John T. Reed' analysis of Russ Whitney' TV infomercial 2 "Any level of income or credit" The narrator says these techniques will work "for any level of income or credit." I can tell you why he says that. He wants as many people as possible to sign up for his seminars. But can he deliver real estate investment techniques that work for any level of income or credit? Almost certainly not. For one thing, people at opposite ends of the income and credit spectrum must employ opposite techniques. And people at the bottom end of the spectrum have an exponentially harder time investing in real estate. If you really wanted to teach them how to invest in real estate, they would have to take a much longer and very different course than the people who have income and credit. I have never heard that Whitney is teaching multiple technique levels for different income and credit investors. I read a bunch of his books. His approach is one-size-fits-all, which is not reality"”especially when he encourages person of all income and credit levels to buy his stuff. "Quick-cash properties" The narrator says you will learn "how to buy and sell quick-cash properties." What, pray tell, are those? I have been in the real estate investment business since 1969. I have never heard the phrase "quick-cash property." So it appears to be an invention of Russ Whitney designed to tell prospective customers what they want to hear. I get a lot of people who want to know how to make some extra cash and figure real estate is the way to do that. I straighten them out. For example, page 11 of my How To Get Started in Real Estate Investment book explains that real estate is a capital-intensive business. In real estate, we have an expression, "House rich and cash poor." It refers to the propensity of property to soak up cash, not throw it off. The fact is, ownership of rental property is not in any way a source of quick cash and never will be. The only quick cash in real estate ownership comes from sale of property. Whitney has a unique way of regarding borrowing as "making" money. I regard it as borrowing. So do most people. So his "quick-cash" properties may merely be properties that will facilitate your going deeper into debt. "To create positive monthly income" The same comments I made about "quick-cash properties" apply to positive monthly income. The vast majority of rental properties purchased today with mortgages of 80% or more of value have negative cash flow. That is, their monthly income is less than their monthly outgo. Not good. Once again, "positive monthly income" is what beginners want to hear before they sign up for an expensive seminar. The truth is that in order to get positive monthly income you have to have a very small mortgage as a percent of value"”like 60% or less. One way to do that is to make a huge down payment. Another is
to buy the property at a huge bargain"”like 40% below market value. See my book How To Buy Real Estate For At Least 20% Below Market Value for details on how to do that. But that book starts by telling you how hard it is to buy at a bargain price. Such painful truths cannot be uttered by gurus who are trying to sell multi-thousand-dollar seminars to tens of thousands of beginners. FHA and VA assumable mortgages Whitney' narrator then says, "Find and get FHA and VA assumable mortgages you don"t even have to qualify for." Well, now, that' a very interesting statement. When I got into real estate in 1969, you could buy real estate "subject to" all FHA and VA mortgages without qualifying. The same was true when Whitney bought his first home in 1977. You could never "assume" such mortgages without qualifying in the sense of the FHA or VA letting the previous borrower off the hook. So why is Whitney' narrator using the incorrect word "assume" rather than the correct phrase "subject to?" I imagine because he figures many more people understand "assume" than "subject to." As usual with Whitney, his paramount objective is what sells best, not what is accurate. But even the non-qualifying subject to' changed starting in 1986. On 12/1/86, FHA began requiring credit checks of buyers trying to buy subject to existing FHA mortgages. On 2/29/88, the VA announced they would require credit checks for subject to'. And on 12/15/89, FHA added a number of strict assumption and subject-to rules. So even if you allow Whitney to use the word "assume" loosely to mean "subject to," it still does not wash because policies instituted by the FHA and VA in the late eighties ended it. It is true that you can still buy subject to FHA mortgages originated before 12/1/86 and VA mortgages originated before 2/29/88. However, that does not mean much as a practical matter because loans originated that long ago have been getting paid down for 15 to 17 years. Furthermore, the properties in question have almost all appreciated in value to the point where you would need an enormous down payment"”like 80%"”to buy subject to those old FHA and VA mortgages. "Pocket up to $3,000 at closing" Real real estate investors do not pocket money at closing. They would be surprised to learn that out in real estate investment Seminarland, putting cash in your pocket is big. How can such a thing happen? Other than some sort of mortgage fraud, I wouldn"t know. The seller is not going to give you $3,000. That would be like cutting his price that amount. The price is almost always arrived at after hard negotiation. Who else is going to give you $3,000? The title company? The Realtor'®? The termite guy? F"get about it! About the only one who is writing a big check at a real estate closing is the new first mortgage lender. Will they write a check for $3,000 more that your purchase price plus your closing costs? Why should they? It would make their loan less secure. Most likely, this is accomplished by misleading the new first mortgage lender into thinking the purchase price is higher than it really is or that you are making a bigger down payment than you really are. That is a felony. I would like to hear from anyone who can tell me how Whitney' instructors say to pocket the $3,000 at closing when you buy a home. One of Whitney' favorite tricks is to make a big deal out of the fact that the security deposits of the tenants in a building you are buying are credited to you at closing. This may be one of the ways he claims to tell you that you can get cash at closing. First, it is standard practice in real estate for that to happen. In some states, I believe it is required by law. So it is not a Whitney idea. Second, this money belongs to the tenants. Again, there are many state laws that require you to keep it in separate accounts and so forth. The only reason such money is credited to you at closing is so you can put it ino a trust accountt for the tenants. You cannot spend or invest it. Another trick that Whitney makes a big deal out of is closing shortly after the first of the month in order to get the maximum amount of rent for that month credited to you. If the rests are due and collected