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  • Best Practices for the Intelligent Real Estate Investor – John T. Reed
    s attorney will sue both you individually and your LLC and throw into the complaint a boilerplate clause about the LLC being your alter ego and about your commingling the LLC funds with your personal funds and all that If the judge buys the alter ego etc arguments your LLC means nothing as far as protecting you In some cases LLCs or corporations can hurt you by forcing you to include your children in your pension account or by forcing you to hire an attorney for every nickel and dime legal matter that sole proprietors handle without an attorney in small claims court Insurance Other investors wave away all questions of risk management by saying That s why I have insurance Insurance just covers certain casualty risks like fire and water damage and tort lawsuits The list of real estate investment risks is far longer than the list of risks you can buy insurance against Indeed an LLC and insurance are somewhat redundant You do not want to manage the same risk twice and pay double to manage it twice Each management technique has its costs Redundant risk management is a total waste of your money Diversification Other investors think they got risk all covered by diversification I never buy more than one property per town Interesting That would protect you from municipal risk like rent control But most states pre empt municipal rent control so again you re wearing both suspenders and a belt to keep your pants up Redundant risk management Waste of time and money What about county Do you own more than one property per county Yeah They re all in the same county Well then you are not diversified against adverse county laws like slow evictions Nor are you diversified against adverse state laws like no rent control preemption or federal laws like the passive loss limits or regional or national economic downturns or international interest rates or property type risk like too many office buildings Diversification only protects you against risks unique to the jurisdiction you are not in twice in your case just town government or school district risk Deedless real estate investing How do you manage those risks in the real world One way is deedless real estate investing which is the subject and title of Chapter 6 Caveman biases against good investing When I was in my 20s I took the CCIM courses They basically taught a Benjamin Graham Intelligent Investor approach to real estate investment analysis That is the value of an investment property is the present value of all the cash income streams that will come at you as a result of buying the property namely cash flow amortization of the mortgage tax benefits and appreciation realized when you sell the property That made sense until I left the seminars and returned to the real world I considered naming this book How Real Estate Investors Really Make Money in the Real World In the real world of real estate investing property values often went up or down by more than just the changes in the cash flow amortization and tax benefits What was that about What it s about is the subject of Chapter 7 Bad instincts for investing This chapter is about a new field called Behavioral Finance or Behavioral Economics My explanation of it is that human brains evolved during caveman days to deal with the best practices for the intelligent cave man Those best practices included safety in numbers flight is usually better than fight better safe than sorry when it comes to physical injury if you have no HMO if something happens twice it s best to assume it s a permanent pattern vivid dangers like being stomped by a mammoth are more important than abstract dangers like interest rates going up and so on What is logical for investors is often the opposite of what is logical for being a caveman In the caveman world all the dangers were physical poison plants attacks by animals or other tribes falling off a cliff fire etc In the investment world caveman best practices like the herd instinct can be very bad Behavioral finance experts call those caveman instincts that are incorrect when compared to more sophisticated analysis biases You need to know all of your caveman biases that cause you to make incorrect investment decisions like Enron employees investing their life savings in their company stock because it s what I know best Ouch Real estate investment is most definitely NOT so simple that even a caveman could do it Rational man Chapter 7 lists all the biases pertinent to investing explains them and tells you how to override them Those caveman biases also explain why property values sometimes rise or fall more than the fundamentals that seemed to make so much sense in Benjamin Graham s book or the CCIM courses Those biases explain why Graham and the CCIMs do not fully explain price movements Behavioral finance experts are also often contrasted with traditional economists Traditional economists speak only a rational man The rational man of classical economics texts always knows all there is to know about a business decision is totally logical and always acting in his own interest Behavioral economists respond When you say rational man are you speaking of that fat guy smoking a cigarette and standing in the long line to buy Super Lotto tickets You figure he s logical well informed about what he is about to do and always acting in his self interest Real world screwed up man Behavioral economists don t assume rational man They assume real world screwed up man Behavioral economists therefore come closer to the correct analysis Economist and author Robert Shiller co author of the currently primary Case Shiller Home Price Index wrote a book called Irrational Exuberance which is a phrase he got from former Fed Chairman Alan Greenspan that describes crazy run ups in the stock and real estate markets Shiller also speaks of irrational despair which is where investors and home buyers get stupid in the other direction like valuing a company s stock so low that its market cap total number of shares x current price per share is less than the amount of cash it has in the bank Or valuing a home so low that it costs less to own it than it would to rent it My new book Best Practices for the Intelligent Real Estate Investor is not about rational man It is about real world man who at times behaves quite irrationally thereby creating