Real Estate Blog

There are literally millions of people that have became millionaires by investing in real estate and a large amount were in the poor house before starting.  Real estate is kind to people without large chunks of capital to invest and even caters to them.  What other avenue of investing can say that?  Whether it be stocks, bonds,antiquities, or even precious metals - there is nothing comparable to the rate of return that real estate can provide.

Interestingly enough, there are people out there that are begging you to take their money and invest it - ever heard of a mortgage company?  By owning a home, you are getting a return on the money that you pay to the mortgage company, this is the appreciation of the property, which is about 6% nationally and also the equity that you build up by paying down your loan. 

If you were living in a $300,000 dollar house and the guy next door went to the bank and invested $300,000 dollars of his own cash in a money market account getting 5% interest for 5 years - in that 5 years, you would have made more money off your house than he did on his investment.  The reason you made more is because you might have invested $10-20,000 to buy the house, but with that money you were controlling $300,000 worth of of real estate.  The other guy had to use his whole $300,000 to get the same rate of return as you did.  The real difference is that he had to use his own money and you used someone else’s, your mortgage company!

Even though most people don’t have thousands of dollars lying around, when buying real estate you are essentially getting between a 3-5% rate of return on whatever your house is worth.  So, next time you think that you need to have money to make money, think again!

Real Estate can be a great way to become wealthy and is in fact the way that most successful people attain their wealth.  The first step to becoming wealthy in real estate starts with understanding what constitutes an investor.  According to John T. Reed ” A real estate investor is someone who has his name on a deed other than his home”.  He is right and more importantly, investments can be both real estate and interest in real estate. 

As a real estate investor, knowledge is the most powerful asset you can have.  If you have extensive knowledge of a specific subject, you are a expert or professional in that subject.  By holding this status, you have the ability to buy, sell, market, mentor, consult, and even write about your specific discipline.  People will regard you as a subject matter expert and with that comes the responsibility of maintaining and always building on your knowledge.

There are a plethora of places to learn about real estate investing, but I will tell you some that I personally like to go to when I have questions.  By frequenting these sites, you will not only have the opportunity to hone your skills in the area of real estate that most interests you, but you will also be productive and at the least, learning something you didn’t already know.

This site offers everything from forums for discussing real estate issues to listing your properties for sale and even offers internal email access to its members.  I highly recommend this site.  My favorite site for real estate investing is:

www.thecreativeinvestor.com 

For an extensive list of real estate articles and beginner level information on real estate investing I personally recommend one site which offers a great forum and one of the best lists of guru sold books out there:

http://www.creonline.com

If you are a landlord like I am, you always have questions about how to deal with tenants, tenant law, and even software for property management.  The best site I know of for these questions and more about property management and landlord help is:

http://www.mrlandlord.com

Being current on real estate news is very important.  Here are three sites I like to frequent on a daily basis:

http://www.inman.com

http://www.realtytimes.com

http://online.wsj.com/real-estate

Lastly, the best place for a more realistic and personalized view of investing will always come from your bloggers.  Some of the best investors, Realtors, and gurus are bloggers - get your information from the horses mouth!  Here are the bloggers I like to visit the most:

http://www.Bloodhoundrealty.com/BloodhoundBlog/

http://www.activerain.com

http://housingpanic.blogspot.com

http://www.johntreed.com

Ask anyone that is an investor of real estate and they will tell you about how they were burned on a deal, missed a opportunity, or lost a lot of money due to ignorance of not understanding what they were doing.  As I once heard the world renowned speaker Zig Ziglar say, “If you haven’t failed at what you do, you will never succeed” - simply put, failure teaches us how to learn from our mistakes and correct our errors.

Being able to calculate risk takes many years to fully understand and apply, but I would like to take this opportunity to give a bit of insight on how you can start to think critically and apply risk management techniques to your real estate purchase.  Properly evaluating your risk will give you the pretense for prevention and ultimately lower your risk of failure.

In real estate investment, the ultimate goal should be to profit on purchased and controlled assets.  To do this, you need to be able to both successfully and consistently acquire and sell your investment for profit.  The only way to do that is to be able to recognize value, acquire it at a substantial discount, and sell it under desirable conditions.

Recognizing value is an essential factor in being able to profit on investment.  To evaluate value, you must know the market area of the property in question so you can provide a comparable market analysis of the property based on location and recent home sales, be able to inspect the property with reasonable knowledge of most aspects of basic home repair and be able to appraise the value of the home and its amenities.

Once you have developed the ability to determine what the value of a investment is to you, your finally ready to manage your risk.  In managing your risk, you are essentially accounting for all scenarios that will affect your purchase price, cash flow during asset holding and the pre-determined exit strategy.

The purchase price should be determined by using the following:

• Current Home Value
• Closing Costs
• Determination of Rents Based on Debt Service and Expenses
• HOA and Utility Fees
• CMA of Current and Repaired Market Value
• Title and Encumbrance Search
• Repair Costs
• Analyze List Price /Sales Price Ratios
• Obtain Property History Report
• Determine what your Profit Must Be
• Pre-determined Cash Flow analysis

The cash flow analysis of your investment should have accounted for the following:

• Home Owners Association Fees
• Interest Rate
• 10% Property Management Fee
• 10% Rent Loss
• 5% Maintenance Fee
• 5% Marketing Fee
• Principle, Interest, Taxes and Insurance
• Down Payment
• CMA on What the House Will Rent For

The exit strategy should be determined before you even buy the house and depending on whether it is long or short term holding, the following should be evaluated in your selling price:

• CMA on Retail Market Value
• Holding Costs for 3 Months (PITI x 3 Mos)
• Realtor Fees (6% of Sale Price)
• Marketing
• Closing Costs (3-5% of Sale Price)
• 1031 Exchange

 ——

Calculated Risk is an asset to any investor and is used by most all good investors alike.  Being able to calculate your risk into your purchase price, holding costs and sale will allow you to maximize your profit potential and ultimately help you to be successful as a investor.

