Reality Based Real Estate Investing - Minnesota Homes For Sale

“Reality Based” Real Estate Investing
©2007-08 John Mazzara 1 http://www.RealityBasedRealEstateInvesting.com

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No part of this publication may be reproduced, changed, altered, stored in a retrieval
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unauthorized use of this material is prohibited.
Authored & Published by:

John Mazzara
RE/MAX Associates Plus
7450 France Ave S Suite 100
Edina, MN 55436
952-929-2577 Office
612-386-7027 Cell
952-928-3799 Fax
john@johnmazzara.com
http://www.RealityBasedRealEstateInvesting.com
DISCLAIMER AND/OR LEGAL NOTICES-READ THIS FIRST

The information presented herein represents the views and opinions of the author as of
the date of the publication. Because of the rate with which conditions in the market
change, the author reserves the right to alter and update his opinion based on new
conditions as they may present themselves in the future.
This publication is for entertainment and informational purposes only. This publication
is not intended for use as a source of legal, accounting, or financial advice. While all
attempts have been made to verify information provided, the author/publisher assumes no
responsibility for errors, omissions, or contrary interpretation of the subject matter herein.
The author/publisher wants to stress that the information contained herein may be subject
to varying federal, state and/or local laws and ordinances. All users are hereby advised to
retain competent advisors to determine what state and/or local laws or regulations may
apply to the user’s particular situation or application of this information as it might
pertain to their circumstances. As such, the purchaser or reader assumes complete and
total responsibility for the use of these materials and information.
The author/publisher does not guarantee any results-implicit or otherwise-that you may or
may not experience as a result of following the recommendations or suggestions
contained herein. Investing in real estate is not for everyone. Investing in real estate
involves risk with no guarantee of any return. You can lose money. Invest in real estate
at your own peril.
Any perceived slights of specific people or organizations are unintentional.
COPYRIGHT
Copyright Notice © 2007-2008 John Mazzara

CONTENTS
Prologue Why Should YOU Invest Your Time Reading This Book? 4
Chapter 1 Setting Your Goals & Reality Check 11
Chapter 2 Optimal Property Selection-You Have MANY CHOICES 15
Chapter 3 Geographic & Demographic Considerations 49

Who, Where & Why!
Chapter 4 Correct Investment Property Financing 55
Chapter 5 Holding Period Considerations For Maximum Benefit 67
Chapter 6 Tax Benefits of Real Estate Ownership 75
Chapter 7 1031 Exchange-

The Key To Massive Wealth Accumulation 79
Chapter 8 Lease Considerations-Clauses & Concerns 83
Chapter 9 Title-How You Want To Own Your Real Estate 89
Chapter 10 Insurance-Neglect This Area At Your Own Peril 91
Chapter 11 Putting It All Together-The Next Steps 94
Epilogue Closing Thoughts & My Proposition To You 96
APPENDIX Goal Setting Questions & Required Exercise 102


SHHH-NOT SO LOUD! KEEP YOUR ENTHUSIASM TO YOURSELF!

LISTEN, IF THESE SECRETS ARE MADE PUBLIC, INVESTORS
EVERYWHERE WILL BE EMPOWERED. WITH THIS BOOK, YOU HOLD
THE KEYS TO HAVING AN UNFAIR ADVANTAGE. ENJOY THESE TRUE
CONFESSIONS AS I SHARE TWENTY-THREE YEARS OF SUCCESSFUL
REAL ESTATE INVESTING STORIES, TIPS AND ADVICE.
Seriously, thanks for picking up this book. You now hold “a world of real estate
knowledge” in the palm of your hands. I know you will find it useful whether you are a
newbie or a seasoned professional. If I can help you in your real estate endeavors, just
call or drop me an email. My contact information can be found on my website at
http://www.johnmazzara.com . A wealth of real estate information is available to you at
my real estate website http://www.selling.mn. Please note: this ends in .mn
SIX QUESTIONS YOU MUST ASK BEFORE STARTING THIS BOOK
#1
Q) WHY SHOULD YOU INVEST YOUR TIME IN READING THIS BOOK?
A) I have been in this industry a long time. My experience will shorten your learning
curve and you will be the beneficiary of my success and failures. There is an old cliché’
“knowledge is power.” I would like to recast the adage to read this way: the application
of knowledge is power.
Regarding real estate investing, I’ve “been there-done that”. I’ve been successfully
selling homes and investing in real estate since 1986. In 2007 I was named as a “Super
Agent” by Mpls St Paul Magazine. Only 4% of the licensed agents within Minnesota
received the 2007 award of Super Real Estate Agent, and I was one of those agents!
When I speak about investing in real estate, I want you to understand that I speak from
actual experience, NOT theory. You will gain 23 years of my experience when you read
this book. You will learn about my successes and failures. I will also give you some
specific ideas on where I see opportunities for investing in real estate today. My goal in
writing this book is to convey my knowledge to you in a concise and informal manner so
that you can use it to achieve your financial goals. Financial freedom has been achieved
for many people through ownership of real estate. Will you be the next real estate mogul?
After reading this book and investigating real estate investing further, you might find that
you don’t want to become a real estate investor. Reading this book gives you the
knowledge you need to decide if real estate is right for you. If you do decide to pursue
owning investment real estate after reading this book, you will make better decisions
because you will be better informed. Your price of admission to my Real Estate
University is the cost of this book and your time invested in reading it. Other than the

use of my professional services provided by me and affiliated companies, I have nothing

else to sell you. There are no follow-on books or tapes.
I do offer a more personalized one on one program to help you write, define, and execute
your goals. There is a cost involved with this program and participation is optional. If I
demonstrate to you that I can add value to your life, consider adding me to your team of
advisors.
There is a lot of information here, so take your time and digest the material. Don’t be an
uninformed investor. Don’t repeat the same mistakes that many before you have made.
Short cut your learning curve wherever possible. Unfortunately, I have seen too many
people jump into real estate investing and lose money because they didn’t have an
adequate knowledge base from the beginning. The choice is yours. I hope you make the
right one. This book will be one step toward your enlightenment as an informed investor.
#2
Q) HOW DID YOU GET STARTED IN REAL ESTATE?
A) My parents owned some rental property and other investment real estate while I was
growing up. Yet, it wasn’t their focus. I was around it, but it was never something they
really intentionally exposed me to. I can’t say I grew up in an investment real estate
family per se. At the same time, many in my family have been in the
construction/housing related fields such as architecture, construction, and interior design.
While I didn’t grow up talking about real estate, my family directly and indirectly
exposed me to the benefits of real estate ownership. In fact, a portion of my college was
paid for by my parents from the proceeds of the sale of a Wisconsin lake lot. Unlike
some of the well known investment property gurus of today, my dad didn’t give me an
apartment building for my birthday or teach me about becoming a landlord. I am self
made in an almost 100% pure sense. Some of my knowledge was acquired from
books/tapes while other parts were from actual experience.
My original career intention was to become a doctor. I worked at a hospital while in

college. It was because of that work experience that I made the decision not to pursue a
medical career. I found that I didn’t enjoy that work environment. Instead, I was much
more intrigued by the world of business and deal making. My background has been
entrepreneurial from the start. I started as a caddy when I was 12 and ran a trapline in
high school. In college I pursued a small mail order business and traded stocks. Real
estate sales and real estate investing was the closest thing I could find that allowed me at
age 21 to explore my desire to begin life as an entrepreneur.
Here is how it all started. As a junior in college I was faced with not knowing exactly
what I wanted to do when I graduated. Because of my undergraduate degree in biology, I
was best suited for a medical or ancillary medical career, a medical sales job or research.
Nothing sounded intriguing to me at the time. Then one morning, while reading the
paper there in a full page ad was my future staring back at me. A gentleman, Al Lowry,

was conducting a free real estate seminar at the Thunderbird Hotel in Bloomington,
Minnesota. Al was going to discuss how easy it was to make millions in real estate. I
called up a friend and we attended together. This initial exposure was all it took for me
to know that I wanted to get involved. I was bitten by the prospect of building a real
estate empire with no money down and limited credit. It just so happened that I had
plenty of both at age 20. Al said you could be successful with assumable mortgages and
contract for deeds. This was exciting!
When I returned to college my senior year, I knew what I wanted to do. I finished my
biology major and management minor that I was pursuing at St. John’s University.
While in my senior year at St. John’s, I attended the local Vo-Tech to get my real estate
license. Upon getting my license, I sent out 3 résumé’s- one to Merrill Lynch Realty
(now known as Coldwell Banker Burnet), Edina Realty, and Coldwell Banker. The
office manager from Merrill Lynch called me in for an interview and offered me a job.
This was the start of my real estate and real world career. Since that time, I have never
ceased my quest or enjoyment for learning. I have three vertically integrated financial
businesses: Real Estate, Mortgage and Financial Planning.
One thing about real estate sales is that you meet all kinds of people from every walk of
life. Through my clients, I’ve learned about many different career choices and different
cultures. I may never have been exposed to many of these people except through meeting
them during the course of business. To this day, some of my best friendships initially
started as real estate client relationships.
For better or worse, when you are dealing with money and negotiating, you often see a
side of people that they don’t often present to the rest of the world. Human nature is a
very interesting thing. People try to make decisions based on finances but usually
succumb to making an emotional decision when making a real estate purchase. Purely
financial decisions are made by computers. Humans make emotional decisions and then
try to rationalize them based on logic. When finding property, I often compare it to
falling in love. You just know when it’s right. While most investors buying investment
property will claim they are able to make their decision more in terms of the numbers, the
recent real estate price explosion in places like Florida and Arizona would suggest
otherwise.
#3
Q) WHAT TYPES OF REAL ESTATE INVESTING HAVE YOU BEEN
INVOLVED IN PERSONALLY?
A) Here is a brief summary. I have sold approximately one thousand homes since 1986.
In a normal year I will complete between 40 and 60 transactions. Transactions are
defined as property sales of houses, duplexes, fourplexes, condos, townhouses, lots and
raw land. Besides residential and investment property I have sold commercial office
buildings and commercial land. I have also managed rental townhomes, condos,

duplexes, and houses for myself and family. Managing real estate means screening
tenants, writing leases, coordinating workmen, collecting rent, and pursuing evictions.
In addition, I have coordinated multiple 1031 exchanges for my clients. I have also
worked on land development from raw land to finished subdivision. Some of the more
creative/crazier things I’ve done in my real estate career include acting as the general
contractor while moving a house onto a vacant lot and purchasing tax forfeited land from
the state of Minnesota.
Following Al Lowry’s advice, I have personally assumed FHA and VA mortgages and
bought/sold property on contract for deeds. Lastly, I have bought foreclosed homes
directly from the bank.
#4
Q) WHAT ADDITIONAL RESOURCES WOULD YOU RECOMMEND?
A) I would recommend that you educate yourself to the greatest extent possible. This
book is just one part of your quest for knowledge. You should continually buy additional
books and tapes on real estate investing. If you are open to it, everyone can teach you
something. Keep an open mind. When I first started, the real estate investment gurus
that I read included William Nickerson, Ed Beckley, Al Lowry, Tony Hoffman, Robert
Allen, Dave Del Dotto, Wade Cook, and Tom Hopkins. I learned a lot from these
individuals. They gave me the tools and conviction to go forward and write offers. The
key is taking action. If you just get the knowledge and don’t apply it, what good has it
done for you other than provide entertainment?
Gurus from the past are no different from the gurus of today such as Robert Kiyosaki,
and Carleton Sheets. The common themes involve setting goals for yourself, taking
action, and utilizing the tools that they give you to analyze opportunities as they present
themselves. You’ll be surprised at what happens when you write down a goal. I still do
annual goal setting with the sheets that were included in the Ed Beckley Home Study
course some twenty four years ago. Goal sheets are simple, yet powerful. Goals are your
blueprint for success.
Another recommendation for you is to join investor clubs. These groups often bring in
speakers and allow you to network with like minded individuals. Let’s face it, getting
started and staying motivated is hard. It is even harder when you don’t necessarily have a
crystal clear path on how you will achieve your goals. Many years ago when I first
started, there was a chapter of the Charles Givens organization in the Minneapolis/St Paul
area which I joined. I also joined the Minnesota Real Estate Exchangers and the
Minnesota Multi Housing Association (MMHA). The first two groups are no longer in
existence, but I am still a member of MMHA. If you want an advocate group to affiliate
with, the MMHA is your group. Their membership fees are tiered to the number of
properties you own. Their website is http://www.mmha.com. They sell a very affordable

forms kit that will cover most of your landlord tenant leasing and disclosure
requirements. You may purchase the kit even if you are a non member, it just costs more.
Next, you should look at who you want on your team of advisors as you begin to build
your real estate empire. You have a choice. Do you want to work with a Realtor who
has never owned or managed rental property? Do you know that most realtors don’t own
rental property and have never owned rental property? Even in spite of the fact that we
are able to see properties first. Also, we are able to buy property at a discount via
receiving a commission off of the purchase price.
Why would you work with someone who doesn’t or hasn’t done what you are trying to
accomplish? In life, and especially in real estate investing, EXPERIENCE COUNTS.
When you choose your trusted advisors make sure they have been in your shoes and
walked the walk. Do they have the scars and war stories? Think about this: How can
someone adequately advise you if they’ve never done it themselves? It is all about
credibility. Harvey Mackay wrote a book entitled Beware The Naked Man Who Offers
You His Shirt. The book title conveys what I’m trying to say.
Your team extends beyond your Realtor. Who is your accountant, insurance agent, and
attorney? Are these individuals experienced in dealing with rental property and the laws
that pertain? You don’t want your experience to be one of you educating your team.
Rather, you want your team to add value and educate you!
Lastly, there are three books that I would recommend you read. While these books don’t
directly deal with real estate investing, their life lessons can be integral to investing in
real estate successfully. These books are as follows: 1) Think and Grow Rich by
Napoleon Hill, 2) Tom Hopkins’ Official Guide To Success, and 3) Looking Out For #1
by Robert Ringer. All three of these books deal with human nature, psychology,
negotiating and the power of goals. I know you will enjoy these books. Each book has
had a lasting impact on my life. I would recommend them all as life lesson books. You
will find that you will read them over and over again.
#5
Q) IS IT POSSIBLE TO BUY PROPERTY WITH NOTHING DOWN?
A) In today’s mortgage market, there are products that allow you to purchase homes with
nothing down. These products didn’t generally exist up until the past five years. If the
seller were to pay for your closing costs and escrows, then you have a “nothing down”
“100% financing” transaction. Mortgage programs are continuously changing, so the
mortgage market may be different when you read this book. Currently you can get 100%
financing with both owner occupied and investment properties. The investment property
has to be one to four units. This means nothing larger than a fourplex should be
considered.

Although nothing down may be possible, bear in mind that “something down” opens up
more financing options. The interest rates are better with “something down”. Another
way to finance a property 100% is if the seller agreed to finance part of the property in
conjunction with you obtaining the difference in underlying financing. This can also be
done if the seller agrees to carry all of the financing on a seller held mortgage or CD.
While seller financing is possible, this is uncommon in today’s market. You should not
expect to buy property this way.
#6
Q) PLEASE INTERPRET THIS STATEMENT: REAL ESTATE INVESTING
DOESN’T MAKE SENSE TODAY. LOOK AT THE FORECLOSURE AND
MORTGAGE CRISIS!
A) AU CONTRARE! Now may be the BEST time to look at buying investment real
estate. In general, do you like to buy at wholesale prices or retail? I think it is safe to
assume that everyone loves a deal. When possible, we want a discount. I believe it was
Baron Von Rothschild who attributed his success as an investor to buying “when there is
blood in the streets”. Crisis is an opportunity if you know where to look and how to find
it. Is your glass half full or half empty? You can always make lemonade out of lemons if
you choose to do so.
Investing in times of stress and duress will generally require you to have an expanded
projected holding period. You need an adequate amount of time for the business cycle to
change so that you can weather the storm and sell into strength. You need vision and
courage. Are you thinking long term or short term? If you are thinking of “flipping
property” in a stressed environment you will need to be very careful. If you have a time
frame that is long enough to withstand the current crisis, you will do fine. This comes
back to defining your goals with anticipated holding time frames.
If you remember nothing else from this book-remember this: All markets are ruled
by greed and fear. The risk-reward pendulum affecting every market will swing from
fear to greed. It is constantly shifting back and forth. Successful investing demands that
you become a contrarian in all your investing-sell into manias and buy into panics. Don’t
follow the “herds of buffalo” or “lemmings to a cliff” as they make the wrong financial
moves and perish on the rocks below. Human nature hasn’t changed since the beginning
of time-only the names have changed. Recent examples can be found in Tulip Mania in
the mid 1600’s to the various stock market crashes throughout time, the Great Depression
of the 1920’s and 1930’s onto the most recent tech stock bust of 1999-2000. The story
remains the same. If you can understand the basic tenants of human nature, you will
be a master of anything you want to do in both life and investing. The current
generation forgets the history lessons taught in the past. That is why we are
destined to repeat the same mistakes every 20-30 years.
Become a student of history and always invest as a contrarian. Sell into greed and
buy into fear. Master this discipline and there will be no stopping you.

LET’S BEGIN!!!!
Chapter 1
Setting Your Goals & Reality Check
Let’s get started! Now that we’ve covered the why let’s move to the how. I love the
enthusiasm of a new real estate investor. I can relate to being in your shoes 23 years ago.
We all start with grand visions of becoming the next Donald Trump or some other
legendary real estate mogul. You have probably seen the infomercials on TV or know
people who have been successful in real estate investing. Now you figure it’s your turn.

I know you’re excited. I can remember listening to tapes, reading books and writing my
first offers. Sometimes I would just get in my car and drive around looking at buildings
for entertainment. I would fantasize about owning them. Other times I would take this a
step further and actually go look at buildings and then write offers in an attempt to
purchase them. I would tell my family that I was going to buy “this” building or “that”
building.
The only problem was that at age 21 and one year out of college, my funds were limited.
However, where there is a will there is way. Needless to say, I tried and was not deterred
by being broke. I would write nothing down or little down offers that required the sellers
to carry some or all of the financing. Most of my offers were rejected. I must have
written at least 20 different offers this way. These were great enthusiastic moments in
my career as I was chasing the dream of becoming a real estate mogul. I was not to be
deterred by the lack of offer acceptance. Eventually, with another real estate agent and
his wife, we were able to purchase 3 duplexes with less than $5000 in about 1.5 years
time. My persistence paid off. Today I am a successful real estate investor because I
never stopped believing in myself. I never gave up.
My first real estate purchase was a condominium in Edina. I purchased the condo by
paying the cash difference between the asking price and existing mortgage. This was
approximately $5000. I was able to do a non qualifying assumption on the
condominium’s existing FHA mortgage. I bought the condo within 6 months after
graduating from college. I didn’t have the cash available to use for a down payment, but
I did have a Visa Card with a cash limit that was enough for the down payment. You
could say that Visa was my silent partner in the beginning of my real estate career-
Creative Financing 101. In fact, I’ve used assumable financing combined with contract
for deeds on two of my three duplex purchases.
Today things are very different. Sellers don’t want to act as the bank and carry financing.
Assumable mortgages are really a thing of the past. The last non qualifying assumable
FHA/VA mortgage was a loan originated in 1987. Most property today isn’t financed
with assumable financing. Instead, we have a multitude of lender programs that may
allow for up to 100% investor financing. Up until 2007, programs existed that allowed
almost anyone to obtain a mortgage. Each year mortgage programs became more and
more liberal. The loose credit standards contributed to the mortgage crisis that plagues us
today.
Recently, due to the foreclosure crisis, lenders have become more conservative. Lenders
are once again concerned about how credit worthy a buyer is and his/her ability to make
payments. This current tightening in the financial markets will change again in time.
The financing program criteria will once again be more liberal. In the meantime, today’s
tighter financial markets are helping create great opportunities for those who can qualify.
You are in a great position if you have credit and verifiable employment.

As always, cash offers will trump any offer contingent upon financing. Today’s market
is a huge opportunity for those investors who can pay cash. Sometimes obtaining cash
can be as simple as accessing a line of credit against your primary residence.
Before you start buying property, I want you to understand that owning property is a
process. The process should always begin with the end game in mind. This means either
using goal template sheets like those in the Appendix, or creating something on your
own. I realize that you can’t know exactly how long you will hold a property or how
long you might want to remain a landlord. At the same time, you need to start with
something in mind. You will want to review your goals on an annual basis or more often.
When you do the review of goals, you can fine tune what you’ve learned based on your
own unique experiences in landlording. Your goals will evolve.
DO YOUR GOALS FIRST. PUT YOUR FINANCIAL BLUEPRINT IN PLACE.
Please stop reading and remove the goal sheets in the appendix. You will notice we
break down the sheet into where we are today and where we want to be in the future.
Feel free to expand upon what I have provided. For those of you that don’t already own
any rental property, you may not have any concrete answers to some of the questions.
Put something down anyway. Your answers will define themselves in the future.
Thinking you have to have all the answers before you start will lead to Analysis
Paralysis.
A common life mistake is doing the same thing and expecting different results. I think
this is also known as the definition of stupidity. It doesn’t work like that in real life or
investing. There is an immutable principal of trade offs. Are you willing to pay the
price? Have you ever achieved a goal without paying a price? If you did I’m sure it
didn’t have any lasting importance in your life or contribute to the character building of
who you are. Successful real estate investing takes time so plan for it up front. Are you
willing to take time away from the football games, fishing, your family and anything else
that you enjoy doing with your free time? You need to be very honest with yourself. I
want you to make a commitment to this before you start or resign yourself to where to
you are today. If you are a dreamer, then stop reading this book. If you are a doer, keep
reading as you will likely be successful. Remember that indecision by itself is a decision.
Your real estate goals must be complementary with other goals that involve your
family/spouse/significant other. If you don’t have the support of these individuals you
will have resentment. Everyone must discuss and agree on the goals so that the sacrifices
that will come with achieving them are understood, supported and appreciated. The
following is an interesting quote to ponder from an unknown author: “Do what others
won’t for 10 years and live like others can’t for the rest of your life”. Application and
modification of this quote to your life will bring accompanying results.
Unlike what you see on TV, real estate investing isn’t easy, without risk or without time
commitments. It is about work. Work involves finding the opportunity and making

offers, adding value through improvements, managing the property, selecting tenants, and
ultimately enjoying either the cash flow, appreciation or both. A profit will be your
reward from the culmination of your efforts. Please understand that real estate investing
is extremely rewarding. You will feel a sense of pride as you review your holdings. You
will feel empowered knowing that you have chosen to add an asset class (real estate) to
your portfolio which will reduce your dependence on other markets like the stock market.
Ultimately, you can have freedom from your day JOB if you can offset your JOB income
with the cash flow from your rentals. Do you know what JOB stands for? If you consider
it an acronym, here is the definition: Just Over Broke. We all want liberation from a
JOB if possible. If you haven’t filled out the goal sheets do it NOW.
When you look at investing in real estate, there are three components that you will need
to consider. Each property will have different metrics regarding the following
components.
THREE COMPONENTS OF EVERY INVESTMENT PROPERTY
• CASH FLOW-Could be positive or negative

• TAX BENEFITS-Depreciation of the building value and appliances
• APPRECIATION-Hopefully!!!
For younger investors with more time before retirement, appreciation and tax benefits
may be the most important goal. On the other hand, older investors are more concerned
about a property’s cash flow. Your evaluation and selection of a property will be largely
dependent on where you are at that particular time in your life when you begin investing
in real estate. Goal setting will help you focus on what you want an investment property
to do for you financially. You need to be able to figure out how you want to structure
your transactions to fit your goals.

Chapter 2
Optimal Property Selection-You Have MANY CHOICES!
Don’t run out and buy any piece of property. Have a strategic plan. I suggest you start
small. Small is good because if you make a mistake your financial damage will be
limited. Small is generally less expensive. I also suggest you buy where you know the
area. Do your investing within 45 minutes of your house. You are probably a local
expert regarding the real estate within this time distance from your house. This means
you should know a little about the crime, schools and amenities within the surrounding
area. You can graduate in size and complexity of real estate holdings over time.

