Guest post by John Stone, President of Stone Realty LLC

This is always a fun topic to talk about.  First, I must admit I watch HGTV and A&E’s Flip This House.  I have always wanted to be like Than Merrill, which is one of the hosts of A&E Flip This House, and have my own show in Indianapolis.  That isn’t working out too well yet, but I am still trying.

So, let’s talk about investing in real estate.  There are numerous ways to do this, but I like to talk about three different types; flipping, renting and wholesaling.

Flipping a property is when you buy a property for a certain amount of money, fix it up and then sell the property.  For example, let’s assume you buy a property for $50,000.  You put $20,000 into the property to fix it up and then you sell the property for $100,000.  Your out of pocket expense so far is $70,000 ($50,000 + $20,000) and your gross profit is $30,000 ($100,000 – $70,000).  You will have some expenses when you sell, I usually account for $10,000, so your net profit is roughly $20,000.  This is considered a great deal in today’s market.

Next, let’s talk about renting.  This is similar to flipping but you are holding on to the property for cash flow.  Again, buy a property, fix it up and this time you rent the property to someone.  A lot of investors rent properties for long-term cash flow.  When it comes to what return on your money to look for, it’s simple, what you are most comfortable with.  I know one investor is only comfortable with a 10% return.  One may say 8% and another 5%.  There is no set number that is right or wrong.  It is whatever you feel comfortable with.

The final type of investing I like talking about is wholesaling.  This may not be as familiar to some people.  Wholesaling is when you literally find a distressed property, put it under contract without actually closing on the property and sell it to someone else.  Let’s dive into this a little more.  This is a little more confusing.  You find a distressed seller (someone that is behind on their payments or about to go into foreclosure) and purchase their house.  On the purchase agreement you put your name and the words “and/or assigns”, so you can assign the property to someone else.  Then go out and find an investor or rehabber to buy the property from you.  Sound confusing?  It is.  But it does work.

The most important aspect of investing in real estate is the acquisition cost.  You have to make sure you are buying the property correctly and for the right price.  Look at comparables and do your due diligence because you don’t want to be stuck with the property.  Real estate can be a very big headache if you don’t know what you are doing.  Consult a real estate professional before you do anything.

If you have any other questions regarding this issue, please contact me.  Go to my website, www.stonerealtyllc.com and there is a page designated specifically to investing.  Or you can always call me at 317-209-4355.

A Penny For Your Thoughts is a new feature on our blog. This short video series will help you to get to know some of your favorite celebrities, business leaders, and community leaders. This week’s guest, John Stone, President of Stone Realty. John specializes in helping people find investment properties.

Do you remember arguing with your sister when you grew up? When the words turned to playful violence it usually went a little something like this: you would pull her hair and she would beat the ever living Bejesus out of you. Well, that’s how it went for me. And in some sort of strange way our violent acts canceled each other out. It took this (painful) memory to bring me to a tidy little conclusion. Our heinous disrespect of math, that was induced by opportunistic lending practices, was just offset by the banks taking a knee to the bank crotch.

The average American and banks are both reeling from poor decisions in regards to borrowing and lending. So let’s just start over. Let’s just act like none of this ever happened. I even have a place for us to get started: math. The banks can do whatever they want to induce us to borrow more and more money, but if you arm yourself with math, then your financial life will be spared. If math brings you to the conclusion that you should be renting, then embrace it.

Renting is not just for young people. Renting can make sense for retirees, and growing families. Renting can make sense for divorcees and people named Dave, Carlos, or Nolan. Before I go on much further you should know that my intent is to list every possible demographic. Renting can make sense for just about anyone. Renting can especially make sense if honest math doesn’t support your quest to own a home.

I admit that telling people to rent just feels awkward. But isn’t that the problem? We have been socialized to believe that home ownership is the American Dream. And this cultural directive is so strong that people trade their math for their peer pressure hat. I’m not much one for blame, but I would like to throw a few groups under the bus (What? Did you want me to just sit on the fence? I have to blame somebody). Here is my list of the top three groups to blame for this powerful social influence:

1. Our parents- And by our, I mean anyone under 38 (I, myself, am 32). Many parents are under the impression that their children “should not waste money on rent.” This notion just doesn’t make sense. I personally believe that this parental pressure has led to a number of poor housing decisions in the last 15 years. The lure of home ownership was different in the 60’s, 70’s, and 80’s. You can’t let your parents influence this financial decision based on 20-30 year old data.
2. Home builders- If the pressure to buy a house wasn’t hard enough to deal with, then homebuilders techniques to get you to commit to 360 mortgage payments can send you over the edge. Homebuilders got into the practice of subsidizing your first couple years of your mortgage via programs such as a 2-1 buydowns. These programs were meant to do one thing and one thing alone: Sell you a house now, and leave your financial future to chance. Builders didn’t care if you couldn’t afford the home, their job is to sell you a home. I believe that they shunned their fiduciary responsibilities, and for this, they receive partial blame. Don’t worry though, the karma train has entered the station, and some of the most unscrupulous national homebuilders have already gone out of business.
3. Michael Bolton

This concludes the “When math gets pissed” series. If you are looking for a tidy conclusion, then please allow this explanation to fly: use math and don’t think that you are immune to bad decision making. I would love to hear your comments on the series. Feel free to post them on the blog. Don’t forget to join my Facebook fan page.

