Rich Dad Education Blog

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Posted 04:25 PM | Permalink | Comments (0) | TrackBacks (0)

We were taught in school that there was no such thing as a stupid question. That might be true for children, but not for adults. In reality we all know there are stupid questions – especially stupid financial questions – questions that betray one’s financial ignorance. But more importantly – and more tragically – there are even more stupid answers to those questions.

Read Robert Kiyosaki’s first installment of his bonus column, Stupid Answers to Stupid Financial Questions, written exclusively for the Conspiracy of the Rich community, and learn how to recognize stupid financial questions – and more importantly the stupid answers to them.(And the not-stupid answers?)

Go to http://conspiracyoftherich.com/ to read more

Posted 10:32 AM | Permalink | Comments (0) | TrackBacks (0)

By Harold Moses

I now hear, “It’s a great time to buy property!” several times a day. With all the inventory surpluses available and the builder incentives being offered, many wonder how a buyer could go wrong. It is important to keep in mind, however, that an investor buys a property for completely different reasons than a home owner does. There are numerous ways an investor can go wrong if he or she is not careful. So how can an investor be sure to make a sound buying decision? The answer comes down to the age-old question of how to make money in real estate.

Investors typically make money from cash flow, equity going into the deal, appreciation, and/or depreciation.

Cash Flow
Cash flow is the amount of free or net cash left over at the end of every month after debt service and operating expenses are deducted from the income generated by the rental of an investment property. Although debt service and operating expenses are both expenses that have to be paid, they are looked at differently when we are talking valuations. Debt service is considered a temporary expense that can be paid off at any point in time. Debt service is paid out of the net operating income (NOI); NOI is not what is left after paying debt service. Operating expenses are considered to be permanent expenses; these expenses will have to be paid or allowances made for, whether the property is owned free-and-clear or is encumbered by mortgages. Expenses (such as vacancy, management fees, repairs and maintenance, property taxes, insurance, etc.) are a few of the expenses that fall into this category.

Cash flow can be looked at and estimated several ways, a few of which are:
• The One Percent Rule
• Gross Rent Multiplier (GRM)
• Cap Rate

One Percent Rule
The One Percent Rule says that one needs one percent of the purchase price of the property as monthly rental income in order to break even. For example, a $100,000 property must bring in $1,000 per month in rent in order to cover operating expenses and debt service.
If this $100,000 property brings in $800 per month in rent, it would be expected to be $200 per month negative in cash flow; conversely, if the property brings in $1,200 per month in rent, it would be expected to be $200 per month positive in cash flow.

I use a rule of thumb that in general, the more positive the cash flow from the One Percent Rule, the more management and maintenance intensive (or lower income), the property is likely to be.

Gross Rent Multiplier (GRM)
The GRM is an evaluation method that has widely fallen out of use, though I do still see it used on MLS listings, usually incorrectly. For this reason, it is necessary for an investor to be aware of what the GRM is and how to interpret it.
The GRM is a multiplier, so it’s a number, not a percentage or dollar amount. The formula is:

GRM = Purchase Price ÷ Gross Annual Rent (GAR or GSI)

This means that if an investor could keep all the rents received, the investor would recover his cost of capital in (X) years.

For example:
A $100,000 investment property that rents for $1,000 per month, or $12,000 per year, would be calculated like this:

$100,000 ÷ $12,000 = 8.3 GRM

If the investor could keep the property occupied 100 percent of the time and could keep 100 percent of the rental income generated, the property would pay for itself in 8.3 years.

Realistic? Hardly, but it is a way to value a property.

My rule of thumb is the lower the GRM, the lower the quality of the property probably is. All things equal, I would expect a property with a GRM of four to be of lesser quality than a property with a GRM of eight.

Cap Rate
I have heard much discussion and debate about the capitalization rate, or cap rate, and what it really is. It is actually very simple to define as long as one understands that the assumption when talking about the cap rate is that you are paying cash for the property.

The formula for calculating the cap rate is:
NOI ÷ Purchase Price = Cap Rate

Suppose you have $100,000 in your hand and you are debating on where to invest it. If you take that $100,000 and put it in a savings account at the bank, what would you get for that? Two or three percent perhaps? Well, that two or three percent is the cap rate of the savings account.

Assume the savings account returns two percent; the calculation would look like this:

$2,000 ÷ $100,000 = 2.0%

The $2,000 is the NOI and $100,000 is the purchase price or the deposit in this case.

