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7 STEPS FOR NEW

IN V ESTORS

Real Estate

CEO & Founder of Real Wealth Network

by KATHY FETTKE

7 STEPS FOR NEW Real Estate INVESTORS

TABLE OF CONTENTS
A Short Introduction...............................................................................5 Step 1 Clarify Your Goals....................................................................9 Step 2 Dene Where You Are...........................................................11 Step 3 Discover Your Purchasing Power............................................14 Step 4 Determine Your Financing Strategy........................................17 Step 5 Determine Your Purchasing Strategy......................................19 Step 6 Deciding What To Buy...........................................................21 Step 7 Protect Yourself.......................................................................24 Now You Have e 7 Steps. Time to Take One!.....................................26

About the Author...................................................................................28

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7 STEPS FOR NEW Real Estate INVESTORS

A SHORT INTRODUCTION
eal estate investing has proven to be the #1 wealth builder in history. In fact, well-located property has been the desire of wealthy families and business owners for centuries. Battles over land have existed for as long as weve had the ability to record events. anks to U.S. law, we dont have to ght for property anymore. We just have to know how to buy it right, use it well and earn cash ow from it. Some people may doubt the benets of owning real estate today, after the credit bubble burst in 2007. However, the chart below from Casey Research shows that prices continued their upward trend, even after the mortgage meltdown. Imagine if you bought real estate 20 or 30 years ago. If you bought a property in 1980, you would only have had to put $13,000 down. at property would be completely paid o today, and tripled in value. If you were renting it out, you could be earning at least $13,000 per year in cashow - the same amount of money it took to buy it originally!
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7 STEPS FOR NEW Real Estate INVESTORS Now imagine that you own property 20-30 years from now. What do you think the values will be then, based on the ination were seeing now? I think its a fair guess to say values will triple again. As Ben Bernanke continues to ood our money supply by creating dollars out of thin air, well see higher ination and a further weakening of the dollar. As ination increases, so do asset values. ats the outspoken objective of the Federal Reserve. is means property values will continue to go up. Take a look at the chart below and notice how the rate of ination and devaluation of the dollar matches the increase in home prices. is is a perfect example of why real estate is the best hedge against ination.
100
Purchasing Power (1971=100)

USD

80 50 40 20 0

900 800 700 600 500 400 300 200 100 0

e fact that you are reading this report means you already understand the value of owning investment property. And you also probably understand that investing wisely makes all the dierence.
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1971 1973 1975 1977 1979 1981 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Currency in Circulation (Billions)

7 STEPS FOR NEW Real Estate INVESTORS Getting the education you need as a new real estate investor can be overwhelming. ats why we created Real Wealth Network, so that real estate investors would have a reliable resource for information and support. General membership is free; we want to educate and to build a professional network. Our members are a mix of new and very experienced investors, all sharing information. rough our free podcasts, blogs, newsletters, weekly webinars, property tours and live education events, our members stay updated on opportunities and changes in the real estate market. As a member, you can receive our referral list of tried and true professionals, including CPAs, self-directed IRA companies, property managers, attorneys, wholesalers and more. We believe that the more you know, the better decisions you can make. We also think too many gurus are out there selling things you dont need and wont use. If you dont get the right education, you could end up in the School of Hard Knocks. Nobody wants to graduate from that place! When you are ready to purchase property, Real Wealth Network can give you referrals to experienced wholesalers in the best emerging markets nationwide. ese aliates oer turn-key high quality cash-ow property in the most recession-proof areas in the country. Well also share our research with you on why we like certain areas for owning rental property and why we avoid areas that are more tenantfriendly. You will receive detailed property analysis reports, and the tools to understand them.
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7 STEPS FOR NEW Real Estate INVESTORS As a Real Wealth Network member, you can meet with your own investment counselor to help guide you through the process. You will also have access to our network of investment advisors, as well as an in-house rental coordinator to help with any rental questions and concerns. We have a long history of turning ordinary people into investors, and ordinary investors into cash-owing millionaires. It does takes years to become a sophisticated and experienced investor, but to start you on your way, here are 7 steps that will put you on the right path to building up safe investments for your future.

