Big Update

Wow..It’s been almost three months since I started the process of setting up a self-directed IRA. Time flies! I am approaching the end to setting everything up, I believe. Probably half of the delays were my fault. First, I filled out the wrong paperwork – I filled out the Traditional IRA application instead of the Roth IRA application. I didn’t catch that until the account had been opened, so then we had to close that account and restart the process using the correct forms. Then, Schwab, where I had the assets I was funding this IRA with, refused the request to transfer funds out. It took three tries. The request kept getting rejected because the paperwork from the new IRA custodian didn’t specify “Roth IRA” in one location on the paperwork. Once we got that straightened out, the transfer went smoothly. But each rejection took a couple of weeks, so we lost a lot of time there. After the funds are transferred to the new custodian, the next step is the creation of an LLC. The IRA will then purchase all the shares of the LLC, thus giving me, the LLC manager, control of the LLC funds.  Well, I checked with my account rep and he told me the fund hadn’t arrived from Schwab yet. Turns out, he was checking the old traditional IRA account that we incorrectly set up initially. Once I pointed this out, he checked the correct account and saw the funds had been transferred. Last week, he started the LLC creation process. I checked the Arizona Corporation Commission’s website this morning and found that the LLC was created yesterday. The next step in the process (and the final one, I think) will be to open and fund a bank account. I believe I will be getting a letter from the LLC custodian to take to a bank that will allow me to open a bank account in the name of the LLC. I’ll contact my account rep later today and find out the next steps I need to take.

Had an update on the Houston apartment complex. I missed the semi-annual conference call, so I only have the info in the monthly reports to go on. It looks like the economy is finally catching up to the Houston market and more jobs are being lost there. Occupancy for January went up slightly and early February also showed some gains. Occupancy is at 90%. Total cashflow was negative $911 in January, the first time the property has had a negative cashflow since we bought it. Management expects cashflow to remain low for the first quarter of this year. This property continues to outperform other similar properties in the area however. The overall market occupancy is 84.8%. The submarket we are in is running 86.6%. As mentioned earlier, we are at 90%, so I feel management is doing a pretty good job. Rent concessions are actually about $200 below budget for the month of January. Higher insurance and real estate tax escrows continue to adversely impact the bottom line. Management was looking into obtaining new insurance and hopefully that process will be completed soon.

On the hard money loan front, things are running smoothly. I have two loans that will likely be paid off soon – hard money loan #4 and #10. Loan #4 was a loan on a motorcycle to a former co-worker of mine. He was recently laid off (about 1 year after I was also laid off) and he is selling the bike. He thinks he has a buyer for it now. The property for loan #10 has been on the market for about 3 months. The owners have it priced a bit high. We knew going into this one that their estimate of the value of the property was probably too high, but even using our lower estimate, the deal still looked good. Now it’s just a matter of the owners coming to the same conclusion on their own. We estimated the property was worth $320,000 and loaned $192,600 in the deal. The owners started out listing the property at $378,600. They have lowered it now to $348,600. They have the property fixed up nicely and have staged the house so it shows well. Even so, they’ll probably have to lower the price again. They are current on payments though, so I’m not worried.

Loan #11 is progressing as well. We had to evict the previous owner to get him to leave, but that process only took 1.5 months, which is relatively quick. The property needs paint, carpet, tile, and some minor flooring work. It should be set to go on the market in 3 weeks. This is the property bought by my partner’s wife, so I’m sure things will move swiftly.

And lastly, my wife and I took a little trip to Las Vegas last weekend. We got a deal from the Wynn for 3 free nights plus $300 in free play and took advantage of it. When we got there, my wife wanted to play the $300 credit on a $5 video poker machine. She sat down and, on her very first hand, got this:

Amazing!! The rest of the trip sort of went downhill from there, but it was a heck of a way to start! And it was nice knowing that we were playing with their money for basically the entire trip.

