Category Archives: Real Estate Investing

Articles on Real Estate Investments

The 2009 Real Estate Investing Market Predictions: Getting the Edge in the New Year

When the market is hot, it’s usually a great idea to flip and take advantage of increased consumer demand for residential properties – holding on to properties may be difficult to convert into positive cash-flow due to market demand for ownership, especially in upper-income markets. But what do we do when the market is cold?

When the market is cold, it’s a great opportunity to take advantage of the large available inventory, sellers motivated to sell, and the low rates available for mortgages. Flipping may be dangerous in cold markets if you don’t have the capital to hold on to the property for a year or more if it doesn’t sell quickly though. However, if you’re looking for passive income, this is a great time to invest, since a lot of people can’t afford to own and thus are looking for rental properties – including yours!

One of the best ways to find hot new properties to invest in is by using the Multiple Listing Service (MLS)contact a real estate agent to find out more. Short sales and REO properties are now searchable in the South Florida MLS system – this may be available in other areas as well. You might also want to Short sales may be a great opportunity to purchase a home at very low prices, fix it up, and then sell for a nice profit.

Opportunities available include new construction, foreclosures, and FSBOs (For Sale By Owner) properties whose owners are finding it difficult to sell. In order to get a property that you can sell quickly, generally try to find homes with about 3 or 4 bedrooms around the middle of your market’s price range. You’ll have a good available market when it comes time to sell since almost any type of family can live in a home that size.

Condos are an interesting concept in cold markets, some investors love to invest in them and others stay far way. On the negative side, condos may be problematic as they often are in competition with apartments for renters – making it more difficult for you to find tenants. On the positive side, you don’t have to worry about having to maintain the exterior of condos as that’s handled by the condo association.

If you’re an experienced investor, you may want to look at helping out investors looking to get out of the game – to your benefit of course. New investors, thinking that real estate investing is just running numbers in a Microsoft Excel spreadsheet, can burn out easily if they can’t handle tenant complaints, property management, and negotiation techniques. This is a great opportunity for you to swoop in, help someone get out of a property they want to get rid of, and get yourself something you want for your portfolio.

If you have a real estate license, this can be an excellent time for you to grow your real estate investment portfolio. One way to do this is by buying properties from sellers when a deal doesn’t go through – make sure you always adhere to your fiduciary duties though. Although some agents don’t take a commission if they buy a property from a client, you are in your legal right to still ask for the commission. If the property is actually on the market, and the owner is your client, first refer the listing to another real estate broker for a referral fee and then purchase the property. You want to do this in order to avoid any violations of the Realtor’s Code of Ethics. I also would suggest you always state that you a licensed real estate agent or broker up front when you’re purchasing a property, even if you have no agency role in the particular purchase. If you represent real estate investors, never bid against one of your clients – your clients’ welfare is your main concern! A solid tip is to offer the property you’re interested in first to your real estate investor clients for 48 hours; if none have expressed an interest in purchasing, then go ahead and purchase the property knowing you’ve kept your client’s welfare in mind. As long as you always abide with the Realtor’s Code of Ethics, you can rest assured that you can generate some incredible long-term wealth by investing in real estate in an ethical manner. There’s a reason why 41% of real estate professionals own investment real estate and that reason is that there’s money to be made in investing!

Even with all the temptation to rush out and start buying investment properties like mad, resist the rush and don’t buy more than you can handle! Even if all the properties you come across are “good deals”, don’t get greedy with your purchases. You don’t want to get in over your head – it may be very hard to get out if you’re in this situation if the markets gets colder. Many conservative investors only like purchasing 1 or 2 investment properties a year – of course they make sure these are great deals! Other investors purchase dozens of properties a year (or more)!

When picking your properties to invest in, you need to analyze them thoroughly. Many investors feel there are only good deals or bad deals and that there’s no such thing as good markets and bad markets. Of course, even so-called “bad markets” may net you great deals if you purchase wisely.