By putting your $100,000 into the purchase of the property and not financing a dime, assume the gross annual rents (GAR) are $12,000 and the operating expense ratio is 45%, so the net operating income (NOI) would then be $6,600, or 55 percent of the NOI.

The calculation would look like this:

$6,600 ÷ $100,000 = 6.6% Cap Rate

Again, the assumption is that you would be paying cash for the property. As not many people are able to pay cash, the cap rate is not a valuation model, but rather another way to analyze a property in which one is interested.

My rule of thumb concerning the cap rate is that, all things equal, the higher the cap rate, the lower the quality of the property.

What the cap rate does not take into account is the equity you create going into the deal or any future appreciation the property may have.

Equity Going Into the Deal
Another way for you to make your money is by creating as much equity as possible going in to the deal. Simply put, if the property is worth or “comps-out” at $100,000, and you can purchase the property for $70,000, then you have $30,000 or 30 percent equity going into the deal. To know how much equity you have going in, you have to establish the current market value of the property. This is typically done by looking at sold comps. You could also have the property appraised, but I feel that checking sold comps is sufficient initially. In the current market environment, I prefer sold comps that are no more than three months old, and I prefer to have an equity position of at least 30 percent.

Appreciation
Appreciation is the long-term way to build wealth in real estate. Over time, assets that an investor purchases tend to increase in value, a process commonly known as appreciation. The nice thing about appreciation is that it compounds. What this means is that a property appreciating at three percent annually is not only increasing in value from its purchase price, but the market value is actually three percent higher than it was the year before.

Here is an example:
Assumptions - $100,000 Purchase Price and 3% Appreciation.

Property is worth:
At the end of year 1 = $103,000
At the end of year 2 = $106,090
At the end of year 3 = $109,273
At the end of year 4 = $112,551
At the end of year 5 = $115,927

As you can see, just by holding the property for five years, the market has created $15,927 of wealth.

Take the previous example we used in which a property is acquired for $70,000, giving the purchaser $30,000 of equity going in. Using the same assumptions of appreciation, at the end of the five-year period, the owner would have $45,927 of wealth accumulated.

Depreciation
There are a couple of types of depreciation. One type is where fundamental value of an asset is lost due to deterioration or changes in the market; another is used for tax purposes. The later is what we, as real estate investors and business owners, are going to discuss.
So what is depreciation and how does it relate to real estate investment? Depreciation really falls under the cash flow discussion but I wanted to break it out separately, as I typically do not rely on depreciation to make decisions concerning whether or not I buy, though it is an important factor to consider in the overall process.

When an individual opens a business, that person typically has to buy assets, computers, vehicles, and many other necessities to make the business run. The IRS allows these capital expenditures to be tax deductible for business owners, but does not allow them to deduct the entire cost of some of these capital expenditures in the year of the purchase. Rather, the capital expenditures are categorized into the appropriate asset classes, as defined by the IRS, such as three-year assets, five-year assets, etc. Residential real estate investments have been designated as a 27½-year asset class. The IRS allows the business owner to deduct the pro rata portion of the asset over the life of the asset class.

For real estate, the IRS typically allows one to deduct 75 percent of your basis over the period of 27½ years. They do not consider land to be a depreciable asset. Only the improvements made or built upon on the land are depreciable; the other 25 percent of your basis is allocated to the land.

Using the $100,000 property that was acquired for $70,000 from the previous example:

Fair Market Value $100,000
Purchase Price $70,000
Amount to be Depreciated $52,500 ($70,000 * .75)
Annual Depreciation Expense $1,909

How does this relate to cash flow? The $1,909 annual depreciation expense is considered a phantom expense because it is an expense you can use against the income received from the property, even if your property shows a loss.

As you can see, the ability to depreciate the asset and deduct that expense against the income from the asset is one of the great benefits of owning residential real estate. Unfortunately, what the IRS gives, they also tend to take away. Though the IRS allowed you to deduct much of the cost of the asset over a period of time, when you sell the asset, you have to give it back. Let’s say you owned this property for 10 years and deducted depreciation for that 10-year period:

$1,909 * 10 = $19,090 Accumulated Depreciation Expense

You, the business, will have to now show that $19,090 as income in the year of sale.

All of these factors should be taken into consideration before an investor makes the decision to purchase any property. Of course, there is far more due diligence to be conducted before making a final decision to pursue a deal, but the ideas mentioned in this article are among the first things to analyze and take into account. If a deal does not make sense based upon these criteria, it is unlikely that it would withstand further scrutiny. Use the information in this article to create a solid starting point from which you can make a decision, and go from there!

