Sample Chapters - Rogue Real Estate Investor Collection

The Rogue Real Estate Investor Collection 7th Edition is comprised of three separate books into one. Below you will find the three books and Chapter One from each book. Click on the name of the book to view the chapter.

ONE

The Truth about Real Estate Investing

“Some people handle the truth carelessly; others never touch it at all.” – anonymous

So, you are thinking of investing in real estate or you own a house and would like to buy some rental property. Does the phrase "caveat emptor" sound familiar? Let the buyer beware! Real estate investing, including owning your own home, is a great way to enjoy a piece of the American Dream, but it comes with a price.

Rarely have I seen a realistic portrayal of both the good and the bad sides of real estate investing. Many late night infomercials and countless books would have you believe that "no money down" and creative financing techniques can take you from rags to riches with little more than the classified advertisements, a phone and a quick appointment to consummate the deal.

On the other hand, friends, family and even the Wall Street gurus will tell you that real estate investing is just not a good idea. It’s not a liquid investment. The tax advantages were taken away in 1986. Renters are all low-life, societal rejects who are intent on destroying your property and living in your rental house for free.

As is usually the case, the truth lies somewhere in between. Few people will argue that owning your own home is a bad idea. After all, it is a forced method of investing in a financial instrument that you can see and feel, and the taxes and insurance are even deductible.

What about all the other ways to invest in real estate?

Contrary to what most people think, there are many different ways to invest in real estate:

• If you are a passive investor who desires a low-risk investment with almost no hassles that consistently returns about 15 percent per year, Real Estate Investment Trusts (REITs) might be your ticket.
• If you do not mind doing a little research, making some phone calls and possibly going to an auction, then tax lien certificates might interest you.
• If you are ready to get your hands dirty, but loathe the prospect of dealing with renters, then you might like buying undervalued real estate that you can fix up for a tidy profit.
• Finally, if you have enough courage to deal with renters, consider letting someone else pay down a mortgage and leave you with a handsome nest egg.

As you can see, I’ve only presented a few options for investing in real estate. It is my opinion that real estate should be an important part of an investor’s portfolio. Why? First, land is a precious commodity that is more or less finite during our lifetime. The population of the world is growing and we will need more land to support the voracious demands of the human species. Second, natural resources such as lumber and building supplies are dwindling. With fewer supplies, prices are rising and existing homes are becoming more valuable. Finally, real estate is one of the few investments where you can use a little of your money and a lot of someone else’s money (i.e., a mortgage company) to control a large investment.

Now, let’s get back to the truth about real estate investing. As a real estate investor, I have read many books on the subject. I have attended seminars and classes, and I have purchased more than one of the infomercial programs. There is a lot of good information to be learned from these materials; however, most real estate courses come at a hefty price. In the end, nothing works better than learning it on your own.

What are the benefits of real estate investing?

First, you make money through net cash flow, principal or equity, appreciation, and tax advantages. If you choose to be a landlord, your net cash flow is the difference between what you charge for rent and the monthly mortgage payment, including principal, interest, taxes and insurance. Unless you purchase the property at well below market value, it is a good rule of thumb to make at least $100 per month to offset the occasional repairs, fix-up costs, and move-in/move-out costs.

Equity is the amount of the original purchase price that you are actually paying off each month. The shorter the mortgage term and the lower the interest rate, the more equity you will accumulate.

Appreciation is by far the best part of real estate investing. Time is your friend. By investing in "bread and butter" houses (a term I picked up from Robert Allen [1990]) in good locations, the value of your house will rise each year. The better the location is, given a good economy, the higher the appreciation. In my area of Johnson County, Kansas (a suburb of Kansas City, Missouri), houses have appreciated an average of 7 percent per year for many years. Although that may not sound spectacular to those of you in markets such as Los Angeles, Phoenix, Las Vegas or Miami, it has been very consistent with minimal downturns. As of 2008, these same markets that many investors thought could never go down are experiencing severe corrections.

Finally, tax advantages include the following deductible items: depreciation of the property and other equipment, taxes and insurance, repairs and supplies, mileage, and office supplies used for the property.

That sounds pretty good so far. Are there any disadvantages?

