Neuhaus News

Jan. 25, 2017

Tax Return? What are you going to buy?

It’s getting to be that time of year again...weather is starting to warm up, birds are returning to the area, the real estate market is starting to heat up, people are starting to talk about taxes…<record scratch>.  What? Why would you bring up taxes you ask?  Well, it’s because there are two certainties in life, death and taxes, and I don’t want to talk about death in this blog post.  I’ll save that for another post.  

 

So people are talking about taxes.  What does that matter to you?  Well, like a lot of people, you might be getting a tax return this year.  How much will it be, what will you use it for?  Well, that’s what I want to talk about.  Have you thought about using it towards purchasing a home?  “It won’t be enough to buy a home in Austin, have you seen the prices?”  Trust me, I get it...Austin is expensive, however, if you can put down 3.5% on a home, I can get you in one.  In fact, right now, for around $7600, I can put you in a brand new home.  (that’s the used car salesman pitch)

 

The truth is, $7600 is a lot of money, but if you’re thinking about buying a home in the Austin area, that's probably the lowest amount you're going to be able to put down.  On top of that, there are  typically closing costs, inspections and  other fees associated with buying a home.  We can provide homes, within minutes of downtown Austin, where you’ll avoid a majority of those other fees and only have to pay the downpayment.  If you can afford *$1626 a month, and *$7600 down, you can buy a 3 bedroom, 2 bath, 2 car garage home in Austin.  Get a roommate and cut that number in half.  Get two roommates and you could all be paying $523 a month...oh, and you’ll be building equity in the home by paying down the mortgage while property values increase over time.  

 

Bottom line, renting in Austin isn’t getting any cheaper so if you’ve been debating buying a home, let’s get the process started by talking about options.  No high pressure sales tactics or anything like that...just pure consultation.  

Contact us today to start the conversation.





* $7600 down and $1626 a month are based on a $217,000 purchase price with 3.5% down and a 4.25% interest rate...these numbers can vary based on credit, debt to income, etc.   

Posted in Home Buying
June 15, 2015

The tortoise wins every time

Every time I read the story of the tortoise and the hare, the tortoise wins. Every time. I mean duh, it is a book. Books end the same way every time. But this applies to more than just this books. In life most good things come to those who wait. Not waiting around and doing nothing, but purposefully taking small steps everyday to achieve an amazing end result.  For most people real estate investing is something other people do.  But with a few easy steps I can make everyone a real estate investor.  One small step at a time. The first thing to know about real estate investing is, the faster you get rich the faster you can loose it.  Everyone wants a get rich quick scheme, but very few of them really work.  I don't know a single millionaire who earned their millions over night.  I am sure they are our there, but I have never met them.  The richest people I know, did not become rich quickly.  It took most of them decades to make their first million.

Step 1: It's all about getting a good start

The single most important and simplest thing todo when investing in real estate is to own your own home.  This sounds like a no brainer right?  Or it should.  Would it surprise you to know that only 56% of the single family homes in Texas are owner occupied.(1)  That means almost half of the homes in the state are owned by someone other that the occupant.  So owning your home already puts you ahead of the game and on the path toward your financial future.  Did you know that home owners have an estimated net worth of 31 times that of renters.

Step 2: Thinking about the first big move

Everyone moves.  Most people do it about every 5 years.(2)  So lets assume you have been in your home that you owned for the last five years.  You have loved living their but it is time to move into something different.  The reason you are moving is not important, what you do with the house you are leaving is.  Most people think they should sell the house before they buy another one.  This is the most popular approach.  After all the equity you have in the house is now worth something you can use to buy the new house.  ok, yes that is true, but wait.  Let me show you what you are giving up. Lets take a look at what you own, and what it would take to buy it again as a rental property.  When you purchased your home there was a down payment on it, right?  Which could have been as little as 3.5%.  On a $200,000 house.  That is $7000.  Lets say for good measure it cost another $3,000 to close the deal.  You could have moved in for $10,000 tops.  On the other had if you went to buy the same $200,000 house as a rental home, you would need to put down 20%.  20% plus closing cost would be around $43,000.  $36,000 less if you purchased as an owner occupant.  And your rate is better too, but we will get to that in another post. So now (in year 5) we have an asset which is worth(3) $231,854.  If you spent $10,000 to buy it then you have made a 318% return.  On the flip side, if you had to put 20% or $43,000 down to buy the house that is now worth $231,854, you would only make a 74% return.  Which one do you want?  From that example you can see that purchasing investment properties as owner occupied is a great way to purchase them with little money out of pocket. So now that we own one, lets not let it go.

