Rich Dad Education Blog

With the way sales prices have dropped in most markets across the United States, people have realized that this is an unprecedented time of great bargains. When the media reports about sales prices dropping, it comes across to the average person as “the sky is falling.” As a real estate investor, you should recognize this time as an opportunity that you may never see again in your lifetime. This is the time when generational wealth is created.

Everything in real estate runs in cycles, and the current cycle is no different. Historically, when you see periods of time when prices dropped really low, or interest rates were really high, people thought that real estate investing was unwise. There were years in the 1980s when interest rates were very high (13-18%), yet investors still made money during that time. In fact, they made more money than they did before because the uneducated people did not know how to take advantage of the opportunity. Why? Because their primary method of investing (getting a loan) was no longer feasible.

Today is no different. Traditional financing in today’s market is also difficult. Lenders have placed a lot of restrictions on getting a loan and that makes it hard for investors to adjust. With all of the foreclosed loans that have happened in the last several years, lender’s appetite for risk has decreased and so the rules have become very tight.

Every problem (if you can solve it) becomes an opportunity. The biggest problem facing real estate investors today, is financing. During this article, we will address several ways for you to solve this problem. When you understand how to overcome the financing aspect of real estate, then you can easily capitalize on one of the greatest buying times that has ever existed.

What are my options?

The options for real estate investors are the same as they always were. The truth is that most people only focused on one way of acquiring properties. Here are a few of your options:

1. Traditional Financing
2. Asset Based Loans
3. Seller Financing/Lease Options
4. Debt Partner
5. Equity Partner

We will review the first two options in this article and handle the other three on the second part. Let’s review how these options can help you with your goals to get out of the Rat Race.

Traditional Financing

Although it may seem contradictory to list this as an option, it is still something to consider. Think about this for a moment:

What is the largest obstacle when trying to obtain a loan from a bank? There are many possible answers, but at the root of it the largest problem is that the loan is based on your financial profile. They are looking at your credit, your income, your debt, and your financial statement. It is ironic that people that own their own businesses and have plenty of assets have a hard time getting a loan because they do not have a work history. The current rules for lending are not written to accommodate those people.

However, what would happen if the loan were made based on the performance of the property rather than the individual? There are still loans like this being written today. The banks will loan money based on the property’s performance and they will not require the loan to be personally guaranteed by the individual. They are called commercial loans.

Commercial loans are for properties that have commercial zoning, or they are five units or more. In some cases, going after a slightly larger deal has benefits, especially where financing is concerned. The lending guidelines for these kinds of properties are much easier to meet than residential loans. As difficult as it may seem, it is often easier to buy a large commercial building than it is to buy a three-bedroom home.

The opportunity on commercial properties is also at an all time high. There is an impending wave of foreclosures on commercial properties coming. Richard Parkus, at Deutsche Bank, estimates that the cumulative commercial real estate charge-offs in the U.S. will be in the range of 10% of the banking system’s $1 trillion in core commercial real estate loans by the end of 2012. That is roughly $100 billion dollars worth of bad loans that will be coming. This opportunity will be enormous for those that know how to do it.

Asset-Based Loans

An asset-based loan is where the loan is made based on the value of the property rather than the financial profile of the individual. Some people call these kinds of loans asset-based loans and others call them hard-money loans. Even though the terms are different, the concept is the same.

Since the lender is more concerned about the value of the property, they will usually do a very limited check of your financial profile. They may pull your credit, but that is about all they will do on you personally.

The value of the property is the number-one thing that an asset-based lender will look at. They do not want to over-finance the property and so they usually will only lend up to 65% of the value of the property. If the property needs repairs, they will also include that money into the loan as long as it does not surpass 65% of the value.

For people looking to get into a property with no down payment, a hard-money loan is an option, as long as you are buying the property at a significant discount of its true value. Many investors also wonder how to cover the cost of renovating a property and this is a potential solution for the repairs as well.

