I often get emails from people all over the world who want to know the answer to this question. Unfortunately again, there isn’t one universal answer.

We teach “Buy and Hold”, specifically in the area of residential real estate. There are, however, partners on my team that specialize in Commercial Real Estate and Industrial Real Estate, lots and land, or even mixed use property. The reason I tell you this is that there are different amounts of money involved in these transactions. Commercial, for example, usually requires at least 25% down. With residential real estate there is much more flexibility. You can buy a lot of property for very little initial cost – as low as 0 – 10% of the cost of the unit.

There used to be an abundance of “No Money Down” products available, now (because they were abused) they are a thing of the past. But you can still find 10% or even 5% down mortgage products available AND because the LTV (Loan To Value) is based on the Value (not the actual price), you can sometimes find properties with some equity built in to cover your 5% - 10%, so you only need to come up with closing costs.

Then the remaining amount needed is actually dictated by the lenders and their associated companies and vary significantly by state, because of differing tax laws, etc. Check with your local lender and get a “Good Faith Estimate” from them that will disclose all associated costs.

I was listening to an audio book while I was driving the other day, as I always do in the car if nobody’s riding along. And the author said something that caught my attention. He said “Risks only feel risky until you do them”. Think about that. It’s so profound yet so profoundly simple. Think of anything you’ve been frightened of doing in your life. Then after you do it, it’s not so bad!

The reason it struck me is that it’s the same for investing. Typically a beginner investor is not only frightened, but completely intimidated and often overwhelmed as well, by all the new information, the new skill sets they must learn and the new decisions they must deal with. I often tell a beginner investor, if you’re not at least a little scared – you’re not paying attention!

The first one is always the toughest. This is the hurdle, when conquered, sets the new investor apart from all the would-be’s and wanna-be’s out there. There are no official studies, but the figure we bet on in the Real Estate Industry is 1 person will invest for every 10 that say they’re going to. Many of them even call themselves ‘an investor’ already – they just don’t have any MN real estate investments yet!

REIT stands for Real Estate Investment Trust. It’s pronunciation rhymes with ‘meat’. It is a structure formed for investors to invest in real estate, but the REIT structure allows them to do so much as they would invest in mutual funds in order to buy stocks. The resources are pooled and diversified. REITs can be publicly or privately held and an investor owns one or more shares of the REIT. And it, like everything else, has its pros and cons.

PROs

Firstly, like mutual funds, when your money is pooled with other people in groups, you are somewhat protected from most major catastrophes and the usually bumpy ride of the regular market. You can also get involved in projects that are otherwise completely out of reach of you financially and have a virtually hands-off investment.

CONS

You are not in control of your investing vehicle at all. Robert Kiyosaki equates it to driving a car without your hands on the wheel. You put your money in and trust on the reputation (or sales materials) of the REIT. Also, REITs are known to often over-pay for investments simply because they can and don’t take the time to research and negotiate as an individual would.

If you’re really interested in pursuing this route, I recommend reading “Investing in REITs” by Ralph Block.

I get why investing is so hard to get started for most people. I remember being there too. But, more than that, I get that often when people are taught, even by great teachers like Robert Kiyosaki, Donald Trump, Robert Allen – whomever they like – is very simplistic. The great teachers teach the mile-high view. They have to. If you’re teaching a world full of people, you can’t teach at the micro-level. It doesn’t apply to everyone.

Also, it’s an enormous leap to go from the learning phase, the mile-high view, to actually doing it when you get the microscope-detailed view. The conversation goes from excitement and detached desire to build wealth to obligation and money going out the door, not in, just to get started.

My “Investors Guide” is geared at just the US. Much of it simply won’t apply to the rest of the world – their laws and their economy. But it was written to address the questions I get every day from real world investors just learning and getting started. There’s really so many facets to investing, I want the lay-person to be able to get started with access to the detailed questions.

Author Robert Kiyosaki, inspiration to many people, often speaks of cash flow. He says that if a property is negatively cash flowing, how many of them can you afford? And if a property is positively cash flowing how many of those can you afford? What he doesn’t allude to until later in his series of books is how he defines “cash flow”.

In his book “Rich Dad’s Prophecy” Kiyosaki actually defines what he means by the term ‘cash flow’. He says there are 4 quadrants to cash flow: rental income, tax deductions, depreciation and appreciation. The only problem with the definition is for some of the newer investors. Many new investors are only focusing on the first quadrant: rental income. All too many get scared right out of the game because they don’t take into account the other 3 quadrants, and that’s where most of your money in real estate will be, not in rental income!

