Benny Moo

Five Minutes to Fort Carson: 8384 Dassel Drive

From the "seeing is believing" angle, here is a property that is a sure-fire rental, four minutes and 57 seconds off of post.

8384 Dassel Drive, Colorado Springs, CO 80817, visit the SITE HERE

 

How do I know it is four minutes and 57 seconds off of post?

Drive Time to 8384 Dassel Drive

Watch the video. Real-time on Fountain, a city that has doubled in size in the last 10 years.
Particulars:
Price: $205,000
Estimated Rentals: $1175 to $1300 / month
Downpayment: $41,000
Mortgage: $164,000
PI on a 15 year at 5.05%: $1299
Key features:

• Built in 2001
• Fully Landscaped
• Central Air Conditioning
• Laminate Wood Flooring in Kitchen
• New Appliances
• Giant, freshly stained redwood deck
• Five-Piece Master Bath (Tub, Toilet, Shower, Two Sinks)
• Finished Basement
• All three baths are Full

Number of Competing MLS 4 bedroom rentals: 10 ($1100 to $1395 / per month)
Number for Sale: 289

Housing never goes out of style. What changes is who can buy... and who can't. Supply and Demand rule all markets. Interest rates are low and by the standards of supply and demand, so too is the monthly rental value.

The Time to Buy is When There is Blood in the Streets

Baron Rothschild

John D. Rockefeller

Warren Buffett

Google the phrase and all are credited with coining it:

"The Time to Buy is When there is Blood in the Street"

It goes to show that on Wall Street, they're a smart bunch when it comes to making money. Oh yeah, you have $700 billion taxpayer bailouts every now and then, but one way or another, they will figure it all out and Wall Street will always make money. The rich will continue to get richer.

However, the last I checked, the American economy is down several pints of plasma in the last month. The boys on the Street will rebound. Will you?

The only good thing about a market such as this one is that it truly benefits the prepared, the intelligent and the shrewd. There definitely is such a thing as "talent" in financial markets, but for the most part, you can develop the mental muscles to be really proficient at all three if you so choose. At the end of the day, the prepared, intelligent and shrewd are probably the ones that ought to be managing money.

If liquidity returns to markets this autumn, and you the average citizen have a few nickels to rub together... you need to look at your long-term future. Here are some of my observations about how the game will be DIFFERENT and how the game will be the SAME after the Wall Street meltdown of 2008.

DIFFERENT: MASSIVE INVESTMENT BANKS
We are coming off of a period of unprecedented merger and deregulation. There were only five large investment banks in the United States at the start of this month. Today there are zero. The last two standing, Goldman Sachs and Morgan Stanley both applied for FDIC protection yesterday with the Federal Reserve. This is a huge change for corporate America. These banks created the modern economy of merged-up monolithic corporations and securitized your mortgage debt. They're old name Wall Street firms operating in a very new way that most people really don't understand. Here's an example: spellcheck "securitized". Good luck.

DIFFERENT: LIAR LOANS, SUB-PRIME MORTGAGES & SUB-PRIME THINKING
I can go into the all the crazy specifics about this subject (and if you like four-letter words and are not offended by swearing stick-figures, click here) but the bottomline is that "sub-prime thinking" is probably gone for three years at least. Sub-prime thinking was the idea that you could always find a sucker to leverage you, that real estate values would always increase, that an appraisal was an unwarranted obstacle to a consumer's God-given right to purchase, etc. Sub-prime thinking was also the zeal Wall Street had for real estate, and everyone making money on everyone else's real estate. If it seems like everyone had their hands in everyone else's pockets... that's because that is exactly what was going on. If you really examine how the American economy operated post 9/11, there was precious little innovation from any sector of the economy. While Wall Street returned to bullish form in 2005 and 2006, this happened to be on the coattails of the largest real estate expansion in history. The only money being made was on real estate gains, even big corporations could track some of their gains to private individual's gains on their McMansion, and the only way people were supporting their decadent lifestyles were via low-interest (but variable) Home Equity Lines of Credit. With the perceived infinite run-up in real estate values, the American consumer generated a Barry Switzer-size Super Bowl liquor tab. It was a gross understatment by our sitting president to say "Wall Street got drunk". Wall Street was only doing the consumer's bidding, which was doing whatever they could with an unimaginiatve economy that forgot to innovate. For five straight years the American homeowner didn't see much in the way of inflation (nor wage gain), but did see ridiculous home price appreciation (13% was the national average in 2004 and 2005). What they did with that gain was go on a buying binge that appeared completely consequence-free. There never was a hangover. There was just a delayed massive DUI pile-up. So the bloody mess you and I see on Wall Street? It's really similar to the property I showed two months ago in Widefield: Needs a lender deficiency to sell, the seller signs a letter of hardship indicating that they can't manage their mortgage payment anymore... and in the backyard is a new beautiful deck with an outdoor kitchen. In the driveway is a black 2006 Escalade ESV with 22" wheels. The basement has a 52" plasma. There is signed Bronco paraphenalia everywhere. None of this crap was on Craigslist.org. None of this will be mentioned in the deficiency. None of these more liquid assets were at stake. In fact, while this situation was a bit extreme, the same scene is replayed time and time again. I have clients who had their tax professional advise them to create more interest on their home because they needed a bigger tax break. You get $0.30 on the dollar at best for residential interest. You don't get any for a Home Equity Line. Guess what they pulled on their home? A HELOC. By the advise of their tax professional. "Spend some money on yourself with your house, re-finance it to re-set the amortization and then pull a HELOC and enjoy life." Holy dumb math, Batman. If that seems wrong, then ask if it is wrong that along with that  $700 billion being delivered to Wall Street and the cronies that created these loans, that some federal oversight might serve as the fries to go along with their Big Mac.