both opportunities and dangers to those of you who read my book so you can can recognize and deal with them appropriately You have probably read a number of books on real estate investment and attended some seminars I ll bet what you just read above doesn t bear much resemblance to what the get rich quick gurus said in those books and seminars does it That s because I have been trying to understand real world real estate investment all these decades and tell you what I learned The get rich quick guys have been trying to figure out how to get you to give them your credit card They have found that fantasy world stuff you ll put 50 000 in your pocket at your first closing works best for that purpose I have found that hard study and experience works best for figuring out what really goes on in real estate investment and how you can maximize your chances of profiting from it Layer cake of values The main focus of real estate investment is the value of the property and its hoped for or deliberately caused increase in value Yet the vast majority of investors do not know where value comes from in real estate In fact the value of a property is like a layer cake Investors have generally heard about the bundle of rights that comprise legal ownership right to occupy lease improve sell etc They need to know about the layers of value They got a harsh lesson about one of those layers the availability of cheap high loan to value financing when the early 2000 s bubble burst in response to subprime lending being taken away Chapter 8 of Best Practices for the Intelligent Real Estate Investor makes sure you understand all the value layers that can dramatically affect your net worth and equity Where s the profit If you think about it hardly any real estate investment books discuss making a profit They just assume that owning property is profitable because of market wide appreciation in prices Chapter 9 of Best Practices discusses the three categories of true profit strategies bargain purchase e g foreclosures IRS auctions adding value e g physical improvements better zoning double digit cap rates i e purchase price so low in relation to net building income that you get a 10 or higher return In the securities hedge fund and private equity industries the first two are called active strategies Double digit cap rates is a sort of Benjamin Graham Intelligent Investor value passive strategy What the vast majority of investors actually do is a passive or non strategy I call buy and hope It is the real estate equivalent of trying to cross the Atlantic on a raft with no oar motor or sail In 2009 millions of buy and hope investors are lamenting the loss of a large chunk of their net worth It is also the real estate equivalent of buying lottery tickets except you can t be sued for owning a lottery ticket You don t have to hope for profits in real estate Indeed you should not just hope for them You can make them happen on purpose by using your skill and simultaneously protecting yourself from bad luck beyond your control If it s vacant you have to move at a frantic pace Many real estate investors own vacant properties usually because they are fixing them and hope to turn them over quickly It better be real quick as explained in Chapter 10 of Best Practices The carrying costs can very quickly eat up all your profits More to leverage than infinite returns Newbie real estate investors love to talk about the infinite returns they get from nothing down purchases As Chapter 11 explains it ain t that simple For one thing there arguably are no true nothing down deals because you have to spend extra amounts of your time to get them and time is money too Then there is the risk Almost all other gurus are trying their best to keep you from thinking about the risks Best Practices makes sure you understand them and deal with them appropriately like getting non recourse mortgages whenever possible The Leverage chapter also makes sure you can calculate the situations where leverage is positive and where it is negative loan constant exceeds cap rate It also explains what almost all investors do not understand but need to That is inflation contrary to what everyone thinks is not necessarily good for real estate investors For one thing high inflation tends to raise mortgage interest rates which depresses resale values Only when inflation is combined with a fixed rate mortgage does your equity grow in real adjusted for inflation terms as a result of inflation Free and clear buildings do not increase your real equity from Consumer Price Index increases in value Chapter 11 also explains why use of lots of leverage proves your ignorance more than it proves your manhood Experience matters Experienced people understand things better than inexperienced people Chapter 12 The History of Real Estate Investment gives you much needed artificial experience if you lack the real kind For those who already have been in real estate investment for a long time it corrects and completes your faulty memories The Chapter lists historical stock market price earnings ratios what s misleading about Realtor median home price stats U S bond interest rates since 1890 mortgage interest rates since 1965 inflation rates since 1890 Case Shiller home price real appreciation rates since 1890 top federal income tax and capital gains tax rates since federal income taxes began in 1913 major federal income tax law changes since 1913 dates of all booms and recessions since 1854 average length of business cycles since 1854 important non tax real estate related historical events since 1920 various famous financial doomsday forecasts since the 1970s the real estate related records of all presidents since Nixon states that have pre empted municipal or county rent control laws and the history of major U S natural disasters since 1811 Hold down your taxes and transaction costs Chapters 13 and 14 give the real estate version of the advice in virtually all good stock market books You must minimize taxes and transaction costs to maximize your after tax after transaction costs profits This is especially true of transaction costs which in real estate are scandalously high Best Practices has a chapter on the minimization of each I also wrote a book called Aggressive Tax Avoidance for Real Estate Investors which is now in its 19th edition Where you spend most of your time too much time Chapter 15 is about the most time consuming and