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Contents
Foreword .......................................................................... 3 Introduction ..................................................................... 4 Chapter One: How to Time Your Investments to Regional Trends ......... 10 Chapter Two: Master the Timing of Financing........................................ 32 Chapter Three: Master Trends in Your Personal Life ................................ 48 Chapter Four: Be a Trendsetter ................................................................ 60 Books and Internet Resources to Learn More ............. 67 About the Author ............................................................ 71
Foreword
My name has become synonymous with real estate because I know what Im doing when it comes to real estate. I learned a lot from my father, Fred Trump, who always told me to know everything you can about what youre doing. I followed his advice and learned as much as I could about it. His advice worked for me, and it can work for you. Pay attention to your neighborhood as well as to global developments. When I moved into Manhattan, I would take the time to walk around different neighborhoods to become familiar with them. Nothing beats this kind of experience. Avoid being an armchair expert. Visit the areas you are interested in and you will have insights that you would have missed by merely reading about a place or by listening to other people. Listen, but form your own opinions whenever possible. If its your money, you owe that to yourself, and it will serve your best interests. Things change rapidly in todays real estate market, so you cannot afford to be complacent or to rely on yesterdays news. What is it like today should be your rst question. Then nd out for yourself by doing your homework. Cover your bases as much as possible. Study this course and learn everything you can whether you think its necessary or not. Knowledge is power. Use it to your advantage. I wish you success in your real estate endeavors.
Donald J. Trump
Introduction
Would you like to become rich by investing in real estate? Possibly, very rich? Then master the art of timing. Timing is about taking advantage of opportunities when they come along. Yet timing involves a lot more than just acting decisively at the right time. On a deeper level, timing means: Acting at the right time to take advantage of a trend. For a simple example of what that means, think about the claims made by the real estate gurus whose ads you have seen on television. They say that if you simply look for undervalued properties, you can buy, then sell those properties quickly (ip them) and turn a quick prot. Certainly, that is an example of how you can take advantage of a trend. You buy at a low price, then sell for a higher price as property values increase. But the fact is, sustained success in real estate hinges on much more than a grasp of one elementary trend. To succeed consistently over time, you need to understand a number of trends some of them quite complex and time your activities to take advantage of them. A rst-time real estate investor is like a surfer. A surfer may wait and watch many waves go by, learning their patterns. When the right wave comes along, the surfer takes a position in front, catches its momentum, and rides it into shore. Catching the right wave in the right way, the surfer glides safely into shore without having to struggle against undertow and crosscurrents. The smart investor can ride with the force of a trend. To understand how this works, think of a surfer. First he or she swims out into the ocean, much like a rst-time real estate investor who decides to invest in properties. The surfer studies many waves that go by, learning
Introduction
their patterns. Finally, he or she selects one that seems promising, takes a position in front of it, catches its momentum and rides it smoothly to the shore. It is a beautiful thing, just as success in real estate is a beautiful thing. Catching the right wave in the right way allows the surfer to glide safely home, with much less effort than struggling against undertow and crosscurrents. Trends work in much the same way, enabling you to accomplish more by tapping into their force.
Introduction
Then economic hard times hit. Many homes in their development went into foreclosure. One day, I noticed that my house was one of the few without a `For Sale sign on its front lawn, Gennady recalls. Yet Gennady and Maria felt that they were only going through a bad time in the area. How could such a nice home in such a great location fail to appreciate in value? In other words, they had vision. In the years that followed, that vision was proven correct. The For Sale signs disappeared. New owners arrived and began to x up their homes. The value of the Yevshenkos house approached $400,000. Their resolve to weather the hard times had repaid them richly. Then calamity struck again when the World Trade Center was attacked. The Yevshenkos packed their bags and moved to their home in Pennsylvania. There they started buying and xing up smaller homes in the area. The couple succeeded in establishing a thriving real estate business. There are no limits on our ability to succeed in the promised land, Maria said. Once again, she was right.
Introduction
Fifth, expanding investment opportunities in a proven area can lead to new opportunities for success. Were the trends always kind to them? Absolutely not! Yet they weathered the bad times and moved ahead toward success by thinking about many trends at the same time.
Introduction
area were also losing tenants too. Apartment for Rent signs sprung up on the block. With their cushion of available cash rapidly depleting, Jack and Janine sold the building at a loss after two years. Their kids were about to start college and the last thing they needed was to go under nancially at the time when they needed tuition funds! To make matters worse, three years later the neighborhood really did improve. If Jack and Janine had timed their investment better, they might have been set up for life.
Introduction
Introduction
Chapter One: How to Time Your Investments to Take Advantage of Regional Trends
You have to believe in the location. Otherwise, youll be making a rotten investment.
From Think like a Billionaire by Donald J. Trump with Meredith McIver (Random House, 2004).
In 1974, New York City was in the grip of a severe economic crisis. Real estate values, which are never supposed to fall in Manhattan, were bottoming out. Some of the oldest hotels in the best locations in midtown New York were rundown and dilapidated. Penn Central owned four of these hotels: the Biltmore, the Barclay, the Roosevelt, and the Commodore. Of these, the Commodore was in the deepest hole. Despite its prime location next to Grand Central Station, it had been losing money and defaulting on property taxes, for years. That same year, Donald J. Trump learned that the Commodore could be acquired at an attractive price. He decided to visit and see the hotel for himself. As he approached, the place looked depressing. The faade was lthy. The lobby was dingy. Cheesy stores were located on both sides. Derelicts were sleeping in the doorways. But as he stood in that lobby, Mr. Trump looked out through the doors into the street. From his vantage point in that dark place, he saw something bright, shining, and full of promise. Thousands of well-dressed commuters from Westchester County and Connecticut were streaming by the door on their way to and from Grand Central Station.