DIFFERENT: THE WORLD AS WE KNOW IT
Shoot, I figure if the media can't gleefully use statements of obscene hyperbole (did you know this was the worst financial crisis since the Great Depression? I seem to remember 9/11 being a little worse. That latter was almost in my son's lifetime), then why can't I? Back to sub-prime thinking... America had stopped thinking about how to make money that didn't in some way shape or form involve real estate or rely on real estate gains to back up the value of some other project. Remember the great tax write-off of 2004? Buy an SUV that weighed more than 5000 pounds so you could fully depreciate it in 2 years time? Hmmm, where does the average small business owner come up with that cash? Oh yeah, their HELOC! Their business didn't have any real value but their home sure did, so their home ended up funding the $3.65 / gallon gas we now have come to love and enjoy. So even Exxon/Mobil profits are tied to the sub-prime thinking tied to real estate. If Wall Street is to get back on it's feet, it will have to start sponsoring innovation that the consumer both needs and wants. That in turn is going to look a little like the Dot-Com explosion of the late 90's, which yes, might need to make you a little concerned.

THE SAME: REAL ESTATE CAN BE A DAMN GOOD ASSET
Real Estate may not increase this year or next. But housing is a basic necessity of life. People need shelter. People need food. People need clothing. Those are the three "needs". As Seth Godin says (and I repeat in almost every post) we have moved from an economy of "needs" to an economy of "wants". People have three big needs and then a ton of wants. I'd rather keep up with the needs than the wants. In the last eight years America added almost ten percent to it's roster of households who owned a home. That period in time coincided with very low interest rates which helped get people into a home when the might not have been able to previously. But it also gave rise to sub-prime; and 100%; and 80/20; and no-doc; and drive-by appraisals; and an average home size that increased 15% in 8 years; and a popularity for new construction; and an increasingly customized society.

There is zero surprise it is all unraveling.The Real Estate Balloon itself was over-leveraged based on unsustainable demand. The last week on Wall Street was not a balloon popping, but the Hindenburg. But remember the adage at the beginning, that the prepared, the intelligent and the shrewd can move forward? Was anything about the grand economic embrace of unsustainable real estate appreciation intelligent or shrewd?

But it is a need. And unlike wants, you can plan for needs. Warren Buffett likes railroads. Still. Yes, check the calendar, it is 2008, and Warrenn Buffet, the world's wealthiest man likes railroads.  Sexy  investments are usually lousy investments. Well, Warren isn't the sexiest of men.

But the Oracle of Omaha is usually right: Buy Value. When you buy a stock in a company, do you really know what's going on with that company, their competition, their marketing, their accounting, their leadership? Maybe, but probably not.

Well, do you own your own home? Has it been a good investment (I'd ask this question especially for those who bought 2004 or before)? What would your life be like if you owned 10 of them? What if they were all free and clear? A big difference between stocks and real estate is that stocks these days rarely  pay dividends. They don't say "thanks for owning me". A free and clear property can not only go up in value: it can pay an amazing dividend.