For example, consider buying a smaller house or condo and not an apartment building as
your first property. Also, I want you to think about who you want to interface with as a
tenant. Are you willing to own property in a higher crime neighborhood for the potential
of receiving a better cash flow? Is this an acceptable trade off? This assumes that the
tenants in these areas will actually pay their rent on time without your encouragement or
involvement. Think about the hassle factor if you have to go out and collect the rent each
month. There is a correlation between properties that cost more but are in more desirable
locations that have little to no cash flow. Cash flow and the hassle factor are generally
intertwined. Properties located in better areas may appreciate more and you might have
less of a problem with your tenant. Life is short. How do you want to spend it?
The following are pros/cons of various common and not so common types of real estate
investment properties and strategies. I have included my analysis of the advantages and
disadvantages. Use this synopsis and my experience to find an area of investing in
which you feel comfortable. I have included, where possible, some personal examples of
my involvement with each of these properties and strategies. Real world stories make
understanding your choices easier.
Feel free to pick and choose which types of properties are of interest to you today. Use
this chapter as a reference to find future opportunities as you advance in your real estate
investing endeavors.
Single Family Homes:
The average price of single family homes within the Twin Cities metropolitan area is
approximately $230,000. The rent you might be able to receive is anywhere from $1200-
$1800 a month depending on number of bedrooms and location. Today, I currently own
one single family home as rental. I think this is one of the best opportunities in today’s
market. Single family homes won’t necessarily cash flow but they currently are
discounted heavily within our marketplace and should, therefore, be considered. If you
can carry the property’s negative cash flow within your budget, I believe you will be
rewarded with the future appreciation that will exceed the cumulative negative cash flow.
Of course we can’t know when this will happen. In my opinion, when the real estate
market swings back in favor of the sellers, single family homes will experience some of
the best rates of growth in appreciation. Single family homes represent the majority of
properties that are bought and sold in any given market. This means when you decide to
sell your investment home you will have the majority of buyers and sellers available to
you. You want the biggest market possible for your exit strategy to be maximized.
Back in the early 1990’s, my fourth investment property was a single family home in
South Minneapolis. I bought the home from a For Sale By Owner (FSBO). I paid a
small amount of cash and assumed their existing loan. I then turned around and sold the
home. I allowed the new buyer to assume the loan the same way I had assumed the loan.
We wrote a contract for deed at the same time for an equity amount of $5000. The $5000
represented the equity that was in the home. My cost/benefit analysis led me to sell the

home within 30 days of purchasing it vs. keeping it and renting it out. Real estate in the
late 80’s early 90’s had relatively low appreciation-2-3% per year. The amount I could
receive on my contract for deed upfront was greater than the net rental amount I could
receive if I held it as a rental. That is why I decided to sell the property. In retrospect, I
wish I would have held onto the property as it quadrupled in value in about 10 years.
Who knew it would quadruple in value? It goes back to the old cliché about hindsight
being 20-20. Life tends to give you all the answers retrospectively instead of
prospectively. I wish it was the other way around.
ADVANTAGES OF OWNING SINGLE FAMILY HOMES
There will be little competition from other landlords.
Most rental property is traditionally in “multi-family” style properties like apartments and
duplexes. This makes single family homes easy to rent as there are fewer of them
available in the marketplace.
Your property will be in a predominately residential setting.
This may allow for greater future demand and appreciation upon resale. Properties that
are in more of a rental or commercial environment will appreciate less. Remember, you
are expecting to sell to an owner occupant. Owner occupants want to live in residential
areas. Owner occupants out number investors and should represent your ideal exit
strategy buyer. Owner occupants are the ideal buyer for you because they buy on
emotion, not on your building’s cash flow.
.
Residential properties, i.e. single family homes, have the highest demand on the real
estate spectrum.
Higher demand will give you more potential buyers upon resale.
Niche market specialization is available.
If you want to allow pets or smokers in your rentals, you are free to do so. Because you
are not under the rules of an association you can make your own rental policies. Smokers
and pet owners are an underserved client population. I simply wanted to point it out.
I’m not recommending you rent to smokers and pet owners. We will be discussing why
later in the book.
You may be able to locate homes in areas that lend themselves to large remodeling
projects, tear downs, or lot subdivision.
This is a huge opportunity for the right buyer. This type of speculation is under the radar.
It generally is a bit more expensive as the homes will cost more. If you can invest in a
more expensive market you will face less competition. Certain communities such as

Edina and South West Minneapolis are perfect for this type of speculation. I feel this is
one of the biggest opportunities in today’s marketplace.
DISADVANTAGES
Cash flow is limited as rents are low.
This can be somewhat hard to overcome unless you have a large down payment. A large
down payment will reduce your leverage. It will also reduce your ability to invest that
cash in an alternative investment or the property itself. If you have negative cash flow,
make sure it fits into your budget.
There will always be some degree of obsolescence which includes the mechanics, the
cosmetics and floor plan functionality.
Most single family homes that can be purchased within the average price range of
$250,000 are 30-80 years old. Investments in the building’s infrastructure seldom yields
any return. For example a new roof, new furnace, new plumbing, etc are selling points
but not real determinants of value. You expect a building to have these things. Therefore
huge upgrades mechanically can leave you with a bad return on investment. Make sure
you check the “bones” of the building.
Houses tend to lend themselves to multiple occupants.
You might end up having an extended number of people living/sleeping under one roof.
Various cities have rules on the number of unrelated people that can occupy a house.
You may inadvertently violate this rule. How are you going to deal with this and various
laws on discrimination? Also, the neighbors will not appreciate all the extra cars parked
up and down their street to accommodate your tenants. This is why I like SMALLER
properties. By their design, small properties accommodate a smaller number of people.
Cash flow is doubtful with a modest down payment.
Rents are inelastic to some degree. This means you can’t just raise the rent and expect
that the market will be willing or able to pay what you need to cover your monthly
obligations to maintain the property. You must be able to absorb the monthly negative
cash flow in your budget. The goal is to have any negative cash flow offset by the
appreciation rate and tax benefits on your building.
You are indirectly responsible for maintaining the interior and exterior of the
building.
Even if your lease calls for the tenant to do things like snow removal, you will be held
accountable by the city or in court if it isn’t done. Even worse, if someone slips on ice on
the sidewalk you will be sued. This highlights why you want an adequate amount of
liability insurance.

Lead based paint issues.
This can be a trap. Watch out. Any building built before 1978 has a great probability of
having lead based paint somewhere in the unit. This by itself does not necessarily create
a health hazard. It is the dust or flaking paint that occurs with aging or negligence that
will cause an issue if ingested. While it is harmful to everyone, it is especially bad for a
child. You need to follow the disclosure rules regarding lead when you lease your
property. A trap/problem could occur if you rent a property to someone who moves into
your building from a building where lead based paint did create a health issue. The
tenant and/or their children may get tested after they’ve moved into your building and
have lead poisoning. If the health department inspects your building and determines that
you have lead based paint in the building, they may determine that you were at fault.
That is one battle I don’t want. Buying a building built after 1978 may be one way to
resolve that problem. You can’t require that kids get lead based paint testing before
moving in, so all you can do is hope for the best.
Duplexes/Triplexes/Fourplexes:
Today, the average duplex might range from $250,000-$500,000. Rents for 1 br units are
within the range of $800-$1000 and 2br units rent for $1000-$1500. In 1990-1991 I
started buying rental property. The first properties I bought were duplexes. At the time,
rental properties were priced so you could actually generate a cash flow with a limited
investment. That has since changed. Today income properties are being marketed
without any corresponding cash flow.
The gloom and doom of the real estate market today is very much like it was in 1990-91.
At that time, real estate as an investment was extremely out of favor. In 1990-1991 we
were just coming off of the Resolution Trust Corporation (RTC) liquidation and feeling
the final effects of Tax Reform Act of 1986. The RTC was liquidating foreclosed
properties from defunct Savings and Loans. The Tax Reform Act changed the laws
regarding depreciation of rental properties. The convergence of these events led to a
great buying opportunity. The mortgage market crisis combined with the record number
of foreclosures is creating the same analogous opportunity today.
Today, all real estate is out of favor, not just rental property. In the current market, I
would avoid duplexes/triplexes/fourplexes because I see little room for appreciation for a
very long time. They are priced too high today. Many sellers who paid too much a few
years ago are trying to unload their unprofitable building. Why would you want the work
without an offsetting reward? If you can buy them so they cash flow, you might want to
consider it. Unfortunately, I’m not seeing many of these deals.
The best advice is to avoid multi-dwelling type of properties until such time that they are
more reasonably priced. Without being able to count on appreciation for determining
part of the property’s future value, you will need to focus on a property’s ability to return

acceptable cash on cash return. They call them income properties for a reason. They
need to generate an income or you shouldn’t buy them.
As previously mentioned, in 1990-91, you could actually buy a property with little to
nothing down. In fact the first duplex I purchased was done by assuming the existing
first mortgage and writing a contract for deed for the seller’s equity. It was a nothing
down deal. The second duplex was done the same way but required $3000 down. Both
properties were two blocks from Lake Nokomis. Other than the airplane noise, this is a
very solid area within Minneapolis. I held these duplexes for 12 years. Interesting to
note, I didn’t experience a big jump in my equity until the last 3 years of ownership. If I
had flipped my duplexes too early, I would have missed out on the majority of the profits.
Referencing a previous point we’ve already discussed, real estate generally is a long term
investment that needs to be held through an economic cycle. Buy at the bottom of one
cycle and then sell at the top of another.
The reason my buildings appreciated so dramatically in the last three years of my

ownership is because we had a perfect environment in which to be a property seller. We
had the convergence of three huge factors: 1) huge demand for rental property and little
available supply for sale; 2) lower property taxes in general and roll back in non
homestead taxes in particular; 3) all time historically low interest rates coupled with easy
to qualify for financing. Let me briefly explain each of these factors as the trends within
these variables will determine when to be a buyer and when to be a seller. These will be
discussed again in greater detail.
REMEMBER-always be a contrarian in your investing. At the beginning of this decade

we had a stock market bust. This market bust started in approximately year 2000 and
continued for three years. This historic event of sustained negative returns in the market
led many investors to look for alternative investments like real estate. For many
investors, the prevailing thought of the day was that a piece of real estate doesn’t go to
zero value and become worthless like some of the stocks of the day. Contrast this with
many of the internet stocks that did go bankrupt. Validating and reinforcing the belief
that real estate should be considered as an investment were success stories of ordinary
people buying property in areas like Florida and Arizona. Ordinary investors were
flipping property and making millions in a short period of time. Investor successes
fueled the flames of other investor’s Greed. Remember, all markets are ruled by either
fear or greed. The chance for any easy buck proved very alluring, i.e. greed runs amok.
This is why there were so many new investors attracted to the marketplace. They all
drank the “Flavor Aid”. This is an analogy to blindly following without having an ounce
of skepticism or reason. Remember the tragedy surrounding Jim Jones in Guyana? All
his followers perished in the jungle after they drank the cyanide laced Flavor Aid.
The second factor was lower property taxes. For the first time in many years, we had a
property tax refund and property tax reduction. Lower property taxes improve a
property’s cash flow. The greater the cash flow, the more debt (mortgage) a property can
support and hence the greater the value of the property. Lastly, we had low interest rates
with easy to qualify for mortgage programs. Lower interest rates allow for more debt (a

larger mortgage) to be placed against a building. This leads to a higher valuation of a

property. I recognized these factors in the marketplace and realized it was time to be a
seller and not a buyer. This is why I promptly sold my duplexes at the end of 2002. As
you become a student of markets, you too will be able to predict mania’s in the markets.
This will allow you to take advantage of over bought and over sold situations. We will
discuss more of this later.
ADVANTAGES OF OWNING MULTI-FAMILY HOUSING
You have one building generating two income streams.
When a building is vacant, the vacancy is usually limited to one side only. This means
you still have some income from the other side to offset the expenses. This is in contrast
to a single unit property where you have no income when vacant.
It is easier to manage everything in one location vs. having to visit two properties.
Consolidating everything under one roof may be cheaper than maintaining two roofs. It is
also easier to drive your car to one building instead of multiple buildings.
DISADVANTAGES
Most duplexes are built on busy streets that have multiple investment properties all
around them.
This tends to generate a “tenant” vs. “owner” mentality. There is a greater probability of
absentee landlords not caring about their property. Adjacent properties subsequently fall
into greater disrepair more easily. Even if you are a great landlord, that might not be the
case with the owner of the building next door. One bad apple (landlord) can spoil a
street. Some landlords just care about filling the building. Today, more cities are holding
the landlord responsible for crimes committed at their properties. This should help
encourage a better initial screening of the tenants. In fact, there is something called the
RICO Act which can cause a property to be forfeited if the landlord knowingly allows
certain types of crimes to be committed on the premise.
Tenants selecting a duplex are doing so when they could have selected an apartment
building that offered greater amenities.
A duplex/triplex/fourplex tends to have greater obsolescence because they are older than
newer apartments. There may be a correlation between lower rents and lesser qualified
tenants unless the location is exceptional-such as across from a lake.

There will always be some degree of obsolescence which includes the mechanics, the
cosmetics and floor plan functionality.
Most multi-family investment properties that can be purchased within the average price
range are 30-80 years old and are within the core cities or first tier suburbs. You will find
that most floor plans of multi-family properties that were built during the same vintage
are the same. Where is your property’s competitive edge? You may need to update the
property cosmetically to give you an advantage over identical properties that exist within
the same area. Since they are almost all the same in size and function, location will be
one of the most important considerations.
Duplexes are bought primarily by landlords.
This isn’t to say that some aren’t sold to owner occupants. But when a landlord buys a
building, he/she usually expect some kind of immediate return on their capital. A multi-
family purchase will be evaluated as a semi- non emotional purchase and more of a return
on capital analysis. This will limit your appreciation and upside unless rents are
projected to increase greatly over time. Net income, which is a function of rents and
expenses, will be the driver of future appreciation. Rental rates are subject to supply and
demand. Currently there is a lot of supply.
Cash flow is doubtful with a modest down payment.
You must be able to absorb your property’s monthly negative cash flow within your
monthly budget. The goal is to offset the negative cash flow by the appreciation rate and
tax benefits. Can you still do this with an extended vacancy? The answer is probably no.
That’s why location is so important.
You are indirectly responsible for maintaining the interior and exterior of the
building.
Just as with a single family house, even if your lease calls for the tenant to do things like
snow removal, you will be held accountable by the city or in court if it isn’t done. Even
worse, if someone slips on ice on the sidewalk you will be sued.
Lead based paint is still an issue.
We’ve discussed this with single family houses already. It applies here, too. This can be
a trap so watch out. Any building built before 1978 has a great probability of having lead
based paint somewhere in the unit. This does not necessarily create a health hazard. It is
the dust or flaking paint that occurs from old age or negligence that will cause an issue if
ingested. While it is harmful to everyone, it is especially bad for a child. You need to
follow the disclosure rules regarding lead when you lease your property. A trap/problem
could occur if you rent a property to someone who moves into your building from a
building where lead based paint did create a health issue. The tenant and/or their children
may get tested after they’ve moved into your building and have lead poisoning. If the

health department inspects your building and determines that you have lead based paint
in the building, they may determine that you were at fault. That is one battle I don’t
want. Buying a building newer than 1978 built may be one way to resolve that problem.
Apartment Buildings:
Most investors that are just starting out should avoid apartments as their first property. In
my opinion, apartment building investing is for the professional investor who can make
completely unemotional decisions based on cash flow. Because of the cost involved,
most small apartment building investors generally are able to invest in 5-18 unit
buildings. Outside of our core central cities which have an even older housing stock,
most of these types of buildings were built from 1940-1970. There is a lot of
obsolescence in these buildings and these buildings are the least desirable places for a
tenant to live for a number of reasons. Rents for these buildings are generally lower than
in newer buildings built today. Therefore, you tend to attract a tenant base that has fewer
options open to them.
Early in my real estate career I pursued a six unit apartment building. It was a 1960’s
building in South Minneapolis. It was being marketed on behalf of a family that had
placed it in trust with a local bank. I made a full price offer that involved the seller being
part of the financing. They received another offer at the same time that was lower than
mine but was for cash. They accepted the other person’s cash offer. Have you ever
heard the saying “Thank God for unanswered prayers”? Sometimes things happen for a
reason. Subsequent to my not acquiring the building, crack cocaine was introduced into
Minneapolis. As chance would have it, the block in which this building was located
happened to become the epicenter of the burgeoning crack epidemic. To make a long
story short, the buyer of the building sold it two years later for $25,000 less than he paid.
That buyer sold it again two years later for $25,000 less than he paid. Needless to say, I
am glad I did not acquire that building.
I also considered buying an 11 unit building as part of my initial investment property blue
print. I had a theory that buying a building in a more transitional neighborhood with the
potential for better cash flow would allow me to buy a better building in a better
neighborhood with negative cash flow. The two buildings would offset one another. I
would be able to net the two buildings cash flow against each other. I made an offer on
the apartment building for $100,000 when it was listed for $200,000. I wanted to be able
to keep it half occupied if necessary and still be able to make the financing payment. Too
many landlords have too much leverage against their properties. High leverage often
leads these landlords into accepting tenants they might not otherwise want to accept in
order to cover their mortgage. I didn’t want to be in that situation. If the area improved I
would be able to fill the building with acceptable tenants. At the same time, by paying
$100,000 for the apartment it wouldn’t be required nor expected in order to keep the
building going. I would be able to have the building 50% occupied all the time and still
be able to cover the buildings mortgage obligation, i.e. debt service.

Sometimes when you are making or negotiating an offer another buyer will appear.
That’s what happened to me. This new buyer stepped in and paid full price. I know they
paid too much because they didn’t do their homework on the area. I subsequently never
followed up on the building’s history to see if that buyer defaulted or if they still own the
property.
At about this same time, I decided to abandon my multiple building cash flow offset plan.
I decided instead to focus on affordable duplexes and small single family houses. I came
to the conclusion that life was too short to be involved with marginal properties.
About 10 years later, a third apartment building was marketed to me directly by a seller.
It was a 10 unit apartment building and included an adjacent vacant lot. I had the
building under contract to be purchased for $150,000, subject to a two week due
diligence period. This sounds like a great deal doesn’t it? You will soon find out it
wasn’t. Next, I hired an inspector to go through each of the units and the entire building.
We spent about five hours evaluating the building. Once I had the building evaluated, I
was able to create a list of required repairs. Next, I started getting bids for the work. The
bids totaled $350,000. These bids only represented what I knew and could foresee.
Anyone who has ever done an extensive remodel understands there will be a cost
overrun. It is typical to run 20-50% over in many cases. Needless to say, what looked
like a good deal for $150,000 was actually over priced. Before the two weeks ended, I
approached the seller with my data and told her I was unable to pay more than $50,000.
The seller agreed with my numbers and the required repairs. Although she agreed with
my assessment, we were not able to come to an agreement that was satisfactory to both of
us. I did not buy that building. This is the value of performing due diligence and not
becoming emotionally attached to the investment property. I didn’t care about the brick
and stone exterior, hard wood floors, etc. I only cared about the numbers. Either the
building “worked” or it didn’t. If I had just reacted to what appeared to be a good value
and had fallen in love with the old world charm, I would have spent too much on the
building and lost a ton of money.
These three apartment building experiences were enough for me. Not to say that I
wouldn’t consider a really good deal if it fell into my lap. I just won’t be proactively
seeking these types of properties.
ADVANTAGES OF OWNING AN APARTMENT BUILDING
There is an economy of scale that happens when you have all the units housed under
one roof.
If you are able to locate a building where the rents are below market and can be raised to
the market rate without losing tenants or having to invest a huge amount upgrades, then
you will have a winner. The key with apartment building investing is being able to add
value where the previous owner failed. Success may be because of your better
management skills, making strategic value adding upgrades and/or being lucky enough to
catch a changing market.

There is the possibility for non recourse financing.
Another positive of apartment building investing is that you may be able to get non
recourse financing. Your intention from the beginning isn’t to default on any loan. Yet,
non recourse financing means that the building stands as sole collateral for the loan and
makes it easier for you to walk away from the building if necessary. The alternative to
non-recourse financing may involve signing a personal guarantee. This means you and
your assets personally stand behind the loan in the event of default. Given a choice,
which type of financing would you prefer-non recourse or recourse?
With an apartment, you may also find a seller willing to carry back some financing. This
may or may not be combined with some underlying assumable financing. If you are
dealing with seller financing, better terms will generally follow a stronger down payment.
In general apartments are harder to finance for buyers. There are fewer outlets for
apartment financing. This is why sellers frequently are involved in financing the new
buyer of their properties. Don’t forget, someday you too will be the seller and will likely
face many of the same financing constraints with your buyers of the future. Remember,
how you buy may be how you sell.
DISADVANTAGES
These buildings are evaluated by their respective cash flow.
This might not necessary be a negative, but generally you would prefer to have an
emotional component to your building if possible. Apartments are valued off of a
capitalization of the net income generated by the building. This is termed a “cap rate”.
Generally speaking, the cap rate is lower for nicer properties. The cap rate is higher for
less desirable properties. Did you notice I mentioned nothing about the actual cost of
replacement of the building? A building’s valuation is all about the return on investment
as calculated by the building’s specific and reoccurring cash flow. This means current
net income and projected future net income. The amount of financing available is a
function of the cash flow. The lender wants to have a certain DCR (debt coverage ratio).
This means they want to know that the rents can carry the mortgage.
Think about the capital that you have to invest in real estate. As an investor, you expect a
return on your invested capital. You have many options on where to invest. Generally
speaking, capital flows to where appropriate risk and required return intersect. The
resultant investment could be mutual funds, stocks, bonds or real estate. Since real estate
is a “more hands on” investment which requires more work, you will generally need a
hybrid rate of return between that offered on stocks, mutual funds and bonds. This
hybrid rate of return is generally in the range of 9-13%. If you can’t generate that type of
return on the real estate, you might be better off with the alternative investments. The
valuation of your net income and hence your building, is always subject to the yields
offered by competing investments.

Let’s review obsolescence too.
Here are some of the things you find in older apartments: small kitchens, old appliances,
outdated bathrooms, inadequate parking, no amenities, no high speed internet or cable,
bad windows, old mechanicals, poor construction and little to no sound proofing.
Compare those issues against a new apartment complex that has been built to correct
some or all of these issues. Where would you move if you were a tenant that had
choices? Who are you most likely to attract to these older buildings? The answer might
be tenants without many choices. Bad credit and other issues may accompany these
types of tenants.
Mechanically, many older apartment buildings are going to need some work.
Some owners milk the building’s cash flow and do as little as possible to maintain them
whereas others put money back into their buildings and take pride in ownership. The 10
unit apartment building that I chose not to purchase hadn’t been updated mechanically in
many years. Because there had been so much deferred maintenance the building would
soon become a money pit where the new owner would spend an endless amount of
money. A money bit refers to a property that continually requires you to spend money to
keep and maintain it. Based on the asking price, that building wouldn’t allow for any
return on invested capital. You might remember that we talked earlier in this book about
a building’s infrastructure. Remember that investing in the mechanicals and the shell
may not increase the building’s value. In the case of the 10 unit, everything was in need
of updating in the amount of $350,000.
Do you want to be the property manager?
Apartment buildings are much more time intensive to manage. If you don’t want to
manage your building, then you will need to hire a manager. This takes away cash flow
which, in turn, lowers your return on your investment. What is your time worth?
When is the last time you saw an owner occupant buy an apartment building and
live in a unit as his/her primary residence?
I’ve never seen this occur-but that doesn’t mean it doesn’t occur occasionally. That
being said though, it probably means your exit strategy will involve, primarily if not
exclusively, other investors. Investors by nature don’t want to pay retail for anything.
Think about negotiating in that type of an environment with a limited number of investors
in apartments. It is an ugly picture isn’t it? I think you will have a more profitable and
pleasurable experience with a different category of real estate such as single family
homes.