Posted 01:35 PM | Permalink | Comments (0) | TrackBacks (0)

The decision has been made – you are going to start a business. You have put a lot of thought into this new venture, completed extensive research into your market, and have written a stellar business plan to guide you through start-up and the first year of running your business. Your business has great potential and everything seems to be in place except for one minor detail: the money.

It’s Important to Ask Yourself Why You Need the Money?

• Do you really need the money? Money, no matter what the source, comes with a price.
• Do you really need more capital or can you survive with your existing cash flow if you manage it more effectively?
• What is the basis for your “need”? Do you need money to expand, or as a cushion against periods of weak cash flow?
• If you need funding because of weak cash flow, is this a temporary problem or a fundamental problem? Temporary problems can be solved with infusions of cash, but fundamental problems can’t be fixed only with money. You can’t borrow your way to success. You need to fix the underlying problem (lack of leads, sales, etc.) before you think of bringing outside money into your business.
• How will you use the money if you get it? Lenders require that capital be requested for very specific needs.
• What is the state of development of your company? Funding needs are usually greatest during start-up and high-growth periods. Don’t assume that once your business gets going, you won’t need additional funding. Many business failures can be chalked up to lack of funding to support fast growth.
• What is the state of your particular industry? Is it alive and well, is it depressed, is it experiencing hyper growth? Different market conditions require different approaches to money needs and sources. Investors and lenders will want to know that you have done your market research.
• Is your business cyclical or seasonal? Short-term funding for seasonal businesses should be identified and arranged prior to a critical need. It is always easier to get funding when you don’t really need it, and you can negotiate better terms if you are not in panic mode.
• How strong is your management team? Management capability is the most important element assessed by money sources, especially equity investors.
• How great are your risks? All business carries some risk, but the degree of risk in your particular business will affect the cost and the availability of financing.
• Are you prepared to ask for financing? Do you have a great business plan that supports your request for funding? A good business plan with financial forecasts that are thoroughly thought-out will help you plan for the future.
• Do you have a presentation prepared that clearly outlines your funding needs, your plan for success, and the benefits to potential lenders and/or investors?

This is not an exhaustive list of questions by any means. Make yourself a list of questions pertaining to your specific business. Imagine you are the person who has funds to invest in a new or growing business venture. What would you want to know about the company, its management, and its marketing strategy before you invested your money?

Why do new businesses fail?

Poor management is usually the number one reason businesses fail, but inadequate or ill-timed financing would certainly come in as a close second. However, just having sufficient funding is not enough – one must possess the ability to manage it, as well. Knowledge and proper planning will help entrepreneurs avoid the four most common financing mistakes:

1. Securing the wrong type of financing for their business
2. Miscalculating the amount of capital needed
3. Underestimating the eventual cost of borrowing money
4. Giving up too much control of the company

Consider Debt versus Equity Financing

Most every business needs funding at some point in the business cycle, but it is important to remember that not all funding is created equal. Funding is defined as money brought into the business, other than what the business generates from its customers. This funding can be used to expand an existing business, to support the business during times of reduced cash flow, or to start a new business venture. Business funding can be obtained from two different sources:

1. Loans – usually from banks, finance companies, business associates, friends, family, credit cards (business and/or personal), or government agencies.

2. Investors – usually from partnerships, angel investors, and venture capitalists.

When seeking financing, the first thing a business owner needs to decide is what is better, incurring debt or losing ownership?

The advantage of a loan (debt financing) is that you are not giving up any ownership of the company and the lender has no management control or direct entitlement to a portion of your business profits. The only obligation you have with a loan is to pay it back on time, based on the terms and conditions of the loan. Any interest can be deducted as a business expense at tax time. The disadvantage of a loan is the debt (monthly payments, even if there isn’t enough business cash flow), potential for personal liability (if you guaranteed the loan), loss of property (if you secured the loan), or a lawsuit if you default on the loan repayment.

A big advantage of raising capital from investors (equity financing) is that you will not have to repay the investor(s) if your business goes south on you, and your personal property will, most likely, not be placed at risk. The disadvantage of bringing investors into your business is that you will be giving up a little (or a lot) of the ownership of your business. You will be obligated to share the profits, which is not bad if the funding was the only way to get those profits in the first place. In addition, many investors seek some control over your business, which can be either a big help or a big pain, depending on the investor and their specific skills and personality.