Step 3: Buying your next target property

Once we have decided not to sell the first home two things happen.  One we should realize that we need to save more for down payment, and second we need to make sure we can qualify for the extra debt.  In a perfect world you would be making enough money that owning two homes would be easy for you to qualify for.  But this might not be the case.  Buying your second investment property is the hardest one to qualify for.  Simply because you are now going to be a landlord and rely on the tenant to pay the mortgage.  Unfortunately, you don't have any experience doing this.  The banks are going to be a little hesitant to give you this first loan because you have no track record.  Typically they like to see that you have been a landlord for two years. Once you have down payment of 3.5% plus some extra money saved to pay for closing cost, moving, ect, it is time to buy the next house.  Lets say you are moving up to a $250,000 house.  A modest move up, after all the house you are leaving now is worth $231,854.   Again you are going to put down 3.5%.  Since you are buying as an owner occupant you get the benefit of the owners interest rate not the rate charged to investors which comes in handy if you can lock it in for 30 years.

Step 4: Get your move on already

Congrats on closing on your second investment property!  This is huge step from casual home owner to the big leagues of real estate investor.  Hopefully you will have tenants in your old house quickly who will be covering the cost of ownership.(4)  Plan on staying in your new house for 5 years.  Now that you know the process, start saving money now for the next down payment.

Step 5: Rinse and repeat

Lets fast forward to year 10.  Your have owned your first investment property for 10 years.  Five of which you lived in it and the other five you leased it out.  You originally paid $200,000 with $10,000 down.  Now it is worth about $269,000.  Your second property which you paid $250,000 with $12,000 down is worth about $290,000.  That is $109,000 return on a $22,000 investment in 10 years. We also got to take advantage of the tenant paying the mortgage on the first property for us.  This has also adds to our return on investment, but because there are too many variables we are just going to concentrate on the loan pay off balance.  If the loan on our first house was at 6% we will have $157,000 left to pay at the end of year 10.  And if house #2 has a loan of 5% we will still owe $221,536.  $378,536 in out standing debt.  If you subtract that from our properties value $559,000 - $378,538 = $180,464 in return on a $22,000 investment in 10 years. I know you are thinking, but wait, I am paying the mortgage to live in these houses for five years.  So I have really paid in more than the $22,000.  And you are correct, you have, but you had to live somewhere, so why not in a house.  It should have been the cheaper to live in a house you own than renting.   Plus there are huge tax benefits to owning homes.  For example you can deduct the mortgage interest off your taxes which could save you thousands on your taxes every year.  Again we are not including that to keep things simple.

What happens if you do this every five years?

The simple answer is your slowly growing very wealthy.  Look at the example below. We will purchase a new property every five years. The purchase of the new property will be of greater value than the last because most people upgrade not down grade.  We are also going to assume that we average 3% appreciation on the property value and that the properties cash flow once we move out.  Yes, it cost money to live in each of them for the first 5 years, but we have to live somewhere so we are going to negate that cost.

 Property 1Property 2Property 3Property 4Total Value
Purchase Price $200,000 $250,000 $325,000 $400,000 $1,175,000
Cost to purchase $10,000 $12,000 $35,000 $17,000 $74,000
30Y loan rate 6% 5% 7% 20%  
Loan $193,000 $241,250 $292,500 $368,000 $1,094,750
Y5 Value - loan balance $52,260 - - - $52,260
Y10 Value - loan balance $107,270 $68,282 - - $175,552
Y15 Value - loan balance $174,469 $139,742 $101,430 - $415,641
Y20 Value - loan balance $256,996 $225,722 $185,771 $78,919 $747,408
Y25 Value - loan balance $418,755 $329,425 $289,834 $157,883 $1,195,917
Y30 Value - loan balance $485,452 $454,817 $419,384 $255,929 $1,585,582

As you can see from the chart, after only 25 years you would be a millionaire, and it only gets better in year 30. We also made some mistakes along the way an put down too much money on property 3, and interest rates when we bought property 4 were sky high. We still managed to make a lot of money because time was on our side. The chart does not show us that in year 30 property one is paid off.  Mostly by the tenants I might add.  The rent generate from that property could go to pay down the debt on the other notes or it could just be funny money.  Either way, rent grows over time by 3-5%.  So if you were getting $1200/month on property one when you first started renting it, by year 30 you could be getting as much as $3000/month in rent.  Our chart does not take into account using this extra rent to payoff these notes early, but if that was done your net worth would by much greater in year 30. To view the full analysis of these properties click on the PDF's below. Please remember that each of these reports starts at the time of purchase. So property 3's year 1 is really year 15 in our timeline.

