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August 13, 2009 by Peter Maclennan Leave a Comment

The Mrs.’ Question #2: Is there a chance I would lose my money?

This post is one in a series of posts featuring my wife, The Mrs. I asked her to pretend that she was a wealthy woman with $2,000,000 (million) to invest. This money was needed to provide her for the rest of her life. She is to ask questions that might come up in the course of investigating a new investment advisor. Please check back for more questions.

Question #2: Is there a chance I would lose my money by investing in real estate?

The short answer is yes. Real estate is an investment and there is a chance that money can be lost.

However, nothing is a guaranteed investment. There is some risk, though it may be incredibly small, no matter where you put your money.

Did you hear the story about the Israeli woman that faithfully stuffed her life savings into her mattress? Over the years she accumulated well over $1,000,000 in cash in her mattress. This was all well and good until her daughter bought a replacement mattress and threw the old one out with the garbage. Who would have thought that a mattress wouldn’t be a safe place to keep your cash?

Strategy and Planning Can Reduce Risk

There are ways to lower the amount of risk you take on any investment.

Diversification

Just as keeping all of your money in one mattress is probably a bad idea, so is placing all of your money in one asset.

Give a portion to seven, or even to eight,
for you know not what disaster may happen on earth.

– King Solomon (Ecc. 11:2)

Spreading your investment capital into different assets protects you from the risk of losing all of your money in one fell swoop.

If you had invested all of your money in New Orleans prior to Katrina, there is a good chance you would have lost a good deal of your savings. Many investors and homeowners learned the hard way that insurance companies are very particular about the difference between rain damage and flood damage.

Leverage

Leverage is the ability to control a large asset with a smaller amount of investor funds. With real estate investing this comes by using a loan. The loan may take the form of a mortgage or a note and deed of trust in California.

With leverage an investor can buy multiple properties, reaping the benefits of diversification. For example, imagine an investor plans to buy his properties with 30% down and a mortgage of 70% of the purchase price.

With $100,000 this investor can purchase three (3) properties valued at $100,000 a piece and have $10,000 in hand for reserves. A purchase price of $100,000 x 30% down payment = $30,000.

Purchasing multiple properties spreads the risk of a loss of income over multiple locations. A tree falling on one property will not cause the investor to lose all of their money.

Caveat: Leverage can cut both ways. If a property were to go down in value, the first thing to decrease is the investor’s equity. This is a risk that each individual will have to determine they are comfortable with.

You Can Lose Money, but You Can Minimize the Risk

Yes you can lose money by investing in real estate. You can also lose money while stuffing into your mattress.

We have identified two ways to minimize risk, diversification and leverage. We didn’t even mention buying multiple unit properties, buying below market properties, and other strategies that can minimize the risk of owning real estate.

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Filed Under: Mrs.' Questions, Real Estate Investing Tagged With: 1 Million, Deed of Trust, Diversification, Real Estate Investing

August 8, 2009 by Peter Maclennan 1 Comment

The Mrs.’ Question #1: How much do I have to invest?

This post is one in a series of posts featuring my wife, The Mrs. I asked her to pretend that she was a wealthy woman with $2,000,000 (million) to invest. This money was needed to provide her for the rest of her life. She is to ask questions that might come up in the course of investigating a new investment advisor. Please check back for more questions.

Question: How much do I have to invest with Maclennan Investment Group?

You can invest as little or as much as you want with Maclennan Investment Group. However, you will probably need at least $50,000  to invest in a single property.

We offer investment solutions tailored to the individual needs of each investor. We can provide solutions for people with $50,000 to over $10,000,000 to invest.

Why a $50,000 minimum?

Our investments are not like stocks where you can buy a few shares for $100.

With Maclennan Investment Group you will be investing in the ownership of real estate. You will be buying a house, a duplex, a triplex, or an apartment house with your money. These investments require more capital to begin.

In most regions the average minimum cost of investment quality real estate is around $200,000. A twenty percent (20%) down payment is equal to $40,000, leaving about $10,000 for closing costs. An investor would need $50,000 to invest in this type of real estate.

Are there exceptions to the minimum?

Yes. It is possible to invest in real estate with less than $50,000. However, this solution often requires that you have a partner or partners to make up the difference. Having a partner is not something that everyone is comfortable with.

If you have $50,000 to invest, we can start you on a Course to Retirement Freedom.

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Filed Under: Mrs.' Questions, Real Estate Investing Tagged With: Investment Group, Real Estate Investing

July 17, 2009 by Peter Maclennan Leave a Comment

Accumulation and Income

As an investor makes plans for Retirement Freedom, they should keep in mind where they are in the wealth building process.