unprofitable aspect of real estate investment property management I also wrote a whole book about it called How to Manage Residential Property For Maximum Cash Flow and Resale Value which is now in its fifth edition If you can structure your approach so that you spend less time managing property you will make more money by doing the things that are profitable finding bargains upgrading the property value and so on So you should just hire it out right I wish Essentially there are no good outside property managers My book sets forth the evidence of that in detail If you think that cannot possibly be true go hire one Here is my advance I told you so You have to do it yourself or hire an in house person who is on salary not 5 of the gross to you to do it The Chapter also talks about turnaround situations disasters the need for totally passive real estate investors to invest via REIT and Case Shiller derivatives rather than actually owning properties directly looking for professionally managed property that you can buy cheap because of mismanagement helpful trade associations unhelpful trade association training of your managers the need to gain technical expertise in complex building systems like HVAC roofs plumbing pavement termites absentee management and so on Litigation Litigation sucks So you just avoid it right Sorry If you own more than a tiny amount of rental property you will be sued So I put Chapter 16 which tells you how to avoid it and how to handle it if and when it happens Like anything else it s an important skill For once in your life actually calculate what you actually make on your investments Chapter 17 tells you How to calculate your true return It s not that complicated but there is a correct way to do it Almost everyone does it wrong One major issue is making sure you take into account the value of your time If you invested passively in securities including real estate related derivatives you would spend almost no time So to get a proper result you have to take into account the value of your real estate time when comparing real estate with securities investment You also have to stop ignoring closing costs both buying and selling and the time value of money Money to be received in the future is worth less And you need to stop ignoring so called one time capital expenditures like a new roof or a new refrigerator Who are you kidding Those major expenses are a big part of your return or lack thereof And you need to always look at current return on current equity not current return on your ancient history down payment That s another who are you kidding move Finally you have to get to the after tax numbers because other investments like municipal bonds have the same return before and after tax Real estate does not Kidding others about your return is relatively harmless like fish stories But kidding yourself about how much you are making on your real estate is dangerous to your financial health Emotional roller coaster Real estate investing ain t knitting It often puts you on an emotional roller coaster the likes of which you may not have experienced in your prior life Some tenants are bad So are some of the employees you hire Someone once said The meek shall inherit the earth but they won t get the mineral rights Mineral rights are real estate Many real estate investment strategies are deal oriented In deal oriented businesses if you snooze you lose That s why real estate brokers put their home phone number on their business card The only listing of mine that ever expired when I was an agent was one that expired when I was on vacation That always on duty aspect freaks out some people Real estate investment also requires you to sign on the dotted line committing yourself to pay back a loan of hundreds of thousands of dollars There is also litigation drops in market values difficulty finding financing fire flood pestilence drug dealers deadbeats and more You need to understand that is a possible part of real traditional estate investment There are strategies that avoid many of the possible stresses And there are ways to handle the stress That s why Chapter 18 covers the emotional side of the business Negotiation You need to know negotiation to be a real estate investor But don t overestimate how much negotiating skills alone can accomplish There are some tricks to making sure you are

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  • Aggressive Tax Avoidance For Real Estate Investors, 19th edition – John T. Reed
    first year expensing and more Reader comments Table of Contents John T Reed s real estate investment background Index Improvements since the 18th edition Front Matter Introduction Real Estate investment blog Letter of commendation from IRS following TCMP audit of John T Reed s tax return Leigh Robinson author of the book Landlording called the book seminal ab English language translation of tax laws affecting real estate investors superb job Tax Angles news letter great book Moneytalk newsletter I am currently researching exchanges in preparation for writing our Third Quarter Investor Outlook and in that process I have read over fifty articles and eight books on the subject Your work is the best I ve seen John B Allen Director of Investment Properties Grubb Ellis Commercial Brokerage Company and author of Selling Income Property Successfully The only How To Invest book I ve ever read in one evening Written so well I didn t want to put it down Tom Collins Real estate broker Burlingame CA excellent highly recommended If you were to read only one book on real estate investing and tax avoidance be sure that it is this one Bob Karch Real estate broker El Paso TX I also recommend that you get my book How To Do a Delayed Exchange Aggressive Tax Avoidance covers exchanges but does not focus on delayed exchanges The Delayed Exchange book actually has the document you need to do one I did not write it The IRS did in the form of a remarkable regulation All I did was slightly modify their regulation so the agreement is essentially the regulation How are they going to challenge that Read it now Tax time is too late Should you wait until tax time to buy the book No That is explained in the book

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  • Checklists for Buying Rental Houses & Apartment Bldgs., 2nd ed. – John T. Reed