Summary

The slow way to make a ton of money with real estate investing and win every time is to follow these simple steps.

  1. Buy a house to live in
  2. 5 years later move into new house
  3. Keep old house and lease out.
  4. repeat as may times as your wife will let you.

 

June 19, 2014

Taking Great Real Estate Photos

Last year I wrote a post about cameras realtors should check out if they wanted to do take their own real estate photos.  (See it here ) Turns out many of you check out that post, and we have actually heard back from several people about the camera they purchased.  Purchasing a nice camera is just part of the story.  You also have to know how to pick your shots and make sure the light is correct.  After the photo is taken you still have to edit the photo to make it look it's best.  So I have narrowed the list down to a few easy steps to get the most out of real estate photos.

The Must Haves

First let me just say, having a nice camera like a Nikon D5200 DSLR or a Canon EOS 70D is not needed in today's world of real estate photography.  Most of the time and smart phone can take great photos.  I have included photos from my iPhone several times with great results.  The tips below will apply no matter what camera you are using.  The key is to learn how to use it. If you do go down the road of buying a DSLR I would suggest getting a wide angle lens.  I personally have been using the Nikon 5100 with a Tamron AF 10-24mm lens to get the wide angle shots. They sell this lens for Canon and Nikon so make sure you buy the right one.  I also use a large flash and a tripod.  Flash is not required but the tripod helps.

real estate photos

Tip to improve your real estate photos

  1. Take your time -  This seems like a no-brainer, but you can tell when photos are rushed.  I know most of the time we are at the house getting the listing agreement signed and we just step side for a few moments and take the photos while the sellers are filling out the disclosures.  Bad Idea.  Rushing the photos is dumb.  You are going to be stuck with them for a few weeks, so make them look good.  Make a special appointment if needed to make sure the house is clean and the lighting is best.
  2. Stage the photo - You may not have hired a stager for the whole house, but that does not mean that you should just leave everything where it is and take the real estate photos.  Pick up the toys, clothes, mail, dishes, or dog bowls to make the shot look clean.  If you make a special appointment to take the photos, hopefully, the owners have picked up the place.  If not you may need to help them.  Just last week I saw a photo in the MLS with a pair of handcuffs attached to a four post bed.  I bet the sellers don't want that plastered all over the internet.
  3. Make sure the light is right - Ok this one is hard.  Hard in that every camera has a different way of adjusting for the light.  In general, we want to make things as flat as possible.  So if the sun is blaring in the window and the lights are off in the room, the photo will look bad.  Ideally, you would be able to reduce the light from the window and make the rest of the room brighter.  We want a lot of light, but even light.  You can use a flash here if you want, or you can bring in extra lights to brighten the room.  Either would be a great way to make things look more natural.
  4. Make sure the camera is level - 7 out of 10 real estate photos I see in the MLS are crooked.  This is sometimes hard to realize because when we use wide angle lenses the image sometimes gets distorted.  It really can be an optical allusion.  To prevent this, #1 makes sure your camera is at eye level, and not too high or too low. #2 turn on the grid in the camera and make sure that a vertical part of the house, a corner, a door, a window lines up with one of the vertical lines.  The closer to the center vertical line the better.
  5. Don't shoot VERTICAL - I should not have to say this, but I see it all the time.  If you are using your phone to take the photos, make sure you shoot in the horizontal.  Uploading photos were taken in the vertical just waste a whole lot of space on the website that could otherwise be used for the photo.  Every single real estate website has a spot for real estate photos, and all of them are in the horizontal.  So why take pictures any other way.8809 Mountain Shadows
  6. Look at your shots after you take them - Since we now live in the world of digital photography it is now possible to look at every shot after we take it.  Take a photo and then look at it to make sure it looks great.  If not try it again.  I often take a photo just to check the lighting.  Then fix the lighting, and take another photo.  Once the lighting is fixed I look at the photo closely for anything unusual in the photo we could take out, like handcuff or underwear on the floor.  Then I shoot it again.  4, 5, even 6-8 times reshooting the same exact shot to make sure I have it looking as good as possible.  After all you can always delete the bad photos.
  7. Edit the photos - After all the shooting is done you have to edit the photos.  You should have taken way more than you are allowed to upload so the first step in editing is picking the best ones.  Once you have narrowed it down to 30-40 it is time to get out the photo editor.  Yep, you need a photo editor more than you need a good camera.  If you have an Apple Computer then you have iPhoto, if you have a windows machine you have something similar.  Either way, do yourself a favor and edit the photo to make sure #1 they are level, and #2 the image is enhanced as much as possible.  Most of these programs have a magic wand feature that will do most of this for you.  No real skill is needed.