The final decision rests with you. After all, it is your business. You get to decide what type of funding will be best for you and your business – debt or equity, or a combination of both.

Sources of Debt (Loan) Funding

There are several sources of debt financing available to new and growing businesses. This list is not in any suggested order. You need to check into all available possibilities and choose the one(s) that make the most sense for the profitability of your business.

1. Self Financing – One of the best ways to finance your business is with your own money from savings or from selling personal assets. But don’t treat this as free money. Have your attorney set up a formal agreement between you and your business that spells out how much you are funding or loaning the business, as well as the terms of payback. Your tax accountant can help you get the maximum tax benefits from a self-funding arrangement.
2. Self Financing Through Personal Loans – If you have sufficiently high personal credit card limits, you may be able to fund your business through cash advances and/or purchases on your cards. However, beware of excessively high interest rates, cash advance fees, and all those annoying over-your-limit fees and late fees. Another option is a home equity loan or line of credit, if you have property with equity and can qualify for the loan. Again, use this money very cautiously; you are placing your home at risk if you can’t make the payments! You could also try to get a simple signature loan, but it is getting more and more difficult to get unsecured loans.
3. Life Insurance – Some life insurance policies (whole life and universal) have cash value which can be borrowed at low interest rates. With most policies, you are not actually obligated to pay this money back, but if you don’t, your policy payout is reduced by the amount borrowed.
4. Retirement Plans – Some retirement plans (like a 401k) allow you to borrow against vested benefits up to 50 percent as long as it is under $50,000. (Check with your plan manager and your tax professional to determine the specific rules for your particular plan.) However, if you quit your employment (which is the goal of many who start their own business), the loan must be paid back immediately or it will be treated as an early distribution and would be taxed accordingly.
5. Barter Your Services – Yes, your business needs cash, but in a lot of businesses that cash is used to buy things, such as supplies and materials. If you have skills (like accounting for example), consider offering your services to a supplier in trade for supplies for your business. Use your imagination. Your sources of funding are only limited by your willingness to think outside the box!
6. Banks, Credit Unions, and Other Commercial Lenders – Traditionally, banks have been a major source of small business funding, usually lending on a short-term basis for equipment and machinery. They also have provided seasonal lines of credit for more established businesses. Check with several lenders to see who has the most favorable terms. Quite often, the smaller, hometown bank is a good choice because you can get to know the bank officers on the loan committee and build rapport over a period of time. Your credit will be a big factor, so do everything you can to improve your score before applying for a loan. Know your current credit score so you won’t have any nasty surprises.
7. Vendor Financing – If your business is one that relies heavily on a particular vendor, it may be possible to obtain a line of credit through that vendor. They want your business, so ask them for nice terms on your account.
8. Small Business Administration (SBA) – Go to (www.sba.gov) to get information on the various SBA loan programs. The SBA generally does not loan money directly (although there are some direct loans to certain groups like Vietnam-era and disabled veterans and handicapped individuals), but rather guarantees a bank loan. This lowers the bank’s risk considerably, so you are more likely to get a loan. Most often, the SBA won’t offer help until you have been turned down by a commercial lender. SBA guaranteed loans generally range between $25,000 and $750,000, but check with the SBA for their current limits.
9. Business Associates – Your own network of the people you know may be a good source of funding, especially among other entrepreneurs and business owners, but you won’t know until you ask. After you are prepared with a good business plan, let it be known that you are looking for funding to start a business. Use the back-door approach – ask if they know of anyone who might be interested in getting a good return on their money. If they are interested, they will let you know, and if not, you may get some good referrals. Check with your attorney before attempting to raise money for any business venture to make sure you are compliant with all SEC securities rules and regulations.
10. Family and Friends – Books have been written on the dangers of borrowing money from family and friends, so proceed with extreme caution if you choose this route. However, excluding someone from the opportunity to benefit from your new business just because they are a family member or a friend doesn’t seem fair.

Just make sure that anyone who wants to loan you money knows the risks involved and understands that they could lose their money if your business fails and you don’t have the means to pay them back. Document every detail of the loan agreement in writing! Make sure that anyone who loans you money can truly afford to lose that money.

Sources of Equity (Investor) Funding

The main sources of investor financing are venture capitalists and angel investors. The SBA also licenses Small Business Investment Companies (SBICs) and Minority Enterprise Small Business Investment companies (MSBIs), which offer equity financing. Nike Shoes, Federal Express, and Apple Computers received financing from SBICs at critical stages of their growth.

