THE BIG PICTURE: THE CASE FOR REAL ESTATE AS A WEALTH-BUILDING VEHICLE

Contents
UNIT ONE: THE BIG PICTURE: THE CASE FOR REAL ESTATE AS
A WEALTH-BUILDING VEHICLE
1 1.1 General Considerations
1.2 Uncle Sam's Tax Reform
1.3 Real Estate: Still The Golden Opportunity
Income Potential
Depreciation (Tax Benefits)
Equity Buildup
Appreciation
2 How Much Can I Make?
3 What Does It Take To Succeed In Real Estate?
4 What Is The Action Model For Real Estate?
4.1 General Considerations
4.2 Surprise: Real Estate Has An Action Model, Too
4.3 Put On Your Thinking Cap: PICNIC CAP
4.4 Chinese Boxes
4.5 An Assignment
4.6 What Kinds Of Properties Are In Your Future?

THE BIG PICTURE
The Case For Real Estate As A Wealth-Building Vehicle

Why invest in Real Estate?
Key Facts (IDEAL Formula):
Income Generation – from rents
Depreciation (tax advantages) – allowed by Uncle Sam
Equity buildup – through tenant debt service
Appreciation – as the value of real estate grows
Leverage – through the use of “other people’s money”
However, this formula is part true……………..

ENTERING IN REAL ESTATE ……
WHAT YOU NEED TO KNOW

Leverage
Income
Generation
Depreciation
Appreciation
Equity
buildup
In mid to late 1970’s and early 1980’s, it was believed that…….
Dimensions
of
Profit
Potential
5 kg 1 kg
1 kg
1 kg
1 kg
1 kg
This was so because……

• Income from rents - not yet under pressure from factors like rent
control.
• Deprivation - to real estate investors through tax write-offs in the real
property arena.
• Equity - build up relatively quickly.
• Appreciation - advancing with unprecedented vigor in many sectors
of the economy, such as California.
• Leverage - becoming a household word as a number of celebrated
"gurus“ were active introducing the secrets of OPM to
millions of receptive would-be investors.
But changes in TAX LAWS changed the whole scenario…..
Such ambitious investors were being enticed out of the side streets of
Everywhere, USA, by ambitions to create for themselves a higher quality of life
via the American Dream.

UNCLE SAM'S TAX "REFORM"
In 1986, government “reformed” tax laws majorly. In many countries,
Appreciation took U-turn….
Appreciation
Appreciation
Investors with minimal business sense found enrolled in
the School of Hard Knocks-without a scholarship.
But….
“Whatever happens, happens for good”
So it was the case here as well…

 Income Generation – through tenant debt-service.
 Equity build-up – even while they are asleep at night.
 Leverage – vitally important dimension.
I-D-E-A-L I-d-E-a-L
This was so because today…
However,
 deprivation of owning income real estate have been reduced as
compared to “good old days”.
 appreciation is at best regional and unpredictable because of the
downward economic trends of the past five years.

The reason behind this shift in laws was to keep business based on
principles of good, professional, business practice.
More profitability and longevity
Chances of succeeding in
real estate investing ~~ how professionally one proceed
with this kind of enterprise from
a business point of viewdepends on

 Keep your eyes open.
 Weigh and analyse all factors objectively.
 Make informed decisions based on factors of profitability
and predictability.
 Operate enterprise in every respect like a legitimate
business, with legitimate goals, legitimate controls, and a
good measure of creativity to gain advantage in the
market place.
Before entering into Real Estate investment,
Things to remember….

REAL ESTATE -
STILL THE GOLDEN OPPORTUNITY

Different ways are:
same formula but different meaning
I-d-E-a-L
 INCOME POTENTIAL
 DEPRECIATION (TAX BENEFITS)
 EQUITY BUILD-UP
 APPRECIATION
 LEVERAGE
 .
 .
 .
 .
 .
Lets discuss one by one…………..

I N C O M E P O T E N T I A L
But the performance of the stock market over the years is not without its
roller-coaster qualities.
Except for going in and coming out
Stocks and bonds relinquish control over funds totally.
So, Income + Management = Income flows
Can you find an investment that pays in
predictable and controllable installments i.e. month in and month out??
Is it possible in stock market which over the years has roller-coaster qualities.

Housing is at the top of hierarchy.
Just follow simple rules….
Housing
? ? ?
N E E D S
I N C O M E P O T E N T I A L
Cont..