Investors, generally, can be put into one of two phases depending upon their financial needs and their employment status. I will call these the Accumulation and Income Phases.

Accumulation Phase

During the Accumulation Phase an investor is not trying to live off of their investments. Usually, the investor has a source of employment that generates their investing capital and supports their daily needs.

At this point it vital that the investor attempt to gather and grow assets. These assets need to be as large as possible to create as large an income as possible.

Appreciation is a key ingredient in a successful Accumulation Phase. Appreciation is the growth in value of real estate.

Imagine that you will earn a return of 7% on your assets once you retire. Would you rather retire with assets worth $500,000 or $5,000,000 ?

Income Phase

Once you have quit your day job, retirees need their investments to support their lifestyle. Consequently, income is more important than growth during this phase.

A transition to properties that will generate regular cash flow should be executed prior to your transition from 9-5 to retirement. Hopefully, much of this income is sheltered from the IRS through depreciation.

Why Accumulation and Income Matter

So what? Why should you care?

Your investing phase will determine the types of real estate investments you should consider.

An apartment building that will appreciate slowly over the next 5-10 years and throws off tons of cash flow may not be the best investment if you need to accumulate wealth. It may be the perfect investment for someone in the income phase of their wealth planning.

A four-plex that is break even on cash flow, but will appreciate by 15% in the next 5-10 years isn’t a great fit for someone who needs to survive off of their investment income. It may fit well into the accumulation plans of someone starting out on their journey to Retirement Freedom.

Do you need help evaluating which phase you are in? Do you need assistance making the transition from one phase of investing to the next? If so click the link below to give us a call, we would love to chat with you.

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Filed Under: Real Estate Investing, Retirement Freedom Tagged With: Accumulation Phase, Investment Income, Retirement, Retirement Freedom

July 15, 2009 by Peter Maclennan Leave a Comment

A Window of Opportunity

Dear Bay Area Real Estate Investor,

If you are reading this and you still have equity in your real estate investments, Congratulations! (I apologize if that offends others of you.) You have managed to buy at the right time and have kept your property performing well.

However, at the current time you face an important juncture. What will you do with that equity?

Will you allow your equity to ride? Or will you cash in your chips to play at another table?

What Do You Believe About the Future?

Your decision whether to stay in the properties you currently own or leave for greener pastures will likely be based on your perception of what the future holds.

You are likely to stay in your current properties if you believe that:

  • Real estate in California is the best and always goes up;
  • You need to drive by a property to “sniff the dirt”;
  • Rents and vacancy are stable and will go up;
  • Appreciation is not important, only cash flow;
  • Inflation is nothing to worry about, I have a fixed rate amortized mortgage; or
  • Cap rates won’t go higher.

However, you might be ready to move if you believe that:

  • Cap rates are headed up;
  • Inflation is coming and interest rates will go up;
  • Rents are declining in the near term and vacancy is rising;
  • Other states may provide a greater return on my capital; and
  • Appreciation is important to you.

The Open Window

If you find your beliefs more closely aligned with the second group, I want to offer you a reason to move your hard earned real estate equity now.

For Multifamily Owners

There is a window now before vacancy peaks, rents bottom, and cap rates rise to sell your Bay Area property and transfer your equity into a property that will appreciate faster than California properties.

Currently, commercial real estate has begun its slide to a new normal. Vacancy is rising and rents are decreasing as companies lay off employees and those laid off move back in with Dad and Mom.

As well, cap rates have begun to increase. As they do so they erode the value of a property as investors consider alternative investment returns. If inflation finds a foothold, interest rates will rise taking cap rates with them.

This leaves a brief window when vacancy hasn’t soared and rents haven’t bottomed to sell your property before inflation takes cap rates higher.

For 1-4 Unit Owners

If you have equity in a single family home, a duplex, a triplex, or a fourplex, now may be the time to move that equity to another property in an area that will provide above average appreciation in the coming years.

It is likely that the value of your rental property will further decline for two reasons.

  1. Expect to see rental rates decrease and vacancy increase as more investors purchase single family homes as rentals increasing the supply.
  2. As well, California has imposed a temporary moratorium on trustee’s sale. The Contra Costa Times reported that while foreclosure filings are piling up, actual trustee’s sales are slowing. This could mean that another wave of foreclosures is yet to come to market, further driving down prices.

Why Move Now?

Moving your equity now is a chance to preserve your equity and invest in in a location that will offer you above average appreciation in the coming years.