1. Venture Capitalists – Venture capitalists are institutional risk takers. They may be major financial institutions, government-assisted sources, or groups of wealthy individuals. Although there are venture capitalists who invest in start-up companies, most often they prefer three-to five-year-old companies with the potential to become major regional or national businesses and return above-average profits to their shareholders.

The most important thing that venture capitalists look for in a company is a top-notch, quality management team. The company itself has to have a competitive or technological advantage and the potential for major growth. The possibility of a public stock offering is also considered very important.

Venture capitalists trade their investment dollars for equity in your company (generally 50 percent or more). Thus, you are giving up some of your potential profits and many times, relinquishing some of the decision making. Many venture capitalists prefer to influence a business passively, but will react when a business does not perform as expected and may insist on changes in management and strategy. They may even insist on taking over management in some cases, depending on their equity position in the company. Investment amounts made by venture capitalists are generally $4 to $5 million or more.

2. Angel Investors – Angel investors can really help your business, but they are no “angels” when it comes to scrutinizing your business plan and management team. They invest to make money; they want high growth and high return, and want to know how your business will beat the competition and take its market share. Angels generally invest smaller amounts than venture capitalists ($300,000 to $5 million is a typical range, but lower amounts may be available). Angel investors will generally require less ownership than venture capitalists, in some cases as low as five to 10 percent, but up to 50 percent or more is not unheard of as well. Each individual angel investor or investor group will have its own requirements, so ask lots of questions to make sure you understand their guidelines and what you will be required to give up in return for their investment in your business.

Don’t expect to get money right away. Angels will do a lot of research and carefully investigate your business plan, which may take months, depending on how many opportunities they are investigating. Because angels own part of your company, they will likely want a say in major decisions, and they will watch to see if you listen to them. This could affect future funding. Angels will generally look for a clear exit strategy, perhaps through a public offering or a buyout.

3. SBICs and MSBIs – These SBA-licensed companies offer equity financing. Contact the SBA in your area to determine if any funding is available in your area.

4. Partnerships – Another way to raise money is to take on a partner who has funds available to invest in your company. Rather than loaning the money to the business, the partner invests his money and becomes a part owner of the company. Partnerships should be set up with extreme caution, and all responsibilities and duties of each of the partners listed in detail. Nothing will kill a partnership faster than partners with loosely defined roles in the business. Your legal council needs to be involved in drafting the partnership agreement. Everything, including what happens in the case of the death of a partner, needs to be spelled out. The details of partnerships are a topic for another day.

There are several other methods for raising money for your business, including, but not limited to: public stock offerings, sale of private stock, factoring, private, corporation and government grants. Future articles will discuss details on these additional funding methods and will also discuss the tips for presenting your business to angel investors, venture capitalists, and lenders.

The money for your business is there; you just need to go and get it! Happy hunting.

Posted 11:03 AM | Permalink | Comments (0) | TrackBacks (0)

Robert and Kim enjoyed a great time in beautiful Argentina where they promoted Robert's new book, The Conspiracy of the Rich, and shared the Rich Dad message of financial education and freedom with thousands. While there, they relished in the tremendous hospitality of the Argentinean people, drank some fabulous local Malbec wines, and explored the natural beauty of the Andes on horseback. The trip generated plenty of buzz and Robert was featured on the covers of both Newseek (Newsweek) and Fortuna (Fortune) Magazine.

In September, Robert and Kim will continue their South American tour in Brazil, meeting the great people there and spreading the Rich Dad message.

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By Jacquelyn Lynn

The rate of foreclosures and the potential profits they offer to investors mean that they are likely to remain a popular real estate strategy for the foreseeable future. But there’s an old saying, “the devil is in the details,” meaning that the fate of even the largest projects depends on the success of its smallest components, a fact that is certainly true when it comes to foreclosure investing. One of those details you need to understand and keep in mind is the right of redemption.

The right of redemption is the right of a property owner to redeem his or her real estate from foreclosure by paying the lender the outstanding principal and interest due, plus the lender’s costs in foreclosure, or to redeem foreclosed real property from whoever purchased it at the foreclosure sale. The specifics, such as how long the owner has after the property goes to auction, exactly what has to be paid, and even what the process is called, will vary by state.

