Money Affairs

Kroger (NYSE:KR) this morning posted first-quarter earnings results that included market-thumping sales gains. Earnings spiked higher by 14% as the grocery store chain outgrew all other major national food retailers. Up 54% in the past year, the stock rose by a further 3% immediately following the announcement.

Here’s a big-picture look at how the headline results stacked up against Wall Street’s expectations.

“EXPECTED” IS THE AVERAGE TARGET OF THE 20 ANALYSTS THAT COVER THE STOCK. SOURCE: YAHOO! FINANCE AND KROGER FINANCIAL FILING

Soaking up market share
Sales growth was held to just 0.3% thanks to sinking fuel prices that pinched Kroger’s bustling gasoline business. More importantly, comparable-store sales, which strips out volatile fuel price swings, spiked higher by 5.7%.

For investors keeping score, that marks the fifth consecutive quarter in which Kroger has grown faster than Whole Foods (NASDAQ:WFM). The grocer also trounced Wal-Mart‘s 1.1% first-quarter comps — and even passed Costco‘s 5% growth. Kroger is clearly doing a few things right to be outpacing all of its food retailing rivals. Management thinks its customer satisfaction focus has been the key difference. “Our results show the power of our customer first strategy,” CEO Rodney McMullen said in a press release.

Surprisingly high profits
Profits came in ahead of Wall Street estimates, climbing to $612 million, or $1.25 per share, from $557 million, or $1.09 per share, a year ago. The grocer trimmed costs from its operations, which helped lift profit margin ahead of expectations. Operating profit jumped to 3.3% of sales from 2.8% last year.

That’s important because Kroger’s formidable earnings position gives it leverage to keep intense pricing pressure against its grocery rivals. Management said they spent $3.5 billion on price cuts last year, and rising profitability means that Kroger can afford to be even more ruthless on pricing in 2015.

Boosted outlook
Executives affirmed their full-year earnings forecast that calls for profits of $3.85 per share. However, sales growth is outpacing their prior expectations: Management raised Kroger’s 2015 comps outlook from 3.5% to 4%.

That forecast implies Kroger could reach 50 straight quarters of positive comps within the next year. Still, the executive team seems to understand that it will take plenty of hard work to get to that point.

“Kroger has produced consistently remarkable results for so long that it might be easy for some to take a quarter like this for granted — so it is important to emphasize it is the efforts of our incredible team of associates, connecting with customers, that is driving our success,” McMullen said. “Time and again, we have shown that by taking care of our customers, Kroger is creating sustainable value for our shareholders,” he added.

Have you heard my “toilet story?” Let’s just say it involves a plugged toilet, three college-aged tenants, three weeks of procrastination (with continual use of that plugged toilet), and my bad mistake of not hiring a plumber.  It was a low point in my investing career but a turning point as well. I realized the type of investor I wanted to be and the type of investor I did not want to be. I no longer work on toilets. It’s been years since that event, but I still think of it when I hear people say, “I would never want to invest in real estate because I don’t want to fix toilets!” It’s a valid concern. However, the truth is there are many, many ways to make money in real estate without needing to “play plumber.” Today I want to talk about them.

In the next week or so, MoneyAffairs.com will cross the 100,000 member mark, so in honor of how incredible this is, I want to share with you 100 ways to make money in real estate.  Please do us a favor here at MoneyAffairs and share this article on your Facebook or Twitter and let the world know there is more to real estate investing than fixing toilets. Real estate investing is as diverse as the people who are involved, and the list below is just a sample of what can be accomplished.  If you have any questions or comments about this list, or see something missing, please make a comment below!

