|
Return to Transcripts main page
CNN LIVE SATURDAY
Dollar Signs: Making Money From Real Estate
Aired August 28, 2004 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
FREDRICKA WHITFIELD, CNN ANCHOR: Well, welcome to Dollar Signs, where we help you make the most of your money. Are you in the market for a home? How about 10 maybe? Real estate investing can be very lucrative if you know what to do. And my guests today are going to tell us all about it.
David Hinson is with the Wealth Management Network in New York, and John Mangham is a certified public accountant and a real estate investor in Tallahassee, Florida. Good to see both of you, gentlemen.
DAVID HINSON, WEALTH MANAGEMENT NETWORK: Good to see you.
JOHN MANGHAM, CPA: Glad to be here today.
WHITFIELD: Oh, good. Well, first, let's talk about investment property. How do you define what is investment property... John?
MANGHAM: Well, an investment property is something that you're into, very simply, for the money. And what that means is there are two kinds of money: cash flow, which is kind of the pay-me-now, if you've got positive cash flow, and the big upside is appreciation, and that's where we're buying a property that we hope goes up in value over the years ahead.
WHITFIELD: All right. And David, how do you get started? You've got some very specific ideas about having a plan, having a team, and having the resources in which to execute all of it.
HINSON: That's right, Fredricka. The way you get started is essentially to begin to format how you're going to go about actually buying these types of properties, if you choose properties as your strategy. There are a variety of different real estate strategies you can execute -- but really thinking through what you're trying to achieve when you purchase real estate as an asset class of several.
Obviously, it's one of several asset classes you can choose -- putting together your plan, thinking through what you want to achieve, understanding exactly where you want to do with it, and then putting together the appropriate team and all the other pieces so you can actually execute your strategy over time.
WHITFIELD: And so, when you talk about plan, you have to start out with, how much money do I have to even spend; you know, what kind of property am I looking for? Investment property really can run the gamut, can't it?
HINSON: Yes, it can, and that's a key consideration, but it's really one of many. How much capital you have or how much money you have to spend is one. Another one is considering how much time you actually have to focus on it, what your knowledge base is relative to the various classes of real estate. And if you have any competitive advantages -- everybody has competitive advantages when it comes to real estate, and it's really important to understand exactly what your competitive advantages are.
WHITFIELD: And John, most people would think that in order to buy a piece of property, it means having at least 10 percent to put down in order to acquire that property. But you say quite the opposite. It can start with just $1,000?
MANGHAM: Well, you can get into the game, as I like to call it, with a small amount of money. You might start with $1,000. You might purchase a property, taking over somebody's payments. It helps to have a few thousand dollars in reserve, because invariably, there will be repairs; there might be vacancy.
But you can get started small. And the classic way is to buy a good old rental house. Most people don't get started buying large commercial properties. They buy something they're accustomed to dealing with, which is a home.
WHITFIELD: And it's the idea to seek out a type of rental property that's something that, perhaps, you might want to live in, something that you like personally. I mean, do you look for certain attributes when going into your first rental property?
MANGHAM: Well, there are some people who have a theory that they will only buy property that, if times get tough, they could move into it. And so, they've got neighborhood characteristics and schools and churches nearby that would meet their personal needs. Those can be good rental properties.
But on a broader scale, the classic best rental property is a standard old three-bedroom house. That's what we call a bread and butter rental property...
WHITFIELD: Really? Not like a condo or something?
MANGHAM: Well, a condo can be a good rental property, but you've got to deal with the issues associated with the Condominium Owners Association. So many, many investors prefer stand alone, single family detached housing.
WHITFIELD: All right, Wanda in Illinois is on the telephone, and she's got a question about rental properties, particularly, should you get, or when should you get a management company involved? Wanda...
ON THE PHONE, WANDA FROM ILLINOIS: Yes, I'm 60-years-old. I can retire in two years. I have $73,000, which isn't a lot of money, so I was thinking of investing in maybe a 12-flat building in Illinois, or even 20. But I know that I don't have the knowledge to manage it. And I'd like to know, how would I go about choosing a management company who could stand in for me as far as getting the mopping, the hallways, the grounds and everything taken care of? WHITFIELD: David, I'll let you take that one.