Sure, I have properties that cash flow a couple hundred a month. I also have properties that negatively cash flow a couple hundred a month. The real money is how much I save at tax time and the value of the appreciating real estate. If my properties all had a slow year, they may only appreciate $50,000 in that year. Compare that to the couple hundred here or there in rental income – no competition. Add another $25,000 depreciation (what Kiyosaki calls ‘phantom cash flow’) and thousands more from all the deductions, more likely tens of thousands. Based on that, do I worry much about monthly cash flow?

Nope!

I can’t help people qualify for the best loan products, but I can find investments that will be very likely to cash flow! How do you find those, you may be asking yourself right now? Is there a formula? Yes, there actually is. It’s a very simple and straightforward formula that anyone can use. It’s actually not even a ‘formula’, but simply a ratio.

All you need to know is the rent amount (or estimated rent range) and the purchase price. The ratio between the two will come out to tenths of a percent. This is your “Rent Ratio”. The larger that number, the more likely you are to cash flow with less down. The lower the number, the better the loan product you must qualify for and the more down payment you may fork out initially.

In Minnesota right now investors can expect about .5% to .7% for single family homes depending on area, size, etc. And, with ratios like that, an average person would probably have to put 10% to 20% down – depending, of course on the mortgage product they pick. One of the reasons we are so excited about Texas right now is that number – the ratio between cost of the unit & rent – is almost up to 1%. That’s huge! I mean really about the best in the nation. And the best we’ve seen in a very long time. You do however, have to add in 8% for the management though

Here’s an example to illustrate: those single family homes are in the upper 140’s – we’ll use $148 for the example – and the rents will be about $1200 - $1400/ month. 1200 divided by 148,000 equals .81%. 1400 divided by 148,000 equals .95%. These properties, based on those numbers alone, are quite likely to have some cash flow before even tax benefits or depreciation.

Everyone starting in real estate investing wants simple, straight-forward answers that apply universally to real estate investing. Unfortunately there isn’t ONE magic answer in real estate – every single person will be in a different financial place in their lives and have a different answer. And I completely understand the beginners’ frustration with there not being just one answer… it should be much more simple than all that!!!

I have the same feeling about insurance. I get insurance on all my investments – it’s typically required by the lender anyway. But if I have to change companies or details – OMG, I want to poke someone’s EYES OUT. The details they need, the personal information, the structural information, my car insurance information, my social security number & drivers license number??? GET OUT! Just give me a ballpark quote!

But, for all my frustration, I understand. Real Estate often looks the same way.

Every day – every single day almost without exception – I get the same questions from new investors: “will it cash flow?”. And that’s when I have to become the dreaded insurance agent… I have to ask “How much are you putting down?” and “How’s your credit score?” which most people don’t really know – heck, half the time I’m not sure where mine is either. I ask questions that – realistically – are the lenders questions. I try to ‘ballpark quote’ people, but it’s tough. I know people want straightforward and universal answers, but there aren’t any. Some people qualify for great interest rates and some don’t. Some people have 20% down on everything they buy, some don’t. Some people get option arms, some people get 15-year fixed mortgages…  and everything in between. I can, however, tell them what they’ll be able to get in rent, but the ‘cash flow’ question will depend on them.

Luckily I work with great lenders – ones that specialize in investors, and investing mortgage products. They can quickly and easily help investors target their preferred monthly payments, based on their 2 or 3 favorite loan products that they qualify for. THEN I actually CAN answer the question “will it cash flow?”!

I hear many people tell me that real estate investing is not safe. And, in the wise words of Robert Kiyosaki, I usually reply ‘a car is not safe if you don’t know how to drive it’. Before one is allowed to drive a car they go to driving school. They even take a test and are graded on their skills. If they have attained a certain level of mastery, they are awarded a license and are allowed to drive.

Unfortunately in the world of real estate investing, there are plenty of classes you can take and books you can buy, but no test or scoring system before you start. I say ‘unfortunately’ because that means no one has to pass a test, or get a license to invest and that means too many people are driving their financial car – their real estate investing portfolio – without a license. That is why we all too often hear of the failures.

Another unfortunate part of the game is that everyone wants to ‘get rich quick’ like they see on the late night infomercials. And again, if it were really that simple – that universally easy – don’t you think everyone would be doing it? Those products for sale though, sure make the sellers plenty of money. They have to fork out thousands and thousands just to get the regular air-time to sell their products. If they’re making so darned much money in the real estate market, doing so well independently, why don’t they just give away their methods – share the wealth - teach and mentor for free?