Making Money On These Major Types of Properties

There are many different property types that you can use to make money in real estate with. The secret is finding one that you love and can throw your heart and soul into.
1.) Raw Land – This is as “raw” as it gets (see what I just did there!). Purchasing land usually does not produce cashflow, but can be improved to add value. Land can also be subdivided and sold as well for profit.
2.) Farm Investing – In addition to the land itself, the products that are made on the land can be used to make a profit.
3.) Water/Mineral/Oil/Gas Rights – The cousin of investing in raw land, this is the process of buying and selling a person’s (or company’s) right to use the minerals (or water, oil, gas, etc) on a property.
4.) Single-Family Homes – This is the most common investment for most first time investors. Single-family homes are easy to rent, easy to sell, and easy to finance. Single-family homes may be more difficult to cashflow, and can take a significant amount of time and effort to purchase just one unit.
5.) Duplex/Triplex/Quads – Small multifamily properties (2-4 units) such as these are one of my favorite investment routes. These property types combine the financing and easy purchasing benefits of a single-family home with the cashflow benefits and less competition found in larger investments. Best of all, these properties can serve as both a solid investment as well as a personal residence for the smart investor.
6.) Small Apartments – Another favorite of mine, small apartment buildings are made up of between 5-50 units. These properties can be more difficult to finance, as they rely on commercial lending standards instead of residential lending standards. However, these properties are excellent in terms of cashflow. They are too small for large, professional REIT’s to invest in (see below) but too large for most novice real estate investors. Additionally, the value of these properties are based on the income they bring in. This creates a huge opportunity for adding value by increasing rent, decreasing expenses, and managing effectively. These properties are a great place to utilize on-sight managers who manage and perform maintenance in exchange for free or decreased rent. At this level, real estate can truly become 90% passive.
7.) Large Apartments – These buildings are the larger, nicer complexes you see all around the country, often times in upper-middle class neighborhoods in the suburbs. They often include pools, work-out rooms, full time staff, and high advertising budgets. These properties cost tens of millions of dollars to buy but can produce solid returns with minimal hassle.
8.) Large Commercial Office Space – Buying large commercial buildings and renting out office space to business professionals. Usually professionally managed by large property managers.
9.) Small Commercial Office Space – Buying small commercial buildings and renting out office space to business professionals. Often much more hands on.
10.) Industrial Properties- Manufacturing, warehouses, distribution centers, etc.
11.) Mobile Homes – Generally found in parks but also on private land, mobile homes are found all over the country and can be an inexpensive way to enter the world of real estate investing and can also experience significant cashflow.
12.) Mobile Home Parks – The entire park in which mobile homes are situated on can also be bought and sold. Often times the individual lots are rented out to mobile home owners, and other times the homes themselves are corporately owned and leased to individuals.
13.) R.V. Parks – An RV park owner simply rents the space temporarily to individuals with motor homes or campers.
14.) Motels/Hotels – Especially profitable in tourist friendly areas, renting out rooms in a motel or hotel can provide significant income.
15.) Notes – Investing in “notes” involves the buying and selling of paper mortgages. While not necessarily a “property type,” notes can be bought, sold, mortgaged, and traded just like the properties they represent.  Often times an owner of a property may choose to offer financing and “carry the mortgage”. In this case, a “note” would be created which spells out the terms of the contract. For example, an apartment owner decides to sell his property for one million dollars. He offers to carry the full note and the new buyer will make payments of 8% per year for thirty years, until the full one-million dollars is paid off. If that owner suddenly needed to get the full balance of the loan, he might choose to sell that mortgage to a “note buyer” for a discount. That note buyer will then begin collecting the monthly payments and decide if they will keep the note or try to sell it for profit.

Making Money Using These Popular Investing Methods

Just as there are many property types, there are also many ways you can make money with those properties. Every deal is different and may require a different strategy, so it is best to get acquainted with as many of these methods as possible.
16.) Fix and Flip Single Family Homes– We’ll start with the obvious and most popular one. Buy a cheap home, fix it up, re-sell it.
17.) Buy-N-Hold Single Family Homes – Another favorite. Buy a home, hold it for a significant length of time (20+ years), pay the mortgage down, and live off the cashflow in retirement.
18.) Wholesale Single Family Homes- A popular choice for beginners, wholesaling involves scouting your local area, finding great deals, putting those deals under contract to buy, and then “assigning”(selling) those deals to an investor for a fee.
19.) Hybrid Fix-N-Hold for Single Family Homes – One of my personal favorites, this incorporates finding the good deal and remodeling the home from the fix-and-flip but the long term benefits of the buy-n-hold. Simply, a single family home is purchased for a low price during a low market, remodeled to force appreciation, and held until the market improves and sold. This method seeks to maximize the ROI while limiting the risk.
20.) Wholesaling Apartment Buildings – Some investors make their entire living off wholesaling just one or two large apartment buildings per year. With the larger price comes less deals but much higher finder’s fees.
21.) Fix-and-Flip Large Apartment Buildings – From duplexes all the way to large complexes, there are many apartment buildings in need of a complete overhaul. The benefit of flipping apartments over single family homes is the ability to collect rent while the property is being marketed for resale.
22.) Buy-N-Hold Large Apartments – Similar to the long term approach to single family homes, but on a much larger scale.
23.) Hybrid Fix-and-Hold for Apartments- Find a low-cost apartment building needing help, fix it, then rent it until it is most advantageous to sell.
24.) Turn-Key-Investing – This type of investor is similar to a fix-and-flipper, but seeks primarily to sell the remodeled properties to out-of-town individuals seeking a good place to keep their money moving. Often times Turn-Key companies also can handle the management and all other issues, making the investment truly passive for the purchasing investor.
25.) NNN Lease – Often times big businesses do not want to own the building they use (for tax purposes), but instead rent the building and pay all costs associated with the building such as maintenance, taxes, insurance, and more. You, as an investor, can own these buildings for highly-passive income.
26.) Vacation Rentals – Buying a property in a vacation area and renting it out when you are not staying there is not only a great way to pay for your vacation home but also build equity in a location where prices go up (and down) with more extreme force.
27.) New Construction, Residential – Just like it sounds. The process of building a home with the intent of reselling it.
28.) New Construction, Commercial – Like residential, but involving commercial places.
29.) “New Every Two” Primary Residence Flip – Many investors simply invest only in their own home, adding value and reselling every two years. The reason behind this is that in the US, the IRS allows a tax-free sale of a primary residence every two years. If you don’t mind moving often, this might be a great option for you.
30.) Cash Purchase, Sell on Contract –  If you have the cash, you can buy properties and then immediately re-sell them to buyers who may not be able to conventionally qualify for a mortgage. You can carry the mortgage for as long as you’d like, or sell the note for cash in the future.  Make sure to collect a large down payment when using this method.
31.) International Real Estate Investing – You don’t need to live where you invest (but it often does help a lot). Many investors choose to live wherever they like but invest where it makes the most sense – often overseas. While there are many challenges to this type of investing, there are also huge rewards  to those who can effectively navigate the international waters.
32.) Lease-Option Sandwich – Without actually owning the property, lease-options allow a person to gain control of a property by leasing it with a legal “option” to purchase the property at a specified price within a specified time period. Often times these properties can be re-“sold” using another lease option and the investor simply makes money being the “middle man.”