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7 STEPS FOR NEW Real Estate INVESTORS

STEP ONE. CLARIFY YOUR GOALS

If you work 60 hours a week and have no spare time, why would you buy a xer-upper? Its a recipe for disaster. If youre young, why would you buy a property with cash when you have plenty of time to buy a great property using a mortgage and equity, which will set you up to buy even more. We can show you how to do this. e opposite is true if you are retiring. Why lock yourself into a long-term mortgage when what you really need is cash ow? Here are some questions to help you focus your own vision: When do you plan to retire? When you retire, how much money will you need to cover your bills? What are your current retirement income sources? How much money are you willing to invest in real estate? Do you want to acquire property for future growth or do you need cash ow today? Do you have good credit? Do you need to plan for college, travel or your parents long-term care? Are you looking for a tax break?
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o matter what you are trying to achieve, always start with a vision of the end in mind. Too often we see people buying property without determining if it is the right strategy for them.

7 STEPS FOR NEW Real Estate INVESTORS What are your 3 most important goals that you think real estate investments may help you achieve? 1.________________________________________________________ 2._________________________________________________________ 3._________________________________________________________

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7 STEPS FOR NEW Real Estate INVESTORS

STEP TWO. DEFINE WHERE YOU ARE

n order to get to where you want to go, you must know where you are. Wealthy people know their net income (cash ow) at all times. Simply put, this means dening how much money you make minus your current expenses. How much do you have left over at the end of the month? You can also add up the value of stocks, bonds, equity and any other investments you have, minus your debt. at will clarify your net worth. As a member of the Real Wealth Network, we will provide you with a ow-chart that you can use to determine your cash ow, we also have a net worth chart to help you with your assets vs. liabilities. Again, this is not a sales pitch, with a free general membership you will be able to network and use our tools. Our philosophy is to share what we know, and the larger our network of members, the more each member can get out of Real Wealth Network. What we are hoping you will contact us at info@ realwealthnetwork.com or call us at 888-RW-NETWORK to ask us more questions and see how you can benet from being a part of this network of investors.

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7 STEPS FOR NEW Real Estate INVESTORS As another part of determining where you are right now, it is very important to know how much you are paying in taxes and how real estate investing could lower that bill. Meet with your CPA (or call our oce and we will recommend one in your area that specializes in real estate). Once you know your monthly cash-ow, your net worth and your tax liability, you can determine your next steps. If you are cash-ow negative every month, your strategy must be focused on stopping the bleeding and increasing cash-ow now. is can be achieved by cutting expenses while your increasing income. In some cases, buying investment property could assist you by lowering your tax obligation and increasing your monthly cash-ow. So realize that you may be able to increase your income if you invest in property. If you are cash-ow positive but see possible changes coming (potential job loss, career change, new baby, health issues, etc), you must also focus on how to make sure you can keep your cash ow positive that means working on having more than one source that brings you income. If you dont have equity available to invest in income-generating businesses or properties, this usually means you need to invest sweat-equity. In other words, if you dont have money to invest, youll need to invest your time. In real estate, this is considered active investing, like pre-foreclosures, wholesaling, xing & ipping, or buying in cash-ow properties. Remember, buying low and selling high is the key to ipping property, and unfortunately is something often over-looked by the rookie investor. ese types of deals can help you create the funds you need to buy longterm passive investments that build wealth while you sleep!
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7 STEPS FOR NEW Real Estate INVESTORS If you are cash-ow positive, have good credit and at least 6 months reserves set aside for a rainy day, you are ready to invest in long-term passive investments. e goal is to acquire as many assets as you can now so that you can eventually replace your income later. If you have a retirement fund that youd like to self-direct into real estate, you will also need passive investments to meet IRS guidelines. In this case, you would most likely be looking for the highest cash-on-cash returns (the highest yield you can get based on how much of your own money is invested.) e following steps are for the passive investor, and involve the buy & hold strategy a proven method for success.

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STEP THREE. DISCOVER YOUR PURCHASING POWER

everage is what makes real estate the #1 way in increase your wealth. When you nance a property, your tenants pay your loan o for you. Your ROI (return on investment) is higher because you get to buy the entire asset with just a small down payment. Many people are surprised to nd they qualify for more nancing than they realized. ats because rental properties are often much less expensive than qualifying for a primary residence. When buying investment property, most lenders include the rental income when determining the borrowers income. ey may not count it on your rst properties, because the banks want to see that you have experience as a landlord. You may have to initially qualify without using the rental income, so your rst purchase may need to be a smaller one. Many of the investment properties recommended by Real Wealth Network are below the national average home price (currently $180,100), and many are half of that or even less.