Simple Right?

So I hope that helps.  Those are all easy steps you can take to improve your real estate photos.  I sure hope anyone can use these steps to take better photos.  While better cameras do take better photos, the user still has to have a basic set of skills to get the most out of them.  Remember a $10,000 camera does not know if it is taking a level photo, it is up to the photographer to get the shot.  Good luck with your real estate photos!

June 18, 2014

The slow motion moments - Reliving Fathers Day

Just the other day while I was sitting in church I was overcome with this feeling that I was not doing enough to create lasting memories of my life.  I don't really know why I started thinking about that, it was not the topic of the sermon, it just came over me.  I could not get it out of my head for the whole service.  I finally had to take out my phone and make a note to myself to remember to explore the idea later. 

After thinking about it for a few weeks I started to wonder.  If I had a documentary film crew with me every day of my life, what would they use for the slow motion replay?  It's a fun question to ask yourself when you get home from work.  "What did I do today that is worthy of reliving in slow motion?"  It may not be much, or it maybe everything.

Slowing it Down

For most of my life, I have been focused on the big picture.  Ask anyone who knows me, "I got plans".  How to get from here to there, and how to get there as fast as possible.  I know what I want to achieve and when I want to achieve it, and once I achieve it I'm moving on to something else.

What I have also realized is that no matter how fast or hard I work, some things just take the time to happen.  It's like God's way of saying "hey buddy, look up and take notice before it is all over".  After all, what's the point of getting to the end, if you did not have any great memories of how you got there.

Just this last weekend, on Fathers Day.  I told Lindsey that all I wanted to do for fathers day was to watch the US Open. Not a huge request. Just a little me time, with the world's best golfers.  No big deal.

Lindsey decided to run to errands with Caroline while leaving Greyson at home to take a nap.  As nap time approached, Greyson was not interested in going to bed.  I tried a few times to rock him to sleep, but nothing was working.  I was growing frustrated until finally, I gave up and took Greyson back downstairs to watch golf.   We watched golf for 5mins together with him on my chest and he was asleep.

After 45mins of holding Greyson, I tried to put him down on the couch.  Unfortunately, my technique was not great and he woke right up screaming.  As everyone knows screaming during golf is bad, especially at home on Fathers Day.  So I was back to holding him again.  And again he went back to sleep quickly.

So there I was holding Greyson, watching golf, and frustrated that I could not move on to the next thing.  The next thing, of course, being, watching golf without holding a baby.  I was missing the moment.  Probably the last fathers day Greyson or Caroline would sleep in my arms while watching golf.  I was missing all of it.  Too wrapped up in thinking about what I wanted to happen, and not living what was happening.

The Replay

Thanks to technology we can actually relive our lives in slow motion.  The Apple iPhone even allows you to edit your videos with slow motion effects right on the phone.  Unfortunately, the camera crew had the day off, so no one was around to capture the moment.  Just something I will have to remember.  That's probably why I am writing it down for all to read.  As the say, take the time to smell the roses.  It really helps you remember how sweet life is.

June 22, 2013

A property a year will make you a millionaire

After a lot of positive response from my post last week The tortoise wins every time I decided to see what other theories we could test out.  My business partner Stephen Smith suggested we look at something simple like a $100,000 property purchased every year for ten years.  At first, I thought that this would cost more money than my slow and steady approach of buying a new property every five years. But there are some added benefits to buying this way.  We will have to put more money down, but we will speed up the buying process which might make us a millionaire sooner than we expect. So here is the plan.  We buy a $100,000 home every January.  We put 20% down so we can avoid paying PMI.  Because we are "investors" our rate will be a little higher than if we were owner occupants.  For simplicity sake, we are going to assume that rent covers all carrying the cost of the loan, not a penny more or a penny less.  Yes, you will get more rent over time than you need, but that is a whole different post.  We will assume that these properties appreciate at an average rate of 3%(1)

Ready, set, go!

Year one is upon us and we buy our first rental property.  $20,000 down payment, loan of $80,000 rate of 6%. (we are going to use 6% for the rate every time just to keep things simple.)  After we close we have renters paying a little more than it really cost to own it, but for our math, we are going to assume that money is in savings never to be touched.  (well, unless we need a new roof, or AC, or foundation)  For all our calculations we will assume that the property is self-sustaining.

Onward

Year two and three go the same way.  Each year we are saving up $20,000 to buy a new property.  Sounds expensive I know.  If we have just purchased property #3 we now have put $60,000 into our investments.  Let us see how things look.