Kiyosaki's Seminars Investigated

Canadian TV has a story on the Kiyosaki's Rich Dad seminars. The upshot seems to be that they are basically non-educational and nothing more than extended sales pitches for more products and seminars. (I do have to disagree with the story's characterizations of lease-options and preforeclosures - these are valid investments and I have made money using both of them.)

Personally, I tend to agree. I've never been to a seminar I had to pay for. I just don't see the point. Kiyosaki has written lots of books, many of which I've read. I also was an active participant on the discussion forumson his website, which is where I met other RE investors and got most of my financial and real estate education. These are free or low-cost methods of learning. The only Kiyosaki seminar I attended was a free one that lasted a couple of hours. This was long ago – back before he got the image consultant and was still wearing Hawaiian shirts to appearances instead of suits. I’ve gone to a couple of other events he’s been at, all of which were free.

I can see where he is going and he is going to face increasing criticism like this. At one of the events I was at, he was talking about cashflow and how one of his goals was to increase it. He said he was currently getting about a million dollars a month in cash flow and he had talked with Oprah, who was cashflowing about a million dollars a day. His goal was to get to her level of cashflow.

Now to get to that level, you need to sell to a lot of people over and over. Books alone aren’t going to cut it. So I can see him branching out into other areas – seminars, videos, etc. And you can’t give seminars to tens of thousands of people on your own, so he has to hire or partner with other seminar companies. To get the recurring revenue, you also need to promote the need for more seminars, which seminar companies are good at doing.

Oprah has created her empire through television. She has her own show and it is her alone that millions of people watch and identify with. She is not giving seminars using other people and companies to promote her name. That is the big difference. She has a level of control over her empire that Kiyosaki can never have, not with the model he is using. It’s possible he knows this. He tried to go the television route before. He had a show on a local Phoenix television station that lasted a couple of episodes before it was cancelled. His wife also had a show that lasted slightly longer. Since the television route failed, the only other option he has for reaching the huge number of people needed to obtain his cashflow goal is by using surrogates to spread his message. By definition, he has therefore given up some control of his message by allowing others to teach in his name.

The other problem is his subject matter. Oprah talks to people about books, feelings, ways to live your life, and other topics that typically do not require her fans to invest large sums of money. Kiyosaki however, is teaching about real estate and, increasingly, stocks. Investing in these can require (although not necessarily) large amounts of money. Unwise or poorly educated people can, and have, lose all their savings and wind up bankrupt. Further, the law of averages guarantees this will happen to some of Kiyosaki’s followers, no matter what he does. Because the losses can be so great, dissatisfied followers will be more vocal and receive more publicity than dissatisfied followers of Oprah would. If you buy a book that Oprah recommends and you don’t like it, you’re out $5 to $15 bucks. If you buy a rental property like Kiyosaki says and you can’t manage it, you could go bankrupt. That’s a big difference. It’s why, in my opinion, Kiyosaki will never reach his cashflow goal. The number of people required to reach such a goal ensures there will be people who fail and failures in his field of play are enormously magnified, which in turn, discourages others.

This is not to say I am anti-Kiyosaki. His first several books are still filled with valid advice: stop buying liabilities, start buying assets, increase your cashflow. I still believe substantial passive income should be a goal of everyone. But it’s hard to continue to create content on this narrow topic. I stopped reading his books after Retire Young Retire Rich because I felt he was repeating himself.

Bottom line: learn and live Kiyosaki’s core message from his first couple of books. Don’t bother with expensive seminars. Educate yourself by meeting with other real estate investors in your local area and from reading free on-line communities. Be skeptical but keep an open mind. Check out the accomplishments of those whose advice you feel inclined to take to make sure they know what they are talking about. Don’t expect to get rich overnight.

Man Bulldozes Foreclosed Home

An Ohio man lost his home to foreclosure and bulldozed his house rather than let the bank take it back. It seems he was sued and the IRS placed a lien on his home. The bank claimed the home as collateral.