Condo’s/Townhouses/Lofts:
Often, new/upscale condos will rent for more than a typical upscale apartment. Condos
and townhouses typically attract an older tenant who wants to avoid the busy activity that
often occurs at apartment complexes. This is the type of tenant to whom I like to rent my
property. There may be a correlation with maturity of the tenant and their age, although
I’m sure many of us know some pretty immature older individuals and some younger
people who are wise beyond their years. As a generality though, your older tenant should
mean a quieter tenant who wants to live a little more sedate lifestyle.
I have found that if you buy in a bedroom community you will often attract a divorced
parent, a relocating employee or possibly a family. If you buy into a project that is closer
to a college or the heart of the city, you will typically attract a younger tenant who is
interested in a bit of the night life. That type of tenant moves more frequently. Greater
tenant turn over means more work for you. A bedroom community may also be known
as a commuter community and is defined by Wikipedia as follows: “A commuter town
or bedroom community is an urban community that is primarily residential, from which
most of the workforce commute out of the community to earn their livelihood. Most
commuter towns are suburbs of a nearby metropolis that workers travel to daily, and
many suburbs are commuter towns.”
Regarding the age of a project, older projects or projects with fewer amenities, will
generate less rent. Also, older projects will have less appeal overall and will result in
higher vacancies. This is why I like newer projects.
When evaluating a project and community, you need to always consider the competition
from newly built apartments or other new rental condominiums as these are your primary
competition for tenants. In some communities you will find recently built, very nice
apartments with all the upgrades-CAT5 for high speed cable/DSL, swimming pools,
health club/workout rooms, stainless/black appliances, maple millwork, large windows
and often a month or two of free rent or even a free TV if you sign a year lease.
Eden Prairie and Woodbury are two communities that I would avoid buying rental
property in because of the competition from great apartments. Within these types of
communities you will find the competition for tenants is fierce. If you own a rental
condo/townhouse, you will probably not generate enough rent to cover your mortgage
unless you put down a large down payment. On average, the rents for one bedroom units
are $800-$1000 and two bedroom units are $1000-$1500. This amount of rent doesn’t
equate into much of a mortgage-approximately $120,000-$180,000.
I own three lofts/condos at the moment. I’ve chosen to focus on communities that don’t
have a lot of new buildings. I own my buildings in Hopkins, Richfield and St. Paul.
These are good examples of owning property within a core city and the first tier suburbs

that surround them. I don’t have much competition with newly built properties. You
want as many competitive advantages as possible.
With all projects, you are buying into an association with rules and regulations. The
exterior and interior common spaces are maintained for you. Your main concern will be
finding an acceptable tenant. I would focus on what makes a project unique within that
specific community. For example, is it the only new project built in the past 10 years? Is
the location preferential? Does the project have amenities such as an exercise room or
community room compared to competing apartments or other projects don’t have any
common space? What would make this property have a competitive advantage within the
rental community?
Smaller units are generally cheaper and more affordably financed. Interestingly, most
new buildings that are built today barely have adequate parking. Usually you get one
underground parking stall. You may run into parking issues if you buy a two bedroom
unit that doesn’t have two parking stalls. What happens if you have two tenants that
drive and one doesn’t want to park on the street? You may lose that potential tenant.
Many developers will be happy to sell you an extra stall for an additional $15,000-
$40,000. I would tend to discourage buying an additional parking stall as I believe they
cost too much and are a bad investment. Instead, I prefer to buy one bedroom units or
studios that can be redesigned into one bedroom units. Based on functionality, you will
probably get a single tenant who will be satisfied with having the one parking stall
included. As for design, I prefer the loft style building up to six stories or a townhouse
style unit. I wouldn’t advise buying a unit in a high rise tower style building. The higher
association fee associated with most towers is hard to overcome when you are renting.
Usually a tower is sold at a much higher cost per square foot because they are more
expensive to build. Rent is relatively static based on the unit’s size. Translation, towers
should be avoided.
I bought my condos at the beginning of the condo craze in 2002 and 2003. When I
bought them the market was growing and became frenetic. Today we are saturated with
more condos than buyers. This means more units that can’t be sold are being rented.
Greater supply leads to more competition in the rental arena and subsequent rental price
compression. Even though the market is tough, I still feel good about my units because I
bought in strong areas using the criteria I’ve outlined above.
My recommendation is to buy in the beginning of a project when the developer hasn’t

even broken ground. The developer usually doesn’t start to break ground until they have
pre-sold a certain number of units. The banks want to know that the project has a great
chance for success prior to lending money on the project. In order to get the project
going, I’ve found that the developer will offer you more incentives if you buy in the
beginning. Developers will leave money on the table at this stage. They feel they can
make it up on future price increases on the other units. You may be offered free upgrades
such as fireplaces, granite, upgraded millwork, etc. These freebees have real value. You
will be able to monetize the incentives into dollars when you decide to sell the building in
the future.

In general, when you buy a “to be built” project you will find that you have to place 3-5%
down at the time of signing the purchase agreement. You pay for the rest of the unit
when it is completed and you close on it. Building a condominium project can take up to
24 months. This means you will have “free” appreciation during this time. Also, if the
project is being built in phases, the last phases always cost more. Increases in condo
prices occur due to cost increases in building materials, labor and on what the market will
bear. Assuming a rising valuation, your unit will get a “pull up” in value when compared
to the prevailing cost of the new units.
ADVANTAGES OF OWNING A CONDO, TOWNHOUSE, OR LOFT
Your primary concern and responsibility is in finding a good tenant.
All the other issues with older buildings such as obsolescence don’t apply. The
association and management company are in charge. Some of the major obstacles to
your success have been removed; however, you still have to find the right tenant.
You may be able to locate a building in an excellent location.
Many projects are redevelopment or infill in older cities. You might be able to invest in
your favorite community and not have to drive to an outlying suburb.
Your resale will most likely be to an owner occupant. In the meantime, you will not
have to compete as hard with other rental units within the building or within the
community.
Most units in a typical project will be bought by owner occupants. This means these
types of property are not often sought out by landlords who are seeking to buy rental
property. Therefore, you will own a great property and not have a lot of competition
from other landlords within the building because most units aren’t being rented. If you
buy in an older community that does not have a lot of current building going on, you will
be competing with 40’s, 50’s, 60’s and 70’s built apartment buildings. Regarding the
competition, you might not have any that can compare. Your brand new updated
building, possibly with amenities, will win hands down.
You have eliminated the obsolescence factor that you have with older properties if
you purchase a new or newer building.
This makes your building more competitive and will help you save money on updates
that you don’t have to do. Your biggest expenditure will be in purchasing new window
treatments.
You are able to get a break on taxes for approximately the first 18 months of
ownership in a newly built building.

Minnesota has a non-homestead tax classification for rental property. The non-
Homestead taxes assessed against rental property cost more, reducing cash flow. The
actual tax assessment for all property in Minnesota is based upon the value of the
building as it stands on January 2nd one year prior. Taxes payable in the following year
are based on the valuation assessed one year prior. Since your rental unit was either a
piece of undeveloped land or part of a partially completed project, your taxes will be
lower in the first 12-18 months of ownership. Partial completion of a building translates
into lower taxes which results in better cash flow, at least initially. Don’t forget to factor
in the non-homestead vs. homestead tax differential in your extended property ownership
analysis.
If you purchase a new construction development that is done in phases, you may be
able to benefit from a natural increase in the price of the same unit in a subsequent
phase.
I sold my phase one Emerald Gardens condominium as they were starting to sell phase
four of the project. I was able to earn a 200% return on my invested down payment
within 18 months of my initial closing. I will talk more about this property in the section
on financing.
Another advantage of buying a brand new condo/townhouse or any new

construction is the HOW 2-10 warranty.
The builder must provide this warranty to you by law. The warranty covers the
mechanical items for two years and the structure/foundation for ten years. The warranty
is available to collect from if the builder won’t fix the items or if the builder becomes
insolvent. Appliances are generally covered by the manufacturer for one year. These
warranties should provide you more protection and piece of mind as a landlord. These
warranties transfer to any new buyer so they will become selling points down the road.
DISADVANTAGES
You are subject to the rules, regulations, and bylaws of the association which are
subject to change by quorum.
If you or someone else who owns a unit in your building doesn’t act responsibly as
landlord, there could be a backlash and a change of the rules. There is no guarantee that
you or your lease with your tenant will be grandfathered in should there be a change
eliminating your ability to rent your unit. You could be forced to break a lease and sell
your property at the worst possible time in the marketplace. Also, there doesn’t have to
be a problem for the association to change the rules. Association members can do it just
because they want to. If they have the necessary votes, the rules will change.

This was attempted in one of the projects in which I own a unit. We quickly mobilized
the landlords, hired an attorney and attended the association meeting. Because we were
very proactive, we were able to convince the residents that it was in their best interest to
leave the rules unchanged. Bear in mind our interests were secondary. You will need to
be able to persuade the owner occupants why it is in their best interest not to change the
rules.
You are not able to do whatever you want with your property. Some associations
prohibit renting a unit.
Be prepared to get very involved should you need to organize and educate the resident
owners on the benefits to THEM for allowing rentals to continue. Your tenant can’t
have wild parties. Remember this is community living. Everyone will have to act
accordingly. If you have bad tenants, remove them as soon as possible or expect a
backlash.
You will have an association fee that you have to pay.
Typically a tenant will not pay this-even if it includes such things as the heat, water and
sanitation services. You will need to factor this into your cash flow analysis. If rent is
inelastic, you will be absorbing this cost. If it was a house, the tenant would be expected
to pick up the cost of some of the things included in the association fee.
Fixer Uppers-Of Any Kind:

Unless you are in the trades and can do the work yourself or at wholesale, I would highly
advise against pursuing these properties. Fresh paint and new carpet hardly constitute the
necessary work on a fixer upper that will yield you tens of thousands in profits. Yet,
when you watch some of the late night TV shows or read some other real estate books,
they suggest getting ready to make a big profit is as easy as just painting. I’m here to tell
you it isn’t.
The competition for moderately priced fixer uppers-$150,000-$400,000 is intense. You

are competing against people who will do the work themselves and evaluate the
return/profit as being equal to what they would have earned on a job. As an investor, you
will never win in that situation. If you want to play in this game, you need to go upper
bracket. Let’s use $400,000 plus as an example. Ideally you would find a smaller
property in a more expensive neighborhood that would lend itself to an addition or tear
down and rebuild. You could hire out the work and resell the property in that situation
and have a good chance of earning a profit, but the financial risks are much greater. In
addition, you will always go over budget, so plan on that from the start. A profit can
quickly turn to a loss when you are over your budget.

ADVANTAGES OF OWNING A FIXER UPPER
There should be a corresponding discount beyond what the cost of the work will be
to bring the property up to full market value.
If you are able to do the work for less than the discount in the price, you will have a built
in profit. If you have access to reasonable tradesmen, you might be able to make a profit.
If you do the work, you need to factor in a value for your time.
DISADVANTAGES
Competition on the lower end of home value is fierce.
Other than buying direct from a private party, don’t expect to find any bargains in this
price range. This is how the people who buy ugly houses make a profit. Often, they are
the only ones negotiating directly with the seller. This does not create a competitive
environment
You may get your best bargains in transitional neighborhoods.
The problem is you don’t always know which way the neighborhood will transition.
Guess right and there is a nice profit. If you guess wrong, you will lose a lot of money.
One last consideration is an inspection.
Many first time buyers will have an inspection addendum as part of their purchase
agreement. I recommend that you at least consider having an inspection done on the fixer
upper. Things like asbestos can be very expensive to remove. Unless you are
experienced, you might miss some of these time bombs. For a property that is brand
new, an inspection might be unnecessary. You will want to have more thorough
inspections as the housing stock you purchase gets older.
Financing for this type of work is difficult to obtain.
The best way to finance these projects is with a line of credit. The line of credit is like a
credit card. It can be accessed, paid off, and accessed again and again. If you use a
mortgage for acquisition, you may run into restrictions from the lender regarding the
work that you can do and the type of insurance you must carry. In addition, it will cost
you about 3% every time you obtain a mortgage. This will be a big part of your flipping
expenses. Add this to the traditional real estate selling costs, and you will be out about
9% before you even can begin to calculate a profit. You will need to have this figured
into your profit analysis. You will find that many “rehabbers” will become Realtors so
they can list their properties themselves and reduce some of their buying and selling
expenses.

Land/Lots:
Some people like to speculate on land. With land, you seldom have tenants. This is both
good and bad. Tenants cover the debt service associated with owning the property.
Without any income, you have to cover the mortgage debt service, insurance and taxes.
Raw land can be a cash drain or alligator that needs to be fed. If you buy farm land, you
may be able to rent it to a farmer in the community or put the land in a CRP program and
receive rent from the government for not farming the land. The CRP acronym stands for
Conservation Reserve Program. This program encourages landowners to let their land
return to a more natural state. Direct benefits of this program include providing
additional land for food and habitat for wildlife while at the same time reducing runoff
and soil erosion.
I have bought vacant lots in the past, both on the open market and as tax forfeited land. I
bought the lots so that I could complete a house move project and possibly build some
homes on speculation. Sometimes buying a bigger piece of land that offers development
possibilities is the way to go. Also, finding a house on a lot that can be subdivided is
rare, but possible. You can have your Realtor set up land searches for acreage via the
MLS. You will be surprised at what occasionally becomes available. Be prepared to act
quickly because these types of properties won’t last long. I found my current home in
Edina on 1.75 acres via the MLS. In fact, it was actually on the market for 10 days
before I found it hard to believe but true.
ADVANTAGES OF OWNING LAND OR LOTS
I think Will Rogers said it best “Buy land. They ain’t making any more of it.”
Land is a finite commodity. The population is increasing daily. Someday the world will
come to you. In the meantime, the land is expensive to own while it sits dormant.
Buying a property or piece of land that can be rezoned may present an opportunity.
Try and focus on land that is in the path of development and might be annexed into the
water and sewer master plan-called the MUSA line. Expansion of the MUSA will offer
you the opportunity for subdividing. Here is the link to a recent MUSA line study
http://www.metrocouncil.org/planning/landuse/LandStudy.pdf. Also, consider visiting
your local city office and talking with the city manager. Reviewing the current planning
and zoning maps is essential for seeing where these opportunities may be present.
Sometimes you can pay to extend utilities to an area that is right on the edge the MUSA
line. Imagine the change in value that would occur if you were allowed to convert a large
acreage parcel into more moderate .25 to .5 acre lots.
DISADVANTAGES

Unfortunately, you are unable to control the business cycles that exist in the world.
This means that you may often be holding the land longer than you anticipated. Make
sure you have enough capital to extend your anticipated holding period should you be
faced with this situation.
Zoning laws and setback requirements can change over time.
When you buy a piece of land, you may have an intended purpose for the property or you
may want to build a specific type of building on it. If you wait too long, you may find
that the city/county/DNR or some other regulatory body may come in and change the
rules affecting the property. Usually, changes restrict what you can do, not liberalizing
what you can do. This could change the value of your holdings overnight. Submit your
plan to the appropriate office or agency for approval sooner rather than later. Then start to
build. Waiting can be perilous to your financial health.
A few years ago I marketed and sold a lake lot for a client in Mound, MN. The new
buyers were granted a one year variance by the city council to build their new home. In
order to do this, we had to appeal to the city council and planning commission. Today, I
doubt that they would have allowed that same house to be built. In fact, the city told my
clients “no” initially when we went before the city council and planning commission.
We threatened to sue them, which we would have, except they reconvened after we left
the city chambers and they voted to overturn their initial “no” vote. In my opinion, the
cooperation and understanding between a city and homeowner for granting a variance is
not as friendly as it once was. This is why I tell you to do it now.
Building Homes On Speculation Or Moving A House:

Being involved in a new construction project is exciting. You will access your creativity
to design and pick out the various components that will go into the final project. At the
same time, it is also the most frustrating experience you will ever be involved with.
Almost every variable in the building process is out of your control. Please accept that as
an absolute truth. The weather and coordination of various contractors will drive you
crazy. A project of this magnitude is very time consuming and risky. If you don’t have
the necessary time or supervisory capabilities, you should skip this type of real estate
project altogether.
Initially, some projects may appear to have great profit potential. An example of this is a
home which I purchased to move to another site. When I did my house move, I bought a
house in Richfield and moved it to So. St. Paul.
Here were some of my major costs:
Three bedroom rambler with a detached 2 car garage-$17,000

Cost to move both onto the lot-$11,000

Vacant lot-$15,000
I should clarify that this occurred back in 1993, so the prices sound really good. For the
record, I sold the home for $93,000. You will soon find out that it wasn’t as profitable a
venture as it could have been. In the end, you may make a substantial profit only if
everything works out perfectly. At the same time, very small mistakes can magnify your
costs as they cascade throughout the project. For example, when I moved the house and
acted as general contractor, I didn’t have the excavator dig the foundation as deep as I
should have. While the excavator followed the survey and the diagram he was given, I
should have asked that he go two feet deeper. These two feet cost me approximately
$35,000 in additional costs. I would have saved the cost of two extra egress windows,
stuccoing the lower half of the building, repainting of the entire home, adding additional
concrete steps with hand railings to account for the higher elevation and extra brick work.
Besides the cost over runs, I had to deal with a neighbor to the North who was very
unpleasant. She was a woman who had nothing better to do than harass me. As it
happened, I bought the vacant lot that she had previously used as a play area for her in
home day care. Of course, she, too, could have purchased the lot when it was for sale,
but she opted not to do that. Instead, when I started my project she decided to call the
city on me almost on a daily basis. I dealt with a city inspector who was actually a pretty
good guy and was as empathetic as he could be to my situation. At the same time he had
to respond every time the neighbor called. The neighbor played both sides of the fence.
On the one hand, I was the enemy. On the other hand, I was a profit center. If any of my
contractors needed something like electricity or water, she would sell them access. This
went on for five very long months. I spent five months of my life, countless hours and
many sleepless nights focused on the project. At the end of the day, I ended up making
$5000.
The one redeeming thought throughout the process was that at the end of the day, I was
able to go home and be “me” while at the end of the day the neighbor still got to be “her”.
Winston Churchill said it best. I love this quote: Bessie Braddock (to Winston
Churchill): “Winston, you’re drunk.” Churchill: “Bessie, you’re ugly. But tomorrow I
shall be sober.” I think you get my drift.
ADVANTAGES OF SPECULATION
You might be able to get a great buy on a lot, materials, or labor.
You might be able to be your own general contractor and save the typical 20% mark up
on a newly built home. Make sure you do a cost analysis of your time being focused

somewhere else in lieu of being the general contractor. You may find that you are better
off hiring someone to wear the construction manager hat during the project.
DISADVANTAGES
You need to be a master coordinator over variables which you have absolutely no
control.
Building a new home or engaging in a major remodel of a home is usually done in stages.
You need to schedule each contractor to come in after the last contractor has completed
his work. For example the plumber may need to come in before the drywall person. The
hardest thing to deal with is trades people that don’t show up when they say they will. If
somebody doesn’t show up or doesn’t finish on time, then it throws everyone off
schedule. Usually contractors are bouncing from one job to the next, so it isn’t like they
can just come and go at any time. Once one contractor gets off track, your entire
schedule can be thrown into disarray. In addition, you have weather issues that are
beyond your control. What if it rains for two weeks straight? This will require you to
coordinate and reschedule.
In the beginning, you always have your first project. You may quickly determine that
your first project is your last project. Here are some additional considerations. Some
contractors will put you on the “B” list from the start because they view you as a one time
job and not a source of continuing business. The “B” list means you don’t get the same
service or same pricing as the “A” list. Fortunately, some contractors will try to help
you. At the same time, others will try to take advantage of you and your naiveté. Unless
you quit your day job, you are probably going to be offsite at your other job trying to
make a living. The other job is the one that pays the bills. This places you at the mercy
of others since you are not there to supervise. On my projects, I’ve dealt with both good
and bad contractors. Thankfully, the majority were good.
Make sure you aren’t committed to a “time and material” arrangement unless you are
there to supervise or unless you trust the contractor. Compound these problems with
neighbors who may be resentful that you have just turned a vacant lot that used to be
viewed as a source of privacy into a construction zone replete with noise and mess. As I
mentioned here, some neighbors are more than willing to call the city inspector and
complain. Overall, I’d have to say that it was a good learning experience but one that
could have happened if I had watched someone else’s project. My conclusion from this
experience was that I never wanted to do another house move again.
It took 10 years for the memory of the pain to fade before I repeated a similar experience
with my own home remodel. I did an extensive 20 month remodel on my primary
residence with a very similar outcome and similar set of experiences-primarily with the
contractors. One major difference during this process was that my neighbors were
WONDERFUL. They were extremely patient through all the noise and mess. My
conclusion for you is this: leave building to builders and buy a finished product.
Builders earn every bit of profit they make in relation to the hassles they endure. You

wouldn’t believe the time involved to complete a project until you actually do one
yourself. A remodel looks a lot easier than it actually is. If you want a list of excellent
contractors I would be happy to share the names and numbers of the good ones I used on
my project.
You also need access to capital for a major project.
Most banks will not lend you money once the collateral is severely impaired, a house
move for example. How can a bank have any security in a house that is on a trailer?
Under capitalization will kill your project and could put you in bankruptcy. I have/had
credit lines in place so that didn’t happen to me. Make sure you are well financed.
Second Home/Vacation Properties:
If you have the time to enjoy a second home/vacation property then I’m in favor. Many
people fall in love with the romantic notion of a second home. I spent many weekends at
my grandparent’s cabin in the summer of my early youth. I have some of the best
memories of my life from this time period. My grandfather and I caught an 18# 13oz
northern pike in North Sand Lake in Wisconsin. His picture was published in the St. Paul
Pioneer Press. This is just one of hundreds of memories I cherish. To this day, I still
think about the lake almost daily. What a wonderful gift it is to have these memories.
My grandparents went to the cabin every Friday and returned on Sunday. Part of every
weekend involved a little work, such as mowing the lawn, cleaning the beach, painting
the dock, etc. In the beginning of the year you have to open the cabin and then winterize
it and close it down at the end of season. You have to put the dock in the lake then take it
out of the lake. If you have a boat, you have to do the same thing with it and the boat lift.
I guess what I’m trying to remind you of is the level of work. You are maintaining a
second home. If you are only going to visit the cabin a few times a year, then most of
your time at the cabin will involve working on the cabin. How much fun is that?
I know of some individuals and family members who purchased vacation property
together as a family partnership. They allocated the weeks amongst themselves. This has
worked out well for them. The problem with partnerships isn’t in the beginning but
rather when people’s goals and situations change down the road. Make sure you have an
exit strategy in place in advance that deals with all the scenarios which may occur. You
want to pre plan so there are no surprises down the road.
After having done a reflection on the actual amount of time I have available, I have
determined that it would be wiser for me to take a few vacations at resorts and actually
focus on fun activities rather than on the cost and work associated with actual ownership.
In my case, this is not only cheaper, but maximizes my time for enjoyment. This also
gives me the flexibility to try different lakes, communities and lodges. If I had a specific
piece of property, then that would always be my destination. My preference of not
owning a property allows me to have some variety.

ADVANTAGES OF OWNING A SECOND HOME OR VACATION PROPERTY
You have a piece of paradise to call your own.
Vacation properties close to the cities have continued to appreciate. As baby boomers
increasingly retire, it is projected that they will continue to seek out these properties.
Satellite communications and cell phones have made these remote locations accessible.
The demographics favor this type of property appreciating into the future.
A slight twist on only a second home might be to purchase a time share or a big
block of vacation points from some of the time share creators.
On the secondary market, these properties are often resold for a fraction of what they
originally cost. Typically, timeshares are sold in either specific time blocks where you
own a specific week each year or as blocks of points that can be used to reserve weeks
based on availability. Obviously, you are able to reserve more desirable weeks if you
have more points to spend. Ebay is a great source to find resale timeshare units and the
aggregation of resale blocks of points. If I were to purchase something like this, I would
buy high season in a desirable location like Orlando. Regarding points, I would want a
large enough number of points within a recognized trading system like RCI International.
This type of approach gives you some flexibility and you might be able to be use them as
gifts for business associates or relatives.
DISADVANTAGES
Realistically, You are probably not going to use a second home as often as you want.
You are probably going to spend a lot of money maintaining this type of property. Don’t
forget that there is the mortgage payment, taxes, insurance, furnishings, and any other
services that you wish to contract for. If you pay cash, you have the lost opportunity cost
of what the cash could have done if deployed in an alternative investment.
Do a cost vs. benefit analysis.
Look at what it will cost you over an anticipated holding period of time. Add up all the
costs. Pick an anticipated appreciation rate. Compare the two numbers and see how you
come out financially. Also, look at your current ability to get away and use a cabin.
Why do you think that will change in the future? If you are purchasing with the intention
of the family visiting the cabin together, consider the reality of that when you have
teenagers. That is when my grandparents sold their cabin. The cabin maintenance was
getting to be more work than they wanted to do and I was working in the summers
instead of hanging out at the lake.

If you go the time share/points route, just remember that there are annual costs that
you have to pay each year.
If you do this, always look to the resale market first as you may save 50% or more off of
what the developer is selling them for today.
Tax Forfeited Land Or Buildings:

I’ve purchased property this way. Unfortunately, It didn’t quite work out as planned. Be
very careful. I would only suggest this if you are able to get a deep enough discount in
price to warrant the risks involved. You will have title issues that need to be cleaned up.
Plan on it. At the risk of being redundant, property may very well be conveyed with title
issues.
You may also have property issues such as lead based paint, mold, maintaining existing
retaining walls, weed control, and problems obtaining adequate insurance coverage. This
type of investment is not for someone who doesn’t have the time, patience, and cash to
resolve all of the above problems. REMEMBER, the previous property owner felt it
was better to let the property go for back taxes than sell it outright. That should be your
first CLUE that something may be wrong. It could be that the property had too many
liens against it or it could be something specific to the property. Caveat Emptor – Latin
for buyer beware.
It is easy to start the investigative process and see what properties might be available.
You can call each of the counties where you might be interested in buying property.
Each county publishes a list of properties that are currently for sale and also a list of
properties that will be sold at their next auction.
Property auctions are fun to attend. If you want to see people’s competitive nature in
action, especially as it overrules prudent investing, then you should attend an auction. I
plan on attending again just to see the 2008 mindset of the bidders.
ADVANTAGES OF OWNING TAX FORFEITED LAND OR BUILDINGS
You are able to buy properties at an auction, directly from the county, or some
hybrid method which generally doesn’t get the full public exposure as a regular
listed property.
Competition should theoretically be less. If you do your due diligence, you CAN get a
deal.