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It is important to work with a lender who understands investing and also understands the various markets in the U.S. Real Wealth Networks team of mortgage professionals understands our strategies and will oer you
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7 STEPS FOR NEW Real Estate INVESTORS valuable investment advice. You can call 888-RW-NETWORK for a referral. ese lenders can help you determine your credit. Remember,good credit is vital today if you want to get conventional nancing. If you need to improve your credit, there are companies that can help you do that. e resources tab on our website, www.RealWealthNetwork.com has referrals to credit repair companies. Do NOT confuse this with credit consolidation, which is a waste of money and damages your credit! Lenders are also looking for reserve funds. ey want to see borrowers who have at least 6 months reserves per property PITI (principle, interest, taxes & insurance payments). On a $100,000 property, that would be about $5600 set aside in a bank account. Its also helpful to have money in retirement funds, savings and stocks. Keep in mind that lenders will only count about 75% of these funds as reserves. Lenders will calculate your debt ratios. ey want to know how much discretionary income is left after you pay your bills. Currently, the banks are getting tighter on debt ratios, so ask your mortgage broker if you need to pay o debts before qualifying for more loans. Lastly, lenders want to see a two year job history with a US corporation. Its OK to have changed jobs in the last two years, as long as it was the same line of work. However, a job change or even a switch from W-2 employee to contractor can adversely aect your ability to qualify.
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7 STEPS FOR NEW Real Estate INVESTORS Even today, during the nations biggest credit crunch since the Great Depression, banks are still lending up to 80% of the homes value, even on investment property. Try that with a business loan or for other investments! Banks know that cash-owing real estate is a solid investment, and are still willing to back it.

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7 STEPS FOR NEW Real Estate INVESTORS

STEP FOUR.

nce you know your purchasing power, you need to develop your nancing strategy. What money will you use for your down payment? How much? What kind of loan will work best for your situation? Some investors prefer to put more money down in order to get more cashow. Others prefer to mortgage to the max in order to acquire more assets. If you do choose to mortgage, its important to have at least 6 months reserves set aside for possible vacancies per property. Otherwise you risk losing your new asset if you cant meet your debt obligations. At Real Wealth Network, weve found the cash-ow isnt usually much dierent between 20% and 30% down. Cash-on-cash returns are higher when we use less of our own money. We would rather see investors put 20% down and keep the remaining 10% they might have put down into reserves. We believe it is less risky for the borrower to use OPM (other peoples money) because if times ever get tough, your money is liquid.

DETERMINE YOUR FINANCING STRATEGY

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7 STEPS FOR NEW Real Estate INVESTORS e key to success in real estate is having the ability to hold your property long-term which is easier to do if you have cash available when needed. What kind of loan should you get? A 30 year xed will lock in your rate for 3 decades so you never have to worry about rate changes. Most other countries do not oer this, and cant believe we have it here in the U.S. Can you imagine what that payment will feel like in 10 or even 20 years, once ination kicks in? Its incredible that you can lock in todays low rates and small payment for 30 years. Take advantage if you can! Some investors use interest-only loans to cash-ow better. 5, 7, and 10 year ARMS (adjustable rate mortgages) are also an option, but we dont know what interest rates will be then, so we prefer the 30-year xed. If a property is cash-owing nicely, but you dont need the cash-ow today, consider a 15 year mortgage to pay the home o twice as fast. Or get the 30-year xed loan and make double the payment to pay it o in half the time or less. en, in 15 years, all the income from your property will be income, this can allow you to retire earlier and maintain or even improve your standard of living.

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7 STEPS FOR NEW Real Estate INVESTORS

STEP FIVE - DETERMINE YOUR PURCHASING STRATEGY

f you have $100,000 to invest, you could buy one property with cash, or you could buy four properties with 20% down on each. You would then need approximately $25,000 in a reserve fund ($5K each).

is reserve fund is for emergencies, and can be invested as long as its fairly liquid should you need to access it. We suggest you open a bank account just for your real estate, and keep at least $5000 extra as a buer. As long as you know these funds are for repairs and surprises, you will know you can access them when you need them. One strategy is to buy those 4 homes with nancing, and use all the cashow to pay o one of the mortgages. If each home is producing $200 per month in cash ow, that would be $800 paid toward the principal per month. e rst home would be paid o in 8 years! en you take all the cash-ow plus the extra income from that paid-o home, and start paying down another mortgage. e second property would be paid down in 6 years. Now you would have $1600 cash-ow per month. You could use that to pay down the next property in 4 years, and so on. With this plan, youd have 4 properties paid o in less than 20 years, and would then be cash-owing $4000 per month (this is presented in todays dollars because this does not reect a 4% increase in rents, which is really a wash, given we expect at least 4% ination). Isnt that an amazing possibility?