Make Money When Buying Investments

It’s often said “You make your money when you buy.” There are many different strategies you can use to ensure profitability when you buy, starting with finding the best deals. The following is a list of many of the top places to find good deals and make money when you buy.
33.) Subject-To – Purchasing a home with the existing financing in place. This method, while not illegal, can trigger the “due on sale” clause and cause the bank to start foreclosure on the property. Use with care.
34.) Lease Option – As mentioned earlier, a lease-option (lease purchase) is a method used to control real estate without taking title. It is simply “renting” the property with the legal right to buy it later. This can be a good way to buy a property if your intent is to quickly sell it again later.
35.) For Sale By Owners (FSBO) – Often times, sellers will decide to save the costs of hiring a real estate agent to sell their home and sell it themselves with a sign or newspaper advertisement. These sellers can often times be excellent sources of finding good deals or seller-financed deals.
36.) Buying REO’s – REO’s are bank-owned properties that were taken back in foreclosure. Often times these properties can be picked up for significant discount, as a bank is often very willing to get the loan off their books. Additionally, there is no emotional attachment on the part of the bank.
37.) Auction at the Courthouse Steps – During the process of foreclosure, a home is generally brought to the courthouse steps to be sold to the highest bidder. If no one bids, the home goes back to the bank. Often times, homes can be purchased for steep discounts using this method.
38.) Buying in Pre-foreclosure – Sellers on the brink of losing their home can be very motivated to sell their home and save their credit. Many times, more is owed on the house than the house is worth. However, sometimes great deals can be found by weeding out a lot of bad deals.
39.) Short Sales – A bank will often take less than the loan amount on a property to save the hassle and costs of foreclosing. This means you can often get a great deal if you can wade through the red tape and long wait-times that short sales involve.
40.) Tax Liens – When homeowner’s refuse to pay their taxes, the government can foreclose and resell the property. You’ve probably seen the “Pennies on the dollar” infomercials on late night television, but this method can be trickier than the gurus portray on TV.
41.) HUD Foreclosures – When a US government ensured loan is foreclosed on, it often becomes the property of the department of Housing and Urban Development. It is their job to sell the home and often will offer steep discounts in order to move the product.
42.) VA Foreclosures – Similar to the HUD foreclosures, the US Department of Veteran’s Affairs sells their homes as well after foreclosing on one of their insured properties – and no, you don’t need to be a veteran to buy one.
43.) USDA Rural Development Loans – If you live in a rural area, the US Department of Agriculture actually offers a loan program for primary residence homes that require as little as 0% down.
44.) VA Loans – If you are a veteran of the United States, the government offers 0% down loans on primary residences.
45.) Bulk REO’s – Often times, banks will group together large packages of REOs and sell them in a package to large investment firms or wealthy investors.

