How to place a fulcrum - Investigating Real Estate Investment - Part 1 -

Recently, I decided to look into buying an investment property. Usually, I would place money in the stock market because the stock market doesn't suffer from broken toilets, leaky roofs nor does it ever need painting. You can just put your money there and forget about it. Then, if you're nice, you'll check in a few years and there will be a few more bucks in the account than when you started (hopefully).

It's never good to create unnecessary work for yourself, and I find that model works pretty well most of the time. There's one problem though: no bank will ever give you a big chunk of other people's money to go and throw into the churning chaos of the stock market, even though it will probably come back and then some, assuming that you're patient. I'm talking about mortgages.

I would say that there are two kinds of money: 1) my money; and 2) other people's money. Assuming all else is equal, it's always better to use #2! Unfortunately, to get access to #2 you need to have #1. The beauty of a mortgage is that you can get a lot of #2 without having very much of #1 at all. That's leverage.

I think it's called leverage for a reason, because it works like a lever. Perhaps Archimedes was also a financial engineer because he said, "Give me a lever long enough and a fulcrum on which to place it, and I shall move the world."

Other people's money can be the lever, an investment can be a well-placed fulcrum, and you can be lifted by your money. Placing the fulcrum well is the hard part.

This begs the question then: how do I know where to put my financial fulcrum? Well, that's what I'm trying to figure out now and I'm writing this series to summarize what I've learned so far.

If I were building a lever to lift the world, I would talk to a mechanical engineer. I'm studying electrical engineering which makes me pretty ignorant about things not involving electrons. Now, real-estate contains electrons but I still don't know that much about it. That leads us to one conclusion:

Step 1 - Build a team


The military has taught me many things: like how to be walk around in a square for hours; how to make shoes reflect photons really well; and how to sleep in any position at any time. Luckily, it has also taught me useful things; the most important being the value of teamwork. You will never achieve anything worthwhile in isolation. It is imperative to draw upon the experiences of others to be successful in any endeavor.

She's growin' too fast Cap'n!

Then, to start learning about real estate investing, I have to find some people who know the territory! I started today by calling people and then asking them who they knew and then calling those people. That sounds a lot like a factorial, so I didn't do it for too long.







So far, there seem to be several main buckets of experience that every good investor needs. These are:

• Real estate agent
• Lender and mortgage broker
• Lawyer
• Accountant
• Bookkeeper
• Property inspector
• Construction and renovation tradespeople
• Property manager
• Prospective money partners (if needed)

Real Estate Agent (fulcrum connoisseur):
I know of services like Grapevine which don't charge commission, but I think that it can be dangerous to put too much faith in your own abilities and knowledge, especially if you're just starting out. Certainly, it is a characteristic of someone my age to believe that he or she is invulnerable and infallible. Perhaps, in some cases, it will work out. But when everything is on the line, it's better to pay for that bucket of experience and be thankful later. I think of it like an insurance policy (albeit one that is not infallible either).

Not that I don't like the music!

Luckily in my alumni magazine, there are three agents in particular who are recommended for the area I'm interested in. They are Marc LaFontaine, Elaine Smallwood and The Ann & Dwight Team. I enjoyed the first site in particular, because it was the only one that didn't start playing music when I didn't realize that my speakers were near maximum volume!

Given my high level of ignorance at this point, I think that I'm going to invest in the experience of one of these agents. In the future, once I know more, it may make sense to use a different service.

Mortgage Broker (lever salesman/woman):


I read and discussed the idea of a mortgage broker and, apparently, they get paid by the banks, not out of commission from the customer. That suits me, because, again, I want a nice bucket of experience to be able to teach me about finding the best mortgage. This is a major part of placing the fulcrum wisely. I don't want the fulcrum to cost me too much every month. Based on the preponderance of economic articles and announcements that I've been reading lately, central banks seem like they plan to keep interest rates low for a while longer. In any case, they are low right now! They can't go much lower before people are paying you to borrow their money.

The mortgage broker can help you determine how long a lever the bank (the lender) will give you. I am scheduled to speak with one tomorrow, and hopefully he or she will tell me how much I ought to borrow, rather than just how much I could borrow.

Lawyer:


Everyone needs a good lawyer! It would be absurd to hope that all parties with whom you deal are going to follow the law and give you a fair deal. Besides, there are some legal thingies that the lawyer has to take care of which I don't want to go to law school to learn about. The lawyer will make sure that your fulcrum is... nice and by-the-book-legal. Investing in a good lawyer is just paying to protect yourself from terribleness in the future. This seems like a no-brainer.

I haven't spoken to one yet, that seems to be a much later step. More on this later!

Accountant and/or Bookkeeper:


If you are just purchasing one property to begin with, you don't need an accountant or bookkeeper to keep track of your financial details. You can probably handle counting your own beans yourself. On the other hand, when you stick your wallet into the convoluted, spinning gears of the tax code, you want to make sure that you get your hand back. I think it wise to lean on the tax expertise of these folks throughout the process. A few well placed questions will save you more money than it costs to hire them! Don't let the government stop you from pressing on your lever.

Property Inspector:


Don't buy a fulcrum that will fall apart in the breeze! Enough said!

Construction and Renovation Tradespeople:

After taking the time to speak with many contacts who own investment properties already, it became clear that houses always break down. When yours does, (not if) you'll need to know who to call to remedy the problem. If I were renting a house, I would want my house to be in proper order. I think it best to treat tenants with an "ethic of reciprocity!"

So far, the real estate agents with whom I have spoken have known many contractors for these types of things. Engineers, electricians, plumbers -- you name it. That's part of what justifies their commission!

Property Managers:


Just because you want to own real estate doesn't mean you want to spend your life fixing it. If you value your free time, you'll agree that it can be cheaper to pay somebody else to deal with the inevitable hassle and just send you the bill. For a first timer like me, a property manager would be yet another keg o' experience. You pay for their service, but you also pay for the valuable lessons which you may glean from them.

Prospective money partners:


This may apply for larger projects, but to just start out, I would rather start small. Mistakes and happenstance are bound to rear their heads for a first-timer -- maybe even for second- and third-timers. When they do, I don't want any failure to be irreparable. Don't get a lever you can't even move!

Until next time...


I'll post more as I learn more. It's an exciting adventure to learn about this continent of business that I had never previously explored. Wish me luck! I wish you the same.