HINSON: Yes, that's an excellent question, Wanda. There's a number of considerations when you're looking at a management company. One is looking at their track record, how many properties they manage. A larger management company, if you have one property, may not be good for you, because they may not give you the attention you desire.
Conversely, a smaller company that is fairly new to the market may not be good for you because they simply don't have the expertise to do the things you want to do, or don't have the personal to do it. So one of the considerations is to look at the size of the company that you're considering, looking at their track record, what types of properties that they have experience managing.
Because there are different types of properties, and different management companies have different skill sets. One consideration is to make sure that they are a financially sound company. You don't want to have a management company that ultimately goes out of business and leaves you in a position to where you actually have to do the work yourself.
Certainly, in your instance, a management company would be the way to go. But considering those certain factors that I've mentioned, those would probably be some of the real ones you want to really focus on.
WHITFIELD: And then, John, there's the issue also of not biting off more than you can chew if you've never had a rental property. Do you want to take a huge risk, or maybe you should define is it really a huge risk to go into a multi-family unit like an apartment building?
MANGHAM: Well, as David mentioned, you've got to set your own plan. You've got to decide where you want to be in a few years. If you bite off more than you can chew, I've seen instances where investors fail because they purchases several properties or a large multi-unit, a small apartment building.
You've got to take a look at your capabilities to check on the property, even in conjunction with the management company. And I always suggest that you should have some cash reserves. Don't spend the last $73,000 acquiring it, and then find out you have nothing with which to renovate the apartments. They may need repairs.
WHITFIELD: OK.
MANGHAM: So be careful.
WHITFIELD: And Andrew from Levittown, Pennsylvania... sorry to cut you off. We're just about running out of time. I've got this one email I'd like to sneak in before the break: "I have money to invest today, and I'm on the fence whether I should buy real estate or stock. The stock market is relatively low versus real estate being at an all time high. Over the next two to five years, which will have the greatest return?" John... MANGHAM: Golly, looking in my crystal ball -- and sometimes, people ask me to do that -- I personally think that residential real estate -- and I'll go back to good old single family houses -- are not influenced by the economy the same way that businesses that make up the stock market are influenced.
Over the coming years, we're all counting on an economic uplift, and I think the houses will go up in value better and faster than the broad stock market will.
WHITFIELD: And David, how much does one want to keep into consideration how much profit they might be able to gain from a particular type of property when they decide to make that investment?
HINSON: Right. I think the real consideration here is not really looking at the profitability in terms of stocks versus real estate as segregated options. I think what you have to do is really go back and try to understand exactly what you want to achieve from your investment portfolio in general, and make sure that you have an appropriate asset allocation.
In other words, you want to have some money in real estate, indeed, and you also want to have some money in liquid assets such as stocks, because you don't know when you might need to get cash or convert your investments into cash. You also want to have some exposure into the bond market. So I think the real consideration is what sort of total return do you need to achieve your goals, and then, allocate your assets accordingly.
WHITFIELD: All right, David Hinson and John Mangham, hold on a minute. We're going to take a short break, but we're going to continue to take your phone calls and your emails as well. So give us a ring at 1-800-807-2620, or send your emails to DollarSigns@CNN.com. We'll be right back.
(COMMERCIAL BREAK)
WHITFIELD: Well, we're going to go back to DOLLAR SIGNS in a moment, talking about investment properties, real estate properties. But first, let's take a look at some weather developments. Jacqui Jeras is in the weather center. Jacqui...
(WEATHER REPORT)
WHITFIELD: All right, thanks a lot, Jacqui. Now onto DOLLAR SIGNS. So you've decided to invest in real estate. Well, at what point do you say, "OK, now it's time for me to move on to property number two, or perhaps even property number 10?" David Hinson of Wealth Management Network is with us, as well as real estate investor John Mangham. All right, so when do you find that comfort zone -- that, OK, it seems like I'm managing OK with one piece of property, now I may want to move onto another one? David...
HINSON: Yeah, I think you should really begin to look immediately after you purchase a first property. If your desire is to be a real estate investor, as soon as you purchase a first property and you've gotten it stabilized, look towards the next property, and the next and the next.
WHITFIELD: And so, John, how do you do that and be able to, you know, manage all of your expenses and not get stuck with a pretty sizable, you know, tax penalty in the end because of the kind of income that you might be receiving from having real estate property as an investment?