Make Money Using These Marketing Techniques

Without proper marketing, you’ll never make any money in real estate. Whether renting, selling, buying, or any other activity, these techniques will help you find the solutions to the issues you face.
46.) Bandit Signs – You’ve seen them before – those rectangular, often hand-written signs, that advertise “we buy houses” or a variety of other sales information. While tacky and well used, this method is still one of the best ways to market your business. (Editor’s note: Be aware that they are also illegal in many, if not most areas)
47.) Direct Mail – This old school method of finding leads still works today. Sending out a massive amount of letter, especially to your defined target market, is a great way to get calls and weed through deals.
48.) Craigslist Ads – Craigslist is free, easy to use, and taking over the marketing from newspapers across the country. If you don’t use Craigslist yet, do so.
49.) PPC Marketing – PPC (short for Pay Per Click) marketing is the process of soliciting business online through companies like Google, Facebook, Bing, and Others. The beauty of PPC marketing is that you only pay when an ad is clicked on – thus you only pay when an ad works.
50.) Newspapers – The classic way of advertising still is one of the best, if you can afford it.
51.) Business Cards – If you don’t have business cards, you are leaving a lot of money on the table. Hand out business cards to every person you meet and you’ll be surprised at how quick your business grows.
52.) Websites – Websites today are very inexpensive and easy to create. You have no excuse to at least have a Facebook page, LinkedIn, or Google+ page.
53.) Word of Mouth – Despite all the technology we have today, nothing will ever come close to the effectiveness of word-of-mouth advertising.

Make Money In These Real Estate Related Careers

You don’t need to invest in real estate to begin making money from it. There are many paths that will help you earn income while you learn and grow, in preparation for when you are prepared to jump in and begin investing.
54.) Real Estate Agent, Residential- Many people often overlook this option, as it technically isn’t an “investment,” but becoming a real estate agent may help you earn income each month while giving you the tools to supercharge your investing side-career.
55.) Real Estate Agent, Commercial – Primarily assists buyers in purchasing businesses, buildings, and other commercial ventures.
56.) Mortgage Lender, Residential – Working on the loan side will give you huge insight into the math that makes investing work – as well as significant contacts to the big players in your area. Usually lenders work for one institution, such as Wells Fargo, Bank of America, or others.
57.) Mortgage Lender, Commercial – Same as above, but on the commercial side.
58.) Appraiser – An appraiser works with lenders to determine the value of a piece of property. Working as an appraiser will give you in-depth experience in determining how much a property is worth.
59.) Title/Escrow Agent – The Title and/or Escrow agent makes sure all the parts fit together to make a sale happen. By working in this field, you can get an inside look at what happens in the background during every real estate transaction.
60.) Real Estate Attorney – A lawyer who helps the investor stay protected and within the confines of the law.
61.) Real Estate Accountant – An accountant is able to see first hand the math behind a real estate investment.
62.) Contracting – Nothing will give you a better idea of what it takes to remodel a home than actually being the person remodeling it.
63.) Flip Project Manager – By working side-by-side with a house flipper as the project manager, you can be involved in every aspect of the deal, learn the business from the inside, and make valuable relationships without investing any of your own money.
64.) Real Estate Marketer – A real estate marketer works with investors to find leads. From online PPC marketing to bandit signs and more, a marketer can be a valuable part of an investment team.
65.) Property Manager, Residential – Many investors don’t want to manage their property so they turn to property managers to look after their property.
66.) Property Manager, Commercial – Most commercial owners don’t manage their own properties but rely on commercial managers to take care of their investment.
67.) Resident Manager – Often times apartment owners and property managers will trade free-rent in exchange for a tenant to look after the place, collect rent, do maintenance repairs, and essentially “manage” from within the complex. This can be an excellent way for a young person to learn the investing game without losing any money (and actually making some).

Make Money By Lending Money

Lending money is one of the oldest, and most profitable, businesses on the face of the earth. As a good friend of mine once said, “You aren’t making money until your money is making money.”
68.) Hard Money Lender – A hard money lender is a person who lends money for the acquisition and/or improvements to an investment property – based almost entirely off how good the deal is.  If you are looking for a way to earn significant returns on your money without needing to actually own the property, consider becoming a hard money lender.