How to Lease Purchase

In Twitter World, we call this a "Re-Tweet".

Ardell with www.RainCityGuide.com is one of the original bloggers (an original maverick?) out there and spends a lot of time talking about the real estate community, the incentives going on, the problems in the market etc. She had an exceptional post last week that was much more nuts and bolts: How To Do a Lease Purchase. If you know of anyone trying to get out of a house, this is really good to pass on. Unlike her home market of Seattle, our rental market is going crazy and our rental rates are much more on par with reality (in Seattle, other posts discuss renting $650,000 homes for $2000 a month or less).

7980 Interlaken Drive, 80920

I've been posting a series of blogs on the value of long-term real estate investment. Here is a classic example of buying based on fundamentals.

• When possible, one of the prime areas to invest in Colorado Springs is School District 20.
• When possible, purchase a 4 bedroom home.
• When possible, purchase a Grade A (newer construction) home.
• When possible, buy into an area that has a steady demand of relocating prospects.

Even if you aren't looking for a rental property, there aren't many places in all of Colorado Springs where a home just slightly above average selling price in the entire city has:

• A 19 x 16 Master Bedroom with Fireplace and Reading Area
• Two Large Upper Level Secondary Bedrooms
• Builder-finished Basement with Rec Room, Entertaining Area, Fourth Bedroom, 3/4 Bath
• Brand New Central Air Conditioning
• A 22 x 16 Sun Deck
• A covered Patio expanded by brick pavers
• Stainless Steel Four-Burner Natural Gas Outdoor Grill/Kitchen with it's own covered Pergola
• Rubbermaid Exterior Storage
• Over-sized 2.5 Car Garage
• Island Kitchen with Wall Oven, Microwave, Range-Top, Pantry and Side-By-Side Refrigerator
• Plus...Total Mint Condition in every room

7980 Interlaken Drive, C/S/C

Seeing is believing. Just Listed Friday night.

Give your Child a Chance: Investing for College with the Compel Grant

"My friends... my fellow Americans" - any local or national politico presently on the stump...

You can be a populist liberal or a free market baron, the reality is that having a college education does matter when it comes to an individual's employable future and the income they can expect to make on an annual basis. Forget for a moment the Rich Dad Poor Dad garbage that your education doesn't matter. Is the world staying still? Do you live in a static world, or a world changing rapidly?

Education makes you elastic, mailable and better equipped to embrace change. I am 33 years old. Richard Florida (Rise of the Creative Class) has done research that shows the average Gen X'er will have 7 unique careers in their work life. Guess what? I'm on 3 and a half already. Without my education, the events of the last dozen years would have left me with few options, little creativty, and a stake in this year's election that looks more like buying Lotto tickets than living the American Dream.

Stump Speech Rhetoric Number 1: The Economy of Have's and Have Not's
The gap between Rich America and Poor America continues to widen. Democrats and Republicans are presently going nutty on this example. But here are some facts: In 1994, the richest 20% of America received more of the nation's income than the middle 3/5ths combined. We live in a top-heavy world in regards to income. Government can create vehicles to redistribute some of that wealth, but without a wholesale change to our capitalist economy, this is how free-markets work. The top have more than every-one else. Right or wrong: It's a fact.

Stump Speech Rhetoric Number 2: Skill Matters. Education Plus Skill Matters More.
Ask yourself this: do you pay more for a standardized commodity or a customized commodity? Why can Apple hold price on an iPod? Because it makes for such a brilliant customized experience. Other players hold music. iPod makes it your own. Same reason you pay twice the price for a Mocha and not a cup of Decaf. Can we accept this as fact? Okay, let's move to this example: in 1979, the college graduate earned 49% more a year than a worker with a high school diploma. By 1994, the earnings gap had widened to 89%. To further re-butt the "education doesn't matter crowd"... each year of formal schooling after high school adds 5% to 15% to annual earnings for life. These are US Dept. of Labor Stats.

Stump Speech Rhetoric Number 3: Imagine Grecian Columns, Not Safeway Tech.
Community College may work for some, but those are the 5% to 15% annual earnings increments. The four-year bachelors degrees make the massive difference. And they ain't getting cheaper. Today, in-state tuition, books, room and board in Colorado exceeds $10,000 per year for undergrad studies at CU or CSU. Almost no one gets through in 4 years. In 15 years when my twins are 18, it is expected that the same in-state "four-year plan" that costs $40,000 today will cost $103,946. That's based on models found through a number of college planning websites. It's already almost $40,000 a year at my alma mater, Colorado College.

