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Newsletter from Montana
December 2006
A new year is upon us and if you are not rich already, you might want to think of a strategy to build some wealth. I made my fortune in real estate, which is the area I know best, and so I will tell you about it. I did try other areas of investing and I lost a bundle, because I knew nothing about that area of investing, I trusted people without checking if they indeed made their fortune in that particular field, which they had not. Therefore, if you trust someone with your money, you want to check and see if those investment advisors are themselves successful in their own field of expertise. You might want to watch "Pursuit of Happyness," a
movie inspired by a
true story.
In general, personal finances sort into three buckets. The first bucket you probably have already started, it would contain your home, savings for your family, such as an IRA, college education for your kids and life insurance. The first bucket is a safe harbor to fall back on if necessary. Your second bucket should contain some wealth building materials, such as stocks, bonds, rentals, a second business - you could make your hobby into a business, that way all expenses are tax deductible. (Advertise yourself as a fishing guide :-) Your third bucket then are the toys, such as travel, fancy cars, planes, boats, cattle ranch in Montana, second home on a lake in Minnesota and other dreams. It is advisable to get your first bucket started first, because if you start with the second or third bucket, you can stand loosing it all if things do not go according to plan.
If you are stuck on the first bucket, the best way to get rolling on the second is to put 10% of all your earnings into a savings account.
("The richest man in Babylon" by George S. Clason)
Have your employer, or from whomever you receive your income, send the money directly to your savings account. Just totally ignore that money and live on the 90% that are leftover. Big surprise, you will never miss it. You can make due with 90% of your income and if not, I am sure you will find a way to earn more money. It takes a little doing, but it is also rewarding to see your money grow in the savings account. Once you have saved up a little you can put the money down on a rental; either a single family home or a multifamily home with POSITIVE cash flow. Positive means after you deduct 40-45% of the rent income for improvements, maintenance and vacancies, the leftover will take care of your loan payments with a bit to spare. What do you do with the little bit to spare? No, it does not go into bucket #3, you pay off the loan on the rental. In the meantime, you still save 10% on all of your income, put it in a savings account and when you have enough for a down payment for another rental with positive cash flow, you buy one. You might want to keep in mind that you buy those rentals for keeps and not for resale, so you want to be sure you improve them a little bit each time a renter moves out. Put up nicer light fixtures, better floor covering, give it a nice coat of paint, etc. Also, to keep good renters, keep the rent just a tad below of what the market will bear. If you are competitive, you have a better chance that your rentals will re-rent fast and happy renters stay longer, you have less turn over, which are costly. You also might want to ask your renters to send you referrals if they do move out with some incentive for them. Do not buy a rental where you have to collect the rent with a gun. I know in those areas you can pick up rentals very cheaply, but you also will have more problems with the renters than what you bargained for.
To find good renters, not only check references and credit history (collect $ 25 for a credit check in advance), but chat with a previous property owner, preferably with the one before the current one. Check the phone numbers of the references to see if those are indeed the phone numbers of the people and businesses the applications claims them to be. You can go to Superpages.com,
type in the phone number and see what comes up.
If the people are moving from not very far away, visit them in their current home. Just drop by with the rental agreement and in whatever shape their home is in now, that is what your rental will look like. Once you have paid off your first rental, what do you do with the positive cash flow? You start to pay off the loan on the second rental you bought. You will be surprised how fast loans are paid off if you pay a little more to the principal each month. Have a goal to own 400 rentals. After you managed the fist twenty yourself, you might want to consider hiring a manager. If you keep in mind that you do not want to sell your rentals, you are not affected by the up and down of the housing market. As long as your rentals have a positive cash flow, who cares what the units are worth in the market place. By the way, the housing market in the Midwest is holding steady. It never went up a whole lot, but it also does not fall through the floor either. If you want to buy rentals in the Midwest, I am not only a member of the multiple listing service in Detroit Lakes (NW Minnesota), but now I am also a member of the Fargo, North Dakota, MLS (and still a member of the Billings and Red Lodge MLS in Montana).