  • Property 1, is now worth, $106,090 and we have paid the loan down to 77,884.82.  A value of $28,205.18
  • Property 2, is now worth $103,000 and we have paid the loan down to 78,933.04.  A value of $24,066.96
  • We have paid in $60k for three properties and their combined value is now $309,030.  After we paid the debt on the property we will have a profit of $72,272.14

Years 3-7 go as planned.  We have just purchased our 7th property.  We have invested $140,000 in 7 years.  A very strong investment.  By now we have realized that each property is a little bit different part of town, as we had to move around a bit to keep to our criteria of $100,000 homes.  Also in real life rates would have changed a little.  Since it is hard to predict rates we are keeping ours in the example at 6%.  If your rates go up, rents will go up as well because fewer people will be able to buy homes, so it should all work out. Either way, we are keeping to our assumption that the properties more or less pay for themselves.  So where do we stand as we start year 7 with our seventy property?

  • Property 1, is now worth $119,405.23, loan balance is, 73,004.31, giving us a value of $46,400.92
  • Property 2, is now worth $115,927.41, loan balance is, 74,336.06, giving us a value of $41,591.35
  • Property 3, is now worth $112,550.88, loan balance is, 75,590.44, giving us a value of $46,960.44
  • Property 4, is now worth $109,272.70, loan balance is, 76,771.95 , giving us a value of $32,500.05
  • Property 5, is now worth $106,090.00, loan balance is, 77,884.82, giving us a value of $28,205.18
  • Property 6, is now worth $103,000.00, loan balance is, 78,933.04, giving us a value of $24,066.96
  • Property 7, we just purchased for $100,000,  Balance is $80,000, value is $20,000

After 6 full years and our 7th purchase, we have invested $140,000 in cash, we have $766,244 worth of real estate.  If we sell everything today and pay off all the loans we will have around $239,722 left.(2)  That is about a 12% ROI each year.  So we are doing ok.

Fast-forward

It is now year 15.  We have purchased all ten properties as planned.  Investing some $200,000 in ten years.  A very impressive number if I do say so myself.  Retirement is getting closer every day.  So what do things look like now?  Well, we have had some fluctuation in the market.  Ups and downs on price and rate.  We have been able to dollar cost average the purchase of real estate.  When the market went down, we got to buy in a little nicer area, when the market was up we had to buy out-of-town.  But now we have 10 great properties and let's see how we are doing at the end of year 15.

  • Property 1, is now worth $155,796.74 loan balance is, 55,852.03, giving us a value of $99,944.71
  • Property 2, is now worth $151,258.97 loan balance is, 56,839.08, giving us a value of $94,419.89
  • Property 3, is now worth $146,853.37 loan balance is, 59,109.94, giving us a value of $87,743.43
  • Property 4, is now worth $142,576.09 loan balance is, 61,248.88, giving us a value of $81,327.21
  • Property 5, is now worth $138,423.39 loan balance is, 63,263.55, giving us a value of $75,159.84
  • Property 6, is now worth $134,391.64 loan balance is, 65,161.19, giving us a value of $69,230.45
  • Property 7, is now worth $130,477.32 loan balance is, 66,948.58, giving us a value of $63,528.74
  • Property 8, is now worth $126,677.01 loan balance is, 68,632.13, giving us a value of $58,044.88
  • Property 9, is now worth $122,987.39 loan balance is, 70,217.88, giving us a value of $52,769.51
  • Property 10, is now worth $119,405.23 loan balance is, 71,711.51, giving us a value of $47,693.72

That is $1,234,420.09 worth of real estate that we only paid $200,000 for.   Not bad.  Two other things are also happening that we are not taking into account.  One is by now your rents have increased by about 3% a year.  So most likely each of these properties is making you more money per month than you would need to cover the notes.  Since the notes are at a fixed rate, the largest part of your expenses is fixed.  Taxes will go up and down, and maintenance will also cost more now, but on average you will be making more money.  You can either be pocketing that money or, you could be using it to pay down the debt.  Either way, the increase in rent would have put your return much higher than I have calculated here.

Summary

You don't have to buy anything "special" or at a great price to make money in real estate. Sure those things help amplify the results, but nothing does more for real estate than time.  Time is the greatest creator of wealth in real estate.  The longer your time horizon the less critical it is to by the "right" property.  Making sure you buy a good rental property that will stand the test of time is job one.  Everything else is just a bonus.  

randomness

  1. If we pick the right properties we should do better than 3%, but because I don't like to oversell we will play it safe with 3%.
  2. I did not include real estate commission or closing fees because those vary from state to state, and we are not ready to sell just yet.