“I want positive cash flow” is a phrase I hear prospective real estate investors say often – with good reason too. Tax benefits, appreciation, and leverage are other benefits of holding investment real estate but making positive cash flow after taxes and mortgage payments (or at the least, breaking even and then selling five or more years down the line) is the goal for most.

When looking at annual cash-on-cash returns on investment properties, you generally want to look for returns of 3%-5% on single-family homes and condos and 7%-8% on triplexes and fourplexes.

When looking for prospective residential real estate investments, always keep in mind you’re generally looking for properties that have high demand. Buying homes in areas near shopping, job opportunities, and quality schools can do wonders for your ability to find tenants and buyers. Do some research as to which areas seem to be in the path of progress for economic growth and jobs. Don’t be afraid to go small as well because, depending on your area, single family homes with relatively smaller square footage area can often get higher rents per square foot than larger homes. If you sense a sense of pride of ownership in the neighborhood you’re considering to invest in, then that’s a great sign there will be demand by tenants to live there as well.

If you’re looking for quick appreciation, smaller properties and newish single-family homes can be a great place to look. Of course, if you don’t mind getting your hands dirty, properties in need of some do-it-yourself handyman work can also be a nice source of investment properties for you.

In general, unless you really know the area extremely well, I would avoid purchasing investment properties in distressed neighborhoods, even if the price is great. Think about it this way, even if the numbers work well, what happens 5 or 6 years down the line when the local economy in that neighborhood withers to nothing?

Following that line of thinking, while purchasing luxury properties for investment can be a source of bragging rights among your buddies, I would suggest you focus more on middle-range properties more moderately priced. Average priced homes mean average priced rents, which can usually give a wide group of potential tenants that may be less likely than other income groups to move to a home higher up on the luxury scale. If following this strategy, look for areas where the average person in the area is a reliable working person who perhaps lacks this ability to quickly move up to buying a home.

As a general rule, when it comes to sell, single-family homes are the easiest to sell and multi-unit properties are generally more difficult. The reason for this is that multi-unit properties are judged according to NOI (Net Operating Income) while single-family homes, if sold to an owner-occupant, are often purchased for more emotional reasons. Having multi-unit properties so tied to NOI can be tough if rent prices don’t go up as quickly as interest rates do – this may cause that multi-unit property to decrease in value. However, if you know what you’re doing, multi-unit properties are the only way to go for experienced investors – they can give you huge amounts of passive rental income!

For a quick guide when you’re running the numbers, I would suggest using a 35% expense factor. The reason for this, even though some may think it’s too high of a number to use, is that it gives you a realistic gauge as to the profitability of the prospective property. In other words, if the property is still coming up as profitable when using this high expense factor, you may have just landed on an investment gold mine! What you do is take this 35% expense factor and then subtract it from the projected income. This will let you know if this property will be bringing in enough cash flow to cover your monthly payments.

Now that we’ve gotten ourselves acquainted with how to invest in real estate in a cold market, we’re now going to be talking about a topic that may be on your mind once you’ve gotten to this point… which is where to get the money to do all this! Although some real estate gurus might like to tell you otherwise, in most large markets, it’s extremely difficult to find no money down deals – even 20% soft second mortgage deals are rare. Prepare yourself to pay a down payment, it’d be extremely difficult to get a loan anyway if you’re only putting down 3%-4%.

If you’re investing in smaller properties, then you’ll likely be putting 20% down on conforming loans – this is because of the changes in mortgage insurance restrictions. Of course, do your best to raise your credit score – try companies like Lexington Law and Source One Credit Repair for some help in this area.

With all the mortgage law changes, loans may sometimes be hard to come by, but if you have 20% available to put for a down payment, verifiable income tax returns for the last 2 years, and verifiable assets, then you’ll stand an excellent chance of getting approved. Local lenders may be your best source of investment funding.