When you are interviewing asset-based lenders, there are several questions you want to ask them:
• Do they lend based on the before repair value or the after repair value?
• What is their maximum loan to value (LTV)?
• How many points do they charge (fees for doing the loan)?
• What is their normal loan term?
• What interest rate do they charge?

These questions will give you an insight into how they work and if it will be a solution for your deal. You always want to find a lender that will loan based on the after repair value (ARV) as it will be much easier to find deals that meet that criteria.

Hard-money lenders are very easy to find. A simple search in Google will help you find many in your area that you can talk to. Do a search for “(your state or city) hard money lender” and you will find plenty of results. Then it is just a matter of talking to them to find out what their lending criteria is, since each lender is different.

These two valuable ways to finance deals in today’s market are just the tip of the iceberg when it comes to financing. Check out the article next month when we discuss creative financing and raising capital from partners. These techniques are things that every investor must know to be successful in today’s real estate market. Now is the time to create generational wealth for you and your family.

Posted 08:59 AM | Permalink | Comments (0) | TrackBacks (0)

Last month’s article discussed the Iron Condor strategy. The Iron Condor’s popularity stems from the cash flow and potential monthly income it can generate. The Iron Condor is simply the combination of two of the first strategies that beginning option traders learn – the bull-put spread and the bear-call spread. Iron Condor is best used where the market or stock is neither trending up nor down, but moving sideways as a trader can collect credits on both spreads.

After determining the trend of the stock and clear areas of support and resistance, a trader selects strike prices and expiration dates, and determines if the risk/reward ratio is in line with their personal trading rules. Once the trade is placed, then ideally the stock will stay in the expected range and the options expire worthless. In this scenario you keep the entire net credit. However, as with all option strategies, there are times when the trade does not work out as expected. Unexpected news, broad-market surges that pull the stock up or down with it, or other factors can cause the stock to breakout of its sideways trend and cause the Iron Condor trader anxiety.

Traders must be prepared for this scenario. You never adjust a trade simply to adjust it; you need to have a plan of action if your trade does not go as expected. While the great majority of Iron Condor trades may be profitable, one losing trade can erase the profits from numerous previous trades. Fortunately, for the astute trader there are numerous techniques that traders can utilize to help mitigate loss or repair Iron Condors.

Managing Iron Condor Trades

The Iron Condor is a neutral strategy and the placement of proper strikes is critical. While there is a great deal of variation in which initial strikes are chosen, strike prices should be out-of-the-money. If stocks stay in a sideways trend, then Iron Condors benefit from eating away at time decay. Thus, if the trend stays its current course, profits will be maximized and the trader can move onto the next trade.

If you are wrong in your analysis or if the market goes against you, a small comfort can be taken in that you cannot lose both sides of the trade. Either the market will start trending upward, in which the bear call side of the trade will be in jeopardy, or the market will trend downward which will place the bull put side of the trade at risk. If a loss does occur, then at least the winning side of the trade will help reduce the overall loss, and occasionally still allows you to make a small profit on the overall trade depending on how far into your losing strike price, the stock goes. Hence, more repair strategies will focus on the side of the trade that is in danger while planning to let the winning side expire and keep the credit.

Example

If we have placed our Iron Condor trade correctly, we have identified:

Trend: Sideways

Resistance Areas: At least one strong, and ideally two levels of resistance that the stock must pass through to endanger the bear call side of the trade.

Support Areas: At least one strong, and ideally two levels of resistance that the stock must pass through to endanger the bull put side of the trade.

In our analysis, these support and resistance areas are critical; if they hold, they will help keep the stock in a channeling pattern. Our first potential warning signal that an adjustment to the Iron Condor trade will be, if one of the resistance or support area has been broken. This won’t necessarily cause a panic but it should catch your notice.

If you were looking at company XYZ that was in a sideways trend and identified:

Resistance: One area at $100 and another at $110

Support: One area at $90 and another at $80

In this scenario it might be common to place a bear call at the $110/$115 strike price and the bull put at the $80/$75. Naturally many variations of these strike prices could be chosen but for our example, we will use these. In our example, assume you decide to ignore one of your personal rules and place the Iron Condor trade despite the company’s earnings announcement coming up in a few weeks. Strong news on that earnings report caused the stock to break trend and break through the $100 resistance barrier.