DISADVANTAGES
You will most likely have to commence a court proceedings called “quieting the
title” in order to be able to resell the property and establish your claim to the
property.
Did you know that federal laws trump state laws? Did you know that the State of
Minnesota only gives a 60 day notice to all creditors when they take back a property due
to tax forfeiture? Did you know the IRS requires a 90 day notice and that if they aren’t
given the 90 day notice their lien remains intact? This means that their lien is not
extinguished by the state proceedings. I DIDN’T KNOW IT EITHER!!! Be very, very
careful if you are buying tax forfeited land. Learn from my mistake. I purchased two
lots directly from Dakota county that were sold as tax forfeited land. I did my homework
but I still got into trouble. I had a title search completed on the property prior to the
purchase. I had two attorneys review the title search-the head attorney for the title
company owned by a large real estate firm in the Twin Cities and a private practice
attorney who I hired to quiet the title. Both attorneys assured me that I could go through
a court proceedings called “Quieting the title” for a few thousand dollars and be in great
shape with my title. Quieting title is the legal proceeding that clears the title.
Unfortunately I was given bad advice from both of my “experts”. Neither of them
understood the ramifications of the IRS lien from the former owner. Ultimately, I had to
settle someone else’s tax lien against my newly acquired lots. Imagine how happy I was
to pay someone else’s tax bill. It took me two years of negotiation to settle the previous
owner’s $15,000 tax bill for $7500. My opinion from this experience is that the IRS is
not the kinder/gentler agency they portray themselves to be. They are tough.
There are other risks, too, such as insurability.
Ideally you’d like to get a copy of a CLUE report. This report stands for Comprehensive
Loss Underwriting Exchange. It is a national insurance industry database with more than
40 million personal property claims. If the property you are interested in has had lots of
claims, you may find it almost uninsurable at conventional rates. The problem is that the
seller has to order the report. That makes it real hard if the property is tax forfeited.
Other than your own due diligence, these properties are often sold “as is” with
limited to no disclosure from the seller.
The Latin term “Caveat Emptor” i.e. “buyer beware” best describes my advice for you. I
recommend you triple check the title. I double checked it and it wasn’t enough
.
Due to the nature of the title and way that the purchase takes place, you generally
have to pay cash for the property.

This is yet another reason why it is wise to have a sizable line of credit.
Foreclosures:
Last year I purchased my first foreclosed home directly from the bank. It turned out to be
a great deal because the lender in third position did not redeem their position. This left a
lot of equity in the property. It is very rare that a property will have a third position lien.
In fact, in this case it was unintentional and due to a mistake being made by the title
company that had closed the loan on behalf of the inadvertent third position lender.
Foreclosure investing can be done profitably if you are very familiar with the market and
the area where the home is located.
Because I have lived in the Twin Cities my entire life and have sold homes in the metro
area since 1986, I am very well aware of the market conditions and current valuations. I
consider myself an expert. Recently, I have seen some very good values on foreclosure
auction properties and foreclosure properties being sold on the MLS. These two avenues
might be where you want to concentrate if you like this kind of investing.
ADVANTAGES OF INVESTING IN FORECLOSURES
You are able to buy property for less than it is worth.
Isn’t this how it is supposed to work? We, of course, wish it was but we know it’s not
always the case. Most of the time you pay retail, which is really just fair market value.
Buying for 60-80 cents on the dollar is wholesale investing. Most banks put their
inventory of homes on the MLS and let the ultimate price be determined in the free
market by supply and demand. The situation where I bought the single family home I
own directly from the bank was an unusual situation due to unique circumstances.
Generally, you will get your best deals in a slow market where the property needs some
work. Don’t expect to get huge discounts like you see on late night TV. On average, you
might expect to achieve a 5-10% discount. In some cases there will be no discount. No
discount is available if the home is in decent shape in a high demand area. For example,
in Edina we have foreclosures. We also have a fairly vibrant market in spite of the
overall real estate market’s slow down. In this example regarding Edina, expect any
discount to be small to negligible.
Foreclosures are hard work for a number of additional reasons.
Pre-foreclosure properties can be a better deal. Finding these properties is to your

advantage. The key is finding them and then buying them from a motivated seller. Most
people won’t do the work and will pick an easier form of investing. This means less
competition. Are you prepared for the leg work to find these potential sellers? In the
Twin Cities we have two legal papers, Finance and Commerce and the St. Paul Legal
Ledger. Both publications publish pre-foreclosure proceedings. In some cases, they only
publish the property’s legal description, not the actual address or phone number of the

homeowner. You will need to figure out those pieces of the puzzle and it takes time.
Then you need to drive by the property, assess the neighborhood and contact the
homeowner if you think it is worth it. There is a service called Realty Trac
(http://tinyurl.com/2jh66u) which publishes foreclosures and also Foreclosures.com
(http://tinyurl.com/yqhxq3). These services offer monthly subscriptions and provide more
information about the property. Another resource I’ve found is
http://www.foreclosureforum.com. This site will list each state’s foreclosure laws and
hosts a bulletin board that has useful information.
DISADVANTAGES
Just like with tax forfeited land, you need to do a lot of due diligence on the property
itself.
If you don’t perform adequate due diligence, you may find yourself with a bad property,
a property with title issues, or both.
In Minnesota, we have a 6 month redemption period for the homeowner of their

primary residence.
This means that the owners of the home can stay in the property for six months after the
sheriff’s sale has occurred. How do you know in what condition the people are going to
leave the house when they vacate? They may blame the bank for causing their problem.
They may vandalize the house. They may take appliances, light fixtures and the copper
plumbing. For these reasons and others, I would only buy a home from the seller or from
the bank after the redemption period has ended.
Another angle involves buying the foreclosed mortgage itself directly from the bank at
the sheriff’s sale. In this case, you have assumed the banks position. At the end of the
redemption period you will own that property. You are bearing a lot of risk during the
redemption period regarding the status/condition of the underlying house. I want that risk
to be the bank’s risk, not mine.
I once sold a home for an investor who had purchased a defaulted mortgage. He
foreclosed on the property and I was selling it for him. The former owner would come
back and take things out of the house such as cabinets, appliances, etc. One day when it
was approximately -20 degrees, the former owner broke in and turned on the water pump
in the basement. In short order he had created an ice skating rink within the home. This
occurred on a cul-de-sac in Lakeville, Minnesota. Do you know that the other residents
on the block didn’t see a thing? Amazing isn’t it? My client turned the damage in for an
insurance claim. Do you know what happened? The claim was denied because he had
the wrong insurance. A regular policy does not cover you if the home is vacant after 30
days. This investor found out the hard way.
Almost every home sold through the foreclosure process is sold in “As Is” condition.

This means you don’t know the history of the property. It is very possible that there is
something about the house that is deficient or dangerous. For example, it could have
mold, lead based paint, asbestos, or have been a drug manufacturing house. A
methamphetamine house can cost you an unbelievable amount of money as you may
have to replace the plumbing, carpet, drywall, etc. Avoid this type of property at all
costs. Homes built before 1978 may have lead based paint issues. Many new stucco
homes have mold infiltration problems that can cost you hundreds of thousands of dollars
to remediate. PERFORM YOUR DUE DILIGENCE BEFORE YOU BUY THESE
HOMES.
My opinion of foreclosure investing when you deal directly with the owner is that
you are taking advantage of someone else’s misfortune.
In order for you to gain equity, you have to pay the owner less than the property is worth.
You could make the argument that you are the only one willing to help them and you
should be compensated for your risk. For me, it feels like you are taking advantage of
someone when they are at their most vulnerable point. It isn’t a “feels good” place for
me to invest, especially if you are dealing with individuals in dire straits. There may be a
mental illness, chemical dependency issues, extreme medical hardship, or unemployment
issue that these families are dealing with. When you work with banks on their foreclosed
inventory it is a totally different experience. When banks sell to you it is one business
dealing with another business. That type of foreclosure investing is perfectly ethical in
my opinion.
Short Sales:
Short sales are becoming more popular today. A short sale involves a lender and the
homeowner working together to get the home sold rather than have it end up in a
foreclosure. Usually what happens is the lender agrees to take less for their
lien/mortgage. They agree to sell at a discount, which then allows the seller to avoid
foreclosure and actually sell the house for what it is worth in the market at that current
time. Lenders sometime prefer short sales over the alternative which is foreclosure.
Remember, a foreclosure involves a redemption period and risk to the property. Banks
know that if the market value is less than the mortgage balance, it isn’t going to improve
with a foreclosure. The bank will have to wait until after the foreclosure process is
completed before the lender would be able to liquidate the property. Why not shave six
to eight months off the time line if the net cash results are going to be the same or better?
Homeowners may prefer to initiate a short sale so they don’t have the foreclosure on their
record. As a general rule, a foreclosure will greatly limit or even eliminate your ability to
get financing for at least a two year time frame. Most foreclosed homeowners would like
to be a homeowner again. A short sale shows a willingness to work with the lender to
come to a solution. This may be viewed more favorably by a future underwriter.
What many homeowners don’t fully understand is that they may very well have a tax
liability based on the amount of mortgage debt forgiveness. If you are a homeowner

contemplating this, talk to your tax and legal advisors first. They may suggest a
foreclosure instead. Because of the mortgage and foreclosure market that we are
experiencing in 2007 & 2008 legislation was recently passed. The law is called the
Mortgage Forgiveness Act-H.R. 3648. This significance of this law is HUGE. The new
law temporarily waives the tax liability on mortgage forgiveness that has occurred from
the beginning of 2007 through the end of 2009. This provides an incentive to the
homeowner to pursue a short sale vs. a foreclosure with their lender. This should help
stabilize housing values. The bill also extends the tax deduction for mortgage insurance
premiums through 2014.
ADVANTAGES OF BUYING HOMES SOLD THROUGH SHORT SALES
As an investor, you have two motivated sellers-the bank and the homeowner.
Generally, you will get to purchase the property at a slight discount to the actual market
value. Motivation regarding price really just depends on how each party to the
transaction views themselves and their bargaining power at the time of the offer. This is
in conjunction to the overall prognosis for the real estate market on a going forward basis.
DISADVANTAGES
When you make an offer during a short sale, you don’t know the bank’s bottom line
for a period of time.
You make an offer, the seller presents it to the bank, and the bank decides how much of a
loss they are willing to accept. You may end up writing lots of offers and doing few
transactions if you are out to steal each property. Banks aren’t going to just roll over and
let you stick a knife in them.
Buying Homes On EBAY:

EBay actually has real estate for sale. Ebay has it all: houses, land, commercial
properties, time shares and unique properties. I have actually bid on some time shares
and time share points unsuccessfully. If you want a timeshare, you might want to look
here. I would be very, very careful when buying and selling other types of real estate.
You really need to see and inspect what you are buying.
ADVANTAGES OF BUYING REAL ESTATE ON EBAY
Only consider this if you are buying what you know, that is your state, which is your
area of expertise.
You might get a discount. You might get a building that has cash flow. You might find a
motivated seller.

DISADVANTAGES
Initially I would ask “Are you crazy?”
If you are going to buy property that is out of state, you are really asking for trouble.
Realistically, what are the chances that you are lucky enough to have found an
overlooked opportunity that nobody locally knew where the property is located has
recognized the value? Wake up and smell the coffee. Do you really believe that
somehow you are able to see value where others within that specific community have
not? Communities across the US are valued differently. When you compare values
relative to where you live, you are assuming all things are equal. They are not. You have
no idea what the local economy is like, what the other real estate values are, what is
required of you as a landlord, what structural or non structural issues may be present-such
as lead paint or mold. Also, you will need to hire someone to manage the property for
you which is an added expense.
There is a book called Acres Of Diamonds. Let me drill down on that book’s salient
message. It talks about how you need to look for happiness and opportunity where you
are today, and overcome the urge to become restless and seek it elsewhere. Isn’t that a
great message? Think how much happier we’d be in our lives if we just stopped
believing that happiness lies in the next county, state, job, career or a different significant
other. In essence, the grass isn’t always greener on the other side. It is a great book and
a very short read.
Rent To Own/Lease Options:

Some gurus have recommend this as a way to get above average market rent for your
rental property and eliminate negative cash flow. They feel it will endear the tenant to
your property. I have yet to see this idea really work in practice. Most tenants rent with
the intent of being a tenant. They seldom view your rental property as the house that they
will buy someday. I think the investment gurus who recommend this are really just
trying to sell books based on theory rather than what actually works in the real world. I
have tried to base this book on fact.
ADVANTAGES OF OWN/LEASE OPTIONS
You may find a tenant who wants to own a home but for whatever reason the buyer
is unable to obtain financing at the current time.
You may find that offering rent with the option to buy looks attractive to the tenant. In
theory, the tenant will feel more inclined to treat the home better and stay there longer if
they believe that one day they will call the property “home”. The tenant may also agree
to pay a higher than market rent for the ability to purchase the home in the future at some

pre-agreed to price. Most tenants will never exercise their options for a number of
reasons. This means you are able to get a higher rent during the lease period for a
perceived benefit that never materializes, so the theory goes.
DISADVANTAGES
You will have transferred the potential appreciation to the tenant by agreeing to sell
the home to them at a pre-arranged price.
A lease option may impede your ability to sell the home in the future because you are
stuck in the option term and conditions. You are giving the tenant a certain amount of
control over your property depending on how the option is written. Most property
owners don’t want to leave money on the table and will instead set the option purchase
price beyond what the property has the likelihood of appreciating at over the option
period. Most tenants aren’t dumb. Eventually they will figure out that the option price is
over priced. When they figure this out, you will have an angry tenant that legitimately
resents you as they paid for something that is essentially worthless. They may feel taken
advantage of, especially if they have paid a higher amount of rent for the privilege of the
lease option provision. I have never been a fan of this type arrangement.
There are other variations of this type of arrangement that I feel are better such as giving
the tenant a partial credit for rent paid, first right of refusal to purchase if the property is
sold in the future, or agreeing in advance to pay a portion of the buyer’s mortgage closing
costs. As a general practice, I would always ask the tenant if he/she wanted to buy your
building before selling it in the open marketplace. I would never give them a lease
option.
REITS/Real Estate Limited Partnerships:

This might be something to consider if you want less personal involvement and a greater
hands off approach. Always read your prospectus and consult with your financial
advisors before making a purchase. All real estate is cyclical and REITS will follow the
business cycle. Learn to watch the economy.
If you would like to own real estate but not want to own it directly, REITs and Limited
Partnerships may be for you. These vehicles don’t historically correlate directly with the
stock market. These vehicles are securities that may be either publicly or privately
traded. You will need to discuss these investments and their appropriateness in your
portfolio with your financial advisers. I will just give you a brief descriptive overview of
what REITS/Limited Partnerships are. As we know, real estate in general is very
expensive. As such, you may be unable to adequately diversify your exposure to
different markets and different types of real estate. Most people don’t have enough
money to buy property across the country or across all the different real estate asset
classes.

A REIT in a collective partnership of real estate that may be categorized by style-such as

apartments, mini-storage, or office buildings. A publicly traded REIT trades on the
various stock exchanges. Generally, 95% of the income from a REIT must be passed
through to the investors. The advantage of the REIT is the diversification of the holdings
and lack of actual management involvement by you. You will not get a call in the middle
of the night to fix a toilet. Also, if the properties generate rents that increase over time,
you will receive a larger and larger income. In this sense, these vehicles may keep pace
with inflation by returning an increasingly larger income as rents rise.
A limited partnership can be small, large, public or private. Limited partnerships by

nature are very illiquid. In addition, you are not in control. That is why you are called a
limited partner instead of a general partner. Partnerships inherently have more risk.
Partnerships may be designed to generate tax losses, income, and/or future appreciation.
Typically, these vehicles are expensive to create and run. Before 1986, they were very
popular. During that time period, they were primarily bought and sold for the tax losses
they produced. The Tax Reform Act of 1986 effectively abolished these types of
partnerships that didn’t have any true economic viability. Many partnerships imploded
and became worthless. Investors lost fortunes. Partnerships have had a bad reputation
ever since. Today the majority of partnerships you will find are “all cash” or lightly
leveraged partnerships.
Options On Real Estate:

Many large parcels of developable land are initially controlled by options. A developer
will agree to buy a parcel of land at a certain price subject to certain terms and conditions.
Exercise of the option may be conditioned upon such things as getting a certain number
of lots approved, changing the zoning or the ability to develop and bring utilities into the
site. In the event the developer is unsuccessful, they may let their option expire or
renegotiate their purchase price to reflect what they were able to accomplish.
You don’t typically see options on residential type buildings. They are used more often
in an offer for a redevelopment site regarding a commercial building or buildings. A
much more common option involves commercial leases. You may see an option within a
commercial lease that allows the tenant to continue his/her lease based on some pre-
arranged formula. Depending on which way rents move, this could be a very valuable
asset to the tenant and a liability to a landlord. If you do purchase a commercial building
you will want to review all leases, paying careful attention to any renewal terms and
conditions that might give the tenant an option.
Options are an advanced strategy. It probably isn’t going to be the first thing you do
when creating your real estate empire. Creating an option involves finding a seller and
giving them some money, generally non refundable consideration, for the right to
purchase their property on some agreed to terms and conditions over a certain time
period. An option is generally unilateral in that you, the potential buyer, has the option to
purchase, whereas the seller has the obligation to sell under previously agreed to terms.

Normally, after the expiration of the option time period, there is no binding obligation on
either party. Options can be especially useful for a developer to get control of a piece of
property in order to rezone it or get a project approved before purchasing the land. If
they are unsuccessful in gaining approval, then they don’t exercise their option and lose
their consideration and any developmental and engineering costs incurred. The grantor
of the option is able to get some non refundable option money in advance, and possibly a
higher price for their land/building because they’ve reduced the risk to the developer. It
can be a win-win for both parties. If you are the developer, it can give you a huge
leveraged return on your option consideration money. There are many books written
specifically on this topic. I simply wanted to make you aware of the concept and how it
works.
Builder Close Outs-An Under Appreciated Opportunity:

Publicly traded companies have to satisfy Wall Street on a quarterly basis. If you are
able to take their inventory off of their hands, you will be doing them and yourself a
favor. It is a win-win for everyone. The best time to negotiate with publicly traded
builders is the last 30 days before their quarterly reporting period ends. You will get a
great deal if the builder is sitting on a number of vacant spec homes. New homes will
have all the warranties we discussed earlier. The risk to you is that you may be unable to
rent them at an acceptable level of rental income.

Chapter 3
GEOGRAPHIC & DEMOGRAPHIC CONSIDERATIONS

WHO-WHERE-WHY!
“LOCATION-LOCATION-LOCATION” OK-you’ve heard that adage ad nauseam.

Well, now you’ve heard it again. Yet this truism defines whether you will have a
pleasant and profitable experience as a landlord, a mediocre experience, or a downright
unpleasant experience. Let’s break out each of the three “location” definitions as I
define them: Location #1-Crime, Location #2-Schools, Location #3-Amenities/ease of
ingress and egress. I am going to include an additional fourth location because I think it
is important. Location #4 deals with the over all age of the community housing stock.
Ideally you want to find a property that combines the best attributes of each of these
categories. Let’s break them down.
Crime-Location item #1

You can do a lot of research right from your computer and phone. But the first thing I
would do is drive by and through the neighborhood in which you are considering making
the investment. Take a note pad and write down some of the addresses of the properties
that are nearby. For example if there is a large apartment building on the corner, or multi
family building/unit in close proximity write the address down for further research.
When you get back to your home or office, call the police chief that services that area.
You can give them the address of the properties you’ve selected and ask about the
number and type of police calls that have been called in from that address over the past
year. You can also discuss with the police the neighborhood itself to find out about
registered group homes and whether any crime or registered offenders may live nearby.
Many local police websites also provide a lot of information about what is happening
regarding that specific city or neighborhood. Here is the Minneapolis site
http://www.ci.minneapolis.mn.us/police/ . Here is the St. Paul site
http://www.stpaul.gov/depts/police/ .
Always remember that tenants that don’t feel safe will move. This, of course, assumes
they have the ability to move. Even if a tenant isn’t initially diligent in their crime
research, it won’t take them long to figure it out once they’ve moved into your property.
If the crime rate is high, they won’t renew their lease. In fact, they may break their lease.
This means more turnover and greater expenses coupled with a larger time commitment
from you. That’s why I stress buying in the most desirable location that you can.
Another resource is The United Way. They have some helpful data on their website at
http://www.unitedwaytwincities.org. They call them profiles for Minneapolis
Neighborhoods. These profiles have been compiled from the U.S. Census Bureau of the
Census and from the Minneapolis Police Department. This may aid in your research of
various demographic data.
Next I am going to reference some resources for the State of Minnesota. One is at
http://www.mncriminals.com I found this site extremely interesting. You can register
for free and then input someone’s name into the data base. If that person has been
convicted of a crime in Minnesota it will show up. This includes DUI’s. The greatest
part of this service is that it’s free. When you are doing your tenant screening you may
want to start here first. I assume you will be doing full criminal and credit background
checks-more on that later. This is a first step that you can take before spending the
money to do the full blown search.
If you want to check out registered sex offenders, check out

http://www.familywatchdog.us and http://www.corr.state.mn.us or call them at 651-361-
7200. For safety reasons, a tenant will want to live where they perceive it to be safe. The
reason a specific property you may be interested in is under priced may be due to who is
living in close proximity. Find this out before you make your offer. The seller and the
seller’s Realtor are under no obligation to disclose this to you. I showed a client a
beautiful duplex in Northeast Minneapolis about 10 years ago. It was at least $25,000
under market. We soon discovered why. When we went to the basement, there was gang
graffiti sprayed on the wall. When we went outside to view the exterior we were greeted

by terrible epithets from an angry youth who spit in our direction after he was finished
berating us. Besides having this special human adjacent to this duplex, his property was
in disrepair. Either you had an absentee landlord who just didn’t care about his property
or you had an owner occupant who didn’t care about his investment. Either way, we
chose not to invest there. We moved on. Again, life is too short.
You may not know that registered group homes and facilities sometimes are single family
houses and duplexes. This actually happens quite frequently. These homes provide
housing for people with various needs. Call your prospective city offices and ask for the
addresses of the licensed facilities and what type of licensing they maintain. You will be
surprised to know that one might be blocks from where you are living. These buildings
don’t necessarily cause problems. I have positive and negative stories about these
properties. Just make the call to the city and draw your own conclusions based upon the
clientele that is being served at the group homes nearby your rental property.
Schools-Location item #2
All things being equal, a person will choose to send their child to the schools where they
believe they will get the best education. Communities where the school results are
superior will be more desirable. Supply and demand then will dictate that real estate will
cost more within these areas. Think about this when buying a single family home. A
single family home as a rental property will very likely attract a tenant that has children.
There are certain communities within the Twin Cities which tend to consistently show
test performances at very high levels. It should not be a surprise that these particular
communities also have the highest priced real estate within the metro area. Remember
that part of your strategy when buying real estate is to have an exit plan. A strong school
system will always be desirable regardless of the other events affecting the overall
housing market.
Here are some education rating resources. The first one is the Minnesota Department of
Education http://education.state.mn.us/mde/index.html . The department publishes the
math and reading test results for the schools within the state. You can use their reports to
see which communities and schools are producing the best test results.
Additional resources include The US Department of Education Institute of Education