D E P R E C I A T I O N ( T A X B E N E F I T S )
•Congress changed tax
rules 4 times.
•Reformation was
damaging
• Capital gains lost
its special
treatment lead to
depressed real
profit potential.
• Passive Loss Rules:
Passive Loss can be
used to offset
“Passive Income,”
but not “Regular
Income”.
1980’s 1986

Passive Test
Following criteria should be satisfied by participating in business:
 Work atleast 500 hours per year (~10 hours per week).
 If worked < 500 hours/year ---- You should be the primary person
involved, exclusion of anyone else.
 If worked ~ 100 hours/year ---- You should put more time than
anyone else, including employees.
Was there nothing left of value?
Fortunately, the answer is Yes…
Cont..

 Legitimate expenses within your passive activity can still offset income
from that passive activity which include:
o interest
o depreciation
o property taxes
o insurance premiums
o management fees
o advertising
o legal or accounting fees
o repairs, etc.
Uncle Sam only exacts his pound of flesh from the net profits.
 Any excess loss from a passive enterprise can be used to shelter income
from other passive enterprises.
 Any unused loss can be carried forward to future years where you will
have passive income that needs to be sheltered.

 Losses from passive enterprises could make it attractive to plan to find
"passive income generators" (PIGS) in the future.
 The imaginary game of "depreciation" can still be played where Uncle
Sam pretends that your real estate property loses all of its value in 27.5
years (for residential) or 31.5 years (for commercial), and let's you write
it off over time as an expense.
 If Active participant in your business activity –
Use up to $25,000 of losses against other income (such as salary or interest and
dividends).
But, this $25,000 bonanza is reduced by 50% in stages when adjusted gross
income > $100,000, and evaporates altogether at $150,000 AGI.
This policy applies if rental property or limited partnership ≥ 10%.
Still left some valuable crumbs enough to enter the real estate field from
the tax point of view.
Tax laws change. Be sure to check current laws and regulations.

E Q U I T Y B U I L D U P
Characteristics that make real estate unique:
 Service of debt increases net worth.
 Money is made while sleeping as someone else is servicing the debt in
exchange for the privilege of using your property.
Tenants Pay
Interest on the debt
Retire the principal
amount

A P P R E C I A T I O N
Example, In the mountain states and in the north west real estate is appreciating at a respectable
rate. At the same time, other regions of the country are experiencing flat or declining values.
What is the implication of this?
Depends on you
Apply I-D-E-A-L formula that will give you the highest return in your area.
If areas where property values rising? Profit "booster" of appreciation to add to the other factors
of profitability that pertain to your investment.
Important: Real estate is still a "forgiving" undertaking as in most areas of the country will
recover from occasional corrections and declines.
Reason: The reason for this is tied inseparably to the market forces of supply and
demand.

A P P R E C I A T I O N
It is quoted like
"They aren't making land anymore"
And it is true.
In any case,
Street-smart investor target properties
that lend themselves to profit-taking
on a quick turn-around transaction.
Wait !
Use combinations of creative acquisition
techniques to invest in those areas despite a
lack of appreciation.
What next?
Less land to be developed + housing is necessity
=
leads most real property to rebound after market declines.
OR

L E V E R A G E
More exciting or stimulating factor
“Leverage."
Control an entire piece of real estate
& benefit from its full slate of cash favors, even if you don't pay for it all at once.
Harvest the entire property even with
nothing down transaction.
+
Use "other people's money" when a down
payment is called for in a given
transaction
Leverage

L E V E R A G E
Cont..
Other options: With nothing down
Buy stocks and bonds Open up a retail store Start a franchise
"Little guy's" only chance to make it big without a fat wallet.
And it works……
IDEAL formula

REAL ESTATE -
HOW MUCH CAN I MAKE?
Doesn’t matter
How Much Do You Need And By When?
..
Set goals
..
Follow Plan
(step-by-
step)
..
Reach
Destination

California woman had made real estate development her primary wealth vehicle. She had it
down to a science.
For every lot she developed and sold, she made $25,000, more or less. Her goal was very
specific--one million dollars a year in earnings. That meant that she had to follow her cycle
40 times/year which is 1 development lot/week.
How she did??
Followed clock work
knew the precise steps to follow on a daily basis & followed them.
Case Study
In US, 5% adult population owned ~ one income property other than their own home.
They don’t make $1million/year as real estate investor,
Then how??
Regular income ~$100-$1000/month --- Rental home or small multi-unit
Most Important:
LEVERAGE

REAL ESTATE -
WHAT DOES IT TAKE TO SUCCEED IN
REAL ESTATE?