    a rental house or apartment building this book could save you a great deal of time money effort and emotional strain Use this book to prepare for your inspections and negotiations Carry it with you when you inspect the property Use it as a guide when you are reconstructing an income and expense statement drafting a contract etc If you only read this book and add it to your investment library you have missed its main point You can t learn what is in this book any more than an airline pilot can learn his preflight check list In the acquisition of a house or apartment building accuracy and thoroughness are essential and it is too easy for even a veteran investor or pilot to forget one of the many important steps Real estate investing does not have the life or death aspects of flying a plane but the stakes are still high And those high stakes demand the high standards of accuracy and thoroughness that are attainable only through the use of written check lists Checklist for Buying includes Things to take with you when you physically inspect the property Items to check in your inspection of the exterior Questions to ask the people with the most knowledge about the building the tenants previous owners neighbors and others Income and expense categories to take into account for estimating cash flow How to verify or forecast the property s actual income and expense numbers Clauses to make sure you have in your purchase agreement Clauses to seek in your financing How to prepare for closing and what to look for at closing Environmental audit information How to evaluate the neighborhood How to invest absentee acquisitions far from your home Residential investment strategy How to avoid cities that are likely to

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  • How to Buy Real Estate for At Least 20% Below Market Value, Volume 1 – John T. Reed
    that are real bargains at present These are part bargain purchase OREOs and part fixers See my book Fixers for details on how to do those A great many bargain purchase opportunities also include fixer characteristics Short sales In theory you can still buy at the pre foreclosure stage if you do a short sale That s a deal here the lenders agree to release the property from their lien for less than they are owed because the property will not sell unless they do But my son s recent experience and reports from around the country cause me to conclude that short sales are generally a waste of time The lenders take forever Time is money Screw them You have better things to do Let them learn to speed up with some dumber investor than you Some investors take the attitude that the long time it takes to get answers from the lender on most short sales is good because it drives away impatient buyers As long as you do not have to make repeated follow up calls to make sure the lenders do not forget about your offer that could make sense Also you need to be careful that the market does not change during the wait such that you no longer want the property in question that the price the lenders finally agreed to Lower minimum bid A similar thing can happen with underwater properties at the foreclosure auction The foreclosing lender can set the minimum bid below the loan balance They should if they want it to sell at the auction But they rarely do Reselling to get your profit People automatically assume that collapsed prices mean bargains In fact while it is easier to find properties to buy nowadays remember when the profit comes It comes when you resell the property not when you buy it The late Paul Thompson was a foreclosure auction buyer I asked once if high foreclosures was a great time for him No It just makes it easier to buy but it simultaneously makes it harder to sell And you have to do both to make money It just changes the pie chart of where you spend your time Nowadays you spend more time selling and less time buying It s not better It s just different The skills required are different In addition to needing more marketing expertise you also need to work much harder to figure out the current market value of the property in question With fewer sales and recent falling prices confidence about current market values is hard to come by but it is crucial to investing in any market conditions Financing is different Financing is harder to get now so you need to think about it more and make sure you have it lined up in advance as best you can This is especially true of any speed strategy All strategies involving vacant properties like rehab and flipping are speed strategies Another common speed strategy

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  • How to Buy Real Estate for at Least 20% Below Market Value, Volume 2, – John T. Reed
    fixers See my book Fixers for details on how to do those A great many bargain purchase opportunities also include fixer characteristics Short sales In theory you can still buy at the pre foreclosure stage if you do a short sale That s a deal here the lenders agree to release the property from their lien for less than they are owed because the property will not sell unless they do But my son s recent experience and reports from around the country cause me to conclude that short sales are generally a waste of time The lenders take forever Time is money Screw them You have better things to do Let them learn to speed up with some dumber investor than you Some investors take the attitude that the long time it takes to get answers from the lender on most short sales is good because it drives away impatient buyers As long as you do not have to make repeated follow up calls to make sure the lenders do not forget about your offer that could make sense Also you need to be careful that the market does not change during the wait such that you no longer want the property in question that the price the lenders finally agreed to Lower minimum bid A similar thing can happen with underwater properties at the foreclosure auction The foreclosing lender can set the minimum bid below the loan balance They should if they want it to sell at the auction But they rarely do Reselling to get your profit People automatically assume that collapsed prices mean bargains In fact while it is easier to find properties to buy nowadays remember when the profit comes It comes when you resell the property not when you buy it The late Paul Thompson was a foreclosure auction buyer I asked once if high foreclosures was a great time for him No It just makes it easier to buy but it simultaneously makes it harder to sell And you have to do both to make money It just changes the pie chart of where you spend your time Nowadays you spend more time selling and less time buying It s not better It s just different The skills required are different In addition to needing more marketing expertise you also need to work much harder to figure out the current market value of the property in question With fewer sales and recent falling prices confidence about current market values is hard to come by but it is crucial to investing in any market conditions Financing is different Financing is harder to get now so you need to think about it more and make sure you have it lined up in advance as best you can This is especially true of any speed strategy All strategies involving vacant properties like rehab and flipping are speed strategies Another common speed strategy is being faster than all the other buyers in your market If you have

