I recently had lunch with a gentleman (I'll call him "Jack") who opted into the MN investment property program on my website. Jack is a 50-something guy who was eager to tell me all about his love for investing, experience and everyone he knows in the investing world...

I asked Jack how long he had been investing, and very proud of himself and his experience, he proclaimed that he'd been investing for more than 20 years now! --- "pretty good", I thought - most people who seek me out are more beginner to intermediate (5 years or less, on average). Then I asked him how many properties he currently owned (must be quite a few after 2+ decades, right?). And the answer he had surprised me a bit...

...He said he didn't actually OWN any properties yet!

As it turns out Jack never did ACTUALLY PURCHASE anything... nor did he have a job, or any money to put down. Oh, and I almost forgot... his credit score is trashed and he wanted to know if I was hiring...

Now I'm not gonna insult Jack - God bless his enthusiasm & effort, but I (all too often) get e-mails, voice mails, and "ask a question" forms (submitted on my site) - from many others who have a few issues similar to Jack.

...If you're feeling a little like Jack, and you want to STOP PRETENDING that you are a Minnesota real estate investor and actually BE one -  here is my advise... (remember - I promise you no B.S. - so this is honest-feedback!)

I will NEVER tell you that you cannot invest in real estate - YOU ABSOLUTELY CAN DO IT - but I will tell you that if you are truly committed to making money with real estate - as with most other great things in life (your marriage, relationship with your kids, your health) you won't get somethin' for nothin' - you will have to WORK at it.

If you don't have good credit, any money to put down, and no job for that matter - the EASIEST route I can suggest for you is this simple 3 step plan:

1. Get a job - (maybe even 2 jobs, if that better supports your goals).

2. Repair your credit - get caught up on your credit-cards and bills and raise your credit score.

3. Save some money to start buying real estate with.

The other route you can take is to become a full-time real estate investor. This means you are working at it 50-80+ hours per week - doing EVERYTHING imaginable to find and purchase properties with poor credit and no money down. I won't lie to you, this CAN be done, but it's not easy, so be prepared to work VERY HARD for it!

Like I said, the easiest route is the first one, but no matter what you decide - you must decide to take "massive-action" and do the kind of things that OTHER successful real estate investors are doing, and work hard for it.

I get calls and e-mails every day from all over the world: New Zealand, UK, Germany, Turkey, Guam, Australia, Alaska, Canada - you name it.   People who KNOW they want to invest, people who are committed to starting investing, just don't know where to start.

All these people want one simple formula, one simple answer of what to buy and how to buy it... that's how they find their way to my site. 

Most of these people are very well studied, and very well read.  They know all the best authors for investing, they've gone to the seminars, and they've bought the CDs. They've spent all kinds of money, and all kinds of time on everything about investing... just not yet an investment.

And these people are so well educated, they've spent so much time and money learning not only the positive aspects of investing, but the pitfalls to avoid.  And sometimes having learned so much about the pitfalls, in fact, that they have their own personal overeducated version of analysis paralysis (I call these folks the "Yeah-buts"...).

I've had many many first-time investors take the time to view dozens of properties, study the market tirelessly, even write offers before this version of analysis paralysis hits.  And then what stops them?  The details...  

The many hundreds and thousands of details.  For some it is the paperwork, the process of writing the numbers on paper, signing their name, and the pages of legalese that often accompany a purchase agreement. And for others, it is writing the earnest money check... the prospect of parting with (usually) a couple thousand dollars at least, and the risk they won't ever get that back. For others still, they get past the paperwork no problem, but get stopped by the inspection.

Often would-be investors forget that it's an inspector's job to find issues and write a report on them.  And, they WILL find things (remember, that's their JOB!). They will take photos to include with their report. Whether issues are large or small, the would-be investor receives this lengthy report with a dozen or more photos and immediately panics (because, after all, they just received a report on how terrible the place is!).

Even a brand-new or newly remodeled home will not ever be perfect. And for those that make it past the inspection, perhaps it is the financing at the would-be investor gets caught up on.  Many potential investors are strong and act with conviction until the point they see all the numbers on paper and become overwhelmed.

This is why, and you'll read it again and again on my websites and blog posts, that only approximately 1 in 100 potential investors ever actually make it to that first purchase. That's one person out of every hundred at least as interested as you are now, and that makes it to the finish line.  In fact, I think it's actually slightly less than 1%.

My advice to you? Be the 1%.  Be that 1 in 100. Do whatever it takes to be the master of your own wealth!!!