I have heard of people trying to save money by looking at my investment opportunities then trying to go directly to the developer, thinking ‘Well, if she can collect a fee for referring me, then I should be able to save that amount of money just going directly to the source!’ Well, unfortunately it just doesn’t work that way. You still pay the exact same amount AND you wouldn’t have anyone acting on behalf of you, the buyer.

The developer is only looking out for one person – Himself! Anyone signing papers to go directly to the developer & his agent actually gives up their right to have professional representation of their own. This, to me, makes no sense because they don’t ever pay any money out of their pocket for that representation and usually don’t know the first thing about real estate law, etc.

But realistically, usually these opportunities are not available retail – Joe-Average can’t just access them by just searching online, etc. And if your investment is in MN, where I’m a licensed agent, I actually represent you. I have full fiduciary responsibilities to act and negotiate on your behalf! If you went directly to the developer and his agent – they’d LOVE to help you out. Then they take ALL of the commission AND they’re only representing themselves in the negotiation, so they can really work and negotiate to their own advantage because you’re not protected! Like a snail without a shell!

The next most common question I get from beginner investors is “Were do I get the money?”

And if it were that really that simple – that universally straightforward – everyone would be doing it! The same as “were do I start”, for a thousand people asking that question there are a thousand different answers.

For some people, they own their own house and can utilize some of their equity. For some, loans against their 401K or IRA are appropriate. For still others with good credit but little leverage, investments with some already built-in equity may be the answer for them. And for some, the best option is to pool with other people to utilize their resources – like friends or parents. And once again, the best way to analyze this is to sit down with a qualified lender – one who specializes in investors and knows the ins and outs of the investing world.

A beginner investor could, if so motivated and qualified, get started for as little as $5,000 - $10,000. But I stress – ‘if qualified’. I’ve taken literally hundreds of phone calls and emails from people – good hard-working people – with credit card debt up the wazoo, student loans to the max, very little income, bad credit scores and they are currently renting. And they want to quit their job and be a full time investor! And it pains me each time to have to do a little reality check. If they want to use OPM (other peoples money), they have to be able to show the OP (lender or bank) that they can repay that money on time and with regularity – a bad credit score doesn’t paint that picture.

It’s not that these people can’t invest – absolutely not the case – they just can’t do it right now. For most people in most situations as little as 6 months of diligence can get them on track, extreme situations 2 to 3 years. But anyone can do it. This too, can be assisted by sitting down with a lender. They can recommend the things to do to repair credit issues, tell you how to leverage yourself to qualify for the most money and the least interest, and give you little tips and tricks that will put you right on track.

And I know it’s not the “sexy” part of investing, but it is an extremely helpful first step if you are willing to be vulnerable for a few minutes and share your financial profile with a professional.

Without question, hands down, the most common subject I get in my email box and over the phone. “Alex, I want to invest in real estate, WHERE DO I START?” And, at risk of sounding overly simplified, everyone must start where they are. I don’t mean to sound like a monk on a hilltop giving some crazy riddle, but really – to know where one is going – to make a map – one MUST know where they are starting. And most people think they know where they are, but in reality – they don’t. If you do know where you are financially: know your credit score, your debt to income ratio, know exactly what your leverage is, what your retirement plan is and how much is in it and what it’s going to provide you when you retire, and all other financial factors that influence investing – you’re way ahead of the pack.

It’s just the same if you log onto Mapquest or Google maps or whatever you use, and know where you want to go, what is the FIRST THING you have to type in? Not your destination, but your origin.

It is the same with investing. Most people are pretty clear where they want to go, but need a little help to find out what they need to get started. I did too. I knew I wanted a comfortable retirement, I knew I wanted to move out of the city a ways, I knew I wanted to start building my wealth, but I didn’t know what my leverage was now, in order to get there.

I too, had to look at where I was starting from. And if there are a thousand people reading this, there are one thousand different answers to that question. Having said that, the items in the first paragraph are among the first things you’ll want to know. Ideally you should sit down with a lender – preferably a broker, rather than a bank – and get pre-approved or pre-qualified. Then you will know what you can afford and when.