You bet! First, if you buy a house using creative financing or if you buy a repossessed home, you are in for some fun times. Get ready for cleaning, painting, replacing carpeting, removing trash, mowing, raking, repairing plumbing, installing fixtures, replacing furnaces or air conditioners, and whatever else is needed to get the property sold or rented.

I recall a Veteran’s Administration (VA) repossessed home that my wife and I bought in January 1996. While fixing it up, we heard several loud creaking sounds that eventually were followed by water spewing from broken copper pipes. Had we not been working when the water pipes thawed, the house would have been flooded. Luckily, the VA paid the plumbing bill because the pipes were apparently frozen when we bought the house.

Next, advertising for and securing a decent renter can be expensive and time consuming. The screening process for renters is often an arduous process of phone calls, screening, and crossing your fingers. If you are not nervous about renting your property, I suggest watching the movie Pacific Heights. Regardless of what your lease says, renters have inherent rights and, in the unfortunate event of eviction, you often lose.

Repairs are the Achilles heel of the rental game. After purchasing my first rental property, a continuously clogged sewer line led to installing a new line. Thank you very much – there went all of my annual net cash flow (approximately $1,200) in one fell swoop.

Finally, if you think that selling a property is as easy as a classified advertisement and a sign in the yard, you are wrong. Once a property has been labeled a rental house, its inherent value is slightly lower than owner-occupied houses. And even in a good market most buyers use a real estate agent. Why not? It’s free after all. The seller has to pay the realtor fees, right? In actuality, the fees come from the real estate transaction and it may appear to be free, but really both the buyer and seller are paying the fees.

If I haven’t scared you away, then let’s get started with the “10 Steps to Getting in the Game.”

ONE

Why Should I Read This Book?

“If a man wants his dreams to come true, then he must wake up.” – anonymous

What would you say if we told you that there is a safe and virtually guaranteed way to make 16 to 24 percent return per year on your money that only a few people know about?

What would you say if this investing method could occasionally give you an even greater return on your money, possibly 50 percent to more than 100 percent return on your money per year?

What would you say if we told you that this investing method was sanctioned, encouraged and arranged by the government, and that the government had a very strong motivation to make sure it worked effectively and was as safe as possible?

What would you say if you realized that the safety of this investment was not only monitored by the government, it was actually backed by the most powerful collateral in the world – real property?

Does this sound too good to be true?

It’s not.

Tax lien certificates, which are discussed more fully in Chapter 2, are probably one of the safest, most lucrative and undiscovered investing method in the world. Here are the reasons why:

• Tax lien certificates routinely provide an investment return to investors of 16 to 24 percent per year or more.
• In some states, an investor can earn a flat interest rate of 20 to 25 percent. In Texas, investors can earn 25 percent in less than 6 months for most properties, resulting in a whopping 50 percent or more annual return. Other states that offer very high rates of return if the lien or deed is redeemed quickly include Florida, Illinois, Rhode Island, Georgia, Delaware and Indiana.
• In some cases, purchasers of tax lien certificates can walk away with an entire property for only the taxes owed (often pennies on the dollar).
• Compared to most investments, tax lien certificates are relatively safe. This is because state governments issue tax liens and monitor tax lien certificate sales, so if you do your homework the investment risk is usually low. Tax lien certificates also are backed by the property they are issued against, so that if the defaulter does not pay the tax lien certificate investor all the money and interest due, the defaulter loses the entire property for only the taxes and penalties owed. People get very motivated to pay up if the alternative is to lose their home.
• Tax lien certificates are an undiscovered investing method, because very few books have been written on the subject. If you don’t believe me, go to the library and try to find more than one or two books on tax lien certificate investing. You will be lucky if you find any books at all, and almost all tax lien certificate books are extremely outdated. Tax deeds are even more undiscovered. After several years of research, we have never found a book that covers tax deed sales in any detail.

We spent several years researching tax lien certificates and found most books were 5 to 10 years old and very general. This is because tax lien certificates are handled differently by every state and the procedures change. Also, up until now, it was difficult to decipher all the legal language associated with tax lien certificate investing (almost all the rules and procedures were written by lawyers). However, the Internet has changed this, with more information easily available to more people.