on the first, the seller credits a prorated amount to the buyer at closing. Again, this is standard real estate practice, not a Whitney idea. Generally, however, this is bad advice. Nowadays, most buildings bought with normal mortgages have negative cash flow. In that case, you should want to close on the last day of the month, not the first. Most profits nowadays come from appreciation in the value. You start getting tat as soon as you lock in teh purchase price. Actually closing on the propery gets you the expenses and hassles. That way you have to pay less negative cash flow. You would only want to close shortly after the first of the month if the property were going to have positive cash flow for that month. Either way, it is a piddling little amount once you take into account that you have to pay the building' expenses for that month out of that rent. Like the security deposits, it may go into your pocket, but it won"t stay there long. Government grants The narrator says you are going to learn how to qualify for government grants that first-time home buyers may never have to pay back. Uh, that' the definition of a grant. It' a gift. I am not familiar with any such grant. I would appreciate it if someone who has taken the "free training" would tell what specific program this is. If there is such a program, no doubt it has its own Web site and brochures that you can get for free. You don"t need Russ Whitney or anyone else to tell you about programs like this. Furthermore, it is highly annoying that he would use a government program paid for by the taxpayers to lure prospects into his web. Finally, let me speculate on this program based on my experience with other gurus and my knowledge of government programs. If there is such a program, it is almost certainly targeted solely to people who are extremely poor"”maybe only in certain geographic areas like ghettoes or rural areas far from civilization. Other gurus used to push similar Farmers Home Administration programs because they were nothing down and 1% interest. Great stuff for attracting customers, but only a tiny percentage of the population could qualify. Whitney was once a speaker for a guru who did that: Dave Del Dotto. Community Development Block Grants 7/18/03: I have now learned what grants Whitney is using to sell his "free training." They are Community Development Block Grants. According to the Web site of the Deparment of Housing and Urban Development, grants are only available to "organizations and groups." In particular, the grant Whitney promised to tell you about if you attend his "free training" is the Community Development Block Grant for the Assisted Living Conversion Program. The government gobbledygook explanation of how the prgram works is at https://www.hud.gov/offices/adm/grants/nofa/gensec03.htm. Whitney makes it sound like the government is giving out free money and you will learn how to get some at his "free training." When you get done reading the requirements to get that money, you will prefer working in a slaughterhouse or some such to earn the grant amount instead. $1,500 a month in passive income right away" This is another sentence written based on what beginners want to hear rather than reality. First, why $1,500? Why not $1,200 or $2,300? It' just a number Whitney picked out of thin air because it sounds both attractive and possible. He' been using than same number since at least 1997 when I saw it in a newspaper ad for one of his free seminars. Why the phrase "passive income?" He' trying to capitalize on the success Rich Dad Poor Dad author Robert Kiyosaki has had with his "portfolio and passive income" acts. Real real estate investors never used the phrase "passive income" until the Tax Reform Act of 1986, which included a hated provision called the "Passive loss limits." That provision is still law and still hated by real estate investors. Guys like Kiyosaki and Whitney live in a world apart from real real estate investors. They use words and phrases for the effect they have on ignorant laymen, not because they are used in the real estate industry. What about the phrase "right away?" Whitney makes his money selling get-rich-quick schemes. But he can"t use the phrase "Get rich quick" per se. You have to use less discredited phrases like "right away" and $1,500 a month. OK, so is it possible to make $1,500 a month right away? Well, you could take a real estate job that pays $1,500 a month"”like resident manager of a small apartment building. But I don"t think that' what he means. $1,500 a month? Can you make $1,500 a month from a real estate investment? Sure. Figure out what rate of return you can get, then divide that into $1,500 to learn how much you have to invest. The best data on returns is put out by Mike Scott in Seattle. Last I heard, he said apartments in that area had return rates of 7.8% annually or 7.8% Ã· 12 = .65% a month. So divide $1,500 by .65%. That equals about $230,750. So, if you can buy a $230,750 rental property paying all cash and that property has a 7.8% return, yes, you will net $1,500 a month. Can real estate genius Whitney tell you how to get a better return than 7.8%? Yes, actually, he can. I read most, if not all, of his books. One thing he says to do that raises return is to buy in slum neighborhoods. And that works, up to a point. If the neighborhood is too bad, it will be a disaster, but if you can buy a semi-slum, you can jack your return up to about 10%. In that case, you only need $1,500 Ã· (10% Ã· 12) = $1,500 Ã· .83% = $180,700 worth of free-and-clear slum property. Does he have any other return-raising ideas? Yes, like every other get-rich-quick guru, he is a big advocate of going after "motivated sellers." Does that work? Not the way he says. You can get bargains sometimes from distressed sellers in extreme situations like sheriff' sales, but that takes far more specialized training than I have seen in Whitney' materials. Many of those techniques also take huge amounts of cash. Rooming houses Whitney also advocates switching a property to its highest and best use. That' a correct real estate concept, but a lot easier said than done. The only specific technique I"ve ever heard him advocate is converting a large single-family house to a rooming house for low-income, transient, young men. Lovely. Does that work? I would be surprised if it does. But it' too tiny a niche to be able to say one way or another. It may not even be real estate investment. It sounds more like a hotel to me"”with weekly rentals and high turnover and all that. If you decide to go into the rooming-house-conversion business, you"ll quickly be the world' number one expert at it. How much rate of return can you get if you buy a slum house from a motivated seller and turn it into a rooming house for transients? Maybe 15%. Can that produce $1,500 a month right away? Sure, if you buy a free-and-clear slum house to be converted to a rooming house for $1,500 Ã· (15% Ã· 12) = $120,000 cash, you"ll get Whitney' $1,500 a month "right away."