Debt Views

It is a challenge to invest $5000 because it is really not enough money to buy wealth producing assets like real estate. However many people overlook land as an investment vehicle. Lets explore now, how you would invest $5000 in land and make some really good returns.

First of all, I am an investor with a typically contrarian opinion to the conventional wisdom. This doesn’t mean I am a crack pot, but I do recognize that going where there is little competition is better than following the masses.

In real estate, they call out “position, position, position” The meaning of this is vague, but essentially what this catch cry refers to is buying in the best areas of town. It is quite a misconception to my way of thinking, because it sort of points to the false fact, that there are no buyers in other areas of town, just in the best areas. This is simply not true.

It all depends on the utility for the purchase. If you want to invest $5000 and get a return for example by the end of the year of double, or $10,000 you may be on the right track subdividing a block of land. It is called a “paper rehab” Similar to improving a property but without the painting and hard work. Just a few forms to fill in and pay for and voila, instant increase in value.

Your first step is to find an area where you can afford to make a purchase. With $5000 you will need a 10% deposit on the loan and legal costs and of course the costs of a new title when you subdivide this land. So you are looking for a largish block at around $30,000

Next, you find 2 or 3 candidates and begin doing research on those specific blocks. You go to your local town hall and they will have all the information you need to make a choice. You need to first establish, if the block is allowed to be split in two. Corner blocks are great for this, but consider all candidates on their own merit. Typically there will be a certain minimum size new sub divided blocks may be. In my area this size is 400sqm so your block will need to be at least 900 or 1000 sqm because every block has some sort of “no touch zone” to allow council to access utilities etc. Also you must allow for drive ways and such, so the minimum is just a guideline.

Once you are sure the land is able to be split, you can approach council staff directly and get them to give you a tentative answer. Of course they will not be able to tell you for sure, until you actually go through to process and submit the application. But a tentative answer 9 times out of 10 is fairly certain.

You go ahead with the purchase and cut the lawn to get it neat looking and more appealing. You get your sub division papers processed and now you have two smaller blocks worth $20,000 each. Sell them both, pay out your bank loan and you are left with $10,000

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When nanotechnology was first described, it was considered to be an over-hyped term straight out of a science fiction novel. But over the years, as technology advanced, microscopic machines and even factories became a reality and soon nanotechnology investing was the in thing for corporate ventures.

However, in the last few years, individual investors have realized that there is very little money to be made in nanotechnology investing. Even the existing firms have not performed according to expectations and newer IPO’s haven’t really flooded the market either.

The advances made by nanotechnology has been limited to improving the quality and lifetime of existing materials like batteries, cells etc. There have been very few breakthrough products in nanotechnology.

Whether to invest or not

Here is the big question. Do you invest in nanotechnology or not?

• There are many start up ventures out there that seem to be promising enough but most of these will take years to get established.

• Hence from an investor’s point of view, it is extremely important that you gauge the landscape.

• You need to be well aware of the time frame and the constraints in the filed.

• If you are expecting to invest in some of the nanotechnology products that seem sci fi, then keep in mind that most of these products are almost 100 years away.

• Unless you have an extremely broad time frame for investing, there are better options at hand

For the corporate investor

On the other hand, nanotechnology investing might just prove to be the right thing for corporate investors.

However, keep yourself updated about the recent advances made in the filed like the classification of nanotechnology into active, passive and hybrid groups. This will help investors get a better grip on the time frame required for commercialization of the technology.

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At one time I owned 166 single family houses that I had bought with a minimum down payment by taking title subject to the existing financing. From the first house I bought, I used only seller financing and avoided negative cash flow problems primarily because I couldn’t afford to take anything out of my meager earnings to support it. That means that I had to find ways to buy highly leveraged houses that could support themselves with a little left over for me.

My all time favorite way to buy houses in contrast to lease/Optioning houses, is to “cold canvass” neighborhoods that I want to own long term rental houses in to find a homeowner with a big equity who has to relocate out of town either because of financial distress or personal reasons. When I found such owners, in contrast to others who might have approached them with low offers, I offered to pay full appraised retail value for the seller’s large equity and to take over relatively low payments so long as they were far below prevailing rents for the upscale house.

The catch was that I agreed to pay the sellers just enough money down to enable them to pay the moving company, and nothing more – neither interest nor principal — until I sold the house at a price that would net me at least 10% profit over all my expenses.

Included in my expenses would be vacancies, repairs, taxes, insurance, mortgage payments, marketing, commissions, and settlement costs in addition to the fair market value of my management effort based upon 10% of collected rents. I usually specified that the seller would be paid no later than 5 years hence regardless whether or not I had been able to sell the house.

One day I noticed that I had a lot of balloon Notes coming due in five years, so I changed the maximum holding period to 6 years, then to 7 years. When I tried for 8, I got a lot of resistance, so stopped at 7 years.

The magic in this formula is that I was able to buy much better houses to hold for long term appreciation with very high leverage and positive cash flow that I could use to offset negative cash flow from other houses.

When I hear people mewing about not being able to buy good houses that will cash flow today, I get a little vexed that they haven’t taken the time to invest in themselves by learning how structure a creative seller financing transaction that can solve problems for both seller and buyer; particularly cash flow problems.

What do you do when a seller is willing to meet your price, but wants some cash to solve his problems? Let me tell you about one such person. He was a baggage handler at the airport who wanted to sell his a house that I had sold him a few years back. (It always pays to maintain contact with old customers to whom you’ve sold or financed houses so they’ll call you when they want to sell, or buy another one.)

He wanted $10,000 cash for his house and wanted me to take title subject to the first mortgage loan. The house had appreciated a lot since he had bought it and he didn’t really want to move, but he needed $10,000 to pay some pressing family bills. The problem for me was to find the money to solve his problem. A natural inclination would be to go to the bank and borrow what I needed, but I’ve never done that. I pride myself on the fact that I’ve only signed personally on one loan; my VA loan which I paid off within a year by selling the house. All the hundreds of houses I’ve bought over the decades have been bought by taking title subject to existing loans and with seller financing.

Take a little test for me: Before going any further; how would you raise $10,000 without going to the bank or signing personally on a loan?

In the case at hand, the solution was fairly simple. I called one of my team of professionals, a ‘can-do” mortgage broker who has both private and institutional sources of financing. He arranged a 5.5% home equity loan on the house that the owner signed. I then took title to the house subject to both the first and second liens. The owner then leased the house from me on a net basis for the amount of the first lien payments.

The payments on the home equity loan created negative cash flow each month, but I had a motivated occupant who swiftly forgot that he was a tenant and continued to upgrade the property; and I bought the $10,000 property equity above both loans with nothing down and only a little over $110 per month payments. As far as the seller was concerned, the $10,000 was at no cost, since they never had to make payments on it.

Why would he sell me the house with this financing rather than to sell it on the open market to raise cash. Because he really didn’t want to move into an apartment or another house with higher payments; and have to put his kids into different schools. Being able to stay in the house was what he really wanted, and my purchase allowed him to do that.

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