There are two key reasons why a foreclosure investor needs to be familiar with the right of redemption. For one, when you buy a property at auction, you need to know whether or not the owner is could regain ownership of the property is he is somehow able to come up with sufficient funds to pay the outstanding balance, accrues interest, late fees, and all other costs. It is necessary to incorporate this information into your plan for the investment. The second reason is to understand that you can buy the redemption rights to a property, whether or not you actually buy the property. You can then use those rights as part of your investing strategy.

Protecting Your Investment

In states that provide the right of redemption after the foreclosure auction, you want to be sure you’re not going to be faced with a situation in which you buy the property, spend time and money fixing it up and putting it on the market, then have the owner (or another investor who has purchased the redemption rights) take the property and your potential profits away from you.

The redemption period is set by state law, and typically ends anywhere from some point before the sale to up to a year after the sale. If the redemption period in your state ends before or at the sale and you buy the property at auction, this shouldn’t be an issue. But if the owner has weeks, months, or even a year after the auction to redeem the property, you will be subject to a level of uncertainty that most investors would find unacceptable.

Most people who lose a house in foreclosure aren’t likely to have the means to redeem it later, but circumstances can change and financial windfalls do happen. The solution is to buy the redemption rights from the owner if at all possible. You should do this either shortly before or shortly after you purchase the property at auction, and at a price you are free to negotiate. Typically, redemption rights are sold for amounts ranging from a few hundred to a few thousand dollars. In most cases, an owner facing foreclosure who sees no realistic way to either avoid the foreclosure or recover the property afterward will be happy to sell redemption rights he never expects to use.
As an alternative to buying the redemption rights, you can try using them as a bargaining tool when negotiating the price on a foreclosed property. For example, if your state has a long right of redemption period, tell the lender that has foreclosed that you’re offering less money because you are accepting the risk that the owner could possibly take the property back. The lender might not accept your logic, or your offer, but it won’t hurt to try.

Acquiring Property Through Redemption Rights

Another strategy to consider is the use of redemption rights as a way to purchase property after foreclosure. Because the redemption period needs to extend beyond the foreclosure sale, the potential effectiveness of this technique will depend on state law, but this is how it might work: The redemption price is determined by a statutory formula and may be less than the property’s fair market value or the total pre-foreclosure debt on the property. Assume the fair market value of the property is $300,000. The property has a first mortgage of $200,000, a second mortgage of $90,000, and a mechanic’s lien for $25,000. The lender in the first mortgage position is foreclosing. At foreclosure, the second mortgage and mechanic’s lien may be wiped out. The person holding the right of redemption could exercise that right after the foreclosure sale and pay the redemption price, which if all the junior liens were erased, would be $200,000 plus interest, late fees, and costs. Even if the interest, fees, and costs totaled $25,000 to $30,000, the purchaser is getting the property for far less than fair market value.

If you’re going to use this strategy, it’s a good idea to have your financing in place and any title issues resolved before exercising the redemption right. To get more information regarding the right of redemption in your state, start by calling your county courthouse and talking to someone who handles foreclosures. You may also want to consult with an attorney who practices real estate law.

Jacquelyn Lynn (www.jacquelynlynn.com) is a business writer and speaker, and the author of The Entrepreneur’s Almanac.

Posted 09:44 AM | Permalink | Comments (1) | TrackBacks (0)

A capable real estate agent is one of the most important members of your Power Team, yet they are often the hardest to find. Though I have heard investors say that they do not want to work with a Realtor®, I believe that a good Realtor is worth their weight in gold. As investors, we can use Realtors to help us find properties on the Multiple Listing Service (MLS), to help us crunch numbers, and to act as dispassionate negotiators. So, why would any investor not want to work with a Realtor? In short, the answer is the commission.

Does a good Realtor earn his or her commission? Does a good Realtor sometimes cut his/her commission? The answer to both of these questions is, “Yes.” As investors, it is imperative that we understand the ins-and-outs of real estate commissions so we can maximize our profit while still making the relationship profitable for these valuable members of our Power Team.

As we analyze a typical real estate commission, we will use a six percent commission on a $100,000 property, or $6,000. A common misconception is that the agent who lists the property gets the entire amount. This is not true. The reason that the MLS works so well is that the listing and selling Realtors share the commission.
In a typical transaction, there is a Realtor who represents the buyer and a Realtor representing the seller. They usually split the commission 50/50, although this amount may change depending on the listing agent. In an equal split of a $6,000 commission, each agent would receive $3,000. For example, if I listed your property today, I would go to the MLS site, enter all the information about your property, and offer to split the commission with any Realtor who brings in a buyer. In other words, any Realtor can show and sell another Realtor’s property.

