreclosures. They do not finance you, and typical investor financing is 10% to 20% down, and usually one percent higher interest rate than owner-occupant financing. Second, non-qualified assumable FHA and VA loans were eliminated in 1989 and 1988 respectively. In 2004, the appreciation is such that it is cheaper to do 10% down. Thirdly, what about taking over the mortgage payments? All standard loans currently written have a due on sale clause. This means that when you start sending in the payments, the mortgage company is alerted that the money they loaned a qualified buyer has gone to someone else. They have the right to call the note due immediately, and they will. The other idea is to pay the owner of record and then let them send in the payments. I would not be so trusting that a homeowner in serious financial trouble who agrees to do this will make the payments. The mortgage company cannot tell you because of privacy laws. Both of you could be accused of deceiving the mortgage company and that can be accused of fraud. Lastly, do not use a “straw buyer” to apply for a special owner-occupant 100% financing purchase in your place. I do know that investors in Oklahoma who have done this have gone to jail. 

I am not trying to discourage you from buying rental property. It can be one of your best investments in your retirement portfolio. What I want more than anything is for you to operate in a legal and ethical manner, and realize that with $5000 you can buy your first property in Oklahoma. It may require you to get your hands dirty, become a landlord, and practice psychology, but in reading my other articles I think you will find that it is one of the safest investments with the highest return you can have. I will be glad to help you begin the process, but I also encourage you to seek the advice of an independent financial advisor to see how this best fits in your financial portfolio.