When you forget, remind yourself. When you get scared, just breathe. When you get confronted, just remember.  That's part of the process anytime you're doing something new.  Allow yourself to move through the space of the unknown to emerge out the other side triumphant.

And, if all else fails, come back and read this blog. Pinch yourself. Remind yourself what you're truly committed to. Use Post-It's if you have to. Just do whatever it is you have to do to begin using your most valuable asset investing - your time.

Don't delay any longer.  I (like most investors) kick themselves for waiting as long as they did.  I've never ever met someone who said "boy, I'm sure glad I waited"...

Start Here

ROI stands for Return on Investment. Very simply put, it is the percentage of money that you get back versus the amount of money that you put down to acquire property. Here is a very simple chart to illustrate how ROI and leverage works: (bear in mind that no matter how much you put down, the value the property appreciates will always be the same.

The great part about buying investment property in Minnesota is, he smaller your down-payment - the BIGGER your our ROI.

In this game, the game of real estate investing, most of us prefer to use other people's money (OPM). This is something you typically cannot do with any other investment. Just try walking into your local bank or credit union and asking for a loan to buy stocks and bonds.

No, I take that back. Don't try that. They would likely laugh at you and then I'd feel bad...

A "Market-Basket" (or "commodity bundle") refers to a fixed list of items used specifically to track the inflation or progress of an economy or specific market. If you have ever taken a class in economics, or have a friend that an economist, you've heard this term before.

For a person, what it refers to is, if you go out into the world and buy one of everything you could consider YOUR markets' basket of goods - take that list and compare it to that same list in another time period. For every person, their market-basket of goods will be different. For an average family, let's say, a market-basket of goods for the week might include several gallons of gasoline, an allotment of assorted groceries, any special medications, haircuts, toilet paper etc.

For a company, their market basket of goods will be very different. It will include such things as costs of maintenance, repairs and operations (MRO).

There are many ways to choose categories of market-basket of goods, or take it as a whole picture of everything we as a nation purchase in a stated period of time. Using this latter definition, our national market-basket of goods, over time has increased an average of 5.5% per year. And given that this takes everything into account, even though the price of T.P. and Ramen-noodles may have gone down, there are other things that will have gone up to compensate.

So, if at your job, your wage increases are less than 5.5% per year, you are actually not getting ahead, but rather falling behind, slowly, one year at a time. Large companies know this and purposefully keep their wage schedules below this number. This gives the company more and more leverage every year it operates. Just one more way to keep the common wage earner down.

This is just one more reason I teach about investing in Minnesota real estate. Most people don't realize this is happening as they get BIGGER houses and cars, a BIGGER TV and more and more debt, they have no idea their buying power is slowly but surely on the decline...

It is my purpose in life, to see that as many people as possible create their own independent-wealth and become self-sustaining by retirement, if not sooner. This also, in effect, takes much of the burden off our ailing Social Security system (okay, time for me to get off of my soapbox  - before I really get started...)

I've read many books on building wealth, and one in particular, had me rolling on the floor laughing. The book opened with the best and easiest paths to wealth...

The author said the best way of all was to be born into it. Boy, if somebody had told me that before conception, I might own my own islands by now! The author continued to say that if you didn't have the good fortune to be born into wealth, the next simplest way would be to marry it. And, I guess I knew that too, but being a little old-fashioned, and not wanting to dump the man I love (LOL), it was too late for me in that department.

It was a good book, obviously all about the third easiest way to build wealth, investing in real estate. More millionaires have earned their wealth this way than any other, ever. And I'm not in a tell you that investing in real estate is easy, but it is most definitely the third easiest way. And actually investing in real estate can be easy, just to the learning curve and acquiring the first property are the toughest.

Of 100 people, who ever consider investing in real estate, only one will make it to be an investor, statistically speaking. That is how hard the initial stages are. And of those 100 people, many will find my website, many will attend seminars, even spend good money on books and CDs and DVDs to educate themselves. I wish I could tell them all, the information is actually available for free if you are willing to look. And secondly, you must be willing to do things that you have never done before.

One of my favorite phrases (stolen from Timothy Ferriss's book) The Four Hour Work Week - is, "risk only seems like risk until you take it", (I hope I quoted that correctly ).

For real estate it's doubly true. Everything feels and looks very risky until you have done it once, then re-creating the results after that, is a breeze. So do whatever you need to do, to remind yourself to take a risk and to do some things that normally would be outside your comfort zone... way outside your comfort zone! Put up post it notes if you have to, but be that one in a hundred!