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He realized that if he could acquire the hotel and transform it into something not only attractive, but spectacular, he could take the lead in turning the neighborhood around. So Mr. Trump bought the Commodore. Then he proceeded not only to x it up, but to turn it into the kind of new, sensational building that would spearhead the rejuvenation of the neighborhood. He commissioned an architect to redesign the building, transforming the Commodore from a dilapidated hotel for has-beens to a fantastic futuristic design that would appeal to all those well-dressed commuters and their clients. His plans featured a lofty, marble lobby. From there, gleaming escalators would take visitors up to a restaurant with immense glass windows overlooking 42nd Street. If you go there today, you will see that those plans have become a reality, part of the scene on 42nd Street. Once plans were in place, Mr. Trump made a deal with Hyatt to operate the hotel. Hyatt already had a prole as a hotel chain with buildings that were unusual and upscale. The resulting Grand Hyatt Hotel was more than a commercial success. It was the force behind the transformation of the Grand Central area of New York City. Years later, Mr. Trump sold his interest in the hotel to Hyatt for $85 million, a sizable return on his modest initial investment.
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the trends that made the Grand Hyatt a Cinderella-story are the same ones that affect real estate investment anywhere.
The same trends that made it a Cinderella-story success also aect your plans to invest in real estate anywhere.
No property exists in a vacuum, and neighborhoods are always changing. That holds true whether you own a gambling casino, a strip mall, a hotel or a two-family home in a small community anywhere in America.
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(the major commuter link between the New Jersey suburbs and New York) had announced plans to begin direct, thirty-minute commutertrain service from their town directly into Pennsylvania Station in New York. (At the time they bought, commuters had to take commuter trains to Hoboken, New Jersey, and then continue into Manhattan via ferry or train.) These trends supported their belief that a singlefamily home in the town would be a good investment. They were right. A few months after they bought their home, New Jersey Transit began running trains directly into Manhattan. Properties in the area began to sell for considerably more money in some cases, a third more than only a few months before. In 2005, according to an article in the The New York Times, the value of many properties in their area had doubled in one year. In short, they were a success. Why? Because from day one, Stephen and Lisa had the intelligence to buy a property that would allow them to prot from regional trends in the near and long term. Several years after her husband passed away, Leah decided it would be a good idea to sell her house in an upscale suburb outside Chicago. It was a typical three-bedroom, single-family house built in the 1960s. She followed what she viewed as standard advice and prepared her house to show to prospective buyers. She painted and papered, installed new xtures in two bathrooms and made other cosmetic improvements. Things added up and by the time she was nished, she had invested more than $10,000 to get the place shipshape. When she listed the house with a local real estate agency, it sold within a week to a nice-looking young family. She felt good about the transaction until several months later when she learned that the buyers had knocked down her house and were planning to build a new one on the land. She realized that she had thrown away all that x-up money at a time in her life when it would have come in very handy. She had failed to read the larger trends, such as the
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fact that other houses were being knocked down in her area by new buyers. She had overlooked the fact that the land under her house was worth far more than the house itself, a strong indicator that a new buyer might tear down the house.
Trends Change Property Values. To Succeed, You Need to Time Your Investments to Take Advantage of Them.
In this chapter, you will examine trends that can exert a major inuence on the success of your real estate investments. The more you understand the trends that are at work in your area, the more you minimize your risk of failure and maximize your opportunities for success.
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Why? Because we have all known investors who say: I thought that property in this town would always appreciate. I failed to notice that neighborhoods were going downhill. I was looking at the place through my childhood memories and rose-colored glasses. I missed the fact that, due to regional business trends, there were not enough jobs in the area for the young people I wanted as tenants in the apartment buildings I acquired. It was there for me to see in the performance of similar buildings right down the block, but I was so eager to get started as a landlord that I charged ahead and ended up with a building that was exceedingly hard to keep lled with tenants. You certainly do not want to join their ranks. What, then are the trends to weigh when you are considering buying property in a particular area? Lets take a closer look.
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the economic base from under the region. Are there other employers in the area who can, in turn, re-employ the workers laid off when the factory shut its doors? Hopefully, yes. But in many cases, no. And it goes without saying that owning properties in a community where a large percentage of the people are suddenly without work will not turn you into a real estate success. Where will people get the money to pay rent in your buildings? Where will they get the dollars that you hope they will spend in the stores of the new commercial building you have just acquired? A plant closing in a factory town is an extreme case, but it illustrates the shock waves that regional employers send through a community when they shut down or change locations. You need to understand where people work in an area where you are looking at properties. In major metropolitan areas where hundreds of companies are doing business, you enjoy some protection against business failures. If two or three businesses fold, there are others that are still in operation. Even in a large city with many thriving businesses, you would still be wise to ask some questions: If you are buying an apartDO THIS! ment building, is there a good chance that you will be able Review the lease applications of the people who already to attract tenants who will live in a building you are remain securely employed? considering. Do they work for Review the lease applications companies that seem to be of people who already live in stable and durable, or not? a building you want to buy. Do they work for stable companies? If reviewing such documents is not possible, speak with an attorney in the area who has represented other building owners. Have they had
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a lot of problems with broken leases, for example, or with evicting non-paying tenants? Uncover such information before you own property before your investments are on the line. If you discover a slump, is it likely to turn around any time soon? Do employment trends indicate that there will be a signicant pool of buyers when you decide to sell the property, or properties? If you are buying a commercial property such as an ofce building or a small strip mall, what do regional employment trends tell you about the possibility of nding stable, long-lasting tenants? Consider the history of a retail property. Who have past tenants been? If tenants did not remain in place for long, what kind of enterprises were they pursuing? If you are considering buying a shopping center where upscale clothing stores have closed their doors during the last few years, you might want to rethink your investment. Keep your eyes open and keep asking questions for as long as it takes to get a good read on employment trends in the area. The bottom line is, any enterprise succeeds or fails based on money, and money comes from people who work. Unless you can discover just who those people are and where they earn their money, you will be operating with an unacceptable level of risk.
Understand Transportation
Earlier in this chapter, you heard the story of a young couple that had made a wise real estate investment by considering upcoming improvements in commuter-train service between their community and midtown
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Transportation to and from a property inuences its ability to generate income and appreciate in value.