Make Money When You Pay For Real Estate Investments

Real estate investing requires money, but doesn’t specify who’s money.  There are many ways to pay for investments and the list is only limited by your imagination and creativity.
69.) All Cash – If you have the cash, buying property with no mortgage attached can be a very stable and safe return on your money. While the returns may not be as great as when using leverage (like a mortgage), the security is often worth it for many investors.  Owning a property mortgage-free also enables you to sell on contract whenever you’d like.
70.) Seller Financing – If a seller owns a property free-and-clear (no mortgage), they often times will be willing to finance the sale themselves. This enables you to buy a property without the hassle and costs of going through a bank or other lending institution.  This is often an excellent way to acquire larger apartment complexes or commercial buildings, as the owners may want to continue receiving an income but not want the hassle of dealing with tenants.
71.) 20%-25% Down Conventional Investment Mortgage – This is the classic method for buying a real estate investment through a bank. Come up with 20-25% down payment and the bank will finance the rest.
72.) 20%-25% Down Conventional Personal Mortgage – This is similar to the above method, but you can often get a better interest rate if the property is your primary residence. This works best for duplexes, triplexes, and four-plexes.
73.) 3.5% Down FHA Mortgage- If the home is your primary residence, you can often use an FHA government insured loan that requires (currently) just 3.5% down payment. Again, this is only on your primary residence. This is applicable for single family homes up to four-units.
74.) 3.5% Down 203K FHA Remodel loan – The FHA also has a loan program for buyers who want to buy a property that needs work to fix it up. The minimum down payment is (currently) just 3.5% of the total loan amount, and you are allowed to borrow the costs associated with remodeling the home – both labor and material. This can be an excellent way to build substantial equity in a primary residence without needing to have a lot of money upfront.
75.) 10% HomePath Investment Mortgage- These loan types are only available on Fannie-Mae backed bank REOs, but can allow an investor to purchase the home for just 10% down payment with other benefits.
76.) Small Partnerships – Partnerships are an excellent way to invest in real estate, where two parties (or more) join forces and bring their talents, resources, and experience to the table to make a profitable investment. Perhaps you don’t have the cash to buy an investment but have the time and your friend has the cash but no time – you can join forces and help strengthen the deal and make good money.
77.) Real Estate Syndication – When multiple parties join forces to buy a property it is known as a real estate syndication. This is an excellent opportunity to purchase large properties such as apartment complexes, shopping malls, or warehouses. There are stricter laws governing syndication, so be sure to consult with a real estate attorney.
78.) Use a Home Equity Line of Credit (HELOC) – If you have significant equity in your own home, you can often get a line of credit based on that equity. That money can then be used to finance almost any purchase, including residential property. This is a great way to finance fix-and-flips or to get the money needed for a down payment on a larger purchase. A HELOC is generally very low interest, but variable.
79.) Use a Home Equity Loan – Similar to the HELOC, the home equity loan is (usually) a fixed-rate second mortgage on your primary residence that you can use to purchase anything you’d like – including real estate.
80.) Small Business Loans – Banks often will finance a line of credit or loan for small businesses- and this can include a real estate investment company.  Many banks (especially small, local banks) will even tailor a loan program just for you that help you finance properties.
81.) Self-Directed IRA Investing – Many people have IRA’s, but few know that you can actually use your IRA to invest in real estate.
82.) Whole Life Insurance – This little-known strategy can actually have a significant impact on your investing career. If you have a whole life insurance policy, talk to your insurance agent about how you can borrow money against it to invest in real estate.
83.) Using Hard Money – Hard Money Lenders loan money based primarily on the Loan-To-Value of a property. While the points and fees can seem high, they are often the best method to quickly finance a property. Be sure to always have an exit strategy, as hard money loans are typically good for less than two years.
84.) Using Private Money – If you have friends, relatives, neighbors, or others who are looking for a better interest rate than the 1% or so they get from a bank CD or saving’s account, they may be interested in lending that money to you to finance your acquisition.  Generally, private money is based off the relationship more than anything, but still secured by the loan-to-value of the deal. This is one of the best ways to finance real estate, but use caution when there are personal relationships involved.

Make Money When Selling Investment Properties

Selling properties can net you a lot of cash – but can also cost a lot in fees, commissions, and taxes. The following is a list of ways you can make money when you sell.
85.) 1031 Exchanges – In the US, when it comes time to sell, you can often avoid paying taxes on your profit by reinvesting that profit into another similar investment. This is known as a 1031-exchange.  There are strict rules that govern this transaction, so be sure to seek professional advice before embarking on this journey.
86.) For-Sale-By-Owner Selling – In today’s world of advanced technology, it is possible to sell a home without using a real estate agent. While I generally do not advocate this route, many investors have found success and significant cost savings by selling the home themselves.
87.) Flat Fee Selling Agents – There are many companies out there that will list your property for a set fee (from $99 – $1000) plus the buyer’s agent commission (3-3.5%) rather than the typical 6-7% due on normal transactions. The effectiveness of this strategy largely depends on your market.
88.) Become the Seller Agent – Getting your real estate license does not require that you become a real estate agent. Often times you can save thousands of dollars by listing the property yourself.
89.) Carry A Contract- When you sell, you can often defer all the taxes due plus receive a monthly income by selling on contract to a worthy buyer. This can also enable you to get a premium price for the property. Be sure to collect a sizable upfront down-payment and screen your buyers very carefully.
90.) Carry a Second – While more popular in the past, this method is still a viable option to help close a deal. You can sell a property but be willing to carry a “second mortgage” at a higher interest rate. For example, the buyer puts 20% down, the bank funds 70%, and you fund the remaining 10% with a second mortgage on the property.