In the good old days, actually just a couple years ago, it was easy to purchase investments with little or no money down. But with people over leveraging and going into foreclosure, the banks, the states, and the nation batten down the hatches on more creative lending-solutions.

Now, it is much more difficult. It is tougher to find stated income loans, option ARMS have gone away and the criteria to borrow has gone up.

Don't get discouraged - however, you can still get a good-loan if you qualify. But the loans of today will typically need at least 5% down. There are still zero down mortgages available, however, they are fewer and farther between now and often have terms that make the loan unattractive.

Many people, as first-time investors, confused the down-payment with earnest money or closing costs. Remember it this way, earnest money is a check that those with your offer to show how "earnest" you are in making the purchase. It is still your money and you can use it towards the down payment or towards closing costs, whenever you choose.

Closing costs are the costs associated with making a purchase. Your lender will give you a Good-Faith Estimate (GFE) listing all these costs. There are filing fees with the county and state, there are fees for underwriting, fees for closing company and a title company, etc. etc. etc. Then there is the down payment. This is the amount determined by the loan you select.

If your loan requires 5% down, then 5% of the purchase price is your down payment and will be required on the day of close. Since you have already written your earnest money check, you may choose to put that money towards your down payment. You could also put it towards your closing costs. Or, as many people choose to do, roll your closing costs into your loan. The choices are yours and a good lender will help you with what's right for you.

Many people are familiar with loans that require zero money down, however, these are by-and-large a thing of the past. Although they were widely-popular before all the lending reforms... During that time there were also people getting a lot of loans, but did not have fixed interest rates.

They had loans, where the borrower did not have to prove how much income they are claiming. These were a wonderful thing - when they were used correctly. Unfortunately, many people over-borrowed and then could not keep up with there payments. This led to an alarming-rate of foreclosures in this country, many still going on today.

Because of this, unfortunately many people were hurt financially. They either made bad choices, received bad advice, or a little of both. As a result, this nation has tightened its lending laws (each state being a little different from each other). Many people previously doing creative financing are now finding themselves charged with lending fraud.

So when you go to get a loan today, you will find the loans available to be much different than the loans available five years ago. Luckily, interest rates are still favorable, and people with good credit scores can still get lending with very little money down!

Contact me if you would like a few good references for investment property lenders.

Appreciation, and a conservative 5% on a $250,000 house, is $12,500 per year. Using this example, cash flow is a -$981.12 per year, or $81.76 per month.

Your annual tax savings is $1744, or 12%. With appreciation at $12,500, which is 77%. Leaving your total annual-benefit at $13,262.

So when we talk about ROI (or Return on Investment) - if down payment and closing costs were $14,500 ($14,602 divided by $13,250 = 91%)!

Go Through This Quick Exercise To Answer This Question...   Here's how to calculate your score using this example:

Current age: 55

Current 401(k): $500,000

Years to retirement: 10

Monthly income needed in retirement: $10,000

Number of years needed: 20.

Annual rate of return on investment: 8%.

Rate of inflation: 3%.

$500,000, at 5% effective rate of return for 10 years is $823,504.
Number of years, you can have $10,000 per month: 10 years

In example we are short half the money needed for retirement.

How does a $50,000 investment in the stock market, compared to a $50,000 investment in real estate?

Stock market -- investing $50,000 in a traditional fund.

Assuming 8% annual return = $246,340

Assuming 10% annual return = $366,403

Real estate -- investing $50,000 as a 10% deposit on a $500,000 property.

10% down equals $50,000

6% interest rate on a $450,000 loan amount

Balance after 20 years, $216,014.

Assuming break even on cash flow.

Not considering any tax benefits.

6% average appreciation.

Value after 20 years, $1,655,102.

Equity = $1,439,088 (almost 4 times the return of the 10% investment in the stock market)

Is Now A Good Time To Invest In Real Estate?

Are we in a real estate boom? Or real estate bust? In the year 2001 and 2002 economists suggested real estate was the only sector propping up our economy and keeping it from a full blown freefall.

During the years 2000 to 2004 homeowners and investors enjoyed a $4.6 trillion increase in the value of their properties. That means, on average each homeowner experienced an average of $42,700 gain on their home in just a four year period. During those same years, 2000 to 2004, the stock market experienced a 10% return, as measured by the S&P 500 index.