You can see this principle at work when you look at the major transportation systems in any metropolitan area. Notice that, in general, the neighborhoods and towns that offer the most robust signs of economic health (higher property values, faster appreciation, lower vacancy rates, and more stable retail leases) are almost always those that are easy to travel to and from. The reasons for this have a lot to REMEMBER! do with a subject that we just discussed: employment. Almost any Transportation to and from a property usually determines kind of property retail, ofce, or its ability to generate income residentialis worth more when it and appreciate in value. is located near places where people work. Transportation affects property values in many other ways, too. If you are thinking about investing in a shopping mall, for example, your investment will be more valuable and protable if shoppers live nearby or if it happens to be situated on a well-traveled commuter route. The issue of transportation is more complex than some people imagine. Transportation is closely intertwined with the demographics and economics of a region. Sometimes, transportation can shape the overall success or failure of a real estate investment in subtle and surprising ways. Too much trafc! Not too long ago, Seattle and Atlanta were both considered great places for younger, single professional people to live.
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Both of those cities remain vibrant, exciting places. Both offer a vast business base and a wide array of different employment opportunities for young professionals who are just starting out in their careers. Both cities, however, have also become drivers nightmares! Their roads are simply insufcient to carry workers to and from their jobs during rush hours, which can be nightmarish daily ordeals. To make matters worse, major employers are located outside city limits, forcing large numbers of employees to drive to work. Such factors can pose complex problems for potential real estate investors who have not completely internalized the patterns of highway use. An apartment building located on the wrong highway, attractive though it might be, offers less value than a similar building in a more favorable location. Targeting the wrong tenants! A man bought a 24-unit apartment building in Newark, New Jersey, reasoning that its proximity to New York would attract young professionals who needed to commute into New York City. He soon learned, however, that his location was more likely to attract people in their twenties who were not commuting to New York City, but were driving farther out into New Jersey where they worked in sales and other entry-level positions. This unexpected reality put him into direct competition with newer apartment complexes closer to where his tenants worked. Furthermore, the lack of parking facilities at REMEMBER! his building made it unattractive Properties with convenient to the very people who formed commutes oer higher his core pool of prospective rewards to investors sooner. renters people who needed And higher rewards, sooner their cars to commute to their is another way of saying real jobs further out in the suburbs. estate success. Did it all spell disaster for the
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property? No, but it proved less protable, and far harder to manage, than the investor had bargained for. To summarize, properties that offer tenants easier commutes lead to higher rewards for investors sooner. And higher rewards sooner is another way of saying real estate success.
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Because it is difcult to understand and internalize these trends, you need to conduct some research to fully understand whether an area is stable or going downhill. After all, we all know real estate investors who have made great prots after buying property in communities that were rough and tumble one year, then full of young professional people the next. Greater risk often offers the potential for greater prots, but you need to consider the following steps before buying real estate in neighborhoods where safety is a concern: Visit city hall and review real estate transactions. In which areas are prices going up or down? What varieties of properties sell the fastest? Which properties have owed city taxes in the past? (Are they similar to properties that you are considering?) In many cases, projecting a friendly attitude toward the person behind the counter in the Tax Ofce will open virtual oodgates of information you need to make a wise real estate investment in a doubtful area. Visit police headquarters and talk to police ofcers on the street. Ask what kinds of crimes take place, where they are most likely to occur, and whether crime rates are increasing or decreasing. You cant go into a real estate investment blind to such issues. Get out and look around. Walk the streets during the day and at night. Notice how street activity changes after dark. Are there nice-looking young school
DO THIS!
Get out and look around a neighborhood where you are thinking of buying property. Walk the streets during the day and at night. Notice how street activity changes after dark. There are things you can see yourself that no one else can tell you not your lawyer, not your real estate agent, not your banker.
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children on the streets in the after-school hours, then drug dealers once the sun goes down? There are things you can see yourself that no one can tell you not your lawyer, not your real estate agent, not your banker. Talk to people in the local coffee shop or diner, the local laundry, the local newsstand. Strike up some conversations about the neighborhood. Have these people been victims of crimes? Do they know other people who have? Talk to owners of properties similar to those you are considering. They are often eager to tell you about their experiences. Apartmentbuilding superintendents will often give you the names of their bosses who own the buildings. In other cases, tax records at city hall will tell you the names of investors who already own properties in the city or town. Call them, explain that you are thinking of investing in the area, and listen to what they have to say.
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the very least, walk by a few of the schools at the time of day when parents are dropping off, or picking up, their children. There are few better ways to get a sense of the people who live in a town. Be sure to investigate the school budget and the communitys record of support for it. A community that defeats school budgets might not be the best place to acquire residential property if young families are part of the tenant base that you are hoping to attract. Why go to all this trouble? Because the quality of education in an area is a prime concern if you are thinking of acquiring residential properties. Good education means a more stable tenant population and a greater demand for residential property at the time you choose to sell. It also is a reliable barometer for the overall health of a city or town. To really understand school systems, some digging is often required, as this case study shows.
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is very difcult for a school system to keep quality high when forced to deal with such growth.) Before too long, the couple decided to send their daughter to private school.
The message is, let the buyer beware. The time to beware is before you made that purchase, not afterwards. Familiarize Yourself with Hospitals, Fire Departments, and Other Emergency Resources
You might be wondering why these community features appear in a chapter about trends. After all, arent they just unchanging parts of any community? The answer is, they might not be so unchanging after all. Especially in urban settings, rehouses can be closed as part of scal belt-tightening. In New York City for example, rehouses have closed in the outer boroughs over the last ve years, to the consternation of people in DO THIS! the adjoining neighborhoods. As a real estate investor, you need to be Visit local hospitals and ask for a copy of their annual aware that such closings can harm reports. Read them! If a hosthe perceived value of your proppital boards up its windows erties and the sense of security and doors, that will exert a that your tenants will experience negative impact on the value even if the closings have no staof any property you acquire tistical impact on the citys ability in the area. to deliver emergency services.