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  • Real Estate Investment Strategy, Volume 1 – John T. Reed
    other topics See the Table of Contents One newsletter I love to read is John T Reed s Real Estate Investor s Monthly He s a smart man a funny writer and always provocative Jane Bryant Quinn Newsweek personal finance columnist John T Reed s real estate investment background Table of Contents Reader Comments Front Matter Volume 1 Index Volume 2 Volume 3 I have three books of this real estate investment strategy series You get a 2 00 discount on domestic shipping if you buy two books and free domestic shipping if you buy three or more at the same time Deals that make sense Case studies on subjects like Rental houses Judgment investing One bedroom houses Rooming houses and Buy two get one for 2 3 off The Contrarian Strategy Inflation appreciation Prices What if values don t go up Geography location views earthquakes regions Risk and real estate toxics calculated risks protection against uninsurable catastrophes The selective leper strategy The vulture strategy The best of John T Reed s newsletter articles on investment strategy have been put together in one book Over 100 articles are grouped by category 242 pages comb bound Not available in traditional or

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  • Fixers, 2nd ed. – John T. Reed
    Wh you must do in the real world is buy disasters and turn them into fixers and at that point sell them for a profit Unless they are disasters that make your competitors for buying them newlyweds run away you cannot buy them cheap enough to make a profit after all your work Furthermore taking them from disaster to perfect is not profitable Just take them out of the disaster category Click here to see a YouTube of me discussing this at a speech 101 pages 8 1 2 x 11 One newsletter I love to read is John T Reed s Real Estate Investor s Monthly He s a smart man a funny writer and always provocative Jane Bryant Quinn Newsweek personal finance columnist Reader comments about Fixers Table of Contents Front Matter Copyright date acknowledgements etc Index Errata John T Reed s real estate investment background This is one of two books I have on adding value to a property as a way to make extra profit The other is How to Increase the Value of Real Estate The Fixers book used to be part of the Increase Value book but it was too complex just to be

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  • Distressed Real Estate Times, 3rd ed. – John T. Reed
    the bargains that were expected in this crisis but have not appeared is a big part of profiting from it and avoiding losses based on inaccurate assumptions in it Many homeowners associations and their homeowner members are in financial difficulties because of the economy today In some cases these difficulties provide bargain opportunities In others they hurt property values of homes in the association because of inadequate money for maintenance Blind optimism is no virtue Sometimes armies attack Sometimes they must retreat They have to know how to do both Sometimes football teams are on offense Sometimes they are on defense They have to know how to do both The same is true of real estate investment You must have both attack and retreat and offense and defense in your repertoire Blind optimism is no virtue Being able to deal with current realities including when they are adverse is no weakness What is the difference between an offensive tactic and a defensive tactic An offensive tactic is a tangible or intangible action that increases the value of a property with skill not the good or bad luck of market wide appreciation A defensive tactic is reducing losses protecting yourself from risk etc You need to know offense and defense to maximize your investment return Increased opportunities During hard times in real estate the number of certain opportunities goes up namely pre foreclosures foreclosure auctions FHA and VA repos conventional repos bankruptcy properties IRS auction properties Distressed Real Estate Times tells you how to take advantage of those increased opportunities In addition almost all the other types of bargain purchase opportunities are enhanced by hard times like probates The number of people dying stays the same but the estates have greater difficulty selling than normal About half the book is focused on the opportunities created by distress The rest of the book helps both the distressed owner and those trying to profit from working with distressed owners Historical perspective It s good to be young for most purposes But it s also good to have experience a situation only available to the old Distressed Real Estate Times artificially gives you the experience of those of us who have been in the business since the 1960s You need it Young people tend to notice how the real estate market works when they come of age conclude that is normal then expect that version of normal to return soon whenever it goes away Those who came of age in the early 2000s during the subprime boom therefore think that was normal Ha Dangerous That is not only wrong It is a very dangerous notion to carry with you in the real estate business A brash young computer company man was interviewed on 60 Minutes II during the height of the dot com The interviewer wondered asked about the fact that the young man was making millions but didn t know anything about business Get used to it the young man said I hope

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