However, moving your equity is not the best option for every individual. You need a personalized investment strategy tailored to your needs, desires, and situation.

If you would like help evaluating your situation and charting a course to retirement freedom, please give us a call at (925) 385-8798.

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Filed Under: Bay Area Real Estate News, Real Estate Investing Tagged With: Bay Area, Real Estate Investing, Real Estate Investor, Retirement Freedom

June 18, 2009 by Peter Maclennan Leave a Comment

What is Your “Why?”

Why?

Spend much time around children and you will inevitably here the question “Why?”.

“Why do we have to go now?” “Why is the sky blue?” “Why did Johnny hit me?” “Why can’t I have candy?”

A Key to Understanding

While many adults find incessant “why’s” bothersome and tiring, for children it is a key to understanding.

Their young minds are still grasping the world. They are learning how it works. They are learning to make decisions and choices for themselves and understanding the world around them is key that.

“Why” allows children and adults to understand the reasoning and the logic behind the actions in the world around them.

The Importance of Why

Imagine for a moment that James asked Andrew for a wrench. Andrew goes to the toolbox and comes back with a hammer. What would James think? What would James think of Andrew?

Now, imagine that James asks Andrew for a wrench. Andrew asks why? James’ reply is, “I need to pound a nail into a board.” Andrew goes to the toolbox and comes back with a hammer.

Now, what would James think?

Understanding the why allows Andrew to fetch the correct tool for the job. The hammer makes James’ task easier and helps him to accomplish his goal.

Andrew gave James not what he “wanted”, but what he needed.

What is Your Why?

What is it that you need? What is the reason behind your desire to invest in real estate?

What benefits are you seeking to gain by investing in real estate? Are you looking for cash flow to replace your income? Do you need appreciation to bolster your nest egg?

Each individual has different goals, dreams, fears, and finances. Unique desires require a Charted Course specified to your situation.

The same real estate investment may not benefit you the same way it benefits your neighbor/friend/sibling. It may not be what your journey to Retirement Freedom needs.

Sitting down with a real estate investment counselor or advisor that knows the right questions to ask can make all the difference in the world. They should ask questions first, and help you arrive at solutions only after understanding your “Why”.

(Photo:  Blue sky 2 by Fabio Marini)

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Filed Under: Real Estate Investing, Retirement Freedom Tagged With: Investment Property, Real Estate Investing, Real Estate Investors, Retirement Freedom

June 11, 2009 by Peter Maclennan Leave a Comment

6 Reasons Real Estate Is Better Than Your Mattress

CNN is reporting:

A woman in Tel Aviv, Israel, gave her elderly mother a new mattress as a surprise gift, throwing out the old tattered bed her mother had slept on for decades. The gesture ended up bankrupting Annat’s mother, who had stuffed her savings of nearly $1 million inside her old bed for decades, Annat told Israel Army Radio.

While it might be nice to sleep on a $1 million mattress, there are better places to put your money.

Real Estate is Better than Your Mattress Because…

  1. Your daughter can’t throw it away. I think this one speaks for itself.
  2. Real estate might offer you a return on your money. A mattress keeps your money close at hand but it offers no opportunity for return. In other words, your money is not working for you. If inflation is in effect, your dollars are actually losing value by sitting in your mattress.
  3. Real Estate is an asset not somewhere your @$$ sets. A poor attempt at humor.
  4. The Four Benefits of Real Estate Investing. Cash flow before taxes, depreciation, principal reduction, and appreciation.
  5. A building is harder to steal and haul away than a mattress. Every two-bit burglar is going to start cutting open old mattresses to look for nest eggs, upon hearing this story.
  6. Someone will still sleep in a used house. Just let this settle into your mind for a bit.

Hiding Money

Putting silliness aside, where are you hiding your money because you are afraid? Is it a 401k? A CD earning 1%? A coffee can buried in the back yard?

Prudence, not fear, should rule in the realm of investments. A mark of maturity is handling responsibilities well. Money and wealth is a responsibility to be stewarded. At the very least, we have a responsibility to leave our heirs with an inheritance.

A good man leaves an inheritance to his children’s children,
but the sinner’s wealth is laid up for the righteous.
– King Solomon

Rest Easy

The poor woman that lost her fortune may have slept on a lumpy mattress, but it probably allowed her to rest easily at night knowing exactly where her money was.

Are you able to sleep at night because you know where your money is and what it is doing? Why not put your money into an investment that you can see, touch, and understand like real estate?

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Filed Under: Benefits of Real Estate Investing, Real Estate Investing Tagged With: 1 Million, Investment Income, Nest Eggs, Real Estate Investing

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