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A similar problem can strike with hospitals. If a hospital down the block from your new apartment house suddenly boards up its windows and shuts down, that can exert a negative force on the value of properties in the area. It does happen. If you doubt the nancial health of a hospital in the area where you might invest, visit their administrative ofces and ask for a copy of their annual report; incorporated institutions will have pre-printed copies available for the asking. It is also a wise idea to visit the Web sites of local newspapers and search for articles about the hospital(s) in town. Do those stories make you believe that those institutions are stable and strong, or that trouble lies ahead for them?
REMEMBER!
Nothing exists in a vacuum. All parts of a community are interconnected, from its grandest mansions to its smallest stores.
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Nothing exists in a vacuum. All parts of a community are interconnected, even its smallest stores. Learning about such trends can be difcult, since retailers do not often announce closings ahead of time and few storeowners will tell you if they are in trouble. How can you learn about stores that are about to close? Local attorneys who specialize in real estate can be a great source of information since they are generally tapped into the local grapevine of information about the major retail tenants in a given area. Are they making money, for example, or are they about to shut their doors? Dont overlook the value of chatting with local merchants. Walk into a store in the area, strike up a conversation with a small retailer and ask about local stores. Which among them are doing well? Which might close? The time you spend asking can be of great value as you strive to make the best real estate investment possible.
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Ask your mortgage lender and insurance company whether they would require any special environmental certications or approvals for the property you might buy. Have a home inspection company do a test of the soil that surrounds the building or property.
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them to be part of your long-term plans for the property you acquire. Again, local retailers and attorneys can be a useful source of information about plans for local development. Local and regional newspapers can also be an excellent source of information about developers plans in the area. If you are thinking of investing in an area, call the local paper and subscribe or visit the papers Web site often to stay abreast of local news. Another essential step is to monitor new projects that are under considDO THIS! eration by the planning boards of Call Town Hall and ask what local municipalities. If a large new real estate projects are pending before the towns store is planned for a community, planning board. Its a great for example, its developers need way to learn about the to appear before the local residents activities of other real estate in board meetings to answer quesdevelopers in the area. tions and make a case for why their store will be good for the community and not cause gridlocked trafc or other problems. Call town hall to ask about projects that will be discussed at upcoming meetings.
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In summary . . .
Whether you are thinking of investing in a community or you already own properties there, your ultimate success hinges on your ability to: 1. Uncover trends in the area 2. Interpret what those trends will mean for real estate 3. Take action early so you can prot from the trends or limit the damage they can potentially cause to your investments Remember, change happens all the time, in all localities. By implementing the strategies in this chapter, you can empower yourself to prot from trends.
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Visit police headquarters and talk to police ofcers on the street. Ask what kinds of crimes take place? Where are they most likely to occur? Are crime rates increasing or decreasing? Walk the streets during the day and at night. Notice how street activity changes after dark. Are there nice-looking young school children on the streets in the after-school hours, then drug dealers once the sun goes down? Talk to owners of properties similar to those you are considering. How are they doing? What problems have they encountered? Set up a meeting with someone at the board of education or an administrator in one of the schools. It is a great way to get a feeling for the communitys commitment to education. Investigate the school budget and the communitys record of support for it. Check out hospitals too. If you are in doubt about the nancial health of a hospital in the area where you might invest, visit their administrative ofces and ask for a copy of their annual report Ask your real estate attorney whether businesses in an area have closed, or whether any are likely to do so. The presence of solid retailers in a neighborhood or city is a sign of a stable community. Walk into a store, strike up a conversation with a retailer and ask about local stores. Which among them are doing well? Call Town Hall and ask about real estate projects that are pending before the towns planning board. Its a great way to learn about the activities of other real estate developers in the area.
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Are you thinking of buying a property, or maybe several properties? If so, it is important to ask: Are interest rates right just now, or should I wait until they fall? Are lending institutions currently offering mortgages that work for me, or should I wait until something better comes along? Those are vital rst questions to ask. After all, you want to take advantage of lending trends so you can obtain the most advantageous mortgage. The difference of even one percentage point, over the course of a 15 or 30-year loan, translates into a lot of money. If you were to obtain a 30-year mortgage for $350,000 at 5 percent for example, and hung in there until you paid the loan off, you would pay about $327,000 in interest alone. (Banks like to lend money because they can nearly double their money.) If you bump that interest rate up to 6 percent for the same 30-year mortgage, the total interest you will pay jumps to a heady $446,000. The difference of one percentage point on that loan, over the course of 30 years, will cost you roughly $120,000.
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You might not be thinking of holding a property for that long. But then again, there is always a possibility that you will end up holding a property longer than you expected when you rst acquired it. Perhaps it will turn out to be one of those happy property investments that attracts renters, requires little maintenance and appreciates steadily in value year after year. Some successful real estate investors end up with a portfolio of properties that t that description. Lucky them! Yet, those same lucky investors will be quick to tell you that having ve or six high-interest loans, as opposed to ve or six low-interest loans, can make a tremendous difference in REMEMBER! the long-term protability of being Having ve or six high-intera real estate investor. If you are est loans, as opposed to ve paying $100,000 too much interest or six low-interest loans, can on ten properties, that amounts to a exert a tremendous inuvery large sum of money over the ence on your overall success course of an investing career. in real estate. That amount of money will ultimately determine whether you retire to a fairway-side condominium in a gated community or move into one of the apartments some of your tenants just vacated. Interest rates have that kind of power. Many people, eager to apply for a mortgage on a promising property, respond to such thinking by saying, Oh, but if I decide to hold the property, I can always renance it later on. Of course, that is true. But even so, it is vital that you have a bead on what might happen to interest rates in the long term. If interest rates jump over the next few years, your old loans interest rate might start to look pretty good. Then again, if your initial mortgage loan was an adjustable loan (one that adjusts according to then-current interest rates
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after ve years or another predetermined period of time), it becomes even more important to know where interest rates are headed. You cant predict the future, but it behooves you to create a worst-case scenario for your loan if you opt for an adjustable. Of course there will be a cap, (a maximum interest rate you and your lender agreed on) on the loan. (The rate of interest on your loan can never exceed that, no matter what.) That cap limits the damage you incur if mortgage rates soar into the stratosphere. Yet even with that safeguard in place, you still need to be careful. If interest rates go through the roof and your loan adjusts to the highest possible rate allowed by your cap, you should consider what that will mean for your monthly payments, your cash ow (the rents you net from the property minus your mortgage payment and operating expenses) and your ability to hang on to the property. A little doomsday thinking about the worst that could happen if rates rise can prevent you from investing in a promising property that turns out to be a costly dinosaur ve years down the line.