MANGHAM: Well, quickly, there are two categories. Your cash flow on a rental property will generally be offset by a tax deduction called depreciation. That will serve to keep your ongoing taxes at a minimum. When you sell the property one day in the future, there's a technique called a 1031 tax deferred exchange...
WHITFIELD: And what is that?
MANGHAM: ... well, that's a sequence of selling one property, followed by purchasing a replacement. The two transactions are linked together through a documentation sequence done within a timeframe. You only have 180 days to complete this tax-deferred exchange. If you succeed in this process, you can keep from paying capital gains tax when you sell your investment properties, as long as you roll forward and acquire other kinds of investment properties. It's investment to investment.
WHITFIELD: OK, and earlier, we talked about perhaps you don't have 10 percent to put down to get your first piece of real estate property. And Renee in California is on the line. She's got a question about how do you go about investing if you don't have a whole lot of money to work with? Renee...
ON THE PHONE, RENEE FROM CALIFORNIA: Yes, good afternoon. Well, for me it's good afternoon. I own a condominium. It's paid in full, so I don't have a mortgage. And I have some cash that I would like to invest, but safely, because I can't afford to lose any money. I've been that route. So could you give me some suggestions? And I also don't plan on staying in California. I'd like to go back east.
WHITFIELD: All right, John...
MANGHAM: Renee, I would suggest with a condominium that's free and clear, if that's where you're living now, one of the techniques that investors use is called a home equity line of credit. It allows you to tap into the equity, or your value in that condominium, and use that to invest in another property.
Whatever you purchase next, you would want to be sure that it would generate enough of a positive cash flow that it would pay the mortgage, or pay the debt, that you used to acquire the new property.
WHITFIELD: All right, and Gregory from Jersey City, New Jersey writes in with: "Can you put a property in a trust to avoid paying taxes on the rental income of the estate?" David, you want to tackle that one? HINSON: Yeah, you can certainly put a property into a trust. You can't avoid paying taxes on income. If the property generates taxes, or generates income rather, and you had access to that income, you're going to have to pay taxes on it.
WHITFIELD: All right, very good. David Hinson and John Mangham, hold on a minute, we're going to take another short break. And when we come back, more of your email questions and your phone calls.
(COMMERCIAL BREAK)
WHITFIELD: Well, welcome back to DOLLAR SIGNS. If you're looking at real estate to help your money grow, sometimes finding the property can be the biggest challenge. David Hinson and John Mangham are with me now to go over all of these great tips on how to make all of our money grow. And sometimes, finding the property really does take time. And DeWitt in Illinois has a question on the telephone about whether banks can help you find some foreclosure properties. DeWitt...
ON THE PHONE, DEWITT FROM ILLINOIS: Yes, I've been living in my house for approximately 15 years, and I'm looking for a list of foreclosures in the area that I'm staying in. And I was wondering if the Internet's the best place to find it, or can I go straight to a bank and look for that information?
WHITFIELD: John, you want to tackle that one?
MANGHAM: Sure. Years ago, you could call banks and ask for their REO property list. That stands for real estate owned. Those would be the foreclosed properties. These days, the greatest majority of banks across the country now use licensed real estate agents to sell the foreclosed properties. So I would call on a real estate agent in your community, ask to get into the multi-list service with them, and look for properties that are designated as REO or, sometimes, corporate owned properties. Those generally will be the foreclosure opportunities.
WHITFIELD: And David, you know, just getting started, trying to find a property really can be very bewildering and overwhelming. And Paul in Alabama is on the line, who is wondering whether the government can actually help in locating some of these properties. Paul... I guess, Paul, are you there, from Alabama?
All right, Paul's not there, but it's a good question nonetheless, David, you know...
HINSON: Yes, it is, Fredricka.
WHITFIELD: Are there kind of government-assisted programs out there?
HINSON: I think there are. There are some programs out there that you can use to help you find properties, but I would not say that's the best way to go about doing it. Probably the best way is to really begin close to home, understanding your neighborhood, understanding the area in which you live and seeing if there are opportunities there.
And just really getting around and talking to people -- you get a lot of information on what's available in your community if you simply just talk to people... joining associations, joining the local realtors association, going to meetings. Those are some of the best ways to get leads on properties, just simply talking to people.