So I get a lot of questions in my email box from my website. Most are legitimate investors with legitimate questions – some are from newer investors with just basic logistical questions – and a few are from people just trying to get started and doing some of their research on my site. One such person – bless his heart – had the courage to ask the following question: (BTW, this is copy/pasted right out of the email, exactly as written!):

“I am trying to get started in the property investment world and came across your site.  One thing I do know is nothing worth anything is free, what’s the catch? or (what’s) in it for you?”

I tell you I was laughing so hard, tears were coming down! Of all the people in the world who I’m sure want to know that – no one ever asks! This charming soul just said what was on his mind – to this day I don’t even know his actual name or anything.

And I’m so glad someone finally asked, because there are actually several reasons I do this and I’m happy to tell you what they are – and although agents act like there’s some big secret – there really isn’t! What’s the most obvious reason anyone does anything for a living? Simple! Money!

Investors don’t actually ever pay me anything – no one whips out their checkbook and says “hey Alex, great website, learned a lot, what do I owe you?” Nothing like that. If you like the opportunities I find and present, and you’d like to buy one, I get a referral fee (or other type of fee) from the developer, or whoever is involved. I collect that fee after you close on your new property, have all your questions answered, ducks in a row, and paperwork in order. In a nutshell, ‘you likey, you buy – I get paid’. That having been said, ‘you no likey, you no thinkey you likey me? You no buy’. Everything else on my site IS free.

This is why I spend so much time seeking out GOOD INVESTMENTS. In a competitive market like we’re in, I’m only going to have to search harder to find these opportunities. If I don’t find good ones, people don’t buy. If people don’t buy I don’t collect any referral fees or commission. If I don’t collect any referral fees or commission, I go out of business. And if that happened, I’d have no resources to produce a website or the materials on it. The circle of life investment-specialist-realtor-style.

Okay, so we’ve covered the money part – why else would I do what I do? Well, if you’re familiar with the social security set up, or are a fan of the Kiyosaki “Rich Dad, Poor Dad” books, you already know. There are 75 million baby-boomers who will begin retiring in the next 5 to 10 years. When they do, and they turn 70 ½, they are mandated (yes, required!) to begin withdrawing money from their retirement funds on a regular basis (i.e. stocks of some sort). What could happen to the stock market with 75 million people withdrawing? Doesn’t take a genius to figure that one out.

The stock market has the potential to become very unstable. And a vast majority of our middle class society has the majority of – or all of - their retirement funds tied up there. Let’s pick a random number and say 50% of retirees are planning on leaning on their 401K and IRA for retirement money (pretty conservative, I think) which is all in the stock market. And the stock market goes soft, goes into recession or even a crash. The result is that those people can’t retire or can only afford semi-retirement or have to lower their standard of living just to survive. We, as a nation, need to look for other ways to subsidize our retirement or we could be looking at one of the most major national crisis’ in history.

People are frozen in their tracks by listening to the Hype and B.S. that's propogated by the media!

Unfortunately for them, all the would-be beginner and speculative investors only hear the gloom and doom reports in the news and are absolutely certain it applies to them. They do not understand that it’s a buyer’s market right now – the real estate market is only troublesome for someone trying to SELL something immediately - and they’re completely stopped by all the media hype (like the quotes you’ve read on my home page).

I have one would-be investor that very faithfully cuts articles out of the paper for me regularly – mails them to me – about the ‘bubble bursting’ and ‘markets crashing’, and how real estate is a baaaaaad investment. And I just don’t think she understands that the article is written by a columnist – someone who earns a meager salary to come up with sensational material – not an investor. If someone does not own investments, is not an investor and/or work closely with investors, how is it they deem themselves qualified to asses them, I wonder?

Anyway, this gal had looked at investing in real estate a bit with her husband to prepare for their retirement. They’re in their late 40’s to early 50’s and she and her husband want to retire in the next 10-15 years. They’ve dabbled in stocks, have a nice little home that’s almost paid off, and a short-termed mortgage in order to get it paid off quickly.

But they do not have enough to retire comfortably… not by a long shot. They too, are somewhat frightened by the ineffective nature of the social security system and worried what their retirement years will look like as a result. They know they want to impact the situation, but are afraid to act.

And unfortunately she spends time and energy actively seeking materials that oppose investing in real estate. And believe me, that material is out there, easy to find! I just don’t have the heart to tell her “What if you put all that time and energy into learning materials that teach you how to invest safely and securely?” (She is already convinced that her home is a great investment – where the information breakdown is, I don’t really know)

But in the meanwhile I get article after article in the mail – all neatly folded with special passages underlined or highlighted – of all the reasons NOT to invest. Unfortunately for her, I’m quite happy with my investments and retirement plan, so the only purpose of her timely notes I think, is to convince her self.