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got a mortgage approved. Writing mortgage loans really is a service business. There are many honest people in ethical institutions who realize that long-term relationships with satised customers are better than writing as many loans as possible to earn commissions. You might also have a good relationship with a bank, even if you have not held a mortgage in the past. Perhaps you like the way the people there treat you. Or perhaps the bank does an excellent job of managing your savings account, checking account or credit cards. It seems to be a customer-friendly, stable institution. But at the same time, it behooves you to ask who is paying the loan ofcer there the man or woman who is giving you advice about mortgages. The reality is, he or she is paid by the lending institution. And what do lending institutions, by denition, do to make money? They write loans. You may have a great relationship with an honest loan ofcer, who has given you excellent service in the past, or you may prefer a particular bank that has managed your accounts well and seems like a stable institution. Nevertheless, you should remember that the loan ofcer giving you advice works for the very same lending institution from which you want to secure a loan. Unless you have a well-tested relationship with a trustworthy loan ofcer, it is best to track interest rates yourself rather than take the easy path of buying what you are offered.
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Interest-only loans are a new product that was created for buyers eager to obtain mortgages in high-cost housing markets. How does a young executive buy a $1 million home in an upscale suburb when he or she earns $150,000 a year? He or she obtains one of these loans. In the early years of the loan, monthly payments go to pay back only the interest that is owed on the loan. Payments are low compared to a xed-rate loan for the same amount. But after a predetermined period of time, monthly payments increase dramatically as the loanholder begins to repay the principal of the loan. Interest-only loans, like balloon loans, are generally regarded as risky. There might be times to consider one, such as when you are certain you will hold a property for only a short time before selling it for a quick prot. There are many other mortgage features that lenders will throw at you in an effort to make their loans attractive. If you pay more points (a point = one percent of the dollar amount you are nancing) when you make a loan agreement, for example, you can get a lower percentage rate. Conversely, you might be able to obtain a no-point loan if you agree to pay a higher interest rate. All these details will be covered in a later book in this series. What should you do?
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short time, we mean before your mortgage will adjust to then-current interest rates. (Your ARM may adjust after ve years or 10 years; you will know when you apply for the mortgage.) Reason: An ARM lets you minimize your monthly mortgage payment, improving your cash ow. You can use that extra money to improve your property, to invest in other properties, or for whatever you like. An ARM also lets you acquire more valuable property with the money you have available for a down payment; you might be able to leverage your way into more properties. Reality check: When you apply, ask your lender to calculate the theoretical maximum monthly payment you would be required to pay if interest rates soar by the time your loan adjusts. That probably will not happen, but it is information you should have to make a wise decision about the level of risk you are taking on. An interest-only mortgage is high risk, but may be your best option if you plan to ip a property for quick prot. As with the ARM described above, interest-only loans let you acquire more property with less money down and also reduce monthly mortgage payments. However, many nancial experts warn against interest-only loans, for the problems they can cause in the future. Reality check: Have a qualied real estate attorney read and explain all the ne print of these loan agreements. Dont just look at what your mortgage payments will be in the rst few years of these loans. Instead, determine exactly when your loan will move out of its interest-only phase and how high your monthly payments will go at that time. Weigh that information against other risks. If an apartment building you buy needs a major repair when your mortgage payments increase, for example, or if a lot of apartments become vacant, will you lose the place? It is better to anticipate such complications before you apply for one of these loans.
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Mortgage Chart
Mortgage Type: Fixed Best Used For: Your own home Long-tem investments Mid-term investments youll hold for several years Investments you will not hold through loans term Risk Level: Low Notes: The classic, but monthly costs are higher than other loans Plan to sell or renance before loan adjusts Can oer an eective way to leverage into properties you will hold for a few years and then sell, but review carefully with your lawyer. Not for properties you will hold for long. After interest-paying ends, monthly payments surge.
Adjustable
Moderate
Balloon
Medium High
Interest Only
Very High
Consider a balloon mortgage if you want to minimize monthly mortgage payments on a property you will hold for 15, 30 years denitely less than the amount of time before your nal balloon payment is due. With a balloon mortgage, as noted above, you make predetermined monthly payments that do not change for a period of time usually 15 or 30 years. At that time, all the outstanding money you owe becomes immediately due usually a sizable sum. You might also consider one of these mortgages if you realistically expect to renance the loan well before the balloon payment comes due. That scenario works best if you are reasonably certain your property will enjoy rapid appreciation. If its market value rises 50 percent over ve or 10 years, for example, you will then be in a good position to renance your loan and get a more predictable xed-rate loan.
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CASE STUDY!
If you want a xed-rate mortgage for $200,000 If you doubt that interest rates and the loan term (how many months you take to repay) exert a major impact on what a mortgage will cost you and what you will pay each month, here are some sobering facts: If you borrow $200,000 for 15 years at 6% interest, your monthly payment on that amount will be $1,687. The total interest you will pay on that loan over the full 15 years will be $103,788. If you borrow $200,000 for 15 years at 7% interest, your monthly payment on that amount will be $1,798. The total interest you will pay on that loan over the full 15 years will be $123,578. If you borrow $200,000 for 30 years vs. 15 years at 6% interest, your monthly payment on that amount will be $1,199. The total interest you will pay on that loan over the full 15 years will be $231,676. If you borrow $200,000 for 30 years vs. 15 years at 7% interest, your monthly payment on that amount will be $1,331. The total interest you will pay on that loan over the full 15 years will be $279,017. Note that the above gures are intended for do not include such extra costs as property tax or insurance.