Stump Speech Rhetoric Number 4: You Have 4 Choices (credit The Group, Inc. Fort Collins, CO).

• Pay College Costs out of ordinary income. You can add 25 to 30% a year on top of this for the taxable wages, because remember the government takes their share first. So today, paying $10,000 a year requires earning $13,000 a year. Paying in 2023 at $104,000 for the 4 years, or $26,000 per year requires dedicating $34,000 a year in income to pay for education. Per kid. I'm not too uncommon in that I have three within three years of one another. Simple compound interest says this "opportunity/problem" grows with each child you have.
• Student works to pay part of the costs. This could add years to the timetable reducing it's efficiency, and it increases the probability of drop out. It does inspire a stronger work ethic in the individual however, since nothing is free in life, right? I paid for 25% of my education this way. I also carried over-loaded semesters twice and graduated a semester early. I missed out on study abroad. I missed out on three classes I wanted to take. I didn't get to compliment my hard-core humanities education with as much science or economics as today I wish I had.
• Student loans are an option. Barack Obama had to write bestselling memoirs to pay his student loans two years ago (almost 2 decades after graduating law school in the 80's). A Columbia undergrad and Harvard Law degree tend to be pricey and, um, not free. The majority of students aspiring for a college education begin their college experience in debt and the majority of these debt-burdened individuals have more than half that projected tuition expense saddled to their name within 2 years of graduation.
• Pay college costs out of assets. "I don't have any assets" you might say. Well, here is one you might think of: buy a rental property that will be free and clear when your child hits 18.

The Compel Grant Close: The easiest way to pay for college is to buy a rental property with a 15-year loan when your children are 5 or younger.
Here's the equity in a $200,000 rental property with a 20% downpayment:
Equity Now                    Equity in 5 years                    Equity in 10 years            Equity in 15 years
*$40,000                           $76,140                                $127,372                        $200,000
**$40,000                          $131,396                              $253,150                        $415,785

*Assumes 0% annual appreciation
**Assumes 5% annual appreciation, the 27 year average for Colorado Springs Metro MLS from 1980 to 2007

You will probably be $200 to $300 a month upside down on this property in year one with tenants paying 80 to 90% of the monthly mortgage expense. At tax time, you will see most of your expenses and out of pocket returned to you in the form of tax credits. Your monthly interest will help offset some of these losses as well.

By the time the home is sold fifteen years from now, it will probably be renting for $1500 to $2000 a month, and since it is paid off with no monthly expense for ownership, will be supplying you with an additional $20,000 +/- in annual income. This income can be used to begin paying down the principle even sooner should your children already be 7 or 8 years old.

My fellow Americans... No government can force you to do this. You just have to decide for yourself if you want your children to go to college or not.

Investing Fundamentals: Short-Term vs. Long-Term

Real Estate is a remarkable way to build wealth.
 
Real Estate is usually a brutally inefficient way of making money.

What's the difference you ask?

Building wealth is a process of putting money to work for you. Making money is a process of putting yourself to work to make more money.

The grammatical differences are subtle, but the realities are extreme.

Wealth-building is the process of thinking strategically and using one thing (money) to create more of that same thing (more money). Making money involves the tactics of one thing (your time, sweat, and/or labor) and using it to make something else (more money).

Strategy involves a long-term horizon, ends being utilized for perhaps a different means. Tactics involve a short-term horizon, the ends... are. A noted radio commentator likes to say "The future will take care of itself... I am for the 'is'". (yes, I'm taking these comments out of their context... the same commentator picks and chooses everything he airs, I figure turn-about is fair game when illustrating a point) This is precisely the sort of short-term thinking (I'm for the "is") that should stay away from real estate investment.

Wealth-building in real estate isn't very sexy. It isn't for the impatient. It's for those that like to wake-up and find out: gee... compounding value happened. I don't have to work anymore.

Here is another analogy that I like to use when it comes to thinking about a real estate investment: a different, easier to understand investment. These values are arbitrary and are simply made-up to illustrate a point: Buyer A is selling 100 shares of Home Depot stock at 10 am today. Buyer B is also selling 100 shares of Home Depot stock at 10 am today. When they sell, who makes more money?