Put yourself in math’s shoes. Day after day, year after year, middle school and high school students question their teachers as to your importance. And then when they finally start using you, like when they calculate a home’s affordability, then they ignore you. Like I have been trying to tell you, math is angry, and it’s wearing an Affliction t-shirt (which of course means it knows mixed martial arts or it wants you to think that it knows mixed martial arts).

The fact of the matter is that finding out that you can’t afford a home and then not buying that home, is a beautiful thing. It makes you a winner. It makes you wise. But unfortunately, it makes you a financial unicorn. In other words, rare, if not fictitious. It is common for people who can’t afford home ownership to question their value and self-worth. However having the discipline and self-control to say no when the math says no, is brilliant. You actually are doing something that protects the entire consumer based economy that we live in. Battle for your future, dammit. Battle.

Who is a better steward of YOUR money? You or a mortgage company? Right, it’s you. A mortgage company’s job is to make money. Your job is to make good decisions. Affordable is affordable. Relatively affordable is not an option. Yesterday’s blog addressed affordable. But you need to understand why affordability is even an issue. I have a story for you. Wanna hear it? Here it go.

A few years ago when mortgage banks were faced with a limited target market of “those that could afford homes”, they did what they thought was the best thing to do improve profitability: they grew their target market. They did something that was brilliant with a hint of diabolical. They made homes “more affordable”. This doesn’t necessarily mean making less expensive homes. This means expanding the definition of affordable. People who never could have afforded homes were all the sudden hot prospects. Initially this isn’t a bad thing. It is, in itself, an opportunity extended. However, affordable was a technical term. Affordable didn’t mean relatively affordable (like it does today). Mortgage banks kept dropping their lending requirements, and it was that practice which brought forth the sub-prime lending crisis. Banks, although they were making plenty of money on loans that they never should have given, freaked out when hard times hit. They suddenly realized that the people that couldn’t  afford the homes that they were financing were also in deep trouble.

You can try to trick math, but it will eventually chase you down and show you who’s boss. Join us tomorrow as we examine Part 4 of When math gets pissed. We will discuss the glory of renting.

Did you miss Part 1?
Did you miss Part 2?

Welcome pack for Part 2 of When Math Gets Pissed. Did you miss Part 1?

Yes, math is pissed. But math doesn’t really care. You see, math is honest. Of course there is fuzzy math, but fuzzy math isn’t really math. Math will give you the answer to your housing dilemma. There are three numbers that are as foolproof as any, when it comes to homeownership decisions.

10 Can you afford a down payment of 10%? If the answer is “no”, then the answer is “no”. This is where most people absolutely lose their mind. You can either afford this, or you can’t. It’s really that easy. Just because someone or something will sell you a house or approve you for a loan that doesn’t require a down payment of at least 10% doesn’t mean you should do it. There are some restaurants that sell 5 pound hamburgers, but that doesn’t mean you should order one. Borrowing money for a down payment or even receiving a fortuitously-timed gift, also puts you in the “can’t afford it” camp. But again, don’t sweat the “can’t afford it” camp. It’s a smart place to be in. It’s a hell of a lot better than the “thinks they can afford it even though they can’t” camp.

25 Is your mortgage payment under 25% of your net monthly income? Yes, I realize this is a more conservative number than you’re use to. But that’s the point. People kept pushing the limits of 27% of gross income, and that obviously didn’t work. The problem is that some banks will lend consumers money even though their mortgage payment would be 33% of their net income. That leaves very little room for emergencies, utilities, and other necessities.

5 Do you plan on staying in the residence for at least 5 years? According to my book, 60 Days To Change (Yes, I’m quoting my own book. Get over it. That’s just how I roll) 85% of your payment for the first five years of a 7% 30 year mortgage goes towards interest. That means that a house generally is a terrible investment if you live in it for less than five years. Most young Americans just don’t have that sort of stability. Not only that, but 5 years is a good rule of thumb in a GOOD real estate market. And we are only in a GOOD market right now if by “GOOD” I mean “fecal”.

So there it is, Holmes. There is your math served up nicely in a giant wooden table-boat that gluttonous orders of sushi are served in. If you can figure out what 10% of a purchase price is, figure out what 25% of your take home pay is, and count to five, then you are privy to the good news and the bad news. The good news is that you have just earned your ticket to the “I can afford to own a home” club. The bad news is that they are out of t-shirts because they let a bunch of math-hating lemmings into the club. Again, this comes off a bit harsh. But subtle didn’t work. Subtle didn’t work when a bunch of kids that were bad at soccer got participation trophies (me included). Some people win. Some people lose. You don’t get a trophy for losing. There is absolutely nothing wrong with that. You still get your oatmeal cream pie and a juice barrel. Some people can afford a home. And some people can’t afford a home. But unfortunately, there are no more t-shirts. Don’t complain. That’s just how it is. Besides, the kid that was terrible at soccer but great at math isn’t complaining.

Oh, and if you think that I’m suggesting that you are a loser if you can’t afford a home, then you better read tomorrow’s Part 3. Sneak peak: if you can’t afford a house, then your fate is in your hands.

Join us tomorrow for Part 3.