Reality check: Consider one of these loans only if you are absolutely certain you will sell the property or renance your mortgage before the balloon comes due. Consider a xed-rate mortgage for your primary residence or for investment properties you intend to hold for a long time. You will enjoy the security of knowing exactly what your payments will be for the
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entire term of the loan. The downside? Your monthly payments will probably be higher than with the riskier mortgages we describe just above. Remember: You may be able to lower your monthly payments and still enjoy the security of a xed-rate mortgage by: 1) Asking the seller for owner nancing for a portion of the selling price; or 2) Taking a 40-year mortgage with lower monthly payments than a 15 or 30-year loan. There are generally no penalties for repaying a mortgage faster than its 15, 30 or 40 year term; once your foot is in the door, and you have started investing in real estate, you can increase your monthly payments and pay off your loan faster. Reality check: There are few reasons to fear a xed-rate mortgage. If a lender approves you, they have reason to believe that your income and anticipated income from the building will enable you to make payments. You also know the potential risks ahead of time. Your monthly payments will never go up, for example. And as you pay back your loan, you quickly build equity in your property. In other words, you own more of your property faster. Thats an equation that spells real estate success.
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Adapted from Trump Strategies for Real Estate by George H. Ross with Andrew James McLean. John Wiley & Sons, 2005.
of building a long-term relationship with you. If you dont yet work with a real estate agent, get to know a few before you are ready to make any offers on properties. Let them give you advice. Listen. Do you sense undue pressure? Do you get the feeling that the agent is honest, or eager to tell you anything necessary to get you to make an offer on properties? Does his or her advice make sense to you? Does it check out against the advice you are getting from the other sources we mention immediately below?
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Your attorney. If you dont already have a lawyer with proven expertise in real estate work, start looking for one as early as possible. A lawyer who is active in real estate will be up-to-date on what is happening in mortgage lending. Better yet, he or she will be on your side and not trying to sell you something. Because referrals are a good way to nd such a professional, ask relatives and friends to recommend attorneys who they have found to be honest and diligent in handling real estate transactions. Dont hesitate to meet with several lawyers. Discuss your real REMEMBER! estate investing priorities and A CPA does more than just look for someone who listens prepare tax returns. He or she to you and makes thoughtful can oer valuable insights on suggestions based on what you how to maximize your prots have to say. in real estate by beneting Your accountant. A good CPA, ciating your property and like a good lawyer, is someone executing other strategies you should recruit early on as that spell real estate success. a member of your real estateinvesting team. A well-informed CPA will know a great deal about mortgage products and where interest rates are heading. Remember, a CPA does far more than simply prepare your tax returns. He or she can offer valuable advice on strategies to maximize your prots from real estate investments: tax deductions you are entitled to, for example, depreciation you can take on the properties you own, and more. The Web site of the Federal Reserve Bank (http://www. federalreserve.gov). The Federal Reserve Bank ( The Fed) is the branch of the U.S. Government that sets the prime percentage rate,
from tax deductions, depre-
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which in turn determines the interest rates that lending institutions charge consumers. Once you are on the Web site, click on the applet marked consumer credit for information on the current prime rate and an historical summary of how that rate has changed over the last ve years. The site also offers a variety of reports on consumer credit and lending. As your real estate activities increase, take the time to get acquainted with this site and its many free reports on consumer borrowing. Local and national newspapers. Get in the habit of reading business sections daily. In only a short time, you will develop a keen sense of where current interest rates stand in relationship to their historical highs and lows. You will also be among the rst to learn about new mortgage programs soon to be introduced by banks. Internet resources. If you search for mortgage on popular search engines, you will uncover a staggering amount of mortgage information online. Search and study, but be wary of information from mortgage lenders about their own products. Check out what you see against advice from your real estate agent, attorney, and accountant to identify changes in interest rates and loans that can help you maximize your prots and minimize your risks as you build your wealth in real estate.
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In summary . . .
To build a fortune in real estate, you cant just investigate interest rates and mortgage products at the moment you need to borrow money. You need to stay abreast of lending trends every day. Doing so should become as much a part of your daily routine as checking your e-mail. Where borrowing is concerned, knowledge is power. The more you know and understand, the more you empower yourself to reap the richest rewards in your real estate investments.
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Recruit a good CPA, like a good lawyer, to be a member of your real estate-investing team. Visit the Federal Reserve Bank online at http://www.federalreserve. gov to monitor the prime interest rate.
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Their story is a good example of how personal life trends can have an affect on your success, or lack of success, in real estate.
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the street from his familys home came on the market. An elderly widow had lived in the house and had allowed it to deteriorate. Her two sons were offering it for sale in as is condition. They were selling the property directly instead of using a real estate agent. David and his family had known these two young men and their parents for years. David decided to buy that house and x it up as his rst real estate venture. He did not have much money to invest next to nothing, in fact but he summoned his courage and went to meet with the two men who were selling the house. He offered them a reasonable price for the home, but asked them to provide him with owner nancing. To prevent them from dismissing his zero-cash offer out-of-hand, he offered a repayment plan that he had already worked out with his attorney, showing that his plan was viable and would allow the sellers to prot from a higher selling price and signicantly more money in the long term. (I would assume that you have been getting a lot of low offers? he asked. The two sellers conrmed that they, in fact, had.) A deal was struck and an agreement was made. David had his rst property. The entire deal was possible only because David realized that it meshed nicely with the life of a young man in his early twenties. He had no family and lots of time to work on the house when he was not at his day job. When he nally decided to marry and raise a family, he would already have xed up his house. He could either live there or sell it and move. It was a plan that worked well with the trends of what was happening in his life at that time. Because his timing was so good, he made a very wise investment, and he has gone on to make a good deal of money in real estate.
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To succeed in real estate, you need to adjust your plans according to the major trends that are at work in your life. Certain investments might be a great idea for you at the current moment. Others might be the wrong things, at the wrong time.
Success hinges on your ability to be objective, rational, and realistic as you consider which investments are right for you at the current stage of your life. Lets take a closer look at some of the factors to consider to help you make a wise decision.