The reality is that they sell their 100 shares for the same dollar figure, but to know who "made more money" (and in this case, built more wealth) a piece of information is missing that must be known to figure out the riddle. What is it? How much Buyer A paid for his shares and how much Buyer B paid for her shares. If I said that Buyer A paid $50 per share and Buyer B $40 per share, you don't even need to know what they sold for to know Buyer B made out a lot better than Buyer A. Neither Buyer A or B could control what they sold their shares for; they sold today at 10 am for market price. However, Buyer B bought her shares for less. Buyers B netted more dollars than Buyer A.

Real Estate works in a very similar way. Just start stretching the timeline out.

The problem with most returns-on-investments is that the timeline used to measure them is far too impatient. Compounding what money can do year after year after year creates a bell-curve that just can't be argued with.

If you can invest for the long-term, you can invest with a 15 year mortgage. A buyer today buying a $250,000 home in the Northeast part of Colorado Springs can get a 4 bed, 4 bath home with a 2 car garage renting for $1400 a month. If you have 25% to put down on that home, your PI payment on a 15 year mortgage would be $1482 with today's big Fannie/Freddie/Bailout Drop (paid down just a little, 15 years are at 5% today... sellers are eager to pay the expense of the buydown). After expenses and escrows, the "investor" is out about $240 a month after the tenant pays most of the mortgage. That's about $3000 a year (I'll use the worst-case scenario numbers whenever possible).

• The investor gets to write off the difference in payment and rental
• The investor gets to write off $3 out of every $10 spent on interest on that loan
• The investor gets to write off repairs to the property
• The investor must keep accurate receipts and file taxes appropriately and seek good legal and tax counsel, but let's consider: In 15 years, that home is paid off

In the first two to four years, the investor shells out about $3000 a year which mostly comes back on the annual return with all the other tax benefits.
Then there is that interest credit ($79,000 in interest-paid over the life of the loan).
In 2023... it's paid off.
That initial $63,500 investment plus another, say $15,000 over five years of renting "at a loss" (you're quickly seeing how attractive that loss is) amounts to $78,500 in invested money.

• That $78,000 investment produces a $390,000 home after 15 years of 3% appreciation
• That's assuming a rate of return 3/5ths of what the historical 27-year average is in Colorado Springs (3% is 3/5ths of the 5% annual price return witnessed in El Paso County from 1980 through 2007)
• That's a 500% return on investment in 15 years
• That's in addition to the $20,000 to $40,000 in tax-credit advantages the property likely created during the course of ownership

That's also in addition to probably making $25,000 a year in rental income in 2023 at $2025 a month in rent (an increase of only 44% over 15 years, around average for the 3% rate of inflation over the last decade and a half).
How is the home spinning off $25,000 in rental income?

It's paid for.
There's no mortgage.

So let's see... it's 2023... you own a nearly $400,000 home (that might be $495,000 if the historical average of 5% holds)... that's kicking off $25,000 in rental income, and all you have to do is change the furnace filters and the smoke detector batteries a few times year. Keep those receipts for the filters and batteries, those are expenses. Why sell it?

Well... how much do you think your kid's college will be in 2023? A $400,000 home might pay for four years at Colorado College in 2023. It might pay for both my twins to go to CU at the same time.

In Flying Horse today there are 17 resale homes for sale from $300,000 to $600,000. Half of them are distress sales (8). Five of the distress sales are agent owned. People don't usually rent half million dollar properties. People usually rent Grade A, clean properties that are 3 to 4 bedrooms (like the photo here, the same house as the photos above, a house which sold for $253,000 in Wagon Trails on July 13, 2008). You can buy a $250,000 home and rent it for $1400 a month or a $375,000 house and rent it for... $1900? There's dumb math and then there is dumb math. Most tenants don't need golf privileges for their short 12 month stay. The "investors" that bought in Flying Horse in 2005 and 2006 bought under the short-term, tactical principle that home values would always increase. My term for this is "sub-prime thinking". They bought with 30 and 40 year amortized loans. They bought homes with mortgages allowing less than interest-only payments. They bought with loans offering exotic ways of reducing the monthly expense for a short duration because the amount actually borrowed was so huge. Many of the agents who are foreclosing on one of these homes are foreclosing on other homes, elsewhere.

If they bought a single home, with 25% down on a 15 year note with 2005 mortgage rates (which we're seeing a glimmer of today)... they'd not only be solvent... they'd be raising their rental rates.