From what I can tell, it sounds like the guy got a loan from the bank and built the house himself. He owed $160,000 on it. The bank started foreclosure. The home was supposedly worth $350,000 and the owner had an offer to buy it for $170,000. The bank rejected this, saying they could get more for it at auction. So the man decided he would return the property to the way it was when the bank gave him the loan - just an empty lot - and he bulldozed the house.

As much as I hate to say it, I have to agree with the owner here. The bank was just plain greedy. He had an offer that would have paid off the bank completely, but the bank rejected it because they thought they could get more money. That was just stupid.Whoever made that decision at the bank should be fired.

Now there is probably more to this story. For example, why did the IRS put a lien on his house and how much did he owe them? It might be that the $170,000 was not enough to pay off the IRS and the bank, which is why the bank rejected it. As you know, IRS liens get paid off before any other liens, so maybe the bank would have lost money with that offer. If that's the case, I would have to side with the bank. But, lacking any info to the contrary, I think the bank screwed up.

I Started Another Blog!

I started a second blog about my iPhone and what I have done to customize it.

You can find it here.

Hard Money Loan #11

My partner finally found another property to invest my principle from hard money loan #9, which was paid off a little over a month ago. Hard money loan #11 is on a property picked up for one cent over opening bid at a foreclosure auction in San Ramon, California. I normally don't post photos of the properties I am lending on here, but this one is just beautiful, so I have to. For a foreclosure, this is in excellent shape.




This was a rental property and my partner spoke with the owner (who was being foreclosed on). He said he has two tenants living in the property who are paying him $1,600 a month in rent. The lender sent the tenants a letter stating they can live in the property for up to 60 days after the sale. Not sure what authority they have to make that promise since after the sale, it is no longer the lender's property and they should have no say in what is done with it. But anyway, when my partner was there, the tenants were loading a U-Haul, so they don't seem to be planning on staying.

The house was purchased at auction for $577,000 cash and the first mortgage I am a part of will be for $400,000. This gives a LTV of 69% based on the purchase price. The property was purchased in 2004 for $860,000. Current estimate of worth is between $650,000 and $700,000. Buyer is my partner's wife, who has a credit score in the 800s. The interest rate is 9%, which is one percent less than what I normally get. I consider it an employee discount :-) Mortgage is for one year, but we expect it to be paid off in 6 months.

New Year, New Opportunities

The holidays were a pretty busy time for me and I realized I neglected to write about the performance of my Houston apartment complex investment. I also just got the update for December, so I’ll write about both now.

In November, occupancy dropped to 90%, due in part to the declining Houston economy. This property still continues to outperform the other apartment complexes in the area by 3-5%. The manager expected vacancies to remain at this level though December due to the holiday season, but expressed hope that rentals will increase after the first of the year. Cash flow decreased to just under $4,000 for the month and was impacted by higher insurance costs and real estate tax escrow requirements, as mentioned in the last update.

For December, occupancy remained flat, as expected. The submarket we are in declined to an overall occupancy of 87%, so we are still ahead of the curve. Unemployment in the area has increased from 6.5% in Q1 of 2009 to 8.4% in Q4 of 2009. Obviously, that affects the availability of renters. The Managers are cautiously optimistic for 2010 because job losses have slowed and they have increased their marketing efforts to attract new tenants. Cash flow dropped to just around $350, still impacted by higher insurance and tax escrow requirements. The good news is the management has obtained new insurance that will reduce the cost by about 30%, which translates to a savings of about $35,000 per year. The decrease in cash flow means there will be no end of year distribution to investors. For 2009, investors so far have received a 6.75% annual return overall. Management fully expects investor payments to continue next quarter. The semi-yearly investor conference call will be held the first week of February and I’ll have more info then.

I continue to receive on-time payments on hard money loans #10, 8, and 4. HML #9 was paid off at the end of December and that money is sitting with my partner looking for a new investment. We had one lined up, but it was a short sale and at the last minute, the bank decided to reject the offer, so that fell through.

