Big Profits from Small Properties: How to Achieve Financial Independence by Investing in Real Estate

By Michael E. Heeney

Todays property and mortgage markets offer some of the most advantageous opportunities of any time in the recent past. This is one of the best times in history to implement a real estate investment strategy. In Big Profits from Small Properties, author Michael E. Heeney presents a step-by-step guide to creating financial independence, developing a lifetime income, and building personal net worth through real estate investing.

Drawing on Heeneys personal experience, this down-to-earth guide provides practical advice and specific strategies for investing in real estate. Heeney shows how anyone can build a steady, guaranteed income in real estate with a small amount of capital to realize substantial profit and shares information about how you can

create investment objectives and goals;

realize what type of income property works best;

negotiate for good prices and terms;

finance property buys a dozen different ways;

make improvements that provide for extraordinary returns;

buy, upgrade, and operate apartments;

handle tenants;

buy a single-family home;

implement money-saving tax strategies;

grow and protect an estate while avoiding the dangers of over expansion;

realize the keys to finding the right properties and motivated sellers; and

assemble a portfolio of excellent income producers.

Using the steps outlined in Big Profits from Small Properties, you can build a lifetime of income and wealth. Start succeeding today!

• Language: English
• Publisher: iUniverse
• Release date: Dec 10, 2012
• ISBN: 9781475961133

Michael E. Heeney

Michael E. Heeney owns and operates nearly six million dollars in income property holdings. He began his career as a salesman and later began investing in real estate. He and his wife, Stephanie, live in San Mateo, California.

Book preview

Copyright © 2012 by Michael E. Heeney

All rights reserved. No part of this book may be used or reproduced by any means, graphic, electronic, or mechanical, including photocopying, recording, taping or by any information storage retrieval system without the written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews.

iUniverse books may be ordered through booksellers or by contacting:

iUniverse

1663 Liberty Drive

Bloomington, IN 47403

www.iuniverse.com

1-800-Authors (1-800-288-4677)

Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

Any people depicted in stock imagery provided by Thinkstock are models, and such images are being used for illustrative purposes only.

Certain stock imagery © Thinkstock.

ISBN: 978-1-4759-6111-9 (sc)

ISBN: 978-1-4759-6112-6 (hc)

ISBN: 978-1-4759-6113-3 (e)

Library of Congress Control Number: 2012921230

iUniverse rev. date: 06/28/2013

Contents

Acknowledgments

Disclaimer

Introduction

1. Create Investment Goals

Establish Your Investment Goals

Chapter Recap

2. Selecting Your Investment Property

What Type of Property Should You Buy?

Selecting a Good Location

Neighborhood Checklist

Chapter Recap

3. How to Negotiate a Good Deal

Existing Tenants Can Be Crucial to Your Investment

What Kind of Tenants Are Most Profitable?

Mixture of Units in Building

What Type of Improvements Are Profitable?

General Expenses for Apartment Buildings/Net Income

What Can I Do to Make It More Attractive?

What Is the Value of the Building?

What Type of Seller Should You Buy From?

Negotiable Variables

Chapter Recap

4. Financing Your Acquisitions

First Mortgages and Deeds of Trust

Subject To

Second Deeds of Trust

Seller Carryback Loans

Creating Mortgages or Trust Deeds

Blanket Mortgages

Wraparound Loans

Contracts of Sale

Commercial Loans

Subordination Agreements

What about 100 Percent Financing?

Lease/Option

Chapter Recap

5. Improvements and Operations That Make You Money

What Improvements Should I Make?

Permits

Improving the Exterior

Landscaping

Windows

Interior Improvements

Operations That Make You Money

Section 8

What about Rent Raises?

Chapter Recap

6. How to Buy Income Property

Finding Your First Income Property

Making the Deal

Buying Your Second Property

How to Refinance the Drake Apartments

Buying Your Third Property

Buying Your Fourth Property

How to Refinance the Commodore Apartments

Buying Your Fifth Property

How to Refinance the Rosewood Apartments

Chapter Recap

7. How to Manage Your Apartments

Do You Need a Resident Manager?

Hire a General Manager

Renting Your Units

Advertising Vacancies

Choosing a Tenant

How to Collect Rents When Due

How to Handle Bad Tenants

So How Do You Get Them Out?

Chapter Recap

8. How to Buy a Single-Family Home

How to Find a Single-Family Bargain

What about Foreclosures?