Sciences http://ies.ed.gov/ and a publication called Schoolhouse Magazine
http://www.schoolhousemagazine.com .
Another key factor, often overlooked, is demographics. The specific demographic you
should concern yourself with is the age of the population within your city or area of
interest. On the surface, you might assume that it doesn’t matter. Let’s dig a little
deeper. Most communities will fund the majority of their school improvements through
a bond issue. Cities place their bond referendum issues on a ballot and the citizens of
that community have to vote “yes” or “no” since they are responsible for paying for the
bond through an increase in property taxes. If a community is an older community with

older residents, they may not see the need to pass a bond that improves the schools. This
happens for a variety of reasons such as: residents no longer have children in the school
system and don’t see how it will benefit them, they are on a fixed income that they don’t
feel will allow them to make the increased tax payment or they simply don’t think it is
necessary.
Regardless of their reason and validity, a vote against a school bond referendum is a vote
against the inherent desirability of that community. I am not saying schools should have
a blank check to do whatever they want whenever they want. At the same time, having
the best possible education for our entire population is the most important thing we can
do for the good of our society. If a bond referendum allows children to obtain a better
education in an ever competitive world without borders, then we should give it very
strong consideration. Unfortunately, voting on bond issues for items like schools tends to
follow a correlation with age and familial status with children. You may want to visit the
State of Minnesota’s Demographic center at
http://www.demography.state.mn.us/Census2000.html and do some research. If the
community you are considering investing in has a large congregation of older folks or
individuals without children, it might be reasonable to expect some resistance to passing
bonding issues. This will impact your ability to attract tenants and will affect the resale
of the property. Once a community is perceived as not being able to provide an
education that is equal to that of other surrounding school districts it will start to decline.
From a self serving standpoint, we have already outlined the benefits of investing in
communities with strong schools. An investment in our children’s education is an
investment in the future of the United States and our ability to remain competitive in the
world. Think about this next time you are asked to vote on a bond referendum within
your own community.
Amenities-Location item #3
What attracted you to where you currently live? Was it the low crime and schools? Was
it the quality of life amenities such as proximity to shopping, ease of access to freeways
or parks and lakes? My guess is that it was an aggregation of factors that involved trade
offs on your part. It will be like that for your tenant too. A tenant without children will
be more inclined to look for amenities like bike trails, night life and entertainment. These
are less important once you are preoccupied with raising a family. Look at the amenities
in the community in which you are thinking of investing. If you were a prospective
tenant would your needs be met?
Think about the property you will purchase and the likely tenant you will find for that
specific property. For example, if you purchase a single family home, condo or
townhouse in a 2nd tier suburb which is essentially a bedroom community you will most
likely attract a family, older tenant or possibly a divorced parent that is sharing custody of
children. Will your property accommodate the needs of this group? On the other hand, if
you purchase a condo downtown, you will attract a younger and perhaps childless tenant.
Think about what type of individuals you would prefer to have as tenants when you go

about selecting an investment property. You don’t want to purchase a property that
doesn’t have enough demand based on the demographic from which you’ve chosen to
market.
Areas that appear timeless in attractiveness within the Twin Cities are the neighborhoods
surrounding our city lakes. They will always be desirable and properties around them
always will carry a premium. This isn’t the best for your initial cash flow, but it might
give you comfort knowing that valuations will more than likely be maintained.
Ingress and egress to your rental property neighborhood are of value to both you and the
tenant. If a property is in a difficult to find or distant location, you will have problems
attracting a tenant. Ideally a property will be located where it is easily accessible and at
the same time has a close proximity to the amenities listed above.
Age of Housing Stock-Overlooked item #4
The age of the surrounding housing stock is too often overlooked in the location-location-
location analysis. Consider for a moment why it might be important. In general, older
housing has a larger amount of obsolescence. This can lead an area of town into rapid
decay if homeowners are unwilling or unable to maintain a base minimum of standards
regarding the condition of their housing. Declines in value tend to occur more often in
the oldest of neighborhoods.
Many cities with older housing stock such as Minneapolis/St Paul and certain 1st tier
suburbs have instituted a seller required program known as either the truth in housing
report or the time of sale disclosure report. The Minneapolis Area Association of
Realtors has provided a list of these cities and their time of sale disclosure requirements
together with the ordinances at http://www.mplsrealtor.com/Public/Time-of-sale.htm.
These ordinances require that sellers have their home inspected when placing their home
for sale. The seller’s home must be brought up to a minimum level of repair. There may
be “code compliance” issues that need to be corrected. Once these items are corrected,
the house receives a code compliance certificate that allows the home to be sold. The
intent of the program is to have all property within that respective city to be maintained
against a city established minimum baseline. The nice thing about purchasing property in
areas that require an inspection and report is that generally the seller bears the cost of this
work. Not all communities have this program in place. If you buy in a community where
the program didn’t exist previously, and later become a seller when a program is
instituted, you will bear this cost burden. This can be a hidden expense that you should
factor into your analysis.
One thing I have noticed is that improving a piece of property often is contagious. Try to
focus on neighborhoods that appear to be well maintained and hopefully have been
gentrified or are in the process of becoming gentrified. Gentrified is defined in Webster’s
Dictionary as “the process of renewal and rebuilding accompanying the influx of middle-
class or affluent people into deteriorating areas that often displaces earlier usually poorer

residents.” Areas that are not being maintained may be in transition or are transitional.
When the outcome of the transition is uncertain, you have a greater chance for profit and
for loss. Uncertainty usually brings a discount in current value.
The distance from your home to your property is a Sub component of location
I personally don’t enjoy driving for hours on the freeway. My guess is you don’t either.
If you have rental properties, you will need to visit them periodically if only to show
them to prospective tenants. How much driving are you willing to do in owning and
managing your portfolio of property? Are you willing to drive to all ends of the seven
county metropolitan areas or would you like the property situated closer to your home?
My personal rule is 30 minutes. This means I want to own all my rental property within
30 minutes of my home. There are many opportunities within the geographic range of 30
minutes so I don’t need to travel further unless I want to. I could possibly get better cash
flow if I expanded my boundary beyond this range, but then I’d have more drive time.
Each of you reading this book will have a different range of acceptability. Some of you
may have relatives that live an hour away from your home. If you own property in their
community, they may be able to help you with some of the minor duties involved or you
may not look at it as burden to drive an hour since you can stop and visit with them when
you’re in their town.

Chapter 4
CORRECT Investment Property Financing
Financing can make or break your transaction. How you finance a building will be a
major component in determining your profitability. Generally speaking, people prefer to
maximize their financial leverage when purchasing a property. This means they prefer to
use as little of their money as possible and borrow or finance the majority of the
purchase. In an ideal world, this would be fine. In the real world, you need to consider
putting something down for a couple of reasons. The main reason to put something
down is to reduce or eliminate negative cash flow. The second reason is to have
available the maximum number of financing options at the best possible pricing.
Here is how it all works together. Lenders aren’t in the business of owning real estate.
Lenders are in the business of financing real estate. If you put little to nothing down,
lenders run a much greater risk of getting the property back through a default. Because
the risk is greater, lenders will naturally charge much more to lend money at 100% loan
to value than they would have at 80% loan to value.
Sometimes putting something down is simply a shell game of moving money from one
property to another. For example, using money from a home equity line of credit on your
primary residence to use as a down payment on a rental property still may effectively

equal 100% financing. The difference is that the new rental property isn’t the property
with all the financing or leverage. As of today, Minnesota has enacted some lending laws
that prohibit you from obtaining certain low documentation loans and no documentation
loans. This new law does not apply to rental property or commercial property. Even
though the law may allow them, lenders are reducing, modifying or eliminating these
programs. Their availability will be impacted by investors wishing to purchase these
loans. Because of all the ambiguity, I am going to focus on full documentation loan
strategies.
Residential Vs Commercial Financing
If you purchase a four unit building or smaller, you will be eligible for traditional
residential financing. I define traditional as the typical vanilla mortgage products
offered by most mortgage companies. Traditional mortgage loans vary from the 30 year
fixed mortgage to the Option ARM. Your goal as an investor is to coordinate the
appropriate matching of the right mortgage product with your intended holding period.
For example, if the pricing was better, you might look at an ARM (adjustable rate
mortgage) for a building you intended to own for less than five years. If you intend to
own a building for many years as a cornerstone in your real estate portfolio, then you
might prefer a 30 year traditional amortizing loan.
I often see investors making mistakes in selecting appropriate financing. This is another
good reason to select a knowledgeable mortgage loan officer and a reputable mortgage
broker. I am the President of my own mortgage brokerage company-Venture
Development Inc. You can visit us online at http://www.ventureloanapp.com Venture
Development is a Minnesota mortgage broker. A mortgage broker has selling
arrangements with many investors. Investors are often defined as larger banks or lenders
who purchase loans from mortgage brokers. Here are some names of investors you might
recognize: Countrywide, Wells Fargo, US Bank, Bank Of America, Washington Mutual
and TCF. These and other investors offer wholesale pricing to brokers. Wholesale
broker pricing from these institutions generally beats the loan pricing offered at their
retail branches. This is largely a function of overhead. The banks that have retail
branches have an infrastructure overhead that needs to be factored into their pricing
model. This is one reason why mortgages originated at the branch of a large financial
institution will have a higher interest rate. The cost of acquiring loans through the broker
channel is much less.
Mortgage brokers can bring more financing product options to you. Usually, a mortgage
broker has access to more loan product choices than a traditional bank, which I will refer
to as a captive lender. Having access to a greater availability of financing choices allows
you a better chance of making better decisions. You owe it to yourself to talk to someone
in the broker channel.
Generally, a captive lender is only able to offer mortgage financing products that they are
able to sell or create. Working with a captive lender yields fewer mortgage product

choices. Captive lenders tend to rely on their size and name recognition as their main
selling point. In my opinion, this isn’t a selling point at all. In fact, you may not be
aware that many of the large recognizable captive lenders that you are familiar with
(think about where you do your banking now) have wholesale selling arrangements with
brokers like Venture Development. This means brokers can provide financing from the
captive lender more cheaply than if you were to go to the captive lender directly. I enjoy
competing against the larger banking institutions and beating them with their own money.
If you must have mortgage money from a name lender that you recognize, let your
broker know that so he/she can accommodate your request.
Let’s review the problem with relying on the loan officer at the bank or mortgage broker
that has never owned rental property. While these individuals might be competent about
how their products work, they can’t give you advice from any personal experience. The
same should be said about Realtors who don’t own rental property. How can these
people advise you adequately when they don’t “walk the walk”? Think about this long
and hard before you select a Realtor and mortgage person to represent you. You need
experience to lead you. Let me ask you-would you go to a plumber to have brain
surgery? You must work with people that know what they are doing in their chosen field
of expertise.
Let’s consider a case of the wrong financing and how it might affect you. For this
example, let’s assume you are taking out a mortgage on your new rental property. We
need to make some assumptions about the available products. Let’s assume the interest
rate on a traditional 30 year mortgage is 8.25%. You are also being offered other
mortgage products with the following rates: (1) the 5 year amortizing ARM is 7.5%, (2)
the 5 year interest only ARM is 7.75%, and (3) the rate on an Option ARM is 2% start
rate, with a fully indexed rate of 8%. Which one should you choose? Why would you
pick one instead of the other? Here are some guideline questions that might help you
arrive at your own answer. Everyone’s situation is different. The answer is “it all
depends”. Here are a series of questions to help you make the right decision.
First, consider your holding period. If you aren’t going to own the property for 30 years,
then don’t automatically consider a 30 year mortgage. We are making the assumption
that a 30 year mortgage has the highest interest rate. Next we will look at the other three
choices. Choice (1) the amortizing ARM at 7.5%. This gives us a .75% lower rate. Are
you very likely to sell the property within five years? If the answer is yes, then this
would be a better choice than the 30 year fixed mortgage.
Choice (two) is a five year ARM, but you only pay interest, not principal in the first five
years. With an interest only loan, you don’t pay anything towards reducing the principal.
Why is it a good thing to not pay principal? Let me give you three reasons. First,
interest only gives you a lower payment. Would your budget benefit from greater cash
flow?
Second, you can take the savings derived from the difference in payments that would
have paid down principal on an amortizing loan and invest it elsewhere. Here we need to

make an assumption. We assume that wherever else you invest the principal, it will yield
more after taxes than had you paid it down on principal of the loan.
For example, one option for your principal might be your IRA or 401K. I often find that
many people can’t do it all. Have you ever found that there is too much month at the end
of the money? It’s hard to put the maximum allowed into a retirement plan especially
when you are allocating dollars into an investment property that might have a negative
cash flow. A mortgage with interest only may allow you to find those extra investable
dollars. Consider this: the return on your retirement plan is at least your incremental tax
bracket from which these dollars are now growing tax deferred. This tax bracket tax
savings usually gives you a considerably better return than had you simply paid the
principal down on the mortgage. When you pay down/off a mortgage you have
accelerated or removed permanently one of your major tax deductions.
Third, interest only payments help eliminate/reduce negative cash flow from the
investment property. As properties become more expensive, the ability to have them
cash flow greatly diminishes. If you make your mortgage payments based on “interest
only” you can sometimes overcome or mitigate any negative cash flow. It also allows
you to purchase a slightly higher priced property for the same amortizing payment-
approximately 20% more.
You might also consider the Option ARM. As of this writing, within Minnesota this
product still exists at low loan to values for investment properties only. In the future, this
type of loan product may be restructured or eliminated from the marketplace. This
product is unique unto itself. It allows you to make your monthly mortgage payments in
one of four ways. You get the option of choosing monthly how you want to make your
payments. You can alternate your payment choice monthly. Generally, your payment
options are calculated based on the following variables: the fully indexed ARM rate
based on a 30 year amortization; the fully indexed ARM rate based on a 15 year
amortization, an interest only payment based on the fully indexed ARM rate; or the
starter rate which WILL result in negative amortization. The starter rate is generally 1-
3%. We need to understand what happens to the difference between the starter rate
and the fully indexed rate. The difference in the rate becomes the “deferred
interest” or negative amortization. This difference is then added to the back end of
the mortgage and your initial loan amount will increase in size over time.
Negative amortizing loans have a place in the market despite the bad press they have
received. These loans have been used successfully in an escalating or highly appreciating
marketplace. They allow you to make the lowest payment possible while owning or
controlling a property. These types of loans were very popular in hyper inflationary
pricing environments such as Florida, Washington DC, San Francisco and Las Vegas.
Many investors in these areas bought property to flip or turnover quickly. When values
and appreciation exceed the rate by which the loan is negatively amortizing, you are net
net making money. Remember though, that leverage is a double edged sword. When
properties are declining in value, you will be losing money much quicker than if you had

a traditional mortgage since you now have to contend with the negative amortized
interest. It is very easy to find yourself upside down” quickly in such a declining market.
The best feature of the Option ARM is that it allows you to control your cash flow by
choosing how to make your mortgage payment. Imagine the benefit of having payment
flexibility if you need to have a property vacant while you rehab/renovate or lease up a
vacant building. The key to all mortgage products is to understand how they work and
see which one will best fit in with your goals. You may find that you have different
financing strategies for different properties all within your same portfolio. This again is
why it is so important to work with someone who has the experience and ability to walk
you through your financing options.
Here is a real life example from my personal experiences. I purchased a condominium in

what was to be newly constructed for $175,000 at Emerald Gardens. I put 5% down and
waited two years for the building to be completed. I put an additional 5% down when I
closed, for a total of 10% down. I bought from the developer’s sales trailer when all they
had were brochures and an undeveloped parcel of land. I bought in the beginning so I
was able to get some incentives/upgrades for free such as granite countertops and a
fireplace. The project was built in four phases. By the time my building (phase 1) was
ready to close, they were selling into phase 3. New condominium pricing had increased
due to the project’s natural appreciation and also due to increases in the cost of
construction-such as labor and materials. Lucky for me, I had a $25,000 profit on paper
the day I closed. This “profit” reflects the change in base price and cost of upgrades from
phase 1 to phase 3. I rented the unit for about 18 months. In that time period, the
building appreciated another $13,000. My investment strategy was to own the unit for
just a couple years. Because I intended to own the condo short term, I financed the
building with a six month interest only ARM. At the time I did this, the rates on the six
month ARM were about 4% and the rates on the 30 year fixed loans were about 5.5%. I
was able to take advantage of the interest rate differential of 1.5%. This means I was able
to get better cash flow. My cash flow was again enhanced by the interest only feature. I
also benefited because the building’s taxes for the first year were based on an assessed
value of a vacant lot.
Putting 10% down, $17,000, and selling for an approximate profit of $38,000 gave me a
little better than 200% cash on cash return. This does not factor in any depreciation
benefits or positive cash flow. This doesn’t factor out some of my acquisition and
selling costs. Although this analysis is simplified, it is an accurate summation of the
transaction. What would have happened if I had taken a fixed 30 year mortgage? My
return would have been less. Depending on the rent, I might have had negative cash flow
instead of positive cash flow. If I had paid cash I would have only received a 20% return.
This demonstrates the power of leverage. Through this example, you can see how the
financing can dramatically impact the return on your real estate portfolio.
Commercial Financing

Commercial financing is generally reserved for buildings that are over four units. This
would be the type of financing that you would look at when financing an apartment
building or some other form of income generating property such as an office or
warehouse. Lenders first look to the cash flows generated by a property for the ability to
repay the mortgage. They focus less on the individual or entity buying the building. This
is just the opposite in financing units that are four units or less. The residential market
focuses heavily on the borrower and the borrower’s ability to make payments. Since
commercial financing looks primarily to the buildings cash flow, lenders base their
financing on some multiple of rents received. This is called capitalization of net income.
I won’t spend a lot of time on this, since I am recommending that you don’t buy an
apartment building or any other commercial property. Suffice to say, your choices
regarding commercial financing are less than residential financing. You can use a broker
or a banker to obtain financing. Most commercial financing is not 30 year financing but
rather 10 year financing that has payments based on a 30 year amortization schedule.
Fewer financial options add another level of risk of owning apartment buildings. You
might not like the financing options that are available to you when your mortgage
becomes due and payable at the end of the initial 10 years.
Assumable Financing
Assumable financing was fantastic when it existed. I could not have bought my initial
real estate without the benefit of assuming existing FHA/VA loans. Non qualifying
assumable financing was discontinued 1987. Prior to that time, you could assume an
FHA loan VA loan without qualifying. All you had to do was pay a $500 fee to do a non
qualifying simple assumption. You could have no credit or bad credit and still assume a
loan. Here is how a typical transaction would work. You would either put down the cash
difference between the mortgage and the asking price or have the seller carry back the
difference (their equity) on a seller held mortgage or contract for deed. I purchased a
condo and two duplexes by assuming loans and writing seller held contracts for deed.
The contract for deed portion of the purchase price represented the majority of the seller’s
equity. Unfortunately, this system of assuming mortgages was ripe for abuse. There
were individuals who would go out and assume mortgages, rent out the properties, and
then let them go into foreclosure.
Since these mortgages were assumed as simple non qualifying assumptions of the
previous terms and conditions, the assumptions did not provide any release in liability to
the original borrower in the event of a default by a subsequent assumption. Imagine if
you, as the original borrower, had sold a property on a simple assumption to a person
with good credit. Later the person whom you allowed to assume the loan sold it to
another person on a simple assumption. What happens if the third borrower lets the
mortgage go into default? The default/foreclosure could show up on the original
borrower’s credit record since they were never released from any liability regarding the
loan.

Worse yet, if you were a veteran, you could be held liable for a deficiency if the property
was sold for less than was recovered from the subsequent foreclosure sale. In addition,
you would never be able to get your VA eligibility for a VA loan back, since you had a
foreclosure on your record. Since these nightmare situations did happen with great
frequency, FHA and VA changed their rules to only allow assumptions based on fully
qualifying. Qualifying the new borrower for the assumption granted the original
borrower a release of liability. Today, some conventional ARM loans may allow for an
assumption, but again only if the new borrower is qualified. An assumption today would
only be advantageous to pursue if the seller had an unusually low interest rate. That isn’t
occurring much in today’s interest rate environment since rates are still very low.
Contract For Deed Or Using A Seller Held Mortgage
Seller held/created financing is where the seller acts as the mortgage company. The
seller creates the contract for deed or seller held mortgage based on the equity they have
in the property. They agree to accept payment on their equity, with the balance
eventually coming due. Normally, a typical contract for deed runs for 10 years or less
and has a balloon payment where the balance is due. Rarely will you find
contracts/mortgages that fully amortize over a long period of time. Most sellers don’t
want to have their equity tied up in payments for much longer than 10 years. Contract for
deeds had their heyday in the late 70’s and early 80’s when prevailing mortgage interest
rates were double digits. These high rates were a deterrent to selling homes as people
either couldn’t or didn’t want to take out mortgage financing. Sellers had to sell on
contracts for deed to make their property saleable. This isn’t the case today because
interest rates are very low.
Today, if you see contract for deed financing offered, it is usually because there is some
feature of the property that prevents it from obtaining regular/traditional financing. In
other words you own a white elephant. This means you will probably have to sell the
property the same way you are buying the property. It may be possible to resolve the
issue(s) that prevents the property from being financed under traditional methods in the
first place during your tenure of ownership. There are other reasons why a seller may
offer this financing. Sometimes you will find sellers offering this financing as an
inducement for someone to buy the property because there are few closing costs and no
qualifying restrictions beyond what the seller may require. This will attract people who
can’t qualify for a traditional loan. This could be trouble. I don’t recommend you sell
property offering seller held financing unless that is the only way you can find an
acceptable buyer.
Most mortgages today have something called a due on sale clause. This means the lender
wants to be paid off when you sell the property. In the past, with old (pre 1987) FHA and
VA loans that allowed for simple assumptions, you could wrap a contract for deed around
existing financing without invoking the due on sale clause. Since almost no financing
today allows for non qualifying simple assumptions, selling a property on a contract for
deed will allow the mortgage company to accelerate the existing mortgage and call it due.

Imagine the mess you would be in if you wrote a contract for deed with a buyer and then
had to pay off the existing underlying mortgage because it was called due and payable.
What if you, the seller, couldn’t pay off the underlying mortgage? At the same time, the
buyer who bought on a contract for deed might be unable or unwilling to refinance the
property and completely pay off the mortgage. Under that scenario, you’d have a big
mess and probably have a lawsuit to contend with. Be very careful before you enter into
this type of arrangement. Know the restrictions of any underlying mortgages before you
write a contract for deed.
Home Equity Used As A Down Payment
This is often the first place that people will find the down payment for investment
property. There is a famous author who has written many recent real estate investing
books and looking to your home equity for cash is one of his main premises. His premise
is that the equity in your home is not working for you. His plan: find an investment
opportunity that can be purchased with a positive cash flow, break even or negative cash
flow that is offset by a corresponding amount of appreciation. If you do this, you will
now have your dead equity working for you. You will have the aggregate value of two
properties appreciating instead of one.
Home equity used in conjunction with an investment property purchase can effectively
create a 100% loan to value. You might take out a home equity loan and use the
proceeds for a 20% down payment on an investment property. The 100% financing is
just spread over two properties, the home equity loan at your primary residence and the
investment property. It is often much cheaper for you to have a blended rate of two
mortgages. The interest rate is cheaper if you only finance an investment property at
80% or less. Financing the investment property with 100% financing is possible but you
will find the interest rates will be higher and the program’s options will be greatly
restricted. Either way, you are aggregately obligated for the total amount of debt. You
might want to focus on the combination of debt that offers you the cheapest blended rate.
This will ultimately require that you don’t leverage all the financing against the
investment property.
Using Your IRA As A Source Of Capital
You can use your IRA as a source of investment capital for an investment property
purchase. There are many restrictions and more than a few caveats when you look to
your IRA for financing. Here are some of the basic requirements: you are not able to use
the property for your own use and enjoyment and you are prohibited from acting as the
property manager of the property. You will need to hire someone to do this for you.
These restrictions will involve additional costs which in turn will lower your investment
return. When your IRA buys an investment property, it must either pay all cash or use
non-recourse financing. Most available non-recourse financing for an IRAs is capped at
50% loan to value. This means if you put down $100,000 you can only obtain financing
for $100,000. Non recourse financing is defined as financing where the property will

stand as sole collateral. You are able to give the property back to the lender without any
recourse. There are very few lending outlets for IRA financing.
Another pitfall is in finding a custodian that will allow the IRA to hold title to a property.
You won’t find any of the major brokerage firms or name banks willing to do this. There
are the two large custodians that do specialize in this type of transaction: one is Pensco
and the other is Entrust. There may be others, but these are the two largest at the time of
this writing. To begin the process, you would roll over or transfer an existing 401K or
IRA from your existing custodian to a new IRA set up with the new custodian. From
there you would begin your property search. Remember, the IRA ends up buying the
property and goes into title. As you can see, you will need a rather large IRA to buy
property. In addition, all expenses for the property need to pay out from the IRA. This
means you will need enough cash left in the IRA for emergency or unplanned expenses
such as a new roof or furnace. One advantage of buying in an IRA is diversification.
You will have access to a typically non traditional asset class within a retirement vehicle-
direct ownership of real estate. I personally think you can diversify into real estate in
better ways.
If this sounds too complicated and you want another alternative, consider buying REITS
or limited partnerships with your existing IRA at your existing IRA custodian. This is
less complicated and might offer better diversification. Regarding any/all securities and
IRA’s, make sure you consult your own set of financial advisers to see what your options
might be and which would be most suitable for your situation.
Credit Cards/Lines of Credit-Secured & Unsecured
When you first start investing in real estate, you will probably be under capitalized. Not
everyone has excess cash in the bank. How can you get more capital when you have very
little to start with? The answer may involve creating it through credit. This sounds
unconventional, but you need to obtain all the credit you can when you can. This means
setting up lines of credit and opening credit cards when you don’t need the credit. When
are you most likely to be approved for credit? Do you think it is when you really need it
or when you really don’t need it? The answer is when you don’t need it.
If you are employed, you will qualify more easily than if you are self employed. Lenders
believe a pay stub and W-2 provide greater income stability. Somehow lenders equate a
W-2 salaried employee with stability. I guess they’ve never heard of employment at will.
Aren’t we all self employed to some degree since we work in an environment where you
can be let go without cause? It doesn’t make you a better credit risk by being an
employee; it’s just how the credit system works. Consider applying for credit when you
look your best financially. This might be after a large income year or when your existing
ratio of debt to income is less. Credit is granted based on a snapshot in time. Depending
on the type of credit that you obtain, the issuers generally can’t take credit back once it’s
been granted.