Make Money By Teaching/Sharing Information

Finally, if you have experience in real estate investing you can make additional income by sharing the knowledge you have.
91.) Consulting – If you are experienced in real estate investing, perhaps you can share your information, help others, and make a decent side income while doing it.
92.) Blogging – Creating a blog and discussing your real estate adventures can be a good way to organize your thoughts, build relationships with other investors, share your knowledge, and even build your list of lenders or buyers.
93.) Retirement Specialists –A retirement specialist is similar to a consultant,  but focuses primarily on helping individuals invest in real estate to achieve their retirement goals.
94.) Author – Many investors choose to share their knowledge through writing and publishing a book. With the emergence of Amazon and other e-book providers, this is becoming significantly easier to do for anyone with a computer and a love of writing.
95.) Infomercials – If you really want to explode your investing reach, you can rent space on a television network to gain followers or sell a informational product. Cheesiness optional.
96.) Public Speaking – Teaching others through speeches can be a great way to build your investment business and share what you know, while establishing yourself as an expert in the field.
97.) Podcasting – A relatively new medium, Podcasting brings the ability to create a radio show down to a level where anyone with a computer and microphone can experience.
98.) Talking TV Head – If you’re especially experienced and love being in front of a camera, television networks like CNN, Fox, or MSNBC may be interested in knowing your perspective on trends in real estate.

99.) Full-scale Guru – Please… just don’t.

And Finally, Number 100…

100.) Get Involved on MoneyAffairs –  MoneyAffairs is here to help you connect with other investors who have come before you and answer any questions you might have. There are so many examples of success found within the pages of MoneyAffairs and we want you to be the next. So reach out and get involved. Head over to the forums, read some articles, and comment on some blog posts!
That’s it! The Top 100 Ways to Make Money in Real Estate! As I mentioned before, please take a moment and comment below with your questions or comments. I absolutely love reading and responding to comments so please engage!

Suze Orman doesn’t like them. Some journalists are suspicious of them. Fee-only financial advisors generally avoid them. I believe the public generally gets ripped off when they buy them. What are we talking about? Variable annuities. But can you guess who loves variable annuities? Folks who earn sizzling commissions selling them. A 7-8% commission split with a firm still yields a tidy 3-4% commission for the seller. That’s $7,500-$10,000 on a $250,000 annuity – often with very little time or effort. Advisors and agents emit howls of protest when criticized for pushing variable annuities but there are few things more lucrative as selling a variable annuity. Caveat emptor (“buyer beware”) doesn’t seem to apply since sales continue to grow: +16% in 2011 to $85 billion. Advertisements that prey on retirement fears (a gorilla on a plane, elevator or elsewhere – the perils of ignoring your retirement) are very effective in tapping fears about outliving assets in retirement. I regularly receive emails from annuity firms who promise substantial commissions for selling annuities (note: they don’t know I don’t sell products). My 84 year old father is a great example of a potential variable annuity victim – a financial advisor tried to sell him a variable annuity a few years ago, when he was 79. My father showed the proposal to me – the surrender period was 10 years and the fees were well over 3% per year. My father would not have been able to access this annuity without penalty until he turned 89.

What are variable annuities? Briefly, they are a mutual fund type of account overlaid with a thin layer of insurance. If you fund an annuity with after-tax money, all future gains are tax-deferred (taxed at a higher ordinary income tax rate than capital gains rates). If you fund an annuity with tax-deferred dollars, you’re not doing much except adding a layer of unnecessary fees. A recent  “The Great Annuity Rip-Off” article on Forbes.com is a concise summary of the benefits (a handful) and drawbacks (many) of investing in variable annuities. Here are some key points distilled from Forbes.com and previous articles I’ve written about variable annuities:

1. If you truly want to convert after-tax dollars and gains to tax-deferred gains, you can pour money into a variable annuity but be aware you do NOT receive a tax deduction since annuities are not qualified retirement products.
2. It could make sense to annuitize a variable annuity (convert your lump sum to an income stream) if you end up living a substantially longer life than the statistical average.
3. Fees typically are very high – at least 2% per year, including “mortality and expenses.”  Some variable annuities cost 3-4% per year.
4. Investment options typically are limited and often have high underlying expense ratios.
5. The insurance component is misleading – it’s not insurance in the common sense of the word. “Insurance” in variable annuities typically guarantees you’ll receive at least the amount of money you initially invested into the annuity if you die (unless you have a rider that increases the coverage – but these are rare since the 2008 meltdown). If you die suddenly, you get the value of your account (if you haven’t yet annuitized) – the “insurance” only has value if your investment plunged dramatically vs. your initial purchase amount.
6. Annuities are disadvantageous to inherit if they don’t go to a spouse. If the money formerly was after-tax dollars, the heir receives no step-up in basis on accounts with gains. If you invest the same dollars (after tax) in a stock fund, your heirs benefit from a step-up in basis at the date of death or 6 months later. This is hard to quantify but a step-up in basis is a powerful tool to reduce capital gains taxes.
7. Disclosure to individuals – at least the clients I work with – is very poor. I typically see a lot of confusion on the part of clients who bought variable annuities. These are complex instruments with many moving parts that aren’t always adequately explained (or even understand) by the seller. Folks who buy annuities don’t understand the tax ins and outs and often are told variable annuities are “safe” etc.
8. Variable annuities typically lack liquidity and can tie consumer money down with prolonged surrender penalty periods.
9. Variable annuities convert lower capital gains rates on taxable income (if the annuity is purchased with after-tax dollars) into a higher tax rate levied on ordinary income. This can cost consumers significant tax dollars down the road.