As we know real estate has a tendency to run in approximately 7 year cycle. So it makes sense that we are now in a period of absorption. Based on what we experienced, then. Mortgage interest rates are still hovering at generational low levels and real estate listings are centralized on the Internet.

Minority home ownership has become a government priority influenced strongly by the baby boomers. Now that is a buyers market, the deals are there for the picking. There is far more inventory than there are people buying it. Many many people selling and very few people buying means that the buyers can be very selective and the market is highly price-sensitive.

Where can I get the funds they need to invest?

There are many ways a person can collect the funds they need to invest. Most people do not automatically have this money sitting in savings, however there are areas to tap without disrupting your retirement funds. Depending where you are in life will help dictate what funds you will tap.

If you are renting and currently do not own your own home, the first thing you must do is meet with the lender to find out if you qualify to make a purchase. If you do not at this time, the lender you met with should advise you on what to do to qualify.

If you are currently renting and do not own your own home, but have excellent credit history and qualify to make a purchase, there are two ways you may start. Since you most likely will have access to first time buyer programs, you will have the ability to buy $30000-$35000 more of a home for the same monthly payment. The prudent thing to do is to buy your own home first and begin building equity.

If it is imperative to you to begin investing as soon as possible, consider buying a duplex or triplex, living in a portion of it, and renting out the other unit(s).

If you currently own your own home, but have relatively recently purchased it or have credit issues that need to be fixed. You may need to do a little work before you can pull equity out.

If you currently own your own home, if there is some equity in the home, you may choose to either take a loan against that equity or pull some out. This is probably the most common for people to choose, but there are other ways...
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If you have money and other locations, such as an IRA, 401(k), or other short-term investments, talk to your lender, you can often take loans against that amount depending on your circumstances. If you own more property than just your own home, and are considering selling to use in the equity of that cabin, Lake home or other investment or second-home, you may also consider at 1031 tax exchange to defer paying taxes.

If you had the money to pay off your mortgage today, would you?

An enormous amount of people would answer yes to this question. But we live in an ever-changing world. We will not hold the same job for 30 or 40 years. Like their parents and grandparents did. And, unlike her grandparents, we will not stay in the same home for 30 or more years.

Statistics now show that the average length of time, someone will live in their home is in seven years. Also unlike her grandparents, we will not keep the same mortgage for 30 years. According to Fannie May, the average length of an American mortgage is 4 years.

Unfortunately, most of what we have learned about buying a home and having a mortgage is from our grandparents and parents. They probably still tell you make a big down payment, get a fixed mortgage rate, make extra principal payments, and pay off your loans early. For them mortgages are a necessary evil... at best.

And, unfortunately, as we pay down our mortgage, every dollar we give to the bank is a dollar we did not invest. While paying off our mortgage saves interest, it also denies us the opportunity to earn interest, with that money. With mortgage rates as low as they are, it's relatively easy to earn more from an investment than the loan is costing us.

Two Different Paths - Let's Compare...

Two people, each earned $70,000 per year, have $40,000 in savings, and are buying $200,000 homes. Let's call them John and Jane.

John has been taught by his parents that the best way to get a mortgage is to get the shortest one possible and put is much deposit down as he possibly can.

Jane, who is a little bit of a rebel, is going to leverage her money differently. She never listened to grandma when she was growing up.

John puts his whole $40,000, down as a down payment on his new property. He selects a 15 year mortgage with an interest rate of 6.38% APR. Unfortunately, this leaves him no money left to invest. His monthly payment is $1383 (56% is tax-deductible the first year, 33% on average), $1227 after-tax net monthly average cost. John even sends $100 extra every month, towards his principle to pay off his loan sooner.

Jane, on the other hand, only puts down $10,000 on her new home. She chooses a 30 year mortgage, with an interest rate of 7.42% APR. She has $30,000 remaining if she chooses to invest it, her monthly payment is $1175 (100% is tax-deductible for the first 15 years, 64% on average) $799 monthly net after-tax cost. Jane puts $100 a month extra into her investments, plus $28 saved from lower mortgage payments, where account earns 8% rate of return.

After just five short years, John has earned $14,216 in tax savings. He has no other savings or investments.

After the same five years, Jane has $22,557 of tax savings alone, plus she has $83,513 in savings and investments.

What would happen if both John and Jane lost their jobs right now? Even though John has $74,320 in equity, he cannot get a loan if he has no job. He must sell his home or face foreclosure because he can't make his payments. At this point is a fire sale, he must sell at a discount and pay realtor fees of 6% or 7%. Jane has $83,513 in savings and other investments, she can easily make her payments even if she is unemployed for several years -- no reason to panic.