Buying from a Defaulting Homeowner

Bid at a Foreclosure Auction

REOs (Real Estate Owned by Lenders)

HUD Foreclosures

Department of Veterans Affairs (VA) Foreclosures

Fannie Mae and Freddie Mac REOs

Probate and Estate Sales

Selecting a Single-Family Home

Improving Your Property for Profit

Developing a Profit Objective

Renovations/Improvements

Up-to-Date Appraisal/Finished Value

Financing for Improvements

Section 203(k) Program

Title I

Bank Improvement Loans

Chapter Recap

9. A Word on Taxes

Depreciation

Tax-Free Loan Proceeds

Section 1031/Like-Kind Exchanges

Chapter Recap

10. Estate Planning and Other Things to Consider

Protecting Your Assets

Habitability Issues

Business Structure

Caution

On Buying/Selling

In Conclusion

Chapter Recap

Appendices

Appendix A: Amortization Chart

Appendix B: Land Contract – Sample Form

Appendix C: Books for Real Estate Investors

About the Author

Acknowledgments

I would like to thank those who have made this book a reality. I must express my extreme appreciation for my editor, Jon Hueber, for his work dotting my i’s and crossing my t’s. Also, thank you to the people at iUniverse who made this publication possible.

My son Matthew is owed deep gratitude for his superb editorial assistance in organizing the content. Many thanks to my son Scott, who works as general manager of our property operations.

I’d like to express appreciation to my wife, Stephanie, and to my daughter, Nicole, who provided the utmost inspiration.

Disclaimer

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. The publisher is not engaged in rendering professional services, and you should consult a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Introduction

I believed in myself, and I had confidence. I knew how to do it, had natural talent and I pursued it.

—Muhammad Ali, boxer

While foreclosures and unemployment dominate today’s headlines, enterprising investors are taking advantage of a great buyer’s market for just about any type of real estate. Today’s property and mortgage markets offer up some of the most advantageous opportunities of any time in the recent past. This is one of the best times in recent history to implement a real estate investment strategy.

My long love affair with real estate began when my wife and I purchased our first home. After making modest improvements over the first year of ownership, we refinanced the property and netted $15,000. That amount was about 40 percent of the annual salary I was earning from working as a salesman for a consumer products company. I thought to myself, Well, how long has this been going on?

Over the next several years I bought and sold many small homes and apartment houses as a part-time endeavor. When I first started, my goal was similar to that of many owners in residential real estate. I collected the rents and tried hard not to spend any money on the properties. This strategy produced a below-average collection record, consistent vacancies, and many requests for maintenance. So my earlier experiences in real estate were characterized by periods of trial and error. I made just about every mistake you can imagine. After lots of experimentation, I finally achieved financial independence through the specific strategies described in this book. After considering the elements that led to my success, I have detailed clearly expressed fundamentals for finding income property, financing your acquisitions, and managing your investments to obtain maximum income from your properties.

This book will enlighten you about what is involved in income property ownership and investment. If you have imagination, energy, and lots of persistence, the field of real estate is chock full of opportunities. A by-product of obtaining an independent income is that your net worth can balloon rapidly. Under most operations a net worth of $1 million will create a 10 percent annual return of approximately $100,000, a worthwhile initial goal. This book offers readers an example of how anyone starting with a very small amount of capital can create his or her own financial independence and a net worth of whatever is desired.

The book will show you how to

• invest small amounts of money and time in real estate to obtain a modest level of financial security, and

• build a six- to seven-figure net worth through continuous use of its fundamentals for real estate investment.

Now is the best time to start. As a result of the financial crisis, overall real estate prices are equivalent to what they were several years ago. Interest rates today are at their lowest levels since the 1950s. Rental property demand from tenants is increasing as migration and population trends continue their upward trajectory.

Foreclosures are way up, while mortgage approvals are down. Since the housing market tanked, home ownership has given way to home renting. The number of renters in the United States alone swelled by 3.9 million between 2004 and 2010, according to Harvard University’s Joint Center for Housing Studies. In a nutshell, about 38 million households are now renters. Increased demand for rental housing has lowered the nationwide vacancy factor, which is good news for owners of rental property.

As we learn from The Millionaire Next Door by Thomas J. Stanley, PhD and William D. Danko, PhD, 80 percent of American millionaires are first-generation millionaires: ordinary people who have accumulated their wealth in one generation. When principal residence, or home equity, is excluded, households with net worths of $1 million or more represent only 3.5 households per hundred of the US population. Stanley and Danko explain:

America is still the land of opportunity. There is great pride, joy and satisfaction to be derived from building one’s own fortune. Countless millionaires have told Stanley and Danko that the journey to wealth is much more satisfying than the destination. When they look back over their history of building wealth, they recall constantly setting economic goals and great happiness gained from achieving them. Yes, in the context of economic achievement it is the trip, the journey to financial independence about which the millionaire most often boasts.

It is fun to apply your creative juices to finding, buying, and making money from real estate.