Realtors are usually able to sell a home faster than someone trying to sell their home on their own. Realtors work with one another, causing their properties to sell more quickly. For this reason, it is beneficial to use an agent when putting offers on listed properties. Since the seller already plans on paying a commission, it may as well go to the agent that works hard for you.

Although $3,000 may sound like a lot of money to be paid to each agent for spending a few hours showing homes or marketing the property, they are not often able to count all of that money as income. A Realtor must be affiliated with a company. There are two different types of real estate offices: straight commission split and monthly fee with a per-transaction fee. The difference between the two lies in how much of the money made is actually received by the agent. In an office with a split, a portion of the money goes to the agent and a portion goes to the broker. Most new agents start at a 50/50 split and work their way up the ladder to a 70/30 split. In the other scenario, the agent pays a monthly fee to the broker and a transaction fee for each closing. In both situations, the agent has to pay all of the fees out of their portion of the commission. This would include advertising, licensing fees, MLS fees, key box fees, annual dues, etc. These are normal costs of doing business, but can be very expensive.

The second thing to keep in mind when selecting an agent is whether or not they have to get permission to cut their commission. The type of brokerage your agent works for will impact how much of a discount they can give to you. If the agent is on a monthly fee, the brokerage does not care what they charge. The agent is renting the company name and is paying that monthly fee whether or not they are making any money. When they have a closing, they are going to pay the transaction fee no matter what the commission amount ended up being. Because of this, they can negotiate their commission.

If the agent works for a brokerage that has a minimum amount they are required to charge for the commission, it will impact how flexible they can be with their commission. For example, if they work for a company that wants the agents to charge a six percent commission, then their portion would be three percent for each side. Let’s assume that our agent is on a 70 percent split. On a $3,000 commission, the brokerage would expect to get $900 ($3000 X 30%=$900). In this case, the company may say, “You are welcome to cut your commission, but not our portion of the commission.” This means that the smallest commission they can work for is $900, however they would not be making a penny on this particular transaction. As a matter of fact, they will be losing money when the cost of advertising is taken into consideration. This type of agent can sometimes negotiate the commission, but they will have to run it through the brokerage, and they will not be able to discount the commission as much as a different type of agent.

Now that we have discussed how commissions are split, it is important that you become familiar with how to ask for a discount. One of the first questions new investors tend to ask is, “Will you cut your commission?” This is a dangerous question to ask until you have built a relationship with that agent. Right off the bat, you are not only asking them to give you more of their time than a typical homebuyer would require, but to do it for less money. Can we ask an agent to negotiate their commission? Absolutely! However, be realistic. If the agent is not going to make any money, why would they work for you instead of choosing to work with another client who is not asking for a discounted commission? If they have to choose between your discounted commission and working for a full commission, they are going to choose the larger amount every time. We have to show them we are going to give them volume as an incentive to work for less pay.

We already discussed that the original commission amount is established between sellers, or in this case, between you and the listing agent. When you ask your agent to cut the commission, make sure they never discount the portion of the commission that is being given to the buyer’s agent. As a matter of fact, you should increase the amount going to the buyer’s agent whenever possible. If you were offered two identical jobs, but one of them paid 15 percent more than the other job, which job would you take? The answer is obvious. This is also true of agents. If an agent is showing homes to a buyer, and one of the houses is offering a 3.5 percent commission, or even a four percent commission, while the rest are only offering 2.5 percent to three percent commission, which home are they going to show first? It is likely to be yours. If your house is getting shown more than all the other houses, which house is going to sell first? Yours! The holding costs on properties are stressful and expensive. If you can sell a property faster by increasing the amount the buyer’s agent gets paid, this is a simple way to solve both problems. You should keep in mind, however, that if you are asking your agent to cut the commission, while keeping the buyer’s agent’s commission the same, you are not going to get as much of a discount. Therefore, I would suggest that you budget in such a way that you are able to pay a higher commission when you purchase a property, so that you are less likely to experience problems selling it.

In summary, Realtors are expensive! But in my opinion, they are well worth the added expense. Budget for commissions each time you purchase a property. Find an agent who is willing to work with you. Build a relationship first, and then ask them to negotiate their commission later.