Forbes cites a study by Richard Toolson  (Accounting Professor at Washington State University) has looked at issue of break-even points for variable annuities vs. investing the same funds in a lower-turnover stock index mutual fund – assuming both earn the same pretax return. According to his calculations, an individual in a 36% tax bracket will never come out ahead by investing in a variable annuity due to the prolonged drag of fees and tax issues. There are unusual situations when a variable annuity may make sense – e.g. doctors who are concerned about malpractice suits. Three-quarters of US states protect variable annuity assets from creditors – regular IRAs do not benefit from ERISA protection and may be more vulnerable to creditors. There are a few other instances when variable annuities may make sense – but they’re few and far between.  More often than not, it’s clear that variable annuities always benefit the seller, and only infrequently benefit the buyer. If a new client comes to me with variable annuities, they’re immediately reviewed by an annuity expert who provides objective feedback. If the annuities are in an IRA account, it may make sense to dismantle the annuity altogether. If the annuity is funded with after-tax money (a so-called “non-qualified annuity”), it can be rolled into a less expensive annuity via a  “Section 1035 Exchange.”  The annuity otherwise can’t otherwise be terminated if funded with after-tax dollars. The best policy is to steer clear of variable annuities or engage the advice of a professional who does not sell products and isn’t friends with the potential annuity seller (conflict of interest). To quote Suze Orman: “I hate variable annuities with a passion…especially variable annuities that are used in retirement accounts…I think variable annuities were created…for one reason only…to make the financial advisor selling you those variable annuities money.” Well said!

Investing in real estate can seem like a safe bet. After all, you can touch and feel the physical asset, but that creates a false sense of security, experts warn.

“People usually over estimate their returns on rental properties.” says Jeremy Kisner, president of Surevest Wealth Management and a real estate investment property owner himself. “It seems glamorous and sounds cool. But from my experience, most people don’t make the returns they think they will make.”

Aspiring real estate investors can quickly get themselves in trouble, turning potential gains into never-ending losses.

From underestimating maintenance costs to wrongly banking on appreciation, here’s a look at three common mistakes newbie real estate investors make:

Mistake No.1: Underestimating the Cost

When calculating the costs associated with a rental property, many novice investors will factor in the mortgage, insurance and taxes, but leave too little room for maintenance costs.

Take Kisner’s rental property as an example: The house is valued at $380,000 and with a 20% down payment, the mortgage and interest payment is $1,585 a month. Add taxes to the mix and that increases to $1,895 a month.

He rents it out for $2,250 a month, which should mean he is cash-flow positive. However, taking into account the landscaper, pool guy and a property manager would put him in the red each month by $335.

“Most people bank on the fact that right off the bat the property is cash flow positive but they aren’t factoring in all the expenses,” he says, noting that many investors also overestimate the appreciation of the home as well.

If Kisner holds this property for 30 years without increasing the rent, he would have a 6% total return on investment. “Six percent is not horrible, but any type of balance mutual fund over 30 years has done 6%,” he says

Mistake No.2: Banking on the Property Value Appreciating

One of the reasons so many people can get into real estate investing is because they can borrow money to purchase a home. This works when home prices are on the rise, but as we saw in 2007, prices can’t rise forever.

“Leverage is what draws investors in when real estate values are growing, but if the value of a property decreases, the investor using leverage will not only be multiplying losses on the investment, but interest payments on the loan will also continue to build up,” says Duncan Rolph, partner and managing director of Miracle Mile Advisors. “Be very careful using debt to generate a return.”

Gains in real estate are often tied to appreciation, but even in good times, Rolph says stocks may be a better bet. “Prior to the 2008 real estate crash, stocks were still earning substantially higher annual returns than real estate investments. After the crisis, this disparity has only increased,” he says. “From 2008 to the beginning of 2012, the home price index fell 31% while the S&P 500 provided a return of 13% over the same time period.”

Mistake No.3: Putting all Your Eggs in One Basket

Diversification is key to long-term portfolio success, but for many novice real estate investors, all their money is tied up to one property.

“People don’t realize they are putting all their eggs in a single basket and geography ends up being a big issue,” says Rolph. He says natural disasters, including hurricanes and wildfires, can devastate a property owner.

However, real estate investors’ risk doesn’t stop with location. If a home suffers any significant problems like a foundation crack or mold, the repair costs could easily wipe out any gains.

