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Automatic wealth The 6 steps to financial independence - Masreson M.

Masreson M. Automatic wealth The 6 steps to financial independence - Wiley & sons , 2005. - 291 p.
ISBN 0-471-71027
Download (direct link): automaticwealththesixstepsto2005.pdf
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162 AUTOMATIC WEALTH
1. Buy undervalued property. You can’t make a fully valued property become more valuable by fixing it up. The idea is to find a property whose value is less than what it should be (compared to similarly sized and configured properties in the area) and then bring it up to its full value by spending a little money on it.
2. Create a fix-up budget that leaves you with enough profit to meet your overall financial goals. Buying and selling fixer-uppers is fun work. But it’s work. So you want to be sure you make good money for it. You can do that by deciding beforehand how much income you want this business to provide and then dividing that by the number of transactions you can reasonably expect to achieve on a part-time basis. For example, if your goal was to make an extra $60,000 the first year, you might decide that you need to net $20,000 on three transactions. If you want to net $20,000 on an individual transaction, make sure that your budget shows you making that much or more. (I like to cheat in my favor by budgeting a profit of $25,000 if I want to make $20,000 because I’ve learned that there are always some unanticipated expenses.)
3. Just as expenses usually exceed your expectations, prices sometimes disappoint you. To deal with that reality, you must be disciplined about selling. You can’t make money in a buy-and-sell business if you never sell. You must be prepared to drop your asking price to move the property if local selling conditions dictate. A good rule of thumb: Never hold onto a property for longer than one season (or one year). In the long run, you’ll make more money taking smaller profits on each transaction but making more transactions.
Always Have a Plan B
The single most important principle in reducing risk and increasing your profit potential on every property flip is to have a solid backup plan in place. Even though you may have no plans to rent out a property you intend to flip, it’s best to make sure you could rent it out at a profit (or at least break even) if you had to.
We’ve all heard stories about the investor who buys a house, hangs a new front door, touches up the paint, plants a few flowers, and sells it a month later for a $50,000 profit. While this kind of success is not
Step 4: Radically Increase Your Personal Income 163
uncommon in a fast-moving market when the property is purchased below market value, it is certainly not the rule.
Go into every real estate deal—whether you’re planning on flipping or investing long term—with a good defense. And your best defense is to make sure the rental income the property would produce will cover your carrying costs plus at least 10 percent—just in case. Your carrying costs on a property are the sum of your monthly principal, interest, taxes, and insurance (PITI).
Find out what the rental values are in your area by calling about rental properties listed in the newspaper and calling agencies that specialize in rentals. The Department of Housing and Urban Development (HUD) also publishes fair market rent (FMR) guidelines for certain areas—and although this is not always an accurate reflection of reality, it can serve as a good base number.
To determine your margin of safety on a particular property, calculate the gross rental yield. To do that, divide the rental income it would bring in each year by the asking price.
So if the asking price for a home is $100,000 and the rental income is $750 per month, the gross rental yield would be 9 percent ($750 X 12 = $9,000; $9,000 + $100,000 = .09).
In most markets, a 10 percent rental yield provides a comfortable margin of safety. In other words—worst-case scenario—if the property does not sell, you could rent it out and more than cover your costs.
The rental yield also gives you a quick way to determine the maximum amount you should pay for a property. In our example, let’s say your target is a minimum 10 percent rental yield. At $100,000, the house does not meet your criteria. So reverse the math a little bit. Take the annual rental value of the property and divide it by the yield you need to get.
In this case, $750 times 12 gives you $9,000 in annual rental income. Divide $9,000 by 10 percent (.10) and you get $90,000. This is the maximum amount you can pay for the property and still earn the 10 percent rental yield that you want.
The rental value will always serve as your anchor, preventing you from offering a ridiculously high price in a fast-rising market.
Make Any Deal a Potential Quick Flip with an Assignment Clause
Even if you’re looking to buy for the long term, you should give yourself the legal option to flip the property. You do this through an
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assignment clause. If your only goal is to flip the property, an assignment clause is mandatory.
It simply means that on every contract you sign, make sure you have the right to assign the contract to another buyer. In principle, it’s similar to the idea of endorsing to someone else a check that’s made out to you. The assignee would then close on the contract with the seller—under the time and terms stipulated in the contract.
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