At this point you have a couple of options:

1) The put side of the trade is even stronger as there will likely be a new area of support formed at $100, based on the principle old resistance becomes new support. Nothing needs to be done with this side of the trade.

2) You can choose to exit the trade early based on the break of resistance. This may or may not result in a loss, depending on how much time decay has eroded. Here you would want to buy back the options you sold to enter the trade and sell those options you initially purchased. This is a conservative approach but one that should be considered as one of the technical reasons for entering the trade is no longer present. Always ask yourself, why do you want to be in a trade if your original reasons for being in that trade are not present?

3) You can convert the trade to a covered call. For this scenario, you would need to feel confident in the fundamentals of a company as well as have the necessary capital to buy the underlying stock. If you went this route, you would want to sell back the call you bought, in this example at the $115 strike price.

4) If the breakout of the first resistance level was on volume and there is not a second resistance level between the current price and your strike prices, you might consider a ratio back spread. This strategy involves buying more of the higher strike price, which incurs more risk, but it is an option.

5) You can wait for the trade to test the second level of resistance, at $110. There are many variables that will influence this decision but in the end your analysis must conclude that the $110 resistance level, remains strong.

If you chose option two, then you have exited the trade, hopefully with a small loss or small profit. Traders that choose option two often choose not to close out the side of the winning trade, the bull put in this example, as it has a very low probability of failing at this point. Options two and three convert the trade to a different strategy in which different guidelines must be adhered to.

Assume you choose option five, as most traders would in this scenario, regardless of whether it was the best thing to do. If the stock approaches $110 and hits the resistance barrier that you identified but failed to break through, then you are in good shape. If resistance holds, then a pullback will likely occur and more time decay will be eaten up. There is a high chance, at this point, that both sides of the trade will expire worthless.

However, let’s suppose that our second level of resistance does not hold and that the price of the stock goes past our lower strike price. We know that if the price stays above the higher strike price, then we are facing our maximum loss on the trade and needless to say, we are not happy campers. When these situations occur they often occur with little time remaining before expiration date and crucial decisions need to be made.

Here are some of the options we have in this worst-case scenario:

1) We can hope that the stock drifts back below the $110 strike price so we can capture our maximum profit.

2) If the stock breaks through the $110 resistance level on volume, then we know that this is a strong sign of the continuation of the trend. There is the option at this point to buy back the initial short call and keep the long call (or convert to a ratio back spread). This is a risky choice but one that can potentially turn the trade around. It is based on the breakout of the $110 level of resistance, independently a solid play, but you will have taken a loss by buying back the $110 call at a higher premium. If the stock pulls back or the breakout doesn’t hold, then you will be kicking yourself as you would have had your maximum gain if you had done nothing.

If prior adjustments have not been made, then adjustments at this point can be very difficult. You have fewer options, have to make tough choices, all at a time when you are most vulnerable emotionally. This is why you should play out scenarios time and time again in advance, so you have a game plan on how you will react if and when you face these scenarios. You can go months and months trading Iron Condors without having to do anything but collect credits. When you do have to make an adjustment, be prepared so you don’t have to give those credits back.

Posted 08:54 AM | Permalink | Comments (0) | TrackBacks (0)

Occasionally there are sports stories that transcend the sport itself. For those who are diehard NBA fans, you undoubtedly have heard the story of the New York Knick’s point guard Jeremy Lin. The story is so inspirational that even those individuals who never watch or follow basketball might have heard of Lin and his exploits. For those who haven’t heard Lin’s story, it is worth following as there are numerous lessons from Lin’s life we can apply to our business and personal lives.