Economic issues can also lower property values, causing a real estate collapse that can leave an investor holding a home nobody wants. “Getting in and out of a piece of real estate is not the same as buying or selling a stock,” says Rolph. “That illiquidity is a real problem because the time liquefying matters no one wants to buy the asset.”

From the first decision to invest in real estate to actually buying your first rental property, there is a lot of work to be done. This task may be daunting for the first-time investor. Owning property is a tough business and the field is peppered with land mines that can obliterate your returns. Here we’ll take a look at the top 10 things you should consider when shopping for an income property.

Starting Your Search

​Although you may want a real estate agent to help you complete the purchase of a rental property, you should start searching for your investment on your own. Having an agent can bring unnecessary pressure to buy before you have found a property that suits you. The most important thing is to take an unbiased approach to all the properties and neighborhoods within your investing range.

Your investing range will be limited by whether you intend to actively manage the property (be a landlord) or hire someone else to manage it. If you intend to actively manage, you should not get a property that’s too far away from where you live. If you are going to get a property management company to look after it for you, your proximity to the property will be less of an issue.

Let’s take a look at the top 10 things you should consider when searching for the right rental property.

1. Neighborhood: The quality of the neighborhood in which you buy will influence both the types of tenants you attract and how often you face vacancies. For example, if you buy in a neighborhood near a university, the chances are that your pool of potential tenants will be mainly made up of students and that you will face vacancies on a fairly regular basis (during summer, when students tend to return back home).
2. Property Taxes: Property taxes are not standard across the board and, as an investor planning to make money from rent, you want to be aware of how much you will be losing to taxes. High property taxes may not always be a bad thing if the neighborhood is an excellent place for long-term tenants, but the two do not necessarily go hand in hand. The town’s assessment office will have all the tax information on file or you can talk to homeowners within the community.
3. Schools: Your tenants may have or be planning to have children, so they will need a place near a decent school. When you have found a good property near a school, you will want to check the quality of the school as this can affect the value of your investment. If the school has a poor reputation, prices will reflect your property’s value poorly. Although you will be mostly concerned about the monthly cash flow, the overall value of your rental property comes in to play when you eventually sell it.
4. Crime: No one wants to live next door to a hot spot for criminal activity. Go to the police or the public library for accurate crime statistics for various neighborhoods, rather than asking the homeowner who is hoping to sell the house to you. Items to look for are vandalism rates, serious crimes, petty crimes and recent activity (growth or slow down). You might also want to ask about the frequency of police presence in your neighborhood.
5. Job Market: Locations with growing employment opportunities tend to attract more people – meaning more tenants. To find out how a particular area rates, go directly to the U.S. Bureau of Labor Statistics or to your local library. If you notice an announcement for a new major company moving to the area, you can rest assured that workers will flock to the area. However, this may cause house prices to react (either negatively or positively) depending on the corporation moving in. The fallback point here is that if you would like the new corporation in your backyard, your renters probably will too.
6. Amenities: Check the potential neighborhood for current or projected parks, malls, gyms, movie theaters, public transport hubs and all the other perks that attract renters. Cities, and sometimes even particular areas of a city, have loads of promotional literature that will give you an idea of where the best blend of public amenities and private property can be found.
7. Building Permits and Future Development: The municipal planning department will have information on all the new development that is coming or has been zoned into the area. If there are many new condos, business parks or malls going up in your area, it is probably a good growth area. However, watch out for new developments that could hurt the price of surrounding properties by, for example, causing the loss of an activity-friendly green space. The additional condos and/or new housing could also provide competition for your renters, so be aware of that possibility.
8. Number of Listings and Vacancies: If there is an unusually high number of listings for one particular neighborhood, this can either signal a seasonal cycle or a neighborhood that has “gone bad.” Make sure you figure out which it is before you buy in. You should also determine whether you can cover for any seasonal fluctuations in vacancies.Similar to listings, the vacancy rates will give you an idea of how successful you will be at attracting tenants. High vacancy rates force landlords to lower rents in order to snap up tenants – low vacancy rates allow landlords to raise rental rates.
9. Rents: Rental income will be the bread and butter of your rental property, so you need to know what the average rent in the area is. If charging the average rent is not going to be enough to cover your mortgage payment, taxes and other expenses, then you have to keep looking. Be sure to research the area well enough to gauge where the area will be headed in the next five years. If you can afford the area now, but major improvements are in store and property taxes are expected to increase, then what could be affordable now may mean bankruptcy later.
10. Natural Disasters: Insurance is another expense that you will have to subtract from your returns, so it is good to know just how much you will need to carry. If an area is prone to earthquakes or flooding, paying for the extra insurance can eat away at your rental income.

Getting Information

​Talk to renters as well as homeowners in the neighborhood. Renters will be far more honest about the negative aspects of the area because they have no investment in it. If you are set on a particular neighborhood, try to visit it at different times on different days of the week to see your future neighbors in action.

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