When you combine all these factors, tax lien certificates and tax deeds are two of the most lucrative and unique investment methods. They also are one of the safest methods of investing. Add the explosive power of the Internet and now is a great time to start investing in tax lien certificates and tax deeds.

What would you rather do?

• Earn 2 to 5 percent per year on your money by buying savings bonds or CDs,
• Watch your investment dollars go up and down like a yo-yo in the stock market and potentially lose money if the economy or an individual company whose stock you own does poorly, or the CEO lies about the company’s financial numbers, or
• Earn 16 to 24 percent per year by investing in a government-controlled system that is backed by someone’s entire property if they don’t repay?

Tax deeds, which also are discussed in Chapter 2, represent a terrific way to buy real estate for 70 to 90 percent off, or literally pennies on the dollar.

In many states, rather than issuing a lien against a property, the county or municipality forecloses on the lien and the deed (ownership) is auctioned off to investors.

ONE

Why Should I Read This Book?

“The life which is unexamined is not worth living.” – Plato

The last several years have proven that the stock market can be very volatile. However, if you want a more stable investment that provides a good rate of return, the choices can seem limited. Certificates of deposit are safe if you don’t mind earning 2 to 4 percent per year on your money. Bonds aren’t much better, earning about 4 to 6 percent on average per year. Real estate has been the shining star, averaging about 8 to 10 percent per year over long investing periods. In some areas, real estate values have gone up even faster, with 15 to 25 percent per year appreciation common in hot markets.

If you already own your own home, however, and do not have time to be a landlord or attend public auctions, your options for additional real estate investing may seem limited.

What would you say if I told you that there is a very easy way to own almost any type of real estate in any market with minimal effort?

What would you say if I told you that this method of investing in real estate has returned, on average, almost 15 percent per year for the last 32 years with less volatility than the stock market, as compared to the S&P 500 stock market index?

What would you say if I told you that this method of investing in real estate does not make you wait 1 year, 5 years or 10 years to receive your investment returns, but instead pays you part of the profits every three months?

Does this sound too good to be true?

It’s not.

Real estate investment trusts, or REITs as they are commonly called, are one of the best-kept investment secrets.

As illustrated in the following table, REITs exceeded the investment returns of large cap stocks, small cap stocks, foreign stocks and bonds over the period from 1970 to 2002.

As also illustrated in this table, REITs were able to achieve these superior investment returns with less investment return volatility (standard deviation) than large cap stocks, small cap stocks or foreign stocks.

Unlike common stocks, REITs can avoid corporate income taxes if they pay 90 percent of their profits back to the shareholders. This means that in addition to achieving high investment returns with less volatility, REIT investors receive a steady and substantial income stream in the form of quarterly dividend payments.

How substantial are the dividend payments? REITs with dividend yields exceeding 5 percent per year are common, and many REITs have dividend payments exceeding 8 percent per year. In many cases, as the REIT grows these dividend payments are increased.

REITs have another characteristic that often makes them a wise investing choice for investors:

Their investment returns are not strongly correlated with most of the popular stock market indices like the S&P 500 Index.

This means that when most stocks are going down, REITs often go up. In fact, during the bear market from March 2000 to October 2003, while many stocks were declining 50 to 75 percent or more in value, the average REIT went up by 50 percent. For comparison, here is a stock market chart showing the investment returns of the S&P 500 Index versus the Dow Jones REIT Index from March 1998 to March 2008:

Note: the line rising from 0% and then declining represents the S&P 500 Index.

This chart illustrates how the return of REITs and common stocks are often much different over the same time period. While at times the S&P 500 Index lost more than 40 percent of its value, the REIT Index ended March 2008 much higher than the S&P 500 Index over the same 10-year period.

This combination of investing safety, investment return, investment growth and low correlation with most popular stock market averages makes REITs unique in the investing world.

More importantly, for the reasons presented in this book, it is likely that this trend of superior performance will last and possibly accelerate as REITs continue to be discovered, more privately held real estate becomes available to the public, and the shift in demographics creates a demand for income-producing investments that can still grow their earnings.

In fact, I know of no other investment that:

• Earns about 15 percent per year while paying you a steady income stream.
• Achieves these results with less volatility than the stock market.
• Allows you to purchase real estate that is highly liquid and can be bought and sold like any publicly traded company.
• Does not require property management, attending public auctions or raising a paintbrush.