Credit is useful for a number of reasons. You can quickly take advantage of an
investment opportunity when it presents itself. Contrast this with having to go through
underwriting or qualifying. It is possible that sometime in your life you may run into an
extended period of bad luck such as an extended illness or unemployment. If this
happens your credit can carry you through until things turn around. Life is full of ups and
downs. Be ready for the downs if they arrive. This is part of having a plan B, plan C and
plan D.
Think about the banks, insurance companies, and many of the wealthiest individuals in
the world. What do they all have in common? They use debt constructively. They earn
more on their debt than it costs them to acquire the debt. Learn to love the right kind of
debt. It’s all about the constructive use of leverage and earning more on your debt than it
is costing you. Many of you were taught to pay cash and that credit is a bad thing.
Challenge yourself to explore this paradigm shift regarding credit. Remember that if you
act like everybody else, you will end up like everyone else. At retirement age, fewer than
10% of people are financially independent.
Partnerships Can Be The Most Expensive Form Of Financing
You may have heard the joke/cliché: Q-What are the two happiest days in a boat owner’s
life? A-The day he buys his boat and the day he sells his boat. The same could be said
about forming a real estate partnership-the day you form one and the day you
subsequently dissolve it will be your happiest days. Here’s another cliché that you should
remember with a partnership: A partnership is a ship you don’t want to sail. Still, if you
must consider a partnership, let me give you a few things to consider in advance of
forming the partnership.
You need to plan out the dissolution of the partnership at the beginning of the
partnership. Working through the unpleasant questions upfront will save you time and
energy later. After reviewing the questions and scenarios with your potential partner you
may discover that you shouldn’t team up. Besides avoiding the hassle factor later, you
will be able to walk away as friends. A partnership is like a marriage-the better
communication and understanding the better the marriage. We know the success ratio of
marriages. Partnerships fail for exactly the same reasons-poor communications,
resentment, divergent goals and growing apart. Besides being a lot of work, a partnership
is also the most expensive form of financing. Think of a partnership as borrowing
money at a rate of 50%, since you are giving up 50% of the upside in the property. Yet
because most decisions are made together you are really doing 100% of the work.
A partnership usually requires a division of duties. Herein listed are some of the
problems you will encounter. Without a doubt, one partner will feel they bring more to
the table or are shouldering more of the duties and responsibilities. Overtime this will
bring out resentment. Most decisions need to be made jointly because you are partners.
What happens if your opinion about a potential tenant, an improvement, or the property
are completely divergent? How do you go about coming to a consensus? What if one
partner wants to sell and move on? How do you divide up the properties? How do you

balance the equity and properties when there are an uneven number of properties with
disproportionate equity? What happens if there is a disagreement over who shall get
which property when they are ultimately divided? Did you set up a partnership
agreement in writing in advance of buying property settling these issues and/or have a
provision for arbitration or mediation? If one party has to buy out the estate of the
deceased partner, is there a buy sell agreement in place? Is the buy-sell agreement
funded with life insurance or other assets?
Are you both on a joint bank account? Does the bank account have a line of credit which
you are obligated to repay, but where either of you can sign a check? What if your
partner gets sued and loses and/or declares bankruptcy? What if there is a lien or
charging order from some entity that result in the liquidation of your partner’s portion of
the partnership? What do you do when your partner has chemical dependency issues that
are now affecting your partnership? I encountered many of the above problems when I
bought my first three rental properties with another Realtor and his wife. Luckily, I
insisted that we sign a partnership agreement in advance before we became property
owners. There was a provision requiring mediation if we could not come to an agreement
amongst ourselves. We almost went down that road until the wife of my Realtor friend
stepped in and encouraged her husband to honor a previous agreement he had made with
me. We have since come together again as friends but it took a long time for a trust
factor to be re-established.
Owner Occupy First
This is a great idea that should be explored more often. For their first property, many
first time buyers should consider buying and living in a rental property as a primary
residence. As discussed earlier, you can get owner occupied financing on buildings up to
four units. It is possible to get up to 100% financing at very favorable owner occupied
rates. On the other hand, if you don’t want to owner occupy the building and only want
to buy a property as an investment you will need a larger down payment. The mortgage
rates on investment properties will carry anywhere from .5 to 1.5% higher interest rates
than the same financing for an owner occupant. The mortgage rates on investment
properties will always exceed that for owner occupants.
This strategy has worked well for many of my clients. Initially they each lived in a
property and then subsequently moved out and used the property as their first rental. I
have five friends whom I helped buy duplexes as their first home. Each of them was
initially an owner occupant and then subsequently moved out years later as their lives
changed. While they were owner occupants they lived for free or at a very reduced cost.
This allowed them to finish various educational pursuits, take trips, and purchase various
cars and boats. When they moved out, they retained these properties as rentals. Each of
them doubled or tripled the value of their properties. Their return on investment was
exponential.
A key point to consider is that the underlying mortgage financing was already in place.
This means their mortgages couldn’t be changed-even though the usage of the property

was now changed. The same thing applies for accessing a home equity line of credit. Put
a line of credit in place while you are the owner occupant. A little bit of upfront
planning will go a long way towards being able to build your wealth through real estate.
Creative Financing
As we’ve talked about before, I was 21 years old when I first started selling real estate. I
succeeded in a large part due to my understanding and application of creative financing.
Today, creative financing to the extent that I was able execute it, is now a thing of the
past. Assumable financing without qualifying is gone. Nothing down creative financing
like I first tried may work today on a property that is not very nice or one that exists in a
challenged environment. When I bought my buildings, you could buy in prime areas
with creative financing. It bothers me when I see so called real estate experts talk about
what used to work 20 years ago and represent it as if it can be done the same way today.
Unfortunately, times have changed but their teachings have not.
Today, creative financing requires you to play a sort of shell game. You must be able to
move money from various credit lines and from property to property. Maximum
application of creative financing today demands that you have great credit scores so that
you can qualify for the mortgage products and programs. At all costs, preserve your
credit score. Having great credit will allow you to rebuild and fight another day.

Chapter 5
Holding Period Considerations For Maximum Benefit
Have you ever watched the TV show “Flip This House”? It’s exciting isn’t it? The idea
is to buy a property low or under valued, strategically add value, and then sell for a
higher price for a maximum profit. If only it was that easy. I hate to burst anyone’s
bubble, but in real life flips aren’t that easy to do profitably. Did you notice the word
profitably? Many attempts at flipping end with the profitability component missing. I
would guess that there are people you know who have tried a flip or two and didn’t make
much profit.
Let’s assume for a moment that you do a flip and make some money. One of the
expenses that you will find overlooked is the tax due on your profits. If you’re
determined to be a flipper or dealer in real estate which involves having a holding period
of less than one year, your profits will be taxed at ordinary income tax rates. Taxes are
the enemy to serious wealth accumulation. Instead, if you hold property over one year,
you will pay taxes at the capital gains rate. The tax rate differential can be dramatic. The
maximum federal capital gains rate is 15%. The maximum ordinary income tax rate can
come close to 50%, depending on your tax bracket. Taxes alone can destroy your
projects profitability. The resultant tax savings are one of the major reasons why I hold
my properties for at least 12 months. I prefer to pay the lower capital gains rate. I would
encourage you to do the same thing. If you do a rehab, rent it out for 12 months and then

sell it. If you are lucky, you may even be able to sell the flip home to your tenant. If you
work with a mortgage broker that helps with credit restoration, you could enroll the
tenant at the beginning of their lease in a credit repair program and have them credit
worthy and ready to buy at the end of the lease.
Another reason to hold for a year is that the building might be worth more in the future.
This assumes a normal market where real estate is appreciating. In a normal market you
will be rewarded with a higher sale price. We’ve already discussed holding property for
more than one year to get a lesser tax liability and a correspondingly larger profit.
What about a declining market? You should still plan to hold for a year. Rather than by
design, you may end up renting your property out of necessity. In a declining market,
you really need to buy the property right. In a declining market you will need to
anticipate selling for less than you are projecting. A lower sale price needs to be factored
into the plan. When I buy a property, regardless of an appreciating or depreciating
market, I have a profit built in from the start. This means I buy at what I feel is a
discounted price. Buying with a discount up front gives you an initial profit to work
with from the start. This discount provides me a cushion or safety net. This is easier said
than done. Because I am a real estate broker, I have access to the real time MLS daily. I
can set up automated searches and alerts based on my parameters. This allows me to
react quicker to opportunities. Even if I pay list price, I receive my sales commission.
My commission provides me with a discount to the listing’s sale price.
Having a clear understanding of the current market is yet another reason why you need to
affiliate yourself with a real estate professional that will become a trusted adviser. If you
attempt to search for homes on your own, such as randomly seeking out FSBO’s and in
general show no allegiance to the real estate person helping you, then expect the same in
return. On the other hand if you view your real estate investment successes as being
mutually beneficial, you will be on the real estate person’s “A” list of favorite investors.
The “A” list will be the first one he/she calls when an opportunity crosses his/her desk.
One of the first things we talked about in the beginning of this book was to set goals for
your real estate ownership. Part of your goal achievement involves projecting the
holding period of your properties. You can make various assumptions as to cash flow,
expenses and appreciation. Once you do this, you can begin to see where you think you
can maximize profit. Calculating profitability can be done by creating a form that allows
for the input of a subject property’s corresponding income and expenses. When you
subtract the two, you will end up with either a profit or loss from the property. To
determine the overall profit over your entire holding period, you will need to put in all the
acquisition costs and disposition costs together with the tax benefits of depreciation and
appreciation.
The key to the sheet working is in imputing correct data. Do you think your property
might ever become vacant? Many people forget to put in a plug figure for vacancy,
assuming instead that the property will always be rented. I would recommend you put in
at least a 10% vacancy factor. In some transitional areas it may be even greater.

Another item often missed is the adjustment for a shift from homestead taxes to non
homestead taxes. When you turn a property from an owner occupied property to a rental
the taxes increase due to the non homestead classification. Thankfully, today you will
find the differential between homestead and non homestead taxes is not as great as it was
it the past. It still is a factor, so you will need to make an adjustment to your cash flow
numbers. To get an accurate number, you will need to call the city assessor’s office and
ask them to provide you with the non homestead tax.
What is your time worth? You should input a cost associated with the building’s
management even if you manage the property yourself. You should calculate a value of
your time and effort for the management. If you weren’t managing your building, you
could be doing something else with your time.
Historically speaking, long term appreciation will help overcome some of your costs or
losses. In general, the longer you hold a property, the greater the appreciation that
occurs. Most people who flip property hold their building for a short time period. This is
yet another reason why flipping can be so expensive-there is little time for much
appreciation beyond the value added improvements that you make. You will have
limited your appreciation potential to a much shorter period of time combined with the
greatest tax liability on a profit. One argument you could make in favor of flipping is that
it allows you to turn over your capital more often. You may have the ability to find a
number of discounted opportunities on a very regular basis. In this case, you will want to
keep your “Money in Motion”. For example, if you can do four deals a year by turning
properties over rapidly, you might be able to make a higher profit net of taxes than if you
had tied up your capital in one deal holding a specific property for 12-18 months.
Events may occur which will require you to reconsider your holding period as markets
are dynamic and are subject to change. I gave you an example of this when I explained
why I sold my duplexes. Times changed and I needed to react accordingly. You need to
be flexible enough to react to the market and hopefully be able to capitalize on
developing trends.
Real estate holding periods will vary by property, by your goals, and by geography. I
have found that the most successful investors I’ve met tend to foster a buy and hold
mentality. REMEMBER-real estate follows cycles. Buy at the bottom of the cycle and
sell at the top of cycle. While it is impossible to catch the absolute tops and bottoms of
cycles, the goal should be to get close. Although this may be hard to do both emotionally
and in practice, this is what you need to strive for. Wealth generation generally takes
time and isn’t created over night. Real estate tends to appreciate over a long time. If you
live in a community like the Twin Cities, which is projected to increase in population by
over one million new residents within the next 15 years, then appreciation is probable
simply based on supply and demand. You will generally find appreciation to be greatest
in areas with amenities, good accessibility, decent schools, and low crime.

Let’s review in a little more depth my example of market trends and how they impact
holding periods. I briefly explained some of this when I reviewed duplexes as type of
property in chapter one.
I sold two duplexes in 2002-03 that I acquired in 1990-91. This was an extreme
valuation point in the real estate market cycle. Four key variables all converged at once.
Three of four variables were in my favor and allowed buildings to be worth their highest
valuation. In retrospect, I concluded correctly that it was a good time to sell.
Let’s next examine each variable and see how it affects a building’s value.
Variable #1-No supply and huge demand
In 2002-03 all the stock market investors wanted to be in real estate. There was large
demand for rental real estate and very little supply available. Many times investing was
done with no regard to what a building would yield as an investment. Also, at this time
you had many newly minted Realtors who had never owned rental property advising
people who also had never owned rental property. Can you imagine a sillier scenario?
This was a classic example of novices leading novices into the lion’s den.
Next, compound this dangerous environment with the emotion of greed. Greed often
accompanies a scarcity mentality. In fact, you may remember that people stood in line in
some areas so they could purchase condominiums as investments. Their plan was to sell
it before they even had to close on the property. I call this the “greater idiot” theory.
You buy something based on no economic principals and then hope to find a greater idiot
than you to whom you can sell your building. This worked for a while. Whenever you
create an auction like atmosphere or feeding frenzy, you will get a situation where people
pay too much.
Variable #2-Interest rates were at a historic low
Interest rates dipped to their lowest point in approximately July of 2003. You can afford
to pay more for a building’s cash flow when the interest rates are low because the lower
mortgage payment will allow you to finance a larger amount of mortgage debt. This
means properties could be valued higher simply on the basis of available financing.
Because interest rates were at 50 year historical lows, people should have recognized this
rate could not be maintained. In their property analysis, they should have used rates that
would more closely track historical averages. It would have been reasonable to do this
since the most likely outcome would be interest rates reverting back to some historical
average over time. If interest rates were to increase in the future, the natural outcome
would be a smaller mortgage financed with the same payment. This means buildings
would have to drop in value. This is exactly what happened.

Bear this history lesson in mind when you enter the market to buy rental property. A
more realistic and safer approach would have investors using some historical average of
interest rates in their valuation model. Don’t get caught up in the frenzy.
Variable #3-Minnesota had a property tax surplus
Can you believe we actually had a property tax roll back? In 2002-03 property taxes
were lowered to some of the lowest levels Minnesota has experienced in recent years.
Regarding investment properties, Minnesota finally reduced the disparate tax levy due to
non-homestead tax classification. Yet, there still is a differential between homestead
classification and non-homestead taxes as the discrepancy wasn’t completely eliminated
from our tax code. Regarding this issue, I have yet to understand the justification behind
this taxation inequity. Why should rental property be taxed at a higher mil rate when no
more city services are utilized? Instead, society as a whole is benefiting from the greater
social benefit of having more affordable housing choices. The mil rate is defined as the
tax per dollar of assessed value of property. The tax rate is expressed in "mils", where
one mil is one-tenth of a cent ($0.001).
Today, the discrepancy is less dramatic but no less unfair. At one time rental property
owners were paying almost 3 times the property tax amount due to the rental property tax
classification. Today, instead of 3 times the amount, it is now about 1.25-1.5 times.
In addition, the state created a special tax status for apartment buildings where the owner
agrees to rent to certain lower income individuals. Some property owners decided to
pursue that market. If/when the property should ever revert back to market rates with
market tenants, the taxes will increase to what they would be without the special
classification. Imagine if you were an unsophisticated investor who didn’t understand
this. You would look at the current taxes and make a cash flow decision that might look
better due to the special property tax classification. Since this variable could change, you
should use a true market based tax in your analysis. Many investors did not do this and
paid too much for their building’s cash flow.
Also, up to this period in time, buildings were not assessed at full market value. It was
very common to find a building’s tax assessed value to represent only about 80% of what
it was really worth. Today things have changed. Today, buildings are often taxed at true
market value or above market value. This in turn leads to higher taxes which will
correspondingly reduce your cash flow. In the future, regarding the correct number to
use in your property tax analysis, always base it on a building’s true market value and the
taxes that would be attributed to that value.

Variable #4-Lack of qualified tenants
The lack of credit worthy tenants in the marketplace was one of the major catalysts for
me to sell my buildings. I used to run a rental ad in the newspaper from which I’d
generate a list of 10 people waiting to rent my building. Nine of the ten were excellent
prospective tenants. Over time, this changed. The tenant pool declined. It got to be
where one person would show up to view the property and they were not quality tenant
material. My buildings were located just three blocks from Lake Nokomis. The location
was excellent and the buildings were sound proofed and updated. These were beautiful
buildings in a high demand neighborhood. What was the problem?
Where did all the great tenants go? They became the homeowners that fueled the
housing boom. Before the subprime bust and foreclosure explosion, we had a booming
real estate sales environment. Part of the reason we had such an expanding real estate
market is because the mortgage industry created mortgage products that allowed almost
anyone with any situation to become a homeowner. The reason there were so many great
tenants in the past is that the lenders had tighter underwriting restrictions. In the old days
you needed job stability and a down payment. Good tenants in the past could have
afforded a house payment but couldn’t qualify for a mortgage due to the tighter lending
requirements.
In the first part of the century, lenders created new programs to help these great tenants
obtain financing so they could become homeowners. As demand for loans and mortgage
securities grew, acceptable underwriting guidelines were expanded to where it became
ridiculous. Here are some examples of the lax standards to which I’m referring: getting
a loan one day out of bankruptcy, one day after your foreclosure, no money down, no job,
no credit, stated income-you decide what your income is going to be, No Doc (No
documentation)-nothing stated on the application except name and social security
number, No ratio-loans that don’t use income to qualify because there is no debt ratio
calculated, 100% financing, and 125% financing. Can you begin to see why we have an
epidemic of foreclosures today?
In this loose lending environment, tenants were tenants because they truly wanted to be
tenants or because their credit or job situation was simply atrocious. As I just mentioned,
I was seeing the effects of the mortgage market programs in my potential tenant base. I
still wanted to own rental real estate but I wanted to draw from a different tenant base. I
sold the duplexes and bought new construction condominiums. I had to go back to my
goals and revise them. I identified the potential tenant I wanted to rent to: a tenant that
would be attracted to a new property instead of an older apartment or duplex, someone
who was possibly more mature and wanted to live among primarily owner occupants and
a correspondingly quiet environment, a tenant who had rental choices because of their
credit, income and job status and someone who could afford to pay a decent market rent.

Where are we TODAY as a result of the easy mortgage money of YESTERDAY?
While these loans I’ve just reviewed existed during the housing boom, most are not
available today. Sadly, many people today could have become homeowners had these
programs stayed in place. This is why we have approximately 34,000 homes for sale
within the Twin Cities. The pendulum has swung too far from what was acceptable in
the past to what isn’t acceptable today. One solution to the problem could have been to
allow some of the discontinued mortgage programs to continue by imposing tighter
underwriting guidelines tied to a higher credit score requirement.
Many of these mortgage programs have been discontinued due to the inability of the
mortgage companies that created them to be able to sell them to investors. They aren’t
bad loans. They didn’t create the foreclosure problem that we are experiencing today.
People chose not to make the payments for various reasons. Sometimes foreclosure is
truly due to hardship such as illness or some tragic family or job event. Some borrowers
didn’t make their mortgage payment because they didn’t have any equity. Even worse,
other borrowers had negative equity due to a declining market. Negative equity makes it
very easy to walk to away instead of struggle through the pain of waiting for the market
to come back. Take note that we had very few foreclosures in a rapidly appreciating
market. People were able to sell their way out of their problem. When a building is
financed at 100% and then the market values decline, you can see how easy it is to
become disenchanted with a property.
Next, let’s look at ARMS (adjustable rate mortgages) and the blame game surrounding
the defaulting ARMs in today’s mortgage environment. When an ARMs adjusts,
borrowers have the option of paying the new payment or refinancing to a new payment.
Refinancing is an option if the homeowner has good credit. If the homeowner had made
their payments on time, they would have had good credit. Many of these ARM loans
were 2/28 or 3/27 loans. This type of loan is a 30 year loan that has a fixed rate for either
the first 2 of 30 years or the first 3 of 30 years. After the fixed rate period of time, the
rate will become variable. The theory behind this type of loan is that you will act
responsibly with your credit during the fixed two or three year period and then be able to
refinance to A paper rates. After timely payments, when the ARM adjusts you will have
good credit. Guess what happened? People didn’t change their habits. In my opinion,
bad credit is often a lifestyle choice. These choices involve paying bills on time or
buying a case of beer, cigarettes, a new car, cell phone, new car, etc. This isn’t to say
that we all don’t experience life events beyond our control which can give us a temporary
period of financial stress and blemished credit. But, too often, I see others wanting to
blame someone other than the man in the mirror for their problems. Too often, I see
people taking the easy way out and walk away from their obligations. Many people
could work their way out of their financial problems by taking on a 2nd or 3rd job until
they get back on track. If people really understood the ramifications of maintaining bad
credit, they might be more responsible and live less for today and more for tomorrow.
The lifetime higher cost of borrowing and the lesser quality of lifestyle from having to
pay higher rates is staggering.

Regarding foreclosures today, please don’t blame the lenders, brokers, or investors. I
want to assure you that nobody put a gun to any borrowers head and made them sign loan
documents.
Many in this country believe that entitlement to the American Dream with all of its spoils
appears to be one of man’s unalienable rights. We all can and should have it all, right?
Our media reinforces this daily. We are constantly being marketed to via TV, radio,
magazine and on the internet. You DESERVE IT! IT IS YOUR RIGHT! Yet we as a
nation have forgotten the lessons of our forefathers. We need to look no further than one
generation of immigrants from the past to see what can be accomplished when we really
work hard. America needs that work ethic back. We run the risk of becoming a fading
nation whose greatness will be a memory in time. This has happened throughout history
to many great nations and many great empires. Are we sowing the seeds of our own
decline? Is it really going to be different this time? Ponder these questions as you go
forward.

Chapter 6
Tax Benefits Of Real Estate Ownership

One of the best resources for tax information is the IRS. You can go to www.IRS.gov
and research the following topics: depreciation schedules, schedule E, 1031 exchange,
dealer in real estate, and capital gains. Because laws change and everyone has a different
situation, I will just cover some of the highlights regarding real estate and taxation.
The current laws around capital gain taxes allow you to sell an appreciated asset that has
been held for more than one year and pay a maximum federal tax of 15%. Various states
may impose additional taxation on your capital asset sale. The current maximum federal
tax rate is the lowest capital gains tax we’ve had in years. The theory behind a lower
capital gains tax is that it will induce sellers of highly appreciated assets to sell their
assets and put those dollars back in motion within the economy through reinvestment. If
large sums of equity sit locked up as free and clear equity/appreciation, the government
isn’t able to generate growth or tax revenue off of this value. If taxes are low enough,
people will unlock their equity by selling these highly appreciated assets and pay the
corresponding taxes. When taxes are high, people don’t sell these highly appreciated
assets. Thus, you can generate more taxes and more economic growth through lowering
the capital gains taxes -not raising them.

Tax laws can be changed by political administrations. Some administrations believe in

free will of the individual and less government while others believe the government
knows what is best for you and that you need more government involvement in your life
and decision making process. These same two parties are diametrically opposed in their
ideas on taxation and capital gains in particular. Who prevails in the White House and
Congress should have some bearing on when you will want to sell your property. One
political party will likely try to raise the capital gains tax as a way of raising money and
redistributing wealth. Each party has already indicated their intention. Go back and
review your goals as they pertain to taxation under the victory of either administration.
Don’t overlook the fact that you can offset other capital losses against other capital gains
(it doesn’t have to be just real estate against real estate), so the timing of the sale of some
other assets such as stocks may need to be incorporated within your tax loss/tax
recognition strategy.
Depreciation allows you to devalue a building based on the obsolescence of its economic
life. Currently, our tax code requires that you use a straight line depreciation schedule.
This means you take the value used for depreciation and divide it out over a set number
of years. The resultant number is the amount you can show as a loss for depreciation on
your taxes. If you are an active investor who does the majority of the management
yourself, you may be able to deduct depreciation against your building’s income.
Currently there is a phase out of allowable depreciation that declines based on your
income. There is also a provision in the tax code as to whether or not you are considered
an active investor, passive investor, or a dealer in real estate. These issues should be
discussed with your accounting professional. You can review the IRS guidelines as it
may apply to your situation or call the IRS at 1-800-829-1040.
There is an under utilized provision regarding depreciation of rental property that allows
for the acceleration of the useful life of appliances over a five year period of time. This
means you can show a greater loss against your building because of the shorter life span
of the appliances. The greater loss is reflected by the shorter depreciation period. For
investment properties, the straight line depreciation schedule for residential real estate is
27.5 years and 39 years for commercial real estate. Land is never depreciable, so you
need to back that value out of your purchase price to determine the actual value of the
building.
You need to know about something else. It’s called recapture. This part of the tax code
requires that you pay back a portion of the depreciation that you’ve previously reported
on your taxes. The good news is that the maximum recapture rate is 25%. See IRS code
section 1250 for the rules. When you repay recapture, you are paying back in future
value dollars what you were getting for a tax deduction today in present value dollars. If
you were to effect a 1031 tax deferred exchange, you will defer the tax liability of the
recapture and capital gains until you no longer want to own real estate or its equivalent.
We will explore this more in the next chapter.