When you buy rental units, you need to put your real estate person to work. Do not take the word of the listing agent. Have your buyer's agent write a letter to each tenant as due diligence while your units are in escrow, and have each renter state what he is actually paying for rent, who owns the appliances and if there is anything wrong in the unit he occupies. In some cities, or in case of a lax management, you might be in for a surprise. Also, be leery of relatives of the property owner who might move out two weeks after escrow closes.
If you do not have 20% saved up for a down payment on your home or rental, the bank will charge you for Private Mortgage Insurance (PMI), which is used to pay for insurance for the bank. The PMI does not need to be there after you have paid on the loan for a while, property values went up and you now do have 20% equity in the property. Therefore, you can cancel it and it goes away. Unfortunately most people do not know that and pay the PMI until the cows come home (they never come home in Montana, they always stay outside :-). The PMI-people are not about to tell you that they do not need your money anymore, you will have to take the initiative and cancel it.
Speaking of cows in Montana. Here we have the
Montana Code Annotated (MCA) You might want to look up title 70 regarding property rights and if your neighbor is not willing to share the cost of fixing the fence, you might be interested in
Chapter 16 Part 209. You can send your neighbor a notice that the fence needs fixing and if he does not do it in a certain timeframe, do it yourself and mail him an invoice. In Montana, when you stand in the center of your fence line on your own land, you are responsible for the fence to your right; your neighbor is responsible for the fence on your left.
If you rather build a barn than a fence, I found some nifty
barn kits while I was shopping for a barn for our farm in Minnesota.
Some people really take pride in their old barns and
decorate them.
Did you know in the United States only 2% of the population are farmers? You can always tell where the priority of an area is by their tallest and biggest buildings. Out in the country it is often grain elevators and barns, in cities it is the commercial buildings and the lifeblood of the economy rules. In small towns, it is often a church.
According to the United States
Department of Agriculture, ninety-eight percent of all farms in the United States are "family farms". Two percent of farms are not family farms, and those two percent make up fourteen percent of total agricultural output in the United States, although half of them have total sales of less than $50,000 per year. Overall, ninety-one percent of farms in the United States are small family farms. What I found interesting was that Minnesota produces over $ 4 billion in livestock sales and over $ 4 billion in crop sales, while Montana with almost twice the land in farms and ranches only produces $ 1 billion in livestock sales and less than 3/4 of a billion in crop sales. The average size of a farm in Montana is 2,100 acres, in North Dakota it is 1,300 acres, and the average size in Minnesota is 340 acres. That is the difference water and quality of soil makes.
If the snow is thick where you live, these people here sell you a
shovel for your SUV.
If you would like to explore the border waters of Minnesota in August, this is the time to make reservations at
"Ballard's Resort" Pre-book your summer fishing trip during the month of January, and save up to $150.00 per person off the regular package rate.
Trophy Walleyes -- Early Bird Special:
4 nights lodging, 3 days guided walleye fishing, and 11 meals only $479.00 per person (based on a group of six people). There are no dog days on Lake of the Woods. Big water, Big fish. It takes warm weather to generate the desirable active feeding pattern. The main difference between July and August is how they catch fish. In August the walleyes gradually depart from their rock reef locations and move more toward the feeding grounds of the mid-lake mud flats. Trolling the flats with downriggers, planer boards, long-lining, or leadcore line, geared up with crankbaits, are proven methods to catch the walleye there. The guided charters typically use the downriggers when the bait-fishing goes south, and this allows to keep pace with an incredibly fast paced bite. Would you like to catch 180 walleyes in a day with your group of six people? Call Jessie Anthony 1.800.776.2675 ballards@wiktel.com
Set the hook! And let us not forget the f-words, such as family, fun, friendships, fitness and fishing; have a wonderful New Year!
:-)
Best Regards,
Dorothea Lowe, Broker
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