My move towards a self-directed IRA is making progress. I have converted my rollover IRA to a tradional IRA and then to a Roth IRA. The next step is to transfer the funds to the company the sets up the self-directed IRA. I was planning on going with the iTrust product, but after discussion with the company, have realized that the LLC product, rather than the trust, is a better fit for what I will be doing. The only thing holding this up is that I haven't had time to fill out the paperwork yet. I hope to get that done this week. I'm not in a huge rush as it seems the hard money opportunities are slowing down a bit. My partner is noticing increased competition at the foreclosure auctions.

And finally, it’s been over a year since I was laid off from my day job, but I will finally be hired as a full-time employee again come next Monday. The company I have been working as a contractor for for the last nine months or so has decided to bring me on board permanently. While my passive income is not yet high enough to cover my living expenses, it was high enough to cover the expenses of my loans and credit cards during the year I was laid off. (I normally don’t carry a balance on my credit cards, but the layoff changed that temporarily.) It was a huge relief knowing those bills were covered during the times I had no income coming in. My practice of putting 15% of my paycheck into a savings account also helped my ride out that year. This whole experience has taught me the importance of both passive income and maintaining an emergency savings account.

HML #9 paid off

Between Christmas and New Years, hard money loan #9 was paid off. I made a couple thousand dollars on it. I'm leaving my principle with my partner for investing in another loan when he finds a good one.

Over Christmas, we had some out-of-town relatives staying with us and one night, my brother-in-law handed me a real estate listing for a property that was literally down the street from my house. It was listed for $90,000! Being that I live in the neighborhood, I know that property was worth at least $250,000. So we walked down the street to look at the house. It was night, so we couldn't see much, but we could tell it was still occupied. It looked to be in good condition on the outside. The listing said it had a pool. Back at home, I did some more research. Obviously, this was a foreclosure or pre-foreclosure, but I couldn't find anything in my search of public records. No notice of foreclosure auction, no judgments against the owner, nothing. If I had to go based on my research, I'd say the owner was not in any sort of financial difficulty at all.

The following day, I called the listing agent and asked if the $90,000 price was correct. He said it was, although he had received offers so far up to $150,000. He confirmed it was heading to auction. The agent's cell phone cut out, so I didn't get more info, but it sounded good.

The average selling time for properties in the neighborhood is 6 months. I ran some numbers on the conservative side - using an 8 month holding time, below market selling price, etc. and the results looked pretty good. For an all cash deal at $160,000, they could get about a 42% annualized return in that 8 months. Unfortunately, they had no funds available, so they had to pass. I passed as well, since most of my funds are tied up in hard money loans right now. Too bad.

One interesting thing is that I found the original note for the loan on the property and it was for more than $90,000. More than the current high offer of $150,000. That must mean they are trying a short sale, which means the lender would need to approve the final sales price. I would have thought the listing agent, who was a Realtor, would have mentioned this. I also suspect the $90,000 listing price was deliberately set low to attract potential buyers. I'm not sure about the ethics of this and I'm not sure what requirements Realtors have in setting the initial asking price, but it seems like a used-car salesman trick to me.

In other news, my progress towards rolling my IRA into a self-directed Roth IRA is slowly moving forward. For tax reasons, I had to wait until 2010 before I could do the actual conversion. I'm going about this in a couple steps. First, I am converting my Rollover IRA to a Contributory (Traditional) IRA. They are basically the same thing, but my CPA tells me the law that allows me to spread out taxes on the Roth conversion for two years only specifies conversions from a Contributory IRA to a Roth, not a Rollover. The law will probably be changed to fix this, but just to be on the safe side, I'm taking this extra step. The second step will be to convert the Contributory IRA to a Roth IRA. I will do this at the brokerage the IRA is currently at. The third and final step will be to transfer that Roth IRA to a company to who will set up the self-directed IRA. I am currently leaning towards the iTrust offered by NAFEP.

I am currently at the first step in this process and imagine it will take a couple of months to get everything all set up.