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7 STEPS FOR NEW Real Estate INVESTORS Some investors buy one house a year, and use the cash-ow to save for the purchase of the next home. is is a good plan for someone who has 2030 years left before retirement and not enough cash to buy more than one property at a time. e goal in this case is to acquire as much property as possible. Others may have more money to invest and may decide to buy several properties at once with cash. is is a good plan for someone who is closer to retirement. Many retirees self-direct their IRAs to buy rental property. One of our members self-directed his $600,000 IRA; he bought 5 homes in Texas and enjoys $60,000 in annual income after expenses. Real estate shows its true value over time. It is a get rich slow process. If we use the national average of 6% appreciation since 1968, your properties will double in value in 12 years. I think its safer to assume 4% appreciation - increasing at the rate of ination. Using 4% appreciation, your properties would double in value in 18 years. at means that if you bought those four $100,000 homes and had them paid o in 18 years, you could have a portfolio of $800,000 plus $8000 monthly cash-ow. And remember, you would have acquired those assets for just $100,000 18 years earlier if you put 20% down on all 4 properties. Try that with your mutual funds.

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7 STEPS FOR NEW Real Estate INVESTORS

STEP SIX DECIDING WHAT TO BUY

Do you buy single family homes, and if so do you buy new or resale? Do you buy multi-family homes for increased cash-ow, or do you consider apartments and commercial property? What about condos that are highly discounted these days? Single family homes in nice neighborhoods tend to have the most appreciation potential. Most families want to live the American dream of the white picket fence in a nice neighborhood where their kids are safe area and can attend great schools. If the rental market ever softened, it would be easier to lease a singlefamily home than apartments, duplexes or condos. ere is a common belief that duplexes, 3-plexes and 4-plexes cash-ow better than single-family homes. However, with todays depressed prices, you can nd single-family homes that cash-ow just as well as multifamily, and have a better chance of future appreciation. ere are often higher utilities and hidden costs in multi-units, and condos usually have high association fees and surprise assessment fees. Make sure you look into all these additional fees and charges before you make your nal decision.
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nce you decide its time to buy, you will see opportunities everywhere. Without a clear strategy, it could be very confusing.

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7 STEPS FOR NEW Real Estate INVESTORS Some investors believe they have less risk with multi-units because if one side is vacant, they can still collect income from the other side. We have found this is not always the case. Since single-family homes tend to be more desirable, they rent more quickly. It really depends on the location of the property. Youve heard it before. e value of real estate always comes down to location. A well-located apartment will command more rent than a rundown mansion out in the boonies far away from jobs. Location. Location. Location. Use common sense. Stay away from power plants, electrical towers, sewage facilities, the dump, junk yards, air trac, noisy streets and high crime areas. If your tenant isnt happy, youre not happy. But dont buy too high-end either. A+ neighborhoods command top dollar, and rents rarely cover the mortgage payments. While it might be a wonderful place to live, it might not work as a landlord.

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7 STEPS FOR NEW Real Estate INVESTORS It all comes down to rent ratios. We used to be happy with .07 1% rent ratios. at means that on a $100,000 property, it was good to get $700$1000 in rental income. Today, with prices as low as they are, we expect 1.2% of purchase price in our monthly rents. at $100,000 home should bring in $1200 in rent. At Real Wealth Network, we dont buy anything over the median home price of the area. We try to keep it under $150,000 because anything over that usually doesnt cash-ow. is may require that you purchase out of your own neighborhood. In this case, you will need an excellent property manager to take care of your property. You can get a referral from your investment counselor at Real Wealth Network.

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STEP SIX DECIDING WHAT TO BUY

1. Order inspections before buying. Make sure you know what you are getting before closing escrow by ordering a full inspection report from an independent party. Your inspector should go into all parts of the house and up on the roof, your inspection should take at least 3-4 hours! 2. Order appraisals. When you get conventional nancing, you will be required to get an appraisal, and maybe even two. If you are paying cash, you may only need the inspection but consider getting an appraisal as well. 3. Get a landlord policy. Order your insurance policy well in advance of closing escrow so you know your exact insurance costs. Be sure to ask for a landlord policy that includes loss of rent and liability insurance. 4. Get umbrella insurance on your primary residence for at least $2 million in coverage. You may be surprised at how inexpensive this coverage can be. Make sure it covers your investment property.