Understand the Timing of Your Love Relationships, Employment, and Family Commitments
Think about where you are in your life. Try to anticipate the changes that are most likely to happen in your life. As you do, set emotions aside and be objective and realistic. Try to predict what is likely to happen in your life in the years to come. Then formulate those beliefs about the future into a plan. If you are a young single woman, your plan might look like this: In one year I will change jobs, increasing my annual income from its current entry-level sum of $35,000 to, I project, $70-80,000.
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Also in one year, I expect to stop living with roommates and rent my own apartment. That will probably cost me at least $1,300 per month. I want to rent an apartment rather than buy one, because I expect that the next step will also happen. Within ve years, I believe I will be married. Within the next 5-10 years, it is reasonable to predict that my grandmother will pass away. That will bring me an inheritance of several hundred thousand dollars. That might represent a very good time to begin investing in real estate, depending upon my status as married/unmarried, parent/non-parent and other factors. If you are a married man in your fties and you are thinking of retiring soon, your plan might look something like this: We will put our house on the market next year after our second son has nished college. It will probably bring us about $750,000, or about $600,000 more than the current outstanding balance on our mortgage. At that point, we should consider buying a retirement residence, possibly in the Carolinas, for something in the range of $350,000-$400,000. We can then consider investing our remaining cash assets in properties. In ve years, I will be ready to retire. At that point, I can begin to withdraw cash from the investment accounts I have been paying into for many years. I should talk with my accountant now to formulate the best plan for how to deal with those assets. Before moving too aggressively into real estate investing, I need to get good advice in two areas: retirement planning and estate planning. I dont think I want to be heading into my later years owning a lot of risky properties, or a lot of properties that will demand all of my
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attention, such as apartment buildings with large numbers of tenants. Now is the time for me to think about my heirs. Looking further down the road, I dont want to die and bequeath a lot of under-performing properties to my kids. I had better be thinking about properties that are liquid, easily managed, and which promise good short-term prots. Realistically, I am not going to be investing in real estate for the next forty years! Overall, a dose of realism goes a long way toward determining success or failure. Such realism comes from accepting where you stand in the overall scheme of your life and timing your decisions accordingly. Time will often fool you. But you will rarely fool time. Certain events that are likely to happen at different stages of life are almost certain to happen. It is best to be prepared: If you are a single young person, you just might meet someone with whom you will decide to spend your life. If you are recently married, you just might have a child. If you are arriving at your later years, your nancial planning ought to allow you to have access to liquid assets to pay for unexpected healthcare costs. If you have aging parents and you are their heir, chances are that their assets will become available to you at some point in the future. You can deny the future, but it will come to you nonetheless. The wisest investors, on some level, stay aware of that as they plan their investments.
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you realistically predict a time when you will owe no money at all? What kinds of debts (credit card balances, student loans, car loans, mortgages) do you hold? Have you taken the time to manage your debts methodically? Examples: Renancing properties you already own to cancel out high-interest credit-card debt; moving unpaid balances from highinterest credit cards into lower-interest ones. Will you need to eliminate debt, or manage it better, before you can obtain nancing for your real estate investing activities? Has it tarnished your credit report? Does your debt put you in danger of opting for higher-mortgage loans (interest-only loans, for example, or balloon payment mortgages) that you would not consider otherwise? If so, would it be better to implement strategies to reduce your debt before you start investing in real estate? Are you thinking that the right kind of mortgage can save you from debt that you have mismanaged in the past? If so, is that a realistic expectation? Debt is a lot like an addiction to alcohol. When too much of it is present in your life, it becomes something that you lie about: you lie to other people about it and, even worse, REMEMBER! you lie to yourself. As you begin to borrow to nance your real estate dreams, it is a good time to set debt addiction aside and confront the issue of debt head-on.
As you begin to borrow to nance your real estate dreams, it is a good time to confront the issue of debt head-on.
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Of course, many of us hope that the property we are about to acquire will completely change the economic conditions in our lives. That can sometimes happen. If you buy the right property for the right price at the right time and then sell it under similarly advantageous conditions you really might be able to erase your debt and claim a nice chunk of cash at the same time. But more often than not, such positive outcomes result from careful planning, not accidental windfalls or luck. Your odds of success increase exponentially when you are able to understand these factors: Your current debt load. How much do you owe, and to whom? How much are you paying to those entities each month? Are your payments whittling down the principal that you owe, or are you only treading water as interest puts you further and further behind in your ability to pay back what you owe? Other questions ow logically from such considerations. If you are carrying a lot of debt, for instance, what are your plans for convincing a lender to loan you still more money? If you expect that you will be able to sell the property you want and erase your debt, how long will you need to hold the property before selling it and accomplishing that goal? Until that time comes, will rental income and other positive cash ow from the building allow you to remain solvent? If half the building becomes vacant for two or three months, will negative cash ow scuttle your plans? The time to think about such things is now, before serious problems damage your dream of real estate success. Your current assets and their liquidity. One young man we know pulled $30,000 out of his IRA account and threw it at the closing costs of his rst house! He only had a limited time to pay it back before incurring sizable tax liabilities. He did that by selling his nice shiny SUV and liquidating other assets. It was a stressful
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period for him, but his bravado got him his start in real estate. That story illustrates the reality that on-paper assets like retirement accounts might be important from the point of view of the company that is writing your mortgage, but they might not help you too much when you need to write a check and those monies are locked up in retirement accounts until you retire Your current and projected cash ow. This is a large part of what determines whether your real estate investments will succeed or fail. What will you be paying out each month? What will you be taking in? Be realistic as you make your estimates and predictions. A common mistake investors make is to view projected income from a property as money that is already in the bank. They look at a property and say, This place ought to generate $20,000 a month in rental income without considering when that income will start to come in, or how much money needs to be invested ahead of time. The real estate world is full of men and women who drive around to the properties they own, knocking on doors trying to collect rent so they can stay a few steps ahead of foreclosure. You dont want to be one of them.
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In summary . . .