I really advise you to keep up-to-date with the latest developments in laws and regulations that apply to real estate – I cover the most I can in this real estate blog but you would be well advised to also read publications such as the New York Times and your local newspaper. What I can tell you right now is that the financial climate coming up in the near future may be more challenging, but by no means impossible. A new Freddie Mac regulation prohibits the agency from buying any mortgages that have been made to investors that own more than four 1-4 unit financed properties. Fannie Mae still has its loan limit for investment property ownership set at 4 – this number is expected to hold constant.

Moving forward, I see most real estate investors going for the 30-year fixed loan approach in order to finance their investments. Adjustable Rate Mortgages (ARM), known as Variable-Rate Mortgages in other parts of the world, are too volatile in cold markets. 30-year fixed loans, in cold markets where buy-and-hold is generally the preferred strategy compared to fix-and-flip, may give you the best opportunity to get positive cash flow.

If you are going to be holding on to a property for only the next 3-5 years, then short term loans can make definite sense. I’ve touched on short term loans in two posts, Consumer Debt Worst Offenders: Banks, Advertisers, and Advisors and Rule to Grow Rich By #2: Refinancing Your Home, but the main factor you want to consider is whether the market will be strong when the rate eventually changes.

In order to be able to move quickly when you’ve made a purchase and need some quick cash for repairs, “impulse” purchases, and other miscellaneous items, establish a line of credit with your preferred bank. You can use this line of credit to make quick purchases and it gives you a leg up on getting hold of preforeclosure properties before a bank possesses. Keep in mind, if you plan on flipping, that there are new anti-flipping laws which make it mandatory for investors to hold onto a property for 6 months before it’s possible to sell or refinance for a higher value – confirm this with a local expert.

Yet another source of funding can be your retirement account, if you’ve been diligently funding it. If you have a Solo 401(k) or Solo Roth 401(k), you can utilize funds from these accounts for investing in real estate, as long as you return income from your investment properties to these accounts.

Worst case scenario, let’s say you’re reading this article, you’re excited about investing but there’s one big problem: You have no money and you have no way of getting any in the near future! Obviously right now is a perfect time to invest in properties, but even if you don’t have the capital to do so right now, you can still pick up some great properties a couple of years down the line when you’ve saved up enough cash or you’ve raised your income or credit score. There are always great deals out there, no matter the market, as long as you perform your due diligence by doing a financial analysis of all prospective properties. Always remember there is no greater investment than investing in yourself, so use your time wisely! Constantly read and feed your mind with reading material about real estate investing, subscribing to real estate blog RSS feeds, following real estate twitterers, listening to audiobooks, and subscribing to real estate podcasts.

Making the Offer and Closing the Deal: Get the Edge as a Real Estate Investor

Once you’ve run the numbers on a potential real estate investors, you know what you want to offer, then it’s time to get down to business – you need to know exactly what to write on your offer and how to write it. I know there’s a lot of real estate investors that swear by investment guru contract forms that they received at a real estate investing seminar. For example, the Carleton Sheets No Money Down program includes a software program called Real Estate Toolkit that gives you an ability to populate an Adobe Acrobat .pdf file with the pertinent information and you can then just print this out and offer this to the seller. For the most part, I recommend against using real estate investing contracts that you’ve taken from investing books or seminars. Instead, I want you to use the standard Realtor contract form from your state. You want to seem professional – not appear like you’re this real estate scammer that’s trying to take advantage of some unknowledgeable sellers. The contract forms found in most real estate investing programs have these almost ridiculous provisions that are almost comical in their slant towards the buyers/investors. Don’t get me wrong, when dealing with a property that seems like it’s been on the market for ages, has a multiple of problems, then some of the provisions found in these real estate investing guru contracts have some use. Generally speaking though, stick to the standard forms for your state.