Okay, John and Jane didn't really lose their jobs, and now it's 15 years later. How did John and Jane compare now? John has now earned $25,080 dollars in tax savings, he has $30,421 in savings and investments. He now owns his home out right. Jane, on the other hand, has received $67,670 in tax savings. She has $282,019 in savings and investments. The remaining balance on her mortgage is $190,000. She has enough money in savings to pay this off out right and still have over $92,019 left over free and clear.

And, finally after 30 years, John has received $25,080 in tax savings, he has $613, 858 in savings and investments, and owns his home outright.

Jane, after 30 years, has received $107,826 in tax savings, has $1,115,425 in savings and investments, and owns her home outright...

If we are measuring wealth by net worth, in 2001, the median net worth of a renter is $4800. Conversely for the same time period, the median net worth of a homeowner is $171,700.

If we are to take this one more step and measure the median net worth of an investor owning 2 - 4 properties, their median net worth is $450,000.

Anytime someone wants to begin investing in real estate, the first and most important thing to do is find out how much you can buy. Just like on a map, one needs to know where they are coming from before they can map where they are going. Once, you know how much property you can purchase you can choose what property or properties to purchase.

The best way to do this is to find a good lender. You can literally walk into any bank and find a lender. However, that bank will only have its own mortgage products. If you walk into Wells Fargo, you will end up with a Wells Fargo loan if you walk into US Bank you'll end up with a US Bank loan. For a wider selection of mortgage products (i.e. loans) consider a mortgage broker.  This is someone who shops all lenders and banks and will select the best mortgage product for you. If you'd like a recommendation of some local lenders. Simply contact me and I'll send you some names.

Once you choose the lender you prefer, you can start the process on the phone online or in person. The lender will need to know your Social Security number as well as other personal information. You should not give out your social security number too many lenders as each one will pull your credit report and every time you pull your credit report you will get a small ding to your credit score. If you happen to be at a crucial credit score that small ding could affect your interest rate and mortgage product that you qualify for.

This lender will then enter your information into his or her software program and tell you exactly what you qualify for, and when. Once you know this information, you can begin to look at properties in your price range. If you qualify for a large amount you can look at multiple properties or larger properties - perhaps even commercial if you have enough money for the larger down payment amount.

This is the time when you'll need a good realtor by your side. As you start looking at properties you may want their opinion as an investment. This is the reason is best to select a realtor who is also an investor and can analyze a good investment from a bad one. The same rule applies with lenders. Prefer lenders who were either investors themselves or work primarily with investors. They will be most familiar with the inns and outs of the investing game.

Keep in mind there is no one great to investment property. If your realtor is a good one, he or she will ask you about your own personal scenario as well as your goals, as everyone has a different timeline and set of goals. Some Minnesota real estate investors are merely preparing for retirement, some investors are setting up college funds for kids, and some investors are simply complementing their portfolio of stocks and bonds with real estate. There are many benefits to investing in real estate, so it is important to know why you are investing in real estate. You may be investing for monthly cash flow, tax benefits, or just long-term appreciation. Whatever your motivation your realtor should be able to find properties that fit your own needs and goals.

If you choose me as your realtor, I give you my word that that's exactly what I will work to do.  Keep in mind different areas and different investments have different strengths and weaknesses. The areas that cash flow may not appreciate as well. The areas that appreciate strongly may not cash flow or even have high negative cash flow. Often there are areas of town that have strong monthly cash flow, but are balanced with other issues such as tenants in vagrancy issues.

Whatever your property choice just know that the first one is always the most difficult. Once you get that under your belt it's smooth sailing.

Many real estate investors prefer to manage their Minnesota investment properties themselves - which means finding tenants to keep the properties rented out... I have likened this process to fishing - but instead of fishing for fish, you are fishing for tenants - and just like real fishing, this requires patience and some skill to be successful!

A lot of the "skill" part of being an effective property-manager can be learned by reading my free Minnesota Investor's Rental Guide - but you will also need to cultivate your own ability to deal with no-shows and people who keep you waiting when it comes time to show your property to potential renters.

Some days the fish will be biting and this process will come easily, and other days may require more patience and discipline on your part - but in the end (if you persist) you will succeed as an investment property owner and manager. It's important to remember that it only takes ONE new tenant to complete this process!

For more on this topic, read my article on Renting Out Your Minnesota Investment Properties.