WHITFIELD: And sometimes, just driving around and looking at things that, perhaps, you'd be interested in. We talked about earlier whether it ends up being a home that you want to eventually retire into -- you know, things that are appealing to you or likely to be appealing to somebody else, right?
HINSON: Absolutely, absolutely. You know, again, beginning at home, driving around, understanding the neighborhood, understanding the market, you always find opportunities. Most of the best information that you can find actually won't come from official sources or from listings. It really comes through talking to people.
WHITFIELD: All right, Andy in California is on the line with us. And Andy, I understand, what, you have 100 percent equity in your property, and so now you're trying to figure out should you try and use some of that money to perhaps acquire new property.
ON THE PHONE, ANDY FROM CALIFORNIA: Yeah, I'm wondering if it's a smarter move to borrow against the property and buy new property or if it's a better deal to sell outright and buy two properties that are -- and I'm thinking of going from a single family residence to a multifamily residence.
WHITFIELD: John...
MANGHAM: Well, it's a personal decision, and especially when you're changing the property type from single family to multifamily. You're growing your portfolio; you'll grow your income stream because you've got more rental units. Whether to sell or not is based on your best guess as to how much you think your current property's going to appreciate.
If you like your current property, keep it and refinance. Pull the cash out using a refinance transaction to tap that equity, then use those proceeds to buy more property. If you think your current one has somewhat topped out, then maybe selling it is the way to go, and rolling that into the replacement properties would be the better way for you.
WHITFIELD: And David, I know...
MANGHAM: But it's your crystal ball.
WHITFIELD: I'm sorry about that, John. I'm sorry to interrupt you. And you know, David, as we wrap up now, I know you're a big advocate of don't narrow your focus and just think about domestic properties, but think globally. How in the world do you start to do that, and how do you know when, you know, a good deal's a good deal in a foreign land?
HINSON: That's a good question, Fredricka. Certainly, it's better to begin and build a base here. But once you've built a base in the United States, once you understand exactly what's going on with the market that you're focused on, it makes a lot of sense to begin to look abroad. There are economic opportunities. There's real estate investments in the Caribbean. There are real estate investments in Europe.
If, in fact, you want to take a global perspective, you can do so with real estate. I just suggest and I advise my clients to just not think about what's going on in the United States, but rather, to think about what's going on around the world.
WHITFIELD: All right. And John, I'll let you have the last word on perhaps your best piece of advice to anyone out there getting started.
MANGHAM: Well, there's a little phrase I use: "Ready, fire, aim." And that is get ready, go looking, fire, pull the trigger, go ahead and get into some real estate. And after you've bought your first one, then aim. You'll sharpen your focus with your experience and your knowledge, and then you can pull the trigger again.
Ten years from now, you want to own that little portfolio of properties that will put you on the path to a comfortable retirement.
WHITFIELD: Fantastic, all right, John Mangham, certified public accountant and real estate investor and broker, and David Hinson of Wealth Management Network. Thanks so much, gentlemen, for helping us to...
HINSON: Thanks, Fredricka.
WHITFIELD: ... save money and maximize our dollars.
MANGHAM: Fredricka, thanks.
WHITFIELD: Thanks a lot. That's all we have time for right now. "PEOPLE IN THE NEWS" is coming up next, after a look at the headlines.
(COMMERCIAL BREAK)
WHITFIELD: Hello, I'm Fredricka Whitfield. "PEOPLE IN THE NEWS" is coming up next, but first, here's what's happening now in the news. A Pakistani man and a U.S. citizen suspected of plotting to bomb a New York subway station were arraigned today in Brooklyn. A judge ordered them held without bail. Police say the men have been under investigation for about a year now, and that they had scouted several locations in the city, most recently. But police don't believe their actions were part of a wider plot.
(BEGIN VIDEO CLIP)
RAY KELLY, NEW YORK POLICE COMMISSIONER: It's important to stress that, to the best of our knowledge, they had no connection to an international terrorist organization, and they had no explosives in their possession.
(END VIDEO CLIP)
WHITFIELD: In Iraq, U.S. warplanes, tanks, and artillery pounded targets in Fallujah today. The U.S. military says the action began after U.S. troops on the edge of the city came under fire. Witnesses say clashes between the two sides continued for hours.
|