People often forget that real estate, as an investment, can – and should – be looked at just like any other investment. Think about what the normal pattern of behaviors is for people saving for retirement with their 401K plan (buying stock in the company they work for). They set it up, it comes right out of their paycheck before they receive it, usually with a percentage matched by their employer, and they get a regular report of how their investment is growing.

ROTH and other IRAs work similarly, except they typically don’t come right out of the paycheck. They have no other benefit then, until you withdraw the funds and collect your earnings.

Looking at real estate through the same perspective – putting a little money in over time and collecting your earnings at the end – provides a beautiful compliment to those other retirement plans. You can even use the same principles as the other investments, like maximizing your investment by ‘Buying Low’ and ‘Selling High”. And real estate on average appreciates as well as, and even much better than the stocks & bonds people invest in.

Real estate however, provides other benefits along the way, that IRAs and 401Ks do not. With real estate investing you can also get tax benefits every year when you deduct your mortgage interest and other expenses incurred. You deduct your mortgage interests and any improvements made.

You can also ‘depreciate’ your property, otherwise known as ‘phantom cash flow’. And you can move funds around without being immediately taxed (using a 1031 exchange). These are all things that you cannot do with your 401Ks and IRAs.

Why then, is real estate so frightening for people? It’s frightening because people have been taught that it is. Their parents or grandparents survived the depression era and TEACH that it’s dangerous to buy a house. And if you do, pay off your mortgage as soon as you can. Maybe even keep some extra cash in a coffee can, just in case! And if no one takes the time to learn anything NEW, they are stuck in that paradigm and even pass it on to their own children.

For sure, I hear it every day – CNN, the local paper, all the major magazines, local news – everyone talks about how ‘bad the market is’, etc. What they don’t ever say, though, is the market only sucks if you’re SELLING! If you’re a buyer right now – it’s a regular hay-day out there!

You have twice as much inventory to choose from, sellers have to price competitively or be prepared to take a long time to sell, and builders are slashing prices on new and pre-construction just to put dinner on their tables at night. It’s a regular buyers-bonanza!

Here in the Twin Cities market of Minneapolis and St. Paul, we currently have about 41,000 homes on the market right now. A balanced market is more like 20,000. We look at the state of the market by measuring its “absorption rate”, that is, the time in which it would take all current inventory to be sold through, if no new homes were listed and sales stayed on par, where they are right now. Here that rate is about 7.7 months currently. And people keep on listing their homes.

That being the case, we’re looking at a strong buyers-market for the next year or two at least most likely. And if our normal cycle is around 6-8 years, that’s right on track with our historical norm. But, that sure wouldn’t give our news-casters anything to shout about, would it!?!

I can see it now… “Good evening. I’m Dana Smith with Channel 6 news. Our local real estate market is normal and stable. Also in the news, no one was killed or maimed today. Mike, back to you…” Poor Dana & Mike would have to learn new trade skills and work on their résumé ASAP!

Here's an example of how (for years) the media has criticized real estate investing...

Dire Media-Predictions: 

Ignore The Critics!

In spite of all of these so called "predictions", I continue to build wealth with my investment properties and save a lot of money on my taxes each year...

If you want to succeed, find someone who is already doing it and model them. You don't need to re-invent the wheel because the wealth-building system that I follow is a proven, tried and true investment-property strategy that WORKS!

 Minnesota Investment Property

A: There is no right or wrong answer here. What it comes down to is an in-depth analysis of your personal situation (as well as your long and short term goals).

Here are some things to consider:

• Risk Tolerance and current buying power
• Current Personal Leverage
• Personal Usage: long vs. short term occupancy
• Personal Involvement (Maintenance)
• Professional Management vs. Managing your own unit(s)
• Cash Flow vs. Appreciation
• Leveraging Your Investment
• Tax Advantages
• Leveraging Investment Equity: 1031 Exchanges

A: You will find a wide variety of choices when you are beginning to shop for your investments - such as:

• Condos and Condotels
• Villas and Town homes
• Single Family Homes
• Lots and Land
• Existing Construction
• Pre-construction and new-construction
• Conversions
• Fix and Flip
• Commercial
• Industrial

Each one of these choices will have it's own unique characteristics as far as: how much money is required for down payment, the likelihood of appreciation, the likelihood of monthly cash flow, etc.

Click here to see the great MN investment opportunities I am currently making available on this site!