Key Elements:
1. VISION.
 What you want to achieve.
 Be specific and tangible.
 Make image of where you want to be.
 What you want to be doing at the end of your journey
 What rewards you want to enjoy
 With whom they want to be enjoying them--family, friends, loved ones, people they serve.
2. GOALS.
 Translate vision into specific, tangible, time- conscious goals
 Measure, monitor, and adjust on a regular basis

Key Elements:
3. ACTION PLAN.
 Translate specific goals into a set of behaviors to produce specific results.
 Reduce to daily and weekly actions.
4. TEAM WORK.
 Build network that involves not only buyers and sellers, but bankers, real estate agents, title
company officers, attorneys, accountants, insurance agents, appraisers, contractors, partners,
etc.

Key Elements:
Learn and apply creative measures that can lift the "little guy" out of the rut of a self-
imposed incarceration of
negative conditioning and limited vision.
5. CREATIVITY.
 Foundation is creative deal- making and creative financing.
 Put an array of interlocking creative techniques designed to solve problems for a very small
constituency of property sellers-- those who are flexible in price and terms.
 Applying creative techniques to the particulars of a given transaction is a key ingredient to
successful real estate investing.
It is always OPM ("other people's money") that makes the macro world of real property
enterprise go around.
 These insider strategies and techniques have become accessible to the "little guy" in full
force which was earlier for “big guys”.
High time! No one need have a monopoly on creativity.

Key Elements:
6. PROFESSIONALISM.
 A profit-and-loss mentality,
 attention to the bottom line
 reading the "small print" in every lease, every document, and every contract involved.
 Keep score, and play the game.
 Records must be kept, taxes paid, the balance sheet maintained.
 There is no magic wand. It takes keen business sense.
 If you don't have, then learn it, or get someone on your team who knows it inside and out.
It's all a conspiracy by the fateful forces of the capitalistic system--but if you know how
to play the game of professionalism, you will win.
7. HONEST EFFORT.
 It has to be honest--win/win in every respect--or you will slip and fall eventually.
What goes around, comes around. What comes around, goes around.
Effort--lots of effort. Real estate investing is hard work.
Set any goal, you set high work standards.

Work smarter, rather than harder

REAL ESTATE -
WHAT IS THE ACTION MODEL FOR
REAL ESTATE?

AN ILLUSTRATION
It is a dreary, rain-drenched night. You are riding along the highway with windshield wipers
sloshing back and forth rapidly. You are leaning forward and straining to catch a clear view of
slippery roadway before you. Suddenly a confused scene flashes before your eyes. There has
obviously been a serious accident. You slam on your brakes to avoid hitting several cars along
the side of the road. Smashed and crumpled vehicles spring into view. There are bodies on the
ground. You pull your car off to the side and step out to help. A number of people are
around in a dazed stupor. Your confusion and shock renders you ineffectual.
What is to be done? You don't know. No one seems to know.
Understand & apply action
models

Suddenly another car screeches to a halt along side the road and the driver bounds out and into
the midst of the chaos, shouting firm orders in a forceful manner so that people spring into
action.
He points at you and says: "You. Get a flashlight and go down the road to ward off the oncoming traffic." You obey
instantly.
To another shouts: "You. Go immediately over to that farm house and call for an ambulance and the police."
To another shouts: "You. Get coats or blankets and cover up the injured people on the ground to keep them warm.
Do not move them."
To another shouts: "You. Get several others to help you push those cars further off on to the side of the road to
avoid further collisions."
To the other on lookers he shouts: "The rest of you move away and get into the background."
Then the man goes immediately to gather up the dazed survivors and render comfort and
assistance. Soon police and paramedics arrive to take charge of the situation.
The leader who preceded them has already done much to alleviate suffering and prevent further
injury.

A sequence of interrelated actions designed to produce a target result.
The story illustrates the application of a particular action model to use when you come upon
the scene of a traffic accident. In this case, the model is relatively simple:
What Is An Action Model?
Warn or stop oncoming traffic to prevent further collisions
Get help (police, medical)
Improve conditions for the injured
Clear the area for additional safety.

Procedures and the chain of actions to follow:
We know in Brain surgery, Farming , Training show dogs, Building a house, Fishing
the exact sequence of steps to follow
Virtually any objective we can think of is governed by a particular action model or set of action
models. It appears to be a universal truth that results flow from the application of such models.
When we go about targeting results without a clear action model in mind, our success is more a
function of accident than design.
During crisis, it is a rare person who can take an action model and apply it in a practical way to
the situation at hand.
In our little story who is the hero??
The Stranger
Because
 He intervened with leadership and power at a time when everyone else was confused and helpless.
 He applied a simple action model that produced the desired results immediately. In a way, he was like
a professional acting among amateurs.