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Posted 07:48 AM | Permalink | Comments (0) | TrackBacks (0)

By Tarise Smith

Time Management Part One: How do I do it all? My mother always used to say, “I’ll sleep when I’m dead.” Granted, she was a hard-working school teacher and single mother with four kids, who somehow managed to keep up with everything. Despite the remarkable example she set for me, when a busy adult schedule smacked me in the face, I couldn’t figure out how she got it all done. As a young adult I never met deadlines or managed to show up anywhere on time. I just could not keep up with life!

I have learned a lot over the years, and would like to share those valuable lessons with you. These are not new ideas, but I hope to present them in a way that makes putting them into practice feel feasible. Whether you are a new investor or a swamped, seasoned investor, you must break down all the information and tasks you are being given into small, manageable steps. Everyone has heard the old phrase, “How do you eat an elephant? One bite at a time.” You can’t swallow the whole leg! You will choke! You probably cannot even swallow a whole toe. So how do you break everything down?

First, write down your financial goals. How much money do you want to make this year? How much money do you want to make next year? How much money do you want to make in five years? Get your one, two, and five-year financial goals down on paper. When faced with analyzing your goals, it is normal to feel intimidated and wonder how on earth you will ever accomplish them. That is why it is necessary to break everything down. When you focus on the steps you can take today, accomplishing your goals feels far less overwhelming.

As an example, let’s say that your one-year financial goal is to make $120,000 by rehabbing properties. Let’s also say that you make a $10,000 profit on each property. This means that you would need to rehab 12 properties, or one property a month, in order to reach your goal. Depending on your area and how you are structuring your offers, you would probably need to make somewhere around one offer a day in order to get your monthly deal. If I simply looked at you and nonchalantly told you go make $120,000 by rehabbing properties over the next year but offered no further instruction, it is doubtful that you would feel as if that was a reasonable goal. But if I said, “Go out and make one offer a day,” reaching your goal would feel more doable. Simply take your huge goals and break them down into bite-sized chunks.

Ask yourself, “What can I do today to help me accomplish my goal? Who do I need to call today? How many calls on For Sale by Owner ads do I need to make this week? How many investors do I need to network with this month? How many bird-dog flyers or cards do I need to pass out today?”

Break down everything. Start with a large goal, break it into smaller goals, and construct a day-by-day plan that details what steps you must take in order to achieve your goal. If you follow this advice, you will not have huge, unattainable goals lurking over your head. Eat one bite at a time so you don’t choke on any elephant parts. Remember, small steps will build your successful real estate empire.

Posted 09:53 AM | Permalink | Comments (0) | TrackBacks (0)

The ATR (Average True Range) is a volatility indicator used to measure the trading range of a stock over a certain time period. Let’s assume we’re using it to calculate the average true range of stock XYZ on its daily chart. The true range is the greatest value of the following three formulas:
1. the difference between the high and low of current daily price bar,
2. the difference between the previous day’s close and today’s low, and
3. the difference between today’s high and previous day’s close.

The true range simply calculates one day’s range. The ATR looks at the last 14 days (the default) to calculate the average true range over that time frame. If you want to look at the ATR over a longer or shorter time frame, such as the last seven days or the last 30 days, you can adjust the settings to reflect any number of days. Although I used a daily chart in my example, you can use the ATR on any time frame (weekly, hourly, five minutes, etc.) to determine the average movement per price bar.

One of the initial benefits of using the ATR is that it gives you a glimpse into the personality of the stock by telling you how much the stock typically moves per day. You can use this as a filter to make sure you’re trading stocks that you are comfortable with. For example, if you only want to trade stocks that move at least $1 a day, then make sure the ATR is $1 or higher. Unlike the Stochastic, MACD, RSI, and other popular indicators, the ATR is not used to forecast direction or to provide buy and sell signals. It merely measures volatility. High ATR levels signify large swings in price, while low ATR levels signify quiet, smaller moving markets. Sometimes extreme levels (high or low) in the ATR coincide with reversal points in a trend. High ATR levels would correspond with market bottoms, while low levels would correspond with market tops.

ATR can also be used to project targets, particularly for shorter-term trades. Suppose I buy stock XYZ at $50 and it has a daily ATR of $2.50. If I was looking to set a realistic target for a short-term one- or two-day trade, I could simply add one ATR to my entry price, which would put my target at $52.50 ($50 + $2.50). Using ATR is a more realistic and efficient way of selecting short-term targets than picking some random, arbitrary number.
The ATR can be added to the EduTrader Charts by right clicking on the price chart and going to “Add Study” in the drop down menu, then selecting “Average True Range (ATR).”

Posted 11:57 AM | Permalink | Comments (1) | TrackBacks (0)