The Schedule E is a property’s profit and loss statement. This is one of your best tools in
determining how a building REALLY works. You will want this when evaluating an
investment property that is supposed to be generating an income. When I have made
offers on apartment buildings, I’ve requested to review the seller’s schedule E. I have
had seller’s refuse to give it to me. There is only one reason why they wouldn’t provide
it. Care to guess? It may be because they are lying about the numbers. A seller may
falsely tell you that a building generates a certain amount of net income. How do you
really know? Are there side deals with the tenants regarding the rent or were rents just
increased? Do the rents represent a sustainable rent level based on the current market
conditions? Don’t buy a true investment style building, i.e. an apartment, without
reviewing at least the past two year’s schedule E’s.
Let me tell you about a cool strategy. This might work for you if you are not opposed to
moving often in order to gain equity. In years past, there existed the age 55, $125,000
one time equity exclusion. This is now long gone. In its place is a better law that allows
you to avoid taxation on up to $250,000 in equity profits if you are single and $500,000
in equity profits if you are married. This is a renewable resource. The requirement is
that you live in your home for two years to get the full amount of tax free profits. The
government is giving you an opportunity to build huge wealth. I have one client who is
in the construction business as a framing contractor. He and his crew were able to finish
the basement of his first home and build some equity. He sold his home and took the
finished basement equity and purchased a lot in Chanhassen. On that lot, he built an
expensive home. A lot of the work was completed by doing much of the work himself.
He built approximately $80,000 of sweat equity by using his and his contractor’s
connections. Two years later, he sold this home and moved on to yet a bigger home.
After living in that particular home for two years he moved again. For the moment, he is
happy and content in his most recently built home. He and his wife have amassed almost
$500,000 of equity over a very short time period by taking advantage of this two year tax
free equity accumulation rule.
How could you take advantage of this rule today? Most of us aren’t contractors and we
don’t have a network of tradesmen. Still, you might be able to duplicate this experience
to a lesser degree. Consider buying into a new subdivision. I’ve found that large national
tract builders control most of the parcels of land that can be developed into 100+ homes.
Initially, when a builder opens a development, he/she will do so in phases. Just like with
the Emerald Gardens condominium, I’ve seen builders offer special incentives to those
who want to be the pioneers in the new community. Sometimes the incentives are in no
cost upgrades and sometimes it is in the form of a lower entry price. Depending on the
real estate market, it may be both! Once a development starts to take off, the cost of each
new subdivision increases and the incentives disappear. If you buy at the beginning and
sell at the end of the development, you will generally have a nice equity position.
Imagine if you did this every two years. I realize moving isn’t easy. For those of you
who are willing to take a bit of a chance and try this strategy you may find yourself with
a large amount of equity after just a short period of time. If you don’t have children and
schools to worry about, this might be something to ponder.

Remember, we just talked about the two year exclusion of equity from taxation. It is
precisely for this reason that you probably don’t want to rent out your primary residence.
This is especially true if you have a large equity position. If you rent the home and later
sell your rental, you will have converted tax free equity into taxable equity. You’d be
better off buying your neighbor’s home and establishing a current market priced tax basis
instead of renting out your current home.
There is another loop hole that may eventually close that may be of interest to you. If
you have a rental property that has a huge amount of equity due to a very low tax basis,
you may want to consider moving into it as a primary residence and live in it for two
years. If you do this, you will change the status to a homestead property. You will be
able to sell it and avoid paying tax on the gain. You will be able to sell the property and
exclude the $250,000 in gain if single and $500,000 in gain if married.
Here is yet another idea on how you can beat the tax man. Simply die with appreciated
assets in your estate such as low basis real estate and low basis stock. Upon your death,
your asset will get a step up to market value. Depending on the value of your assets, you
may be able to avoid paying estate taxes if your assets don’t exceed the estate tax
exclusion at that time. Part of your overall master plan in owning real estate involves the
correct timing of its disposition. This will involve trying to figure out how to maximize
the amount left to your heirs by paying the minimal amount of taxes required.

Chapter 7
1031 Exchange-The Key To Massive Wealth Accumulation
Did you know that a little known US tax code technique can be used to maximize wealth
creation? In this chapter I will share one technique that could yield you thousands if not
millions of extra dollars of equity over your lifetime of real estate investing. Let me give
you a brief overview of exactly what an exchange is and how easily it can be
accomplished. When someone says 1031 exchange, they are referring to the IRS tax
code 1031. This code refers to like-kind exchanges. A like-kind exchange occurs if you
are exchanging business or investment property of like-kind. Under the code, investment
property must be exchanged for an investment property but it doesn’t have to be the same
kind of investment property in order to qualify. The replacement property must be of like
kind. Here are just a few examples of properties that would qualify as like kind exchange
properties: an investment single family house could be exchanged with another single
family house, a duplex, an apartment, a piece of land, office building, warehouse, retail
property, a percentage interest in a TIC, or even a triple net lease. The term TIC is the
acronym for Tenant In Common and is a way for individuals to collectively invest in a
commercial property or commercial properties. The investment required to invest in a
TIC is generally higher than most other investments. Often, the cost of purchasing a TIC
interest can be upwards of $250,000. Ownership interests and agreements are often
structured to resemble that of a partnership.

A triple net lease or TIC might be your last exchange property and final exit strategy
when you have accumulated a large amount of equity and are done dealing with tenants.
A triple net lease allows you to receive a “pure” rent. The tenant is responsible for the
taxes, insurance and maintenance-sometimes known as CAM. As you can see, the
properties need not be the same to qualify as “like kind”-but they do need to be of the
same nature or character, even if they are of different grade or quality. I have had clients
who moved money from a triplex in California to land and property in Minnesota via a
1031 exchange. There are no geographic boundaries except for the fact that the
properties must be in the USA or US Virgin Islands. Some states may have special rules
on exchanges regarding their state only but most do not. A TIC is a tenant in common
ownership interest in a commercial building. As an owner, you generally will receive a
pass through of the income generated from the building’s rents.
You will want to look at exchanging property if you plan to stay in the investment
property game. It is the perfect way to dispose of one property or properties and continue
to acquire additional property or properties. If you don’t want to own real estate, then
you would just sell, pay the taxes on the profit, and then invest your proceeds into
something else. 1031 exchanging is very powerful because capital gains and depreciation
recapture taxes are deferred. While your tax basis remains what it was initially when you
acquired your first property, you are able to compound and grow the dollars you would
have lost to taxes. Think about how much extra money you would have if you didn’t
have to pay taxes when you sold a property. Think about this over a few properties or
your entire portfolio. The extra amount of money you would be able to accumulate over
time would be huge. This will allow you to purchase more properties at higher prices. In
some ways, you could say that you’ve been given a tax deferred loan from the
government that is only due and payable when you exit the real estate business
completely!
You might be asking, “Why wouldn’t everybody do this?” Sadly, the answer goes back
to what I’ve previously mentioned-it comes back to your advisors. Ultimately, you are
responsible for initiating your own exchange and acquiring the appropriate knowledge.
At the same time, if you are working with competent real estate and tax professionals,
this should have been a discussion that was initiated by your advisor before your
investment property went up for sale.
1031 exchanging and the tax laws pertaining to exchanging apply across the USA.
Because of more rapid appreciation, the East and West coasts were some of the first areas
in the country to become proficient in exchanging. The Midwest adopted these strategies
a bit more slowly. I was involved in a real estate exchange club back when I began my
real estate career in 1986. We used to meet at a hotel for breakfast. Various real estate
agents and brokers would make a presentation of properties that were for sale or
exchange. These meetings were a lot of fun. There were some real characters in this
organization. Sometimes people need to add more cash to make an exchange work. This
is called boot. Boot can be cash or an equivalent. Some of the boot presented at the
meetings consisted of artwork, gun collections, and cars. Many of the people were trying
to do a simultaneous exchange. Just as it sounds, a simultaneous exchange occurs

simultaneously when two properties are exchanged at one time. Simultaneous exchanges
are harder to coordinate.
There are several different kinds of real estate exchanges. Here are the most common
types that you will encounter: simultaneous exchanges, deferred or Starker exchanges,
reverse exchanges, and new construction/improvement exchanges. I will be addressing
the most common type of exchange today-the deferred or Starker exchange. You should
also be aware that there are prohibitions against exchanging a vacation home and doing
exchanges with related parties. These are outside the scope of this book and I would
refer you to the IRS for guidance.
The mechanics of a Starker or deferred exchange are fairly simple and straight forward.
1) You must purchase an aggregate amount of real estate that is greater or equal in
value to what you’ve sold. All your equity must be reinvested in these new properties.
If you don’t reinvest it all, you will have to pay tax on the amount you didn’t reinvest.
What if you would like to get some cash out of the property on the first sale and not have
to pay any tax? Here is an idea on how you can get some cash. Initially you would
invest all the proceeds in the replacement property (ies). Later, in a subsequent
transaction, you would refinance the replacement property (ies) and pull out your equity.
Borrowed funds are not taxable, so this is a perfect two stage approach to minimizing
your tax liability while maximizing the potential cash out you can receive.
2) You cannot touch the proceeds nor have any “constructive receipt” of the funds.
You need to hire a qualified intermediary or accommodator to avoid having constructive
receipt. Many times this entity is the title company where you are closing your sale.
Sometimes it may be a separate third party such as an attorney or a company that only
exists to act as an intermediary. I have used all three variations of intermediaries for my
clients: title companies, third party exchange companies, and attorneys. In each case, the
intermediary holds all the proceeds. This means you walk out of the closing without a
check. The typical fee to act as the intermediary might be $500-$1000. If you employ
some of the other types of exchanges such as a reverse exchange or construction
exchange, the cost will be higher.
3) You must take a few initial pre-sale steps along with a few post sale requirements.
Pre-Closing, you will want to have an exchange agreement with the intermediary.
This will identify the cost and responsibilities and show intent to do an exchange. In
your purchase agreement for the sale of your property, you should include some language
such as “all parties are aware that this property is part of a 1031 real estate exchange and
all parties agree to cooperate and facilitate this transaction.” At the closing table, you
sign the papers and leave without any money as the facilitator has the funds.
4) Next you must identify and close on one or all of the replacement property or
properties. You have 45 days from your closing date to identify up to three replacement
properties. You also have 180 days from your closing date to close on one or all three
replacement properties. These timelines are set in stone.

Exchanging will not affect your ability to obtain a mortgage. The lender just needs to see
the original paperwork pertaining to your first sale and the escrow intermediary
agreement that you obtained at your initial closing. You will make the mortgage
application in your name and you must qualify for the new mortgage. The cash down
payment comes from the exchange intermediary account and is released at the closing of
the replacement property (ies). My mortgage company, Venture Development, has
helped many investors obtain a mortgage as part of the exchange process.
There are times when an exchange may not be the best choice. One particular situation
comes to mind. You might prefer to have a sale instead of an exchange if you have a
large capital loss that would otherwise sit suspended. The large capital loss might be so
large that there is no conceivable way you would use it up in your lifetime. This would be
the perfect time to sell a property and offset your large capital gain with the large capital
loss. Assuming the gain and loss were of equal amounts, you would not have to pay any
capital gains tax on this transaction. You still would recognize the recapture of the
depreciation you’ve previously taken. This may work out better for you than deferring
the gain and having a large suspended capital loss. As with all tax strategies, each
situation is unique. You will need to consult with your appropriate advisors to see what
is best for you. Two qualified intermediaries that provide a lot of useful information
about 1031 exchanging are Starker Services http://www.starker.com and Timcor
Exchange Corporation at http://www.timcor.com.
Under current tax law, there is the possibility of converting an exchanged property into a
personal residence. I have a client that has done this successfully. He initially exchanged
a lake lot for a townhouse and later moved into the townhouse as his personal residence.
The key point that made this transaction work was that he ultimately moved into the
rental property and converted it to his primary residence. He lived in the converted rental
property for two years. By doing this, he was able to convert all of the accumulated tax
deferred gain that had originally come from the lake lot into a primary residence that was
now subject to the two year hold, $250,000/$500,000 primary homestead exclusion.
Tax laws are always changing. For further clarification on holding periods for converted
rental property into homestead property, I will refer you to legislation signed on October
22nd, 2004 regarding this in IRC 121. This legislation refers to a five year holding period
in order to qualify. Since this legislation, the IRS has clarified it further, with a new
ruling for sales after January 27, 2005 that lets you do an exchange on any excess over
the exclusionary amount of the $250,000/$500,000. This could be huge for the right
person in the right situation. This means that you might want to consider purchasing
rental property today that will ultimately serve as your primary residence in the future.
Plan ahead and consider doing some exchanging into property that you ultimately might
like to call home. As you might expect, IRS rules are always subject to change. Always
consult your tax advisor and IRS for the latest information.

Chapter 8
Lease Considerations-Clauses & Concerns
Does thinking about interfacing with tenants make your hair stand on it’s end? Is this one
part of owning rental property of which you are most fearful? Don’t worry; I will try to
assuage your fears. Yet, this is another one of those areas that can make or break
your rental property career. If you do this part wrong, you will not enjoy being a
landlord. Other parts of owning rental property sometimes take care of themselves. For
example, it is possible that if you over pay for a property, in time you may overcome this
through appreciation. If you pick the wrong financing, you can always refinance. But, if
you pick buildings that only attract bad tenants or if you are not selective about finding
appropriate tenants, you will undoubtedly sell your building and put the entire idea of
being a landlord behind you. Dealing with bad tenants can be very discouraging. To
borrow a cliché from the anti drug commercials of the 80’s-“Just say no” to bad tenants
and the properties that might attract them.
In my opinion, the State of Minnesota has created laws that are biased in favor of tenants.
If you would like a free copy of the booklet “Landlord And Tenants: Rights and
Responsibilities” which is provided by the Minnesota Attorney General’s office, go to
http://www.ag.state.mn.us and download a free copy. This booklet covers the laws and
provides the statutes that are applicable to owning and managing rental properties. The
state provides other useful booklets, too. Order or download as many as you wish.
Now that we know that the laws are slanted in favor of the tenant, we must select our
tenants with extra care so we don’t run afoul of the laws. It doesn’t mean we can’t win at

the landlord game. We must be careful and become very knowledgeable about of the
laws. With this in mind, I’ve observed a few landlord mistakes that will almost always
cause you problems. This is one place you CAN learn from others. First, always require
a criminal and credit background check as part of every application. The saying goes,
“You can’t judge a book by its cover” and this certainly is true with tenants. Always,
always complete the screening process regardless of what your first impression
might tell you. Most professionally managed rental properties have an application fee
and the fee is generally equal to the charge from the rental screening agency. Prospective
tenants are used to paying this fee and you should charge it. Usually, the cost to do the
criminal credit search is around $25 and is non refundable. I use a company called
Rental Research. You can find them online at http://www.rentalresearch.com. There are
other companies that provide rental screening. The point is, have a screening service in
place. Screen the tenants according to your accepted criteria and stick to it. Have you
ever seen the movie Pacific Heights with Michael Keaton? This should be required
viewing for any prospective landlord. When you are done reading this chapter go out and
rent the movie. In the movie, Michael Keaton is a very very bad tenant who preys upon
the desperation of a new landlord who is out of money due to renovation cost overruns. I
don’t want to say any more as I want you to see the movie.
Second, consider establishing two rules for your properties regarding pets and smokers.
Keep these rules as sacred and use them to define your tenant criteria. Promise yourself
you will never deviate from these rules once they are in place. I do not rent to smokers or
anyone with a pet. I have in the past. I’ve learned my lesson. Learn through my
mistakes. Smokers and pet owners are not a protected class-hence you are not
discriminating. You can have no smoking as your building or rental criteria. You might
want to visit http://www.MNsmokefreehousing.org for more information. Once you set
the criteria, advertise it in your rental ad and do not deviate. You don’t want to be
accused of changing criteria for one group of renters and not the other, that is,
discrimination.
Why would you want to exclude these groups? Let’s look at each group. Starting with
smokers, there will be more wear and tear on your property. You will have to repaint
sooner and you will have to replace carpet sooner. At the same time, how many non
smokers will rent a place that smells like smoke. The answer is none or almost no one.
This means you may have to spend the money for the repair/replacement sooner than you
had hoped. Imagine if a tenant moved out after one year. It would cost you more for
carpet and paint than the rent you would have generated over the year time period.
The next group is pets. In the past, I have allowed tenants with pets. I speak to this with
first hand experience. That being said let me add that I love pets and have had them in
my personal residence. I have nothing against them. I just don’t want them in my rental
property. From my landlording experience, all cats spray. I’ve been told otherwise, but I
don’t believe it anymore. My experience with cats has been poor. One town home I was
managing for my family had very expensive grass cloth wallpaper. The wall paper
became my tenant’s cat preferred scratch pad. That particular tenant’s cat also
permanently stained brand new Berber carpet with urine and fur ball stains. The total

damage came to about $3000. I could go on with pet stories but I think I’ve made my
point. Suffice to say that pets cause extra wear and tear on a property. Even if you
disagree with what I’ve just said, I have yet another reason for you to consider. If you
have a new prospective tenant that has allergies or is offended by pet smells he/she will
certainly select a different property. If you still want to open your property to either
smokers or pets, you might want to increase the rent or require a larger damage deposit.
A contrarian argument could be made that these two groups of tenants face limited
options. Therefore, if you are willing to accept them, you will have a niche tenant base in
which to market. These tenants may stay longer since they have fewer options for
housing. Even with this positive slant, it isn’t a niche I wish to pursue.
A point we’ve discussed previously is that you need to think about the type of tenant you
wish to interface with when you buy your property. For example, if you are purchasing a
condo in a high rise you will have a different tenant than if you owned a property in a
very transitional neighborhood. A more transitional area may have a tenant base more
predisposed to seeking a rental relationship under Section 8 instead of at open market
rates without any government subsidy. Section 8 is a program where the rent is
subsidized or paid completely by the government. With my properties, I want to deal
with as few problems as possible and have the most number of prospective tenants. For
me, this means avoiding transitional areas and avoiding Section 8. This takes us back to
location-location-location. We have had this discussion earlier in the book so I won’t
repeat myself. I don’t want to have to enforce my leases in family court for non payment
of rent. I don’t want to negotiate with tenants for rent. I don’t want to file an unlawful
detainer (UD) action against someone for non payment of rent. I have purchased
properties where I think I will have the best chance of finding many credit worthy tenants
who have the ability to pay full market rent without a subsidy.
When you have a property in a desirable area, you will be able to enforce a more
stringent tenant criterion such as prohibiting smoking and prohibition against pets. This
is because you will have a greater number of prospective tenants. The better properties
will always attract a larger tenant base from which to choose a tenant. On the other hand,
in certain areas and with certain properties you may find that setting up restrictive tenant
criteria will eliminate most of your prospective tenants. This is often the case with
properties that are being marketed with heavy cash flow. These properties are generally
located in more transitional areas. Don’t buy perceived cash flow unless you are
prepared to earn it through a lot of hard work to collect the rent. How much of your time
and effort are you willing to devote to this? If you don’t want to do it, then you will need
to hire a property manager.
Once you have found a prospective tenant, he/she will need to sign a lease. Properties
such as condominiums and townhouses, which are generally subject to an association,
may require you to have a tenant sign a one year lease. They may also require you to do
a background check and submit both the lease and the background check for their review
and approval. Some associations require that the tenant obtain a rental insurance policy.
Once the tenant has his/her policy in place, you will need to provide the association with
a copy. Make sure you read your associations rules and regulations. You must comply

with the rules. You also should state that this lease is subject to the rules, regulations,
and bylaws of an association, which shall supersede this lease both now and in the
future. This will protect you in the event that the rules are ever changed and your lease
has language that is in conflict with the new rules. Also, you must provide a copy of the
rules, regulations, and bylaws to your tenant. Have the tenant sign off that they have
been provided. You can’t expect tenants to conform to the rules if they don’t know what
they are.
Another question that comes up often regards the type of lease one should use and where
you can get one. Personally, I prefer to use the lease and landlord kit that is available for
purchase from the Minnesota Multi Housing Association (MMHA). There isn’t one
single approved lease for use within our state. At the same time, there are things you
can’t have in a lease. I don’t want to use an illegal lease. I want a lease that conforms to
the state laws and has the best interests of the landlords in mind. I feel this is best
accomplished by using the Minnesota Multi Housing Association lease. MMHA
represents all landlords- small landlords and large multi unit owners who have thousands
of units. Their leases stand up in court. It is always a good idea to have any lease you
decide to use reviewed by your attorney in advance of using it. The last thing you want is
to lose a lawsuit or eviction because you used an illegal or unenforceable lease. MMHA
also provides addendums for pets, non smoking, and lead based paint, etc. They sell a
great starter landlord kit for $20 for members and $40 for non members. You can go to
their website at http://www.mmha.com and order a kit for yourself. While you are at
their website please consider becoming a member. The membership cost for small
landlords in under $100 annually. Another excellent resource is the
http://www.completelandord.com. They have a free report entitled “Rental Property
Management Secrets For Landlords” which you can get from their site. They provide
other resources, too.

Here are some additional tips on leasing:
Tip #1 Name all of the occupants in the property
Always list the names of all of the tenants and occupants on the lease. Follow their
names with a comma and the words “only” like John Doe, only. This will clear up any
confusion if you need to have the police involved at a later date. There should be little to
no confusion as to the legal occupants of the property and who are guests or trespassing.
Tip #2 Create an addendum to the lease
Always have an addendum to the lease specifying such things as painting. Additionally,
consider these items: indicate whether painting is allowed or not, who can change the
locks during the tenancy, renter’s insurance requirements, your ability to gain access to
the property for sale or viewing with a certain amount of notice, define the responsibility
for guests and their actions, establish a penalty for late payments or returned checks if
you want something stricter than what is in the lease, and define the responsibility for
your costs of attorney fees should you have to initiate legal proceedings against the
tenant.
Tip #3 Require a 60 day notice
Always consider having a 60 day notice period in your lease. This means the tenant must
give the owner 60 days notice before they can leave and the landlord must do the same if
they want the tenant to leave. This is important because it gives you an extra 30 days to
figure out if you are going to market and sell the building or to find a new tenant. If you
don’t write this into your lease, you will have the standard 30 day notice apply as the
default in Minnesota. In my opinion, you will find that the 30 day period is too short.
Tip #4 Damage Deposits
Don’t forget to return the tenant’s damage deposit within the required time period and
with the required amount of interest. Currently, Minnesota law requires you to return the
damage deposit to the tenant with simple 1% interest on the initial damage deposit. You
must return the required amount within three weeks of the tenant vacating. If you are not
going to return the tenant’s full damage deposit with interest, you will need to indicate
why in a letter within this three week period. Failure to do this will cost you treble
damages in court. Even if the tenant trashes the building and is entitled to nothing, you
still must send the letter. Many newbie landlords have had insult added to injury when a
tenant sued and won their case against the landlord because they didn’t send a letter.
When I send my letter with anything less than the full damage deposit with accrued
interest, I make sure it is sent certified mail with a signature return receipt required. If
the tenant knows they won’t be getting any money back, they will usually disregard
picking up the letter. In that case, when the letter is returned, put it in your file and save
it in case you need to prove in court that it was sent.