REAL ESTATE -
SURPRISE: REAL ESTATE HAS AN ACTION
MODEL, TOO

Gather A Prospect Base1
Select The Most Promising Prospects2
Contact The Sellers3
Negotiate The Deal4
Write The Offer5
Fund The Project6
Close The Deal7
Augment The Value8
Harvest The Profit (Keep Or Turn)9
Determine the type of real estate you wish to be involved with
Steps

Some Amateur Examples
Jim fancies himself a real "wheeler-dealer" with a silver tongue. He
flourishes in the negotiating arena where he can go after the killer deal.
But Jim doesn't like to gather prospects and zero in on those who are
most likely to be flexible; he takes on every seller in sight. Therefore, he
almost always strikes out. Jim is an amateur who doesn't understand the
action model.
Denise goes down the action chain to the point where writing offers
occurs. She is pretty thorough to that point but has a phobia about the
written idiom. She doesn't go after the close and get the signature.
Therefore, the chain is incomplete and she never gets the results she
wants. Denise is an amateur who doesn't understand the action model.
Fred spends his time spinning wheels with all kinds of contacts and
properties. His hang up is creative financing. He can figure the bottom
line but never how to get there. His deals lack that innovative, problem-
solving core that enables people to jump over walls and around obstacles
and put successful deal together. Fred is an amateur who doesn't
understand the action model.

Some Amateur Examples
Mary is a whiz with everything except getting out. She is poor at back-
end management and tends to get into things without an exit plan in
mind. Thus, when harvest time comes around, she comes up short and
leaves big bucks on the table. Mary is an amateur who doesn't
understand the action model.
Harvey goes through the whole chain of events in the action model and
does pretty well. But for some reason he always forgets how to augment
the value of his properties before turning them--often small cosmetic
improvements can pay big dividends--and therefore puts up with
mediocre returns. He could almost double his results if his action model
were complete. But Harvey is an amateur who doesn't understand the
action model.

Let's see how smart you are.
Without looking back at the action model outlined above,
write down the exact sequence of actions that make up the
investment real estate action

REAL ESTATE -
PUT ON YOUR THINKING CAP

Let's restate the action model in a slightly different way to remember
"PICNIC CAP"
PROSPECTS (Gather A Prospect Base)P
Identify The Best (Select The Most Promising Prospects)I
Contact The SellersC
Negotiate The DealN
IN WRITING (Write The Offer)I
CASH (Fund The Project)C
Close The DealC
Augment The ValueA
PROFIT (Harvest The Profit, Keep Or Turn)P

Each step in investment real estate action model has its own set of
steps leading to a specific targeted result.
It is rather like a set of Chinese boxes, one fitting inside the other, in sequence, until the most
fundamental building block is attained.
How to fit all of these Chinese boxes together into an organic whole that will get you
the results you want.

ASSIGNMENT
 Write down the key words PICNIC CAP in a vertical column. Translate each
letter into one of the action steps of the model.
 Write down at least five action steps after each letter that you would logically
imagine belong to the next layer of action models for each.
 Write down the word IDEAL and identify the five major elements of profitability
in real estate investing. Define each and pick out the ones that you feel are the
most important for your area and your own personal situation.

REAL ESTATE -
WHAT KINDS OF PROPERTIES ARE IN YOUR
"BIG PICTURE"?

Real estate is a broad term
It includes raw land, farm land, residential real estate, and commercial real
estate.
• includes office and professional buildings, strip malls,
and all manner of property used in the
and service industries.
Commercial
real estate
• embraces condominiums, single family houses, small
multi-unit properties (duplexes, tri-plexes, four-
etc.), and larger apartment buildings and complexes.
Residential
real estate

At the beginning of career,
The most logical place to begin is with the smaller properties-- single family homes and small
units. If you are in the process of acquiring the skills and expertise associated with the real estate
investing field, would it not make sense to cut your "eye teeth" on the simpler transactions where
risk is lower and the arrangement relatively uncomplicated?
The larger residential properties are a step above, where more sophisticated interactions and
problem-solving come into play--and where the risk is greater. And the commercial realm brings
it a whole array of challenges related directly to the local, regional, and
national economy, and the viability and staying power of various business tenants who are going
through the ups and downs of commercial life in ways about which residential tenants in general
need not worry.
A variety of complex challenges are there in Real Estate which are
not recommended for the untrained investor.
we recommend the philosophy that a lot of "little" deals
can add up to a great deal of success.

THE BIG PICTURE: THE CASE FOR REAL ESTATE AS A WEALTH-BUILDING VEHICLE

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