So, what is the catch?

Lack of information!

When you survey the REIT market, limited information regarding REITs is available. In fact, lack of information is one piece of evidence that demonstrates the undiscovered and potentially undervalued nature of the REIT market. Few books have been written on REITs, and a limited number of financial analysts cover REITs; thus, the REIT market appears to be undiscovered, especially in comparison to most common stocks.

The most compelling evidence I can offer regarding the undervalued nature of REITs is by studying the market capitalization of REITs in comparison to the market capitalization of common stocks.

The market capitalization, or market cap as it is commonly called, represents the total value of a company based on its current stock price. Take General Electric for example. As of this writing (March 2008), the total market cap of General Electric is approximately 370 billion dollars. In contrast, the total market cap of the entire REIT industry (all publicly traded REITs operating in the United States as of March 2008) is 312 billion dollars, just a little lower than the total market cap of one non-REIT public company, General Electric.

To me, this is an amazing piece of information.

How can one company be worth almost as much as the thousands of hotels, apartment buildings, office buildings, public storage facilities, industrial plants, warehouses, medical facilities, shopping centers and other associated properties and land that comprise the entire REIT industry? Either General Electric is extremely overvalued, the REIT industry is extremely undervalued, or both are true.

What about the first possibility, that General Electric is overvalued? Although some individuals would argue this point, it seems unlikely that General Electric is overvalued. Other large companies in the United States and abroad have market caps in the range of General Electric’s, and it seems unlikely that all the financial institutions that own these companies have overvalued these businesses.

What about the second possibility, that REITs are undervalued? While the phrase “undervalued” is subjective and difficult to quantify, the evidence that the REIT market is undervalued is compelling.

Here are the top seven reasons that REITs appear undervalued:

1. When you survey the entire commercial real estate market in the United States, less than 10 percent of the available real estate is publicly traded. This percentage is much less than that of the United Kingdom, where approximately 50 percent of the real estate is publicly traded. On this basis alone, the total market cap of United States REITs could expand by five times before it reached the market cap level of the United Kingdom.
2. When you look at common stock market valuation techniques, the REIT industry also appears undervalued. REITs on average are undervalued in comparison to other non-REIT companies using common parameters such as price to book value, price to earnings, and price to cash flow. REIT insiders appear to recognize this undervalued nature of their market because, on average, REIT insiders own more company stock than common stock insiders. Also, as discussed above, the total market cap of the REIT industry pales in comparison to the total market cap of common stocks.
3. These trends appear to be mimicked in other countries. REITs in many countries appear undervalued in relation to other publicly traded investments. For many years, most real estate has been in the hands of private citizens. This trend is slowly changing, but because REITs are relative newcomers to most stock markets and not covered by most financial analysts or authors, they are still unknown to most investors.
4. They are not making land anymore. While this may not have been such a big deal even 25 to 50 years ago, when many large parcels of undeveloped land existed in the United States and elsewhere, in recent years real estate development has occurred at a rapid pace. It is estimated that in the United States alone, the amount of undeveloped land has been reduced by a factor of 10 in just the last 15 years. The entire world is finally reaching a point where open space is becoming scarce.
5. Baby boomers will need income. As the huge baby boom generation reaches their retirement years, the demand for income-producing investments will increase substantially. REITs are one of the few investment possibilities for individuals seeking medium to high income, growth potential and some investing safety.
6. Recent changes to the laws governing REITs are favorable and expand the potential business options available to REITs. In the next chapter, a brief history of REIT legislation is discussed with regard to the laws’ implications for REITs and their shareholders.
7. The stock market has spooked many investors. Poor stock market returns, questionable accounting practices, crooked insiders and absurdly overvalued initial public offerings (IPOs) have created, for many investors, a strong distaste for common stocks and stock mutual funds. I know this is true because I talk to hundreds of investors every year, and the most common theme voiced is: “I have money to invest, but I do not trust the stock market.”

Considering these factors, I decided it was time to write a book that explains, in language anyone can understand, how REITs can be a great investing alternative for individuals wanting some of the rewards of real estate investing without the hassles.

If this sounds interesting, I invite you to start at the beginning, with the Real Estate Investment Trust Act of 1960. (Chapter Two)