Should You Be A Full-Time Real Estate Investor? 

Many of the real estate ‘guru’s’ claim that everyone should quit their jobs and jump right into full time real estate investing. They claim that students realize fantastic results with very little experience. I’d like to caution you that life-changing decisions are not usually simple and that full-time investing is not for everyone. Let’s discuss some pros and cons of full-time investing vs. part-time investing. 

THE FULL TIME INVESTOR 

Entering into the real estate profession on a full-time basis offers some advantages over a part-time commitment. Being successful requires you to develop knowledge in many aspects of real estate, and more time spent focused on real estate leads to greater knowledge. As they say, the more you learn, the more you earn. The more you learn the less you’ll have to rely on and pay for the services and advice of professionals. However, you’ll always need and rely on the services of key professionals. You will also learn to recognize a good deal or a loser faster, which gives you more time to do profitable business or relax. 

As a full-time investor, you work your own hours. However, be careful you might find that your new boss (you) may be the toughest boss you’ve ever had. When I say ‘full-time’, that may mean as little as twenty hours per week if you are really good at finding deals. Or, if you are so inspired, (or a ‘successaholic’ like me) you may work forty to seventy hours a week and use the income you earn to buy rental properties or diversify your investments. Remember, the point is you need to satisfy you cash flow needs before you can start “investing” your money. 

If you have always worked for someone else, being you own boss sounds very attractive. In some respects, this isn’t quite the truth (remember that I said you may be the toughest boss you ever worked for). Remember, being your own boss may mean being an accountant, bookkeeper, receptionist, sales person and office manager all rolled into one! You’ll have to deal with tax returns, payroll, office supplies, client relations, bills and all the other hassles that come with a business. You won’t have friends to chat with at the lunch counter or water cooler, but you may have like-minded friends at investor associations to commiserate with. You won’t have paid health insurance, a company car and a 401(K), at least not at the beginning. Also, trust me, you will take your problems home with you every night. 

Sound like fun? It is, once you learn how to master your time and run your business. Being the master of your own life and career far outweigh the hassles of dealing with your own business.  

One final word of advice, please establish an entity such as an LLC, Corporation etc. as soon as possible so that lenders may recognize that you are self-employed. Two years of self-employment is the minimum time that most lenders require to be eligible for the best loan programs. 

THE PART-TIME INVESTOR 

The part-time investor holds a “regular job”. This may be by choice or for the time being until his real estate ventures are bringing in enough cash to quit his job. If it is the latter reason, don’t quit your job because the real estate ‘guru’ told you so. Quit your job when it is not worth the income that it brings you. In other words, if you are making more money per hour selling real estate on the side, you are at the point where your regular job is costing you money. Only then, is it time to quit! One of the advantages of starting out part-time is that you can maintain cash flow from your job while learning the business. It may take weeks or possibly months to find your first deal. That same deal may take several months to turn around, especially if you decide to fix it and sell it retail. Think twice before telling your boss you’re leaving: (don’t burn your bridges) you will have plenty of time to make the career switch once you have real estate experience. You may on the other hand like your occupation. If so, continue to work at it, and invest in real estate on the side. 

The best-case scenario, if you are married, is to have one spouse work a regular job. The other spouse works the real estate business for creating wealth, retirement income and a nice college fund for the children. Of course, in today’s market, you could be laid off due to unforeseen circumstances. If you earn additional income flipping houses and invest the proceeds into rental properties, you will be covered if your main income is lost. This is especially the case for married women who often forego a career and raise a family, only to find themselves divorced with no means of making a living. Some of my best clients are single women who have empowered themselves thru real estate investing. I don’t want to sound cynical about marriage, but with a fifty percent divorce rate in America, it can’t hurt to have a system for making money. 

Someone with a full-time job tends to have little free time to focus on real estate. A part-timer should learn most of the same skills as a full timer. Thus, the key disadvantage to flipping properties on a part-time basis is that it takes sacrifice (as all good things do) to learn the business. Something has to give: television, lazy weekends, meaningless hobbies and even some family time must be compromised. As with any education, time spent learning about real estate will bring its own rewards, especially if people in your life understand your goals and your plan to achieve your goals. If you are married, make sure your spouse reads this material with you and participates in the fun process of making money. 

TREAT REAL ESTATE AS A BUSINESS 

People are lured to real estate because of the quick money that it promises. Don’t hold your breath, you won’t get rich quick. An “overnight sensation” usually takes about five years. More than ninety percent of the people who take a real estate seminar quit after three months. Real estate investing should be treated with the seriousness of a career. It takes months, even years for a business to cultivate customers and have a life of it’s own. You need to treat it like any other business. 

IMPORTANT NOTE 

Establish a 2 year history of self employment as an investor via confirmation from your CPA that you’ve been declaring tax returns as an investor or 2 years since you incorporated or formed your LLC etc. 

THIS ARTICLE WAS ADAPTED FROM AN ARTICLE ORIGINALLY PUBLISHED BY WILLIAM BRONCHICK & ROBERT DAHLSTROM .