Lin’s Background

Lin’s parents, each 5’6” tall, emigrated from Taiwan in the 1970s. While a statistical analysis on parental height of NBA players has not been conducted, it is likely that few NBA players have ever had parents that short. Lin excelled for his high school team in California but local colleges Cal, UCLA, and Stanford all failed to give him an athletic scholarship. They showed cursory interest and said Lin could attempt to walk on but that was the extent of what these colleges were willing to give. Harvard and Brown both told Lin that he would be guaranteed a spot on their respective teams and Lin chose Harvard.

While Harvard and other Ivy League schools can be excellent launching pads to many careers, these colleges are not exactly a path to professional basketball greatness. Before Lin, the last player Harvard had sent to the NBA was in 1951. That player was Edward Smith who also played for the Knicks who averaged 2.5 points in 11 games for the Knicks in the 1953-54 season.

While he received many accolades playing at Harvard, Lin went undrafted in the 2010 NBA draft. After trying out for a few teams, Lin signed a two-year contract with his hometown Golden State Warriors. Lin received very little playing time in his first season and several times, during the course of the season he was sent to Golden State’s D-league, basketball’s version of a minor league. Lin maintained a positive attitude during his first year, which would end up being his only year playing for Golden State. On the first day of training camp in 2011 the Warriors would cut him.

Lin was soon signed by the Houston Rockets but would last only a couple of weeks on their roster before being cut again. The New York Knicks claimed him off waivers this last December after one of their point guards was injured. He didn’t play much at first, but in early February he was presented an opportunity to showcase his talents. The Knicks suffered a rash of injuries to some of their starters and on February 4, and Lin was given his chance to shine. This will mark the day that Lin-sanity, as it is currently being called, kicked off.

On February 4, the Knicks stood at 8-13 and Lin would score 25 points leading them to victory. Lin would get his first start the next game and scored 28 in a win. After scoring 23 points and a third consecutive win, the national media started to pay attention. The next game, Lin scored 38 on Kobe Bryant’s Lakers and the story started becoming a fairy tale. In these four games, Lin set records for being the first player in the NBA to score at least 20 points and average seven assists in their first four starts. At the time of this writing, the Knicks were 6-0 under Lin, despite being without their top two starters, Carmelo Anthony and Amar’e Stoudemire.

The effect Lin has already had on the NBA is widespread. The Knicks have already raised ticket prices on an average of 27%. Other teams with Lin on the schedule have raised their prices and are running out of tickets. Jersey sales have flown off of the shelf and even Madison Square Garden’s public stock has jumped on investor speculation that having Lin will help the Knicks in their cable TV feud. Lin-sanity might very well become a household word after this is all done.

What we can take from Lin-sanity

While it is unlikely that any of us have a chance to play point guard in the NBA, there are wonderful lessons to be learned from Jeremy Lin’s story. While Lin has true talent, few even in the midst of this story are attributing Lin to having elite talent. He has taken the talent he has been given and worked extremely hard to reach where he is now. Lin was never guaranteed that he would be given an opportunity to play in the NBA but he worked every day to be prepared if that opportunity presented itself.

Someone in Lin’s situation can never truly know if the opportunity will ever be presented. There is no doubt that countless athletes with far greater talent than Lin have given up along the way when adversity and obstacles occurred. Few people have paths to success that are easy as most of us have to work hard, acquire knowledge and skills, and then seize opportunity when it presents itself.

This truly is the key. If you are persistent, dedicated, and believe in yourself then opportunity will come knocking. If you are a real estate investor, armed with the proper knowledge, then if you keep making offers, you will find successful deals. If you are an entrepreneur who has developed a great product or service, then pitch your idea to enough investors and eventually you will hear a yes. Sometimes stock traders have to wait for companies to become valued or look through hundreds of trade setups to find the right trade, but persistence always pays off.

The key for real estate investors, traders, and entrepreneurs is to never stop traveling down the road to success. In these areas of investing, opportunity will present itself eventually and the dedicated will be rewarded. When it does, we need to be savvy enough to recognize it, and bold enough to seize the opportunity. Have faith in yourself, envision the life you want, and don’t be surprised when it happens.

Posted 08:49 AM | Permalink | Comments (0) | TrackBacks (0)