Ok, here we go again -  I recently was asked to take a look at a particular investing strategy that seemed very suspect and apparently had one of my clients in the “really interested” column.  The investing technique I am speaking of is preying on bad credit buyers for unethical profit.  This is a win-win situation for the investor, but a deal gone bad for the bad credit buyer.  This is the worst case scenario for any buyer that wants to become a homeowner!  Here is how the craftsman’s scenario works:

The “Investor” sets up a meeting with an unsuspecting buyer that may have bad or fairly bad credit due to some circumstance that is forcing him to look to seller financing or in this case using a Deed of Trust as the medium for conveying title.  The investor explains that they can put the buyer in any home they chose for a nominal fee of 15% added to the total purchase price, plus a premium rent price for the property they are buying.

A bad credit buyer will see this as a opportunity to get into a house, allot time to repair their credit, and then refinance the property with a better interest rate and terms.  The bad credit buyer will sign a contract and be given a certificate guaranteeing the amount they are approved for by the investor.  Once the buyer finds a house they want, the investor will purchase the property and transfer it into a trust with the undersigned being the investor and the bad credit buyer.  The investor will create a deed of trust giving the buyer almost full ownership, but not all.  Leaving a loop in the contract allowing eviction and foreclosure of the buyer if they default on their loan with the investor, causing them to lose all rights to the property.

Here is an example of shady investment practice giving legitimate REI’s a bad name.  Not only is the fore mentioned investor doing a disservice to his investor community, but he is using unethical practice to prey on the weak.

In the aftermath of the contractual agreement, the buyer will gain no principal through-out the time they are (renting) purchasing and they will typically need to refinance the property within 1-2 years after they purchase due to the high interest rate the investor will charge, ranging from 7-13%.  Not only is the investor getting 15% commission on a full priced home, the buyer is paying retail for the property and the 15% premium they pay does not go toward paying down the loan.

If for example, the property were a $200,000 home and the bad credit buyer paid 15%, or $30,000 and it were to go toward the price of the home, leaving a balance of $170,000 - I could see this being a better scenario.  Considering the fact that the buyer had paid a 15% premium and then another 3-5k to refinance the property for FULL PRICE is NOT a deal.  Not to mention they will be paying between $200-$400.00 dollars a month extra in rent, just to cover the high interest rate.

After everything is said and done, the buyer is still left with the responsibility of not missing a single “rent” payment for fear of being immediately foreclosed on.  Unlike mortgage companies, where they are not in the business of trying to foreclose on their clients, a deed of trust scam artist IS.  Once the investor forecloses on your home, they now have 15% equity in the property and control all rights to it.

In very few scenarios this could be beneficial to both a buyer and seller, but from the way this type of investor is using a deed of trust, it is only to put money in the pockets of the investor and will not protect the buyer.  A deed of trust is not bad, but like most investment tools, it can be used in the wrong way and sometimes is.

Making an offer on a investment property is much like pulling the trigger on all the work you’ve done.  After researching the actual value of your prospectus and doing the due-diligence on the liens and encumbrances it will be easier to make a offer that will be acceptable to both the buyer and seller.  Hopefully the offer includes the calculated risk of the purchase and the offer is adjusted accordingly.  Additionally, whether it be holding for long term or flipping for quick profit, knowing the exit strategy of the purchase should already be identified and planned before the offer is submitted. 

Two elements of investing that should be addressed when making a offer is whether the property will appreciate quickly or if it would be a good cash flow property.  Most investment properties will be one or the other.  A property that might be in a good area with fast appreciating values is not always a good rental property that will cash flow.  Most homes that have quick appreciating sell for far more than the mortgage to rent ratio would allow, but a good cash flow house will usually be bought for less than the mortgage to rent ratio allots and will increase in value at a slower rate.

Example 1

• You bought a home for $100,000 that you determined the rents are $1200.00 a month and the mortgage payment with a PITI (principal, interest, taxes, and insurance) is $900.00.  After calculating in your management fees, maintenance, rent loss, marketing etc.. you determine that your monthly cash flow is $25.00.  This property will continue to show minimal profit and increase over time, but the value of the home itself will not go up very fast.

Example 2

• You bought a home for $200,000 and the rents for this home were determined to be $1500.00 and the PITI is about $1800.00 a month - as you can see, your already paying more for the mortgage than the rents will bring in.  In this case, the property needs to appreciate at a fast rate, otherwise you will own a alligator that will eat you alive in debt.  We didn’t even calculate in your management, maintenance, rent loss, marketing etc.. so realistic expectation should be a negative cash flow of possibly more than $500.00 a month.  

From these examples, both can make an investor money, but understanding whether the investment will appreciate or cash flow is very important.  For this reason alone, investing is not something for the faint of heart to try to do.  There are things that can and will go wrong on every purchase - being prepared and calculate your risk ahead of time to help prepare you for these potential problems.