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5. Consider placing the properties in an LLC (Limited Liability Company) for added asset protection. A real estate attorney will
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7 STEPS FOR NEW Real Estate INVESTORS help determine if this is necessary. Again, your Real Wealth Network investment counselor can give you several referrals. 6. Talk to the property manager before closing escrow to verify rents. In fact, talk to several property managers for varied opinions. 7. Have at least 6 months reserves in place per property to cover possible vacancies. 8. Be aware that using your equity line can aect your credit in the same way as using a credit card. It is best to get a xed loan if using home equity, which is treated like a mortgage and can be good for credit. 9. Visit the property whenever possible. If you know the neighborhood, its a little easier to buy sight unseen, thanks to the internet and Google maps. But nothing beats walking the property yourself. It is a large investment, after all! 10. Use the power of the Real Wealth Network. We carry a big stick. People listen to us because they dont want to lose the business of the entire network. We have full-time sta to answer your questions and concerns. Dont be a lone ranger!

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7 STEPS FOR NEW Real Estate INVESTORS

NOW YOU HAVE THE 7 STEPS. TIME TO TAKE ONE!

t Real Wealth Network, we have met many people who spent thousands of dollars on education but still have not taken any action or invested in property. No one will make money in real estate waiting on the sidelines. Commit to taking some form of action every week. Meet with your CPA, talk to property managers, walk through properties, get pre-approved for nancing, get your umbrella insurance policy ready or meet with attorneys to discuss your asset protection plan. We also highly recommend that you attend one of our property tours for a very hands-on experience. Eventually you will know when its time to make an oer because rather than feeling fear, you will feel exhilaration. Fear is only a sign that you have unanswered questions. Get those answers and keep moving forward. We are here to help you along the way. While this may sound like a lot of work, Real Wealth Network has done much of it for you. e experts in our network oer fully turn-key properties, rent ready with experienced property management. We can provide you a team of professionals, including insurance agents, attorneys, CPAs, asset protection, lenders, contractors, title and escrow.
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7 STEPS FOR NEW Real Estate INVESTORS For more information on recession-proof markets, property analysis tools, tours, or live events, call 888-RW-NETWORK (888-796-3896) or visit www.RealWealthNetwork.com. Ask for a complimentary strategy session to help you design a plan that works just for you. We look forward to investing with you! To Your Wealth,

Kathy Fettke and the Real Wealth Team

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7 STEPS FOR NEW Real Estate INVESTORS

About the Author

KATHY FETTKE
athy is an active real estate investor, licensed Realtor, certied coach, and former mortgage broker. She specializes in helping people build multi-million dollar real estate portfolios through through creative nance and planning. With a passion for researching and sharing the most important facts on real estate and economics, Kathy is frequently featured on such media as CNN, CNBC, NPR, CBS MarketWatch and the Wall Street Journal. She hosts e Real Wealth Show on KABC Radio in Los Angeles which is also a featured podcast on iTunes with listeners in 27 dierent countries. Kathy received her BA in Broadcast Communications from San Francisco State University and worked in the newsrooms of CNN, FOX, CTV and ABC-7. Shes past-president of American Women in Radio & Television. Kathy became a certied personal coach through the Coaches Training Institute in San Rafael, California. In 2001, she took the coaching process to television and produced a cable show called DREAM which followed the process of 6 people going after their dreams over 90 days.
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7 STEPS FOR NEW Real Estate INVESTORS Kathy noticed a theme on her Dream coaching show: most people didnt have time for their dreams when they are spending all their time at work to make money for bills. Her show sponsor was a real estate expert and the segments they produced changed her life. After interviewing dozens of real estate millionaires, Kathy discovered their lessons for creating passive income streams. She and her husband bought numerous investment properties and since then learned the highs and lows of investing that can only come from hands-on experience. She is passionate about learning more and sharing that information with the members of Real Wealth Network and the listeners of e Real Wealth Show. Kathy loves the freedom that real estate investing can bring. She is an avid traveler and enjoys hiking, rock climbing, gure skating and surng. She lives in Southern California with her husband, Rich, and their two young daughters.

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