The plan that is set down in the following chapters will provide a path to investment and realty wealth that is more likely to succeed than most other business opportunities. Each chapter is designed to enhance your understanding of the underlying fundamentals you’ll need to

• find, negotiate, and buy income-producing property;

• structure your financing to ensure that you sign up for monthly payments that you can make (Within six months of purchase, mortgage payments should be no more than 45 percent of the building’s scheduled gross income. If you adhere to this rule you automatically net 20 percent on rentals after expenses.);

• make only small down payments in order to limit your risk and increase the return on the cash you have available;

• make physical improvements to the property and improve the operations;

• refinance your property to fund your expansion when your equity reaches 50 percent; and

• take maximum advantage of depreciation benefits as allowed by the IRS.

With these fundamentals and a little experience looking for properties, you will learn to recognize properties whose value you can increase. In the chapter on financing you will learn creative ways to minimize your down payments and maximize the return on your available funds. You will become familiar with management techniques that you can apply immediately. The chapter on depreciation allowances shows ways to save money on taxes and turn it into spendable income. It is an up-to-date expansion—meant for today’s market—of the principles that Bill Nickerson put forth in his classic real estate book, How I Turned $1,000 into a Million in Real Estate—In My Spare Time. These rules were also expanded upon by Albert J. Lowry in another quintessential book, How You Can Become Financially Independent by Investing in Real Estate.

Chapters 2 through 5 cover the fundamentals of investing in real estate. In chapter 6 you will learn to apply these fundamentals to building a property portfolio.

There are an estimated 10 million real estate investors in this country, and generally most have been successful and are independently wealthy. You can join this group too, but it’s going to take hard work. Striking it rich in real estate is no tidy TV episode. Despite what the late night infomercial gurus tell you, you will need to learn the nuts and bolts of property management to create your foundation for success. You will also need to live below your means until you accomplish your goals. Saving for down payments and improvements will be an essential element of your success.

How long will this take? I’m sure there are many phenoms who obtained their lofty financial goals in as little as three or four years, but I’ve never met one. For most people, true success in real estate investment takes ten years or more—and we are talking about true investment income and cash flow, not phantom equity.

When you depend on properties to build wealth and a lifetime of income, you can achieve good returns, even in a recession. Values and rents can fall temporarily during down cycles; but when we return to a thriving economy, incomes and general prosperity push rents up. More households are formed as people can afford places of their own.

If you succeed at acquiring just five rental properties, you can build a lifetime of income and a generous monthly cash flow. I know because I did just that.

Michael E. Heeney

San Mateo, California

-1-

Create Investment Goals

If you believe in yourself and have dedication and pride—and never quit—you’ll be a winner. The price of victory is high, but so are the rewards.

—Bear Bryant, football coach

Establish Your Investment Goals

You may ask, What is the future of real estate? Rest assured, your chances of making money in real estate are still very good. In recent history it is almost impossible to find any ten-year period in which real estate did not increase in value. Consider that the US population is predicted to increase nearly 30 percent during the period from 2000 to 2030, according to a 2005 report by the US Census Bureau (Figure 1). In Northern California, where I live, the population is predicted to increase almost 37 percent over the same time period. In most urban areas there is not an abundance of new rental housing under construction. Our population and income growth, in conjunction with the ongoing deterioration of existing buildings, will create plenty of opportunity for those who are interested.

There are dozens of ways to make money in real estate, including brokerage, trading, building, and fixing and selling (flipping), to name a few. Some ways are easier and more interesting than others, but the most remunerative way is to increase the value of buildings that you acquire by making them more attractive and up to date, thereby improving their potential for bringing in higher net rental income. Net rental income is what you put in your pocket after property expenses are paid. It is by far the fastest way to create wealth and independence. Your first objective should be to buy income property. Income property is, simply put, property in which you can generate income.

Implementing the fundamentals mentioned in the Introduction will offer you the most direct way to create a yearly income in investment real estate. Your goal could be to create a $200,000 annual income; this is the net profit, after expenses, on the properties you acquire. A net income in this range would establish your net worth to be in the range of $2 million—a 10 percent return on your investment.

Figure 1

Table 1: Interim Projections: Ranking of Census 2000 and Projected 2030 State Population and Change: 2000 to 2030

US Census Bureau, population Division, Interim State Population projections, 2005. Internet Release Date: April 21, 2005

Figure 1

Consider this important comparison: Suppose you bought and sold real estate and made $100,000 in one year, or earned $100,000 in some other business, or got a salary of $100,000. You would pay about $30,000 in taxes, leaving you with $70,000. If you invested it in a high-yielding bond, for example, with a return of 4 percent, you’d earn $2,400 a year. This is the long way to create a yearly income. It is difficult to earn a substantial sum beyond your salary. Even if you do, you can keep only part of it.

This book will show you a