Lastly, you should also know that when you buy or sell a building, the existing lease and
its terms along with the occupants stay with the property. This means that you will
inherit the current tenant(s) when you buy a property. One of the duplexes I purchased
had a tenant named Keith. Keith had a history of non payment of rent. In fact, he was
one of the main reasons the seller was selling the building. The owners were sick of
trying to get Keith to pay. When I bought the building Keith was behind on rent. He was
also behind on his utilities. He now became my problem. Our local gas company had
turned off his gas due to non payment. He was heating his side of the building with his
electric stove and any heat that crossed from the common wall of the duplex. I was very
afraid of my pipes freezing.
After negotiations, Keith agreed to leave at the end of the month in return for being able
to just leave and not pay his back rent. In the interim, I called the gas company and
instructed them to put the gas bill in my name. I wanted the heat back on to protect the
pipes. The gas company refused to do this until I paid some of Keith’s gas bill, since he
was still in the building until the end of the month. Needless to say, not receiving rent
and having to pay someone else’s gas bill didn’t make me happy. At the same time, it
was a business decision. Would it have been better to have spent money on an unlawful
detainer and end up with the same result? Would it have been better to end up with
frozen pipes and the damage or to pay part of the gas bill and protect my investment? I
think the answers are clear. This forest for the trees thinking is what you need to do as a
landlord. In business and life, you have to pick your battles with the end game in mind.

Chapter 9
Title-How you want to own your real estate
I think most people want to own property in their own name. You will find that it makes
life much easier. It also allows owners to be able to utilize the building’s depreciation on
their tax return. Some people own property in a corporation or corporate entity.
Depending on the corporate entity that is used, you might not be able to use the
building’s depreciation. In addition, you may bring on some unwelcome tax
consequences when you sell the building for a profit. Consult your advisors before you
title buildings in anything but your name.
Other real estate guru’s may suggest you own buildings in an LLC or corporate entity.
The advantage of a corporate shell is that you are able to avoid personal liability. This
will be the case as long as you actually maintain the corporate shell. Many people create
these types of entities but then don’t conduct business as that entity. For example, I’ve
seen some people comingle personal and corporate assets and bills and act more like a
sole proprietorship. If you do this, you may lose the protection of a corporate veil.
Creating and maintaining a corporate shell will also involve both initial and ongoing
costs. This can be an expensive proposition for a landlord that owns only a few
buildings.
Another problem of owning property in a corporate entity is that you will be unable to
qualify for the majority of residential financing mortgage products. Corporate entities

generally are limited to commercial financing. Since I am recommending you primarily

purchase residential type property, you need residential financing. Remember,
commercial financing generally is less favorable. Think about creating corporate entities
for apartment buildings and commercial properties. If you are involved with these types
of properties, you are probably running a rental business as your primary business. In
that case, a corporate entity might be appropriate.
As just discussed, how you title a building will affect how you are able to finance the
building. If you are married or have a partner, you might want to consider taking out the
financing in just one of your names assuming you can qualify for financing with just one
income. You can still be in title together. The reason to consider this is that it leaves the
other spouse/partner unencumbered financially from the mortgage debt. This allows the
unencumbered party to later obtain additional financing in their name. This can be
valuable once you’ve maximized the financing in your name. Another reason people do
this may be when one spouse/partner has lesser credit. Most loan programs are
underwritten off of the middle credit score of the borrower with the lower credit score. If
you don’t need the income of the other party to qualify, adding them can hurt your ability
to get the best financing available if they have a lower credit score. This can impact loan
to value, program, and interest rates that you would otherwise be able to obtain with your
credit alone. If possible, use one person and always put your strongest borrower on the
application.
If you are concerned about asset protection, it might be advisable to split the ownership
of your properties. You might find that your overall estate is protected better and you
might be better able to utilize the estate tax exclusion. Estate and asset protection
strategies should be coordinated with an attorney and financial advisor who work in that
field.
You may have been advised to buy a property in your name and later transfer it to a
corporate entity. This could create an acceleration of your mortgage under the “due on
sale” clause that is part of your mortgage terms and conditions. You may think that the
lender won’t find out. You may have also been told that the transfer won’t evoke the due
on sale clause. These statements may or may not be true. At the same time, are you
prepared to pay off the mortgage if the lender demands repayment? Most people are not.
Don’t play games and hope you won’t get caught. Play it safe and play by the rules. If
you want to pursue some form of transfer, why not get a letter from the lender either
granting permission for the transfer or providing clarification as to what is acceptable.

Chapter 10
Insurance-Neglect This Area At Your Own Peril

Let’s face it, in today’s world you run a good chance of being sued. You should plan on
this occurring at some point in your lifetime. The best defense is a great offense and to
follow the rules from the beginning. Ignorance of the law is not a defense. With that in
mind, you might want to consider a few forms of insurance and various riders that could
help limit your exposure.
The first type of insurance to consider is an umbrella policy for liability. Generally, you
purchase these policies from your property casualty agent-the person who writes your
homeowners and auto policy. Umbrella policies extend the liability limits on your home,
your auto, boat, rentals, land, and life. If someone sues you, the liability limits on your
base policy may not be enough to cover the lawsuit. Insurance companies do not need to
defend you in a lawsuit. They may determine it is cheaper to pay the limit of liability on
the policy instead of actively mounting a defense on your behalf. It will be a business
decision on the part of the insurance company.
Do you know the cost of an additional one million dollars of liability coverage costs? It’s
cheaper than you’d imagine-around $250 annually. You can get larger amounts such as
two million dollars or five million dollars. Insurance in general is cheaper by the dozen.
This means umbrella policies aren’t priced in direct proportion to the amount of coverage
you obtain. I personally know of someone who was involved in an accidental automobile

death. That person had a one million dollar liability policy. To make a long story short,
the person was sued by the family for a wrongful death. They wanted to get him
personally for a lot of money and even wanted to pursue him criminally. In the end, the
insurance company settled with the family for one million dollars which ended the case
and allowed him to go on with his life. He got to keep his assets and did not go to jail.
Imagine the legal bill and financial liability he would have had if he didn’t have proper
coverage. This person became an advocate of umbrella policies as it literally saved his
life.
If you have assets or intend to have assets in the future you should really look into
purchasing an umbrella policy. There usually is a limit on how many rentals can be
covered by the policy. It will vary from company to company. A typical number is four.
If you own more rental units than that, you may want to consider a separate commercial
liability policy for your business pursuits. Contact your insurance agent to review all
your options.
Another insurance issue involves obtaining the right policy for each of your rental
properties. There is a basic fire dwelling policy that covers the standard perils vs. a
business owner’s type of policy which has better limits of liability and a few more bells
and whistles. Some specialized policies will cover lost rents, vandalism, and higher
limits of liability. Some landlords will wrongly assume that all policies are created equal
when they are not. Shop for your rental property insurance as it will vary dramatically
from insurer to insurer. Insurance companies will vary on what their policies provide in
terms of definitions. Price is not the determinant of quality. The most expensive policy
may not be the best. You may find that the cheaper policy offers better clauses. Until
you compare the clauses and see what is actually covered, you just won’t know. Bottom
line is that you want the best coverage that is available in the marketplace.
I had an interesting situation with my BOP, Business Owner’s Policy. One of my tenants
vandalized the property when she moved out. When I went to make a claim for the
vandalism, the adjuster told me that he wasn’t sure that all the damages occurred at one
time. If they occurred separately, they would individually cost less than my deductible. I
was being set up to accept less than the four thousand dollars worth of damages.
Ultimately, we settled on about $2000. While I believe this was wrong, it was better than
nothing.
In another situation, I had a tenant who damaged my windows by running a humidifier

24/7 in the middle of the winter. Can you guess what happened next? All of the
moisture in the air from the humidifier condensed on the glass and dripped down onto the
window frame. The water sat there for months and ended up removing the protective
varnish finish on the wood. It started to rot the actual wood window frame. When I
called to make a claim, the adjuster came out and took lots of pictures. After they had
completely documented the claim, they pulled out the fine print of my policy and told me
that I was not covered for this type of water damage. I believe the adjuster said
something like this “According to line 3, paragraph 2, in the event of blah blah
blah…YOUR CLAIM ISN’T COVERED”. Thank you very little. Needless to say,

these two examples show that insurance companies don’t give up their money very
easily. That being said, you need to get the best policy available in the market. You may
end up selecting an agent and company that is different from the company that insures
your existing home and auto. Shop around for a rental property policy that is actually
landlord friendly.
Lastly, there is something called a CLUE Report. This report gives you a history of
claims that have been made against the building. CLUE stands for Comprehensive Loss
Underwriting Exchange. It is a national insurance industry database with more than 40
million personal property claims. The report generated from this agency is known as the
CLUE report. If the property you are interested in has had lots of claims, you may find it
almost uninsurable at conventional insurance rates. You may not find this out until after
you’ve bought the building. This is why you want to request this report at the time you
make your offer on the building. You want the report while you are still in your due
diligence period.
You will need the owner of the property to order the report and provide you with a copy
of the CLUE report. Like the schedule E that we talked about earlier, if you have nothing
to hide or nothing unusual to explain, then you should have no problem providing the
report. A building that has had a lot of claims may be harder to insure. You still may end
up buying the building, but you will have to factor a greater cost of insurance into your
pro-forma. In addition, the report may bring to your attention some issues that you need
to investigate.

Chapter 11
Putting It All Together-The Next Steps
TO RECAP
Becoming a landlord can be a very profitable venture. With the right mindset and
realistic expectations you will enjoy the experience. Many people can be a successful
landlord if they want to put forth the required effort. It isn’t rocket science, but doing it
successfully requires a commitment to gain a certain amount of knowledge and doing
business the right way. Success with any endeavor, real estate included, will involve
work on your part.
Initially, I suggest you keep your purchases confined to single family homes, condos,
townhouses, and duplexes as all of these properties can later be sold to both investors and
owner occupants. Owner occupants buy property based on their needs and NOT on cash
flow or lack thereof. Emotions will be a bigger part of an owner occupant purchase. A

property that can be sold to an owner occupant, like a single unit property, will offer you
the best exit strategy. For newbie investors, I’d recommend you start here. In Chapter 1,
we covered the majority of other real estate investment ideas that you can explore once
you acquire more experience.
Once you’ve made your decision about the type of property you want to acquire, you
must decide on the location of where to own your property. I recommend staying close
to home. There is a direct correlation with the desirability of an area and the
corresponding sales price. Long term I feel you are better off in better areas, even if you
are sacrificing cash flow and value for your dollar.
Next we move on to financing. The key to maximizing profits parallels with how you
pay for your building. You should match the property with the right financing. This
requires taking into consideration all of the available mortgage program options and
coordinating these with your projected holding period.
Holding periods and tax considerations go hand in hand. Choices in these areas impact
your building’s financing. You can see how various decisions become inter dependent.
This takes us back to why you need a master plan or blueprint. When decisions aren’t
coordinated and complementary they become out of sync and you get an incongruous
outcome. Your projected disposition of the property should be contemplated at the time
you purchase your property. If you are going to be in the real life game of Monopoly,
you will want to utilize 1031 exchanges wherever possible.
Two areas that tend to be neglected involve the titling of your properties and the type of
insurance for your buildings. These considerations may seem mundane but are critical to
protecting your wealth. Take these areas lightly at your peril.
Now the fun part begins as you start to interface with tenants. Most everyone starts as a
tenant sometime in their life. Try to remember what it was like working with your
landlord when you were a renter. If you’ve never rented, then treat people as you’d like
to be treated. The golden rule applies regardless of the endeavors you pursue in life. I am
a very responsive landlord and try to make my tenants living arrangements as nice as
possible. In return, I gain their respect. My tenants maintain my property in a
responsible manner. Remember, tenants are helping to build your wealth, treat them as a
partner and not with disdain.


CLOSING THOUGHTS AND MY PROPOSITION TO YOU:
PLEASE TAKE ACTION UTILIZING YOUR NEW FOUND KNOWLEDGE!!!
Thank you for taking the time to read this book in its entirety. I hope you’ve enjoyed
reading it as much as I did writing it. My goal in writing this book has been accomplished
if you’ve been entertained and educated at the same time. Please feel free to pass along
this book to anyone who you think might benefit from it. Owning real estate is a great
way to build wealth. I commend you for exploring this fascinating subject. If you have
read the entire book up to this point I know you are a doer and not a dreamer. If you
really want to be a successful real estate investor, I know you can do it. I believe in you.
If you are serious about becoming a real estate investor and are looking for some
assistance, I would like to help YOU. If you want an expert on your team, I am available
as your real estate agent and/or mortgage broker. Remember to begin the mortgage
prequalification process before you begin your property search. We utilize special
programs such as the Credit Analyzer to help you improve your credit scores. Better
credit scores translate into more product and program choices. Counseling/coaching you
on specific areas that lead to credit score improvement are just some of Venture
Development’s strong points. Did your last mortgage person offer to do this or did they
just plug you into a program? I will give you a copy of your credit report during your
free initial consultation.
In nearly all circumstance, when you buy real estate you do not pay the real estate agent
directly. Realtors/real estate agents are paid a commission which comes from the seller.
Generally speaking, this means you don’t pay any money to work with a Realtor who
helps you find a property. Remember, it doesn’t cost any more to work with the best.
My value proposition for you is that you will be learning from my extensive experience.
This alone could save you countless hours of frustration and thousands of dollars. While
markets change, the basic tenants of human nature remain the same. You need someone
within the marketplace to help you interpret what’s occurring. I am that person. As a
successful Realtor since 1986, I have an insiders perspective of the current market
coupled with past market experience. My guidance and input can help you make more
informed decisions.
For those of you who are very serious about making your dreams come true in real estate
I have a special program. This program is intensive and exclusive. It requires financial
and time commitments on your part. This program is much more hands on and requires
more of my time in helping you formulate and execute your goals. The exclusivity of
this program may place you in front of real estate opportunities on a preferential basis. I
will work with only five individuals at a time under this arrangement. If you are
interested in this opportunity, please call me to inquire whether I have any openings.
This program is best suited for those who want to be held accountable to the achievement
of goals within a certain time frame. This program is NOT required for us to work
together.

I hope our paths will cross in the future. If they don’t, I wish you well in your property
pursuits. You can call me for any/all of your real estate or mortgage needs-not just
investment property purchases. If you would like to meet and discuss my services
further, I offer a free no obligation half hour consultation at my Edina, MN office.
If I can help you achieve your dreams, please call me at 952-929-2577 or 612-386-7027.
I can always be emailed at john@johnmazzara.com .
You can visit me online at http://www.johnmazzara.com. This site has links to all of my
websites.
MORTGAGE AND REAL ESTATE WEBSITES
You can visit my mortgage company website directly http://www.ventureloanapp.com

You will find mortgage information and calculators and rate quotes.
Begin your online property search at my real estate web site http://www.selling.mn.
Remember, the real estate site ends in .mn
If you visit the mortgage and real estate websites, don’t forget to enter the sweepstakes!
BLOGS
My two real estate blogs entitled “Twin Cities Real Estate News” can be found at:
http://realtownblogs.com/johnmazzara
or
http://www.TwincitiesRealEstateNews.com
NEWSLETTERS
Please visit the following links if you would like to subscribe to FREE newsletters:
Real Estate Cyber Tips

http://recyber.com/cybertips/r11627
My Home Management Newsletter- Real Estate & Tax Tips

http://www.HomeManagementNewsletter.com
YOU Magazine-Venture Development’s Mortgage Newsletter

http://www.VentureDevelopmentNewsletter.com
Free reports regarding buying and selling a home

http://www.moving.mn

FREE RENTAL PROPERTY WEBSITE
Customizable Free Start Page with FREE hosted websites for family photos, selling a car
or landlording. Advertise your rental property easily (obtain a free rental property
website where you input your pictures and descriptive text. Now all you have to do is
advertise that link.)
http://www.mystartpage.biz/794
LINK TO ORDER THIS BOOK
Please pass this link on to anyone who you think might have an interest.
http://www.RealityBasedRealEstateInvesting.com

TESTIMONIALS
HERE IS WHAT OTHERS HAVE SAID ABOUT MY REAL ESTATE AND

MORTGAGE SERVICES:
1) We have trusted John with all of our real estate transactions for the past 20 years. Not
only has he helped us buy and sell four homes in addition to a recent commercial
acquisition, but he has taken the extra step in alerting us of better financing options in
between our buy/sell transactions that has saved us countless dollars. It is that extra step
that he has taken for us over the years that encourages us to recommend his services to
our friends and family without hesitation. We look forward to continue working with
John on all of our future transactions as we know that he will continue to work hard and
smart for us as if he was doing it for himself. Thank you John!
Steve and Vicki M
2) I have hired John as a mortgage broker in 2003 and again since then. John is a
pleasure to work with. His wide breadth of expertise in different industries and depth of
knowledge in all of these industries is unbelievable. I'd definitely recommend John for
any of his services.
Tim L
3) John's professionalism and knowledge base for all aspects of real estate-selling,
financing, and preparing to sell property-went above and beyond my expectations for a
real estate agent and broker.
Top Qualities-Personable, Expert, High Integrity
Mara P
4) I have known John for almost 30 years. During that time I have conducted real estate
transactions (including using his company to acquire mortgages on homes and rental
properties) with John and also consulted him on financial planning and business matters.
I have always been completely satisfied with the service that he has provided. His
extensive knowledge and hard work ethic, and positive “can do” attitude has contributed
to many successes in my life. John is one of the most honest persons that I know and

there has never been any doubt in my mind that he has my best interests at heart. I look
forward to many more successful ventures with John in the future.
Mark M
5) John-You have recently sent us a "Thank You" card. This is no doubt good business,
but absurd. We owe you the "Thank You"! You gave us good advice, you worked with
us to get the job done, and provided a good time table assessment. You made the sale
(trade) of our home a breeze. We think of you as a valued family friend and enjoy your
company whether there is business to be gained or not. We hope you feel the same way!
Stay as kind and congenial as you are.
Tony & Jeanne H
6) John-Thank you for your great advice through the years-you've been a guiding light on
our financial road!
Carolyn & Chris B
All testimonials are available on file and available for review.

APPENDIX

QUESTIONS AND EXERCISES YOU MUST COMPLETE BEFORE YOU

BEGIN BUYING PROPERTY
LIFE GOALS
What do I want to accomplish within one year?
Don’t write it down unless you believe that it is achievable. It may be better to under
estimate and over deliver on your goals than to do just the opposite. Once you write it
down, it should be a personal contract with yourself. You must now do whatever it takes
to complete the task you’ve set for yourself. Don’t put it in a folder and forget about it
until next year. Put in on your wall next to your desk so it can be viewed daily.
Internalize your goal.
What do I want to accomplish within five years?
Your goals are like building blocks. It is one property at a time. I assume your goal is to
ultimately have financial independence. What would you do with your life if you were
financially independent? What if your rental portfolio replaced your income?
What are my lifetime goals?
Is it more time with the family? More time to travel and enjoy life? What about leaving
a legacy?
What am I willing to give up achieving my goals?
Be honest with yourself. Regarding real estate, make sure those most affected by your
new foray into real estate are in agreement with your goal and will allow you to pay the
price for success. Reality check-with everything there is a cost. What price are you
really willing to pay? Will you work like no one else will for 10 years to live like no one
else can for the rest of your life? Let’s face up to the facts so that you are not
disappointed later.
What activities do I need to do daily to achieve my goals.
It has been said that it takes 30 days to develop a new habit. Write down the new habits
and activities that will become part of your daily routine. Goals are achieved one step at
a time. Put the building blocks in place. Time and tide wait for no man. You have one
life to live. Choose a life of no regrets. Remember that regardless of how you spend
your time, time will pass. Make the right choices.

REAL ESTATE GOALS-this must be completed before looking at properties!
Be specific, include a definite time line for their accomplishment, and write them
down. Goals must be reviewed daily until their achievement is a commitment to
take action. For example, “I will buy one single family investment property every 12
months from the day I start actively searching for property. I will start my search
on December 1st. I will do this until I reach my goal of five properties.”
Take an inventory. What are my overall assets and liabilities?
Take an inventory of what property you currently own. Create a balance sheet reflecting
your assets and liabilities so that you have a net worth statement. This exercise transcends
your real estate and encompasses your other investments and total over all liabilities.
What do I like about my current real estate holdings?
If you don’t own rental property already, see if you can identify what your ideal portfolio
would look like. You may need to think about the future properties as you use your
current property as a point of reference.
What do I dislike about my current holdings and what would I like to do

differently?
Be specific. Is it the age of the building? What about the location? If you don’t own
property then try to identify what you know you don’t want to be involved with.
Knowing what you don’t want will help you identify what you do want.
What would an ideal portfolio of properties look like?
Identify the type of property and area you want to focus and build upon. Visualize and
put down on paper what you are going to strive to build.
What do I want my investment to do for me-generate cash flow, appreciation, tax

benefits?
Set your strategy in place when you go looking for your properties. Each property may
do something different. This allows you to focus your energies on the properties that are
doing what you want to accomplish your goals.

How am I going to achieve my goal?
You will need a list of activities that will become part of your routine. Is it checking the
court house foreclosure records? Maybe it is looking at email and viewing listings from
the MLS daily. Are you committed to learning more and more about investing?

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“Reality Based” Real Estate Investing

©2007-08 John Mazzara 1 http://www.RealityBasedRealEstateInvesting.com

ALL RIGHTS RESERVED

Authored & Published by:

DISCLAIMER AND/OR LEGAL NOTICES-READ THIS FIRST

Any perceived slights of specific people or organizations are unintentional.

Copyright Notice © 2007-2008 John Mazzara

©2007-08 John Mazzara 2 http://www.RealityBasedRealEstateInvesting.com

Chapter 1 Setting Your Goals & Reality Check 11

Chapter 2 Optimal Property Selection-You Have MANY CHOICES 15

Chapter 3 Geographic & Demographic Considerations 49

Chapter 4 Correct Investment Property Financing 55

Chapter 5 Holding Period Considerations For Maximum Benefit 67

Chapter 6 Tax Benefits of Real Estate Ownership 75

Chapter 7 1031 Exchange-

Chapter 8 Lease Considerations-Clauses & Concerns 83

Chapter 9 Title-How You Want To Own Your Real Estate 89

Chapter 10 Insurance-Neglect This Area At Your Own Peril 91

Chapter 11 Putting It All Together-The Next Steps 94

Epilogue Closing Thoughts & My Proposition To You 96

APPENDIX Goal Setting Questions & Required Exercise 102

©2007-08 John Mazzara 3 http://www.RealityBasedRealEstateInvesting.com

©2007-08 John Mazzara 4 http://www.RealityBasedRealEstateInvesting.com

SHHH-NOT SO LOUD! KEEP YOUR ENTHUSIASM TO YOURSELF!

SIX QUESTIONS YOU MUST ASK BEFORE STARTING THIS BOOK

©2007-08 John Mazzara 5 http://www.RealityBasedRealEstateInvesting.com

use of my professional services provided by me and affiliated companies, I have nothing

My original career intention was to become a doctor. I worked at a hospital while in

©2007-08 John Mazzara 6 http://www.RealityBasedRealEstateInvesting.com

©2007-08 John Mazzara 7 http://www.RealityBasedRealEstateInvesting.com

©2007-08 John Mazzara 8 http://www.RealityBasedRealEstateInvesting.com

©2007-08 John Mazzara 9 http://www.RealityBasedRealEstateInvesting.com

©2007-08 John Mazzara 10 http://www.RealityBasedRealEstateInvesting.com

Setting Your Goals & Reality Check

©2007-08 John Mazzara 11 http://www.RealityBasedRealEstateInvesting.com

©2007-08 John Mazzara 12 http://www.RealityBasedRealEstateInvesting.com

DO YOUR GOALS FIRST. PUT YOUR FINANCIAL BLUEPRINT IN PLACE.

©2007-08 John Mazzara 13 http://www.RealityBasedRealEstateInvesting.com

THREE COMPONENTS OF EVERY INVESTMENT PROPERTY

• CASH FLOW-Could be positive or negative

©2007-08 John Mazzara 14 http://www.RealityBasedRealEstateInvesting.com

Optimal Property Selection-You Have MANY CHOICES!

©2007-08 John Mazzara 15 http://www.RealityBasedRealEstateInvesting.com

Single Family Homes:

©2007-08 John Mazzara 16 http://www.RealityBasedRealEstateInvesting.com

ADVANTAGES OF OWNING SINGLE FAMILY HOMES

There will be little competition from other landlords.

Your property will be in a predominately residential setting.

Niche market specialization is available.

©2007-08 John Mazzara 17 http://www.RealityBasedRealEstateInvesting.com

Cash flow is limited as rents are low.

Houses tend to lend themselves to multiple occupants.

Cash flow is doubtful with a modest down payment.

©2007-08 John Mazzara 18 http://www.RealityBasedRealEstateInvesting.com

Lead based paint issues.

©2007-08 John Mazzara 19 http://www.RealityBasedRealEstateInvesting.com

The reason my buildings appreciated so dramatically in the last three years of my

REMEMBER-always be a contrarian in your investing. At the beginning of this decade

©2007-08 John Mazzara 20 http://www.RealityBasedRealEstateInvesting.com

larger mortgage) to be placed against a building. This leads to a higher valuation of a

ADVANTAGES OF OWNING MULTI-FAMILY HOUSING

You have one building generating two income streams.

©2007-08 John Mazzara 21 http://www.RealityBasedRealEstateInvesting.com