Thank You 

On April 27, 2003 I had the pleasure of being the featured speaker on financing investment property at Bob Campana’s THREE-DAY BOOT CAMP.  I had the pleasure of giving my presentation, then answering questions for almost 2 hours afterward.  I enjoyed every minute of it. 

First, I’d like to thank Bob Campana for, once again, asking me to speak to his students.   

Second, I’d like to say thanks to the students for their warm reception at the seminar. 

Finally, I’d like to thank all of the students who have called and come to the office, both for their kind words and their business. 

We at Main Street Financial look forward to helping Campana’s students realize their goals of being successful real estate investors.

Just What is COFI?

There are 12 banking districts in the United States – the 11^th is the largest because it is the states of California, Nevada and Arizona. 

Very simply put, whatever all the banks, savings & loans, and/or credit unions pay depositors to have their money as deposits is “Cost Of Funds”. 

In other words the money it cost the saving institutions as a return to depositors for putting their money in the individual institutions!

You must start thinking about the different ways that people deposit money in savings institutions, it is put in at different times, often each day, therefore different rates.  It is also put in at different terms, some short term and some long term. 

When you go into a saving institution and deposit your funds, most often you are looking for the largest yield or return on your funds.  Most often the largest yield is paid on long terms C.D.’s.  The problem with long terms C.D.’s, is that you must commit to leaving your funds in the C.D. for the original term or you pay a hefty penalty for early withdrawal which in most cases is not worth it, because you will lose all the gain you have achieved. 

So, in other words, just because rates offered on a C.D. goes up, people do not have the advantage of cashing in their current C.D.’s and re-investing them with the higher rate. 

Most of the funds put in savings institutions are put in long term deposits like C.D.’s because they usually pay the highest rate of return! 

Thus you can begin to see why COFI is predictable, if the bulk of the money is committed a certain rate and tied up for several years, it does not matter what today’s rates are! 

It Takes A lot of Movement In one Direction for A Long Time To Change the Over All Temperature of COFI! 

Why Would a Mortgage Lender Use the COFI?

To protect themselves, lenders who offer consumers a fixed rate product for a 15 or 30 years term must build in an extra profit margin to protect against the possibility that rates will go higher in the future.  Think of it as an insurance policy – and borrowers are the ones who pay the premium for the insurance. 

In contrast, some banks use the COFI index.  They take in money in the form of all types of deposits – checking, savings, long and short term C.D.’s.  The cost of that money is the return that they have to pay their depositors.  Main Street Financial is a Preferred Mortgage Broker of a bank that does not lend on signature, auto, or personal loans.  They just take in money!  To make that work for them, so that they can pay their depositors their scheduled interest on their deposits, they give the money to their mortgage division to lend out in the form of home mortgages. 

Main Street Financial is a Preferred Mortgage Broker with the largest depositor of the 11^th district.  Simply put, COFI is what they need to pay their deposit on a weighted average – they add a margin to COFI and lend at the fully indexed rate.  This removes the need for the insurance policy mentioned above! 

It also means that their mortgage rates adjust automatically lower as rates decline – which means Main Street Financial’s customers also enjoy all the benefits of refinancing without any of the expense! 

If the rates move up-ward, it will be a slow movement as not all deposit terms turn over at the same time and therefore immediate movement in COFI does not occur. 

If rates do move upward, the 7.5% payment cap is there to protect from payment shock. 

As the balance comes down, even if the rate is going up, at some point the actual dollars out of the borrowers pocket is less. 

Why Did Rates Go Crazy in the 80’s? 

The federal government controlled the bank industry but the controls were not what they are today since the enactment of FIRREA in 1989. 

Without the tight controls of today the bank industry was allowed to make loans under much looser guidelines.  In order to attract more depositors to fund the loans that they were making, they had to increase the interest offered to depositors.  Thus, the increase in COFI! 

In 1989 FIRREA fixed the guidelines and the “Savings & Loan Bail Out” started.  As the regulations went into effect and the bank industry became very boring – COFI began to drop!  It continued to do so until becoming stable at today’s rate. 

FIRREA 1989 

The Financial Institution Regulatory Recovery Enforcement Act of 1989 is federal legislation that was enacted in the aftermath of the Savings & Loan debacle of the 1980’s.  In large part FIRREA was enacted to strengthen the capital requirements of Savings & Loans and thus ensure the stability of the entire industry.  In order to meet these higher capital requirements, many thrift institutions have had to raise capital by reducing their balance sheets.  Accordingly, liabilities of the 11^th District thrifts have declined by 32% since FIRREA became law.  As thrifts have shed liabilities, the higher of cost funds (deposits, other debt, etc.) have been the first to go.  At the other end of the spectrum, liabilities of the 11^th District that comprise of passbook, checking and money market deposit accounts grew by 13%.  Currently these accounts have returns in the 1.5% to 3.5% range.  Brokered C.D.’s, another source of higher rate funds, have also declined significantly.  The overall result of these effects has been and continues to be a further lowering of the average cost of funds in the 11^th District. 

Where Do I Get Information On COFI????? 

The Federal Home Loan Bank

1-415-616-2600 

Web Site

www.fhlbsf.com 

Please call Main Street Financial at 216-459-0911 for individual consultation on how the “COFI equity builder” loan program can save you thousands in interest payments.