In real estate, investors are often presented with opportunities that make them want to act impulsively when just the right property becomes available in the right location, or an inheritance or other windfall offers an opportunity to start snapping up properties. It is now or never! they think. And in some cases, they are right. Yet wise investors know that quick, unconsidered action often spells disaster. They know if an investment is the right one at the right time in their lives.
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Up to this point in this book, we have dealt with trends how to discover them and how to prot from them. In this nal chapter, we will consider something different:
How to create the trends that will bring huge prots to you.
In other words, how to be a trendsetter.
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Manhattan. Then he learned a signicant fact: The immense Hilton organization, with more than 150 hotels worldwide, was making nearly 40 percent of its overall prots from just two of its locations: two gambling casinos in Las Vegas. Trump recognized that he could make immense prots in the casino business. So Mr. Trump turned his attention to Atlantic City, where talk of gambling was in the air. In 1974, a referendum to legalize gambling in the entire state of New Jersey had been roundly defeated in a referendum, an event that seemed to cool the prospects for legalized gambling in New Jersey. But it was then 1975, and things were changing. Another referendum was coming up on a ballot in 1976 that would legalize gambling in Atlantic City alone. In the belief that the referendum would pass, speculators had already descended on Atlantic City and were snapping up property at record prices. Dilapidated houses near the boardwalk that were worth only a few thousand dollars two years earlier were suddenly changing hands for $1 million or more. The Atlantic City referendum passed in November 1976. Mr. Trump could have jumped into the fray at that moment, alongside many other investors, but he decided to wait while keeping a close eye on casino development in Atlantic City. By 1980, the situation was becoming clearer. A few of the new casinos Resorts and Caesars, in particular were doing quite well. But others were not doing well. Ballys new casino had come in about $200 million over budget. Construction of The Tropicana was hit by construction delays and immense cost overruns. Bob Guccione of Penthouse had acquired a site to build a casino, but when he was unable to obtain nancing, construction came to a halt.
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At the very time when Atlantic City seemed to be cooling off, Mr. Trump sensed an opportunity to enter and invest in gambling with a new kind of energy and panache. He learned that a prime piece of boardwalk property had become available. It was a two-and-a-half acre site near the main road into town from the Atlantic City Expressway. This parcel of land was adjacent to the convention center, the prime boardwalk location. Mr. Trump acquired this parcel and built his casino there. At the same time, Mr. Trump continued developing hotels in New York City. His proven track record on that front lent a lot of credibility and heft to his organization, making it far easier for him to easily pass muster in investigations by the New Jersey Division of Gaming Enforcement.
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Ultimately, the greatest real estate prots come to people who create change, not merely take advantage of it. And many opportunities exist for smart investors to take the lead in creating change.
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ones located across the river in Manhattan, or in Brooklyn or Queens, New York Citys outer boroughs. Buoyed by a belief in the place, smaller investors sparked the trend by buying and improving older Hoboken houses and apartment buildings. It was risky at rst, and naysayers were quick to voice their belief that these early developers and buyers were fools, sinking their money into the wrong place grimy, gritty Hoboken. Yet those pioneer investors started a trend and claimed huge prots from relatively small investments in older homes. They had taken a sizeable risk by investing their dollars in something that was far from a sure bet. Today, we might be tempted to say that they were really investing in a sure thing that Hoboken simply could not fail to offer investors a great return. Yet to say so would be to use 20/20 hindsight, which seems clearer in real estate than in most other areas of life. For all the surething investments that have succeeded over the years after all, many others have failed.
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To do that requires more than mere analysis and understanding. It demands a variety of other traits, some hard to dene. Traits like: Courage Intuition Vision Belief in yourself An ability to inspire others A keen ability to make deals and build support A certain image that convinces other people of the validity of what you are doing
These are not traits possessed only by people like Donald J. Trump, though he certainly has them in abundance. They are traits that many of us have, or can develop. They can turn you from a successful real estate investor into a true trendsetter who goes where others follow. As you walk that walk and build that success, we wish you success, happiness and vast prots. Godspeed!
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Chapter 4: Be a Trendsetter
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BOOKS
Success and Real Estate Wisdom
From Members of The Trump Organization Family: Carolyn 101: Business Lessons from The Apprentices Straight Shooter by Carolyn Kepcher with Stephen Fenichell (Fireside, $21.95) Trump Strategies for Real Estate: Billionaire Lessons for the Small Investor by George Ross (Wiley, $24.95) Trump: The Art of the Deal by Donald J. Trump with Tony Schwartz (Warner, $6.99) Trump: How to Get Rich by Donald J. Trump with Meredith McIver (Random House, $21.95) Trump: Think Like a Billionaire: Everything You Need to Know About Success, Real Estate, and Life by Donald J. Trump with Meredith McIver (Random House, $21.95) Trump: The Way to the Top: The Best Business Advice I Ever Received by Donald J. Trump (Crown, $18.95) From Other Authors and Experts: 21 Things I Wish My Broker Had Told Me: Practical Advice for New Real Estate Professionals by Frank Cook (Dearborn, $19.95) How to Buy a Home when You Cant Afford It by Robert Irwin (McGraw-Hill, $14.95)
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The Complete Idiots Guide to Buying and Selling a Home by Shelley OHara (Alpha Books, $18.95) Home Buying for Dummies by Eric Tyson and Ray Brown (IDG Books, $14.95) Real Estate Investing for Dummies by Eric Tyson and Robert S. Griswold (IDG Books, $14.95)
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How to Save Thousands of Dollars on Your Home Mortgage by Randy Johnson (Wiley, $17.95) Mortgages 101: Quick Answers to Over 250 Critical Questions about Your Home Loan by David Reed (Amacom, $16.95) Mortgages For Dummies by Eric Tyson and Ray Brown (IDG Books, $16.95)
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INTERNET RESOURCES
Mortgage Calculators
Note: Many mortgage calculators on the Internet are really front pages for lenders who are trying to sell you their products. The ones we have chosen below are not. Mortgage-Calc.com: http://www.mortgage-calc.com Calulator.com: http://www.calculator.com YourMortgageCalculator.com: http://www.yourmortgagecalculator.com
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