Keep in mind that if you’re making an offer on a home that is being sold with the help of a real estate agent, the agent will likely require you to present your offer anyway on the standard Realtor form of your state. Real estate agents have been trained in the finer points of the state real estate offer form and know the legalities of the contract inside and out – it also makes it easier for the agent to compare the various offers presented as they are all written on the same form. These state forms have numerous provisions that protect real estate agents and real estate brokers from litigation and protect their right to their commissions. By them accepting your real estate guru contract, they would be exposing themselves to a high level of legal liability – understandably real estate professionals as a whole are extremely wary of accepting any contract offers not presented on the standard state Realtor offer form.

Real estate agents are required, by law, to present every offer given to them to the seller. The reality is that they will likely persuade you to rewrite the contract on the standard offer form. Although they are required to present all contracts, the law says nothing about what they tell the seller as they hand your offer to them. They very well may tell the seller to not even consider your offer if it isn’t written on the standard form. They may tell the seller that something seems fishy about it and has many provisions disadvantageous to the seller. They then show the many other offers presented on the standard form, which obviously have a more professional appearance. Yet another reason to present on the standard form is this: what if it’s a hot property and many offers are coming in? You submit an offer on a real estate guru form, the real estate agent asks you to present a new offer on the standard form, but during this exchange a great offer comes in and the property is sold from out under you. Real estate investing is often a race – you need every edge you can get. Those submitting on standard contracts generally look like professionals that can close; those that submit on investing guru forms may unknowingly come across like seminar graduates that don’t have the experience or ability to close on the deal even if they got it. If you’re submitting your contract offer directly to the seller who is selling by-owner, and you’re using the standard Realtor form in your state, make sure to tell the seller you’re submitting on this form because it’s the standard form for the state and is evenly balanced for all parties involved.

Most loans are able to be turned around in two weeks if you have a top-notch mortgage broker on your team. Obviously you’re going to want to confirm this with your broker, but if it’s possible, then put down on the contract that the closing will be in three weeks – this gives you a little wiggle room. Remember that the homeowner wants this deal done as quick as possible so they can move on with their lives. If you can close quicker than other investors and potential owner-occupants you might just give yourself an edge and eventually, land yourself the deal. When it comes to time before closing, having the closing come quickly is extremely effective to landing the deal when dealing with vacant properties, but only slightly so when the property is currently being occupied, depending on the homeowner’s circumstances. The reason why it may not be in the homeowner’s best interest to have a quick closing date if they currently occupy the property is that some people are wary of having the pressure of having to get all of their items moved out of their home in two weeks. To improve your chances in this situation, tell the seller’s real estate agent that you can close quickly on the deal, but that the seller can have as much extra time as needed in the home to handle their affairs (about two extra weeks) and move out of the home.

To show your professionalism and willingness to move quickly on this deal, include a copy of your bank statement (make sure to black out your account numbers) which shows enough cash in your account to purchase the property, if you’re paying cash in full. If instead you’re getting a loan, then attach a letter from your mortgage broker which states that you’ve been preapproved for an investor loan. If you can pay closing costs with cash, then make sure to state on the contract that you’re paying the closing costs with cash.

As a side-note, I know of an unethical practice where some real estate investors offer to close with all cash and no financing contigency – but all the while they have no cash and were planning to obtain a loan all along. It’s the old bait-and-switch, they tell the seller one thing, then do another thing once they have the seller on the hook. Imagine you’re a seller, you’ve been waiting months to sell your home, a seemingly perfect offer comes along, 100% cash, quick close, what could be better? It’s almost too good to be true – and it is. Most homeowners, especially homes being sold by owner (FSBO) don’t realize they deserve to see proof of these financial claims. They agree to this offer and they become emotionally invested in this deal. They tell all their friends, maybe they throw a party. Then the buyer lays the brutal truth on them. Sadly, some sellers are so tired of the process, and they feel embarassed telling their friends and family that they got suckered, that they begrudingly go along with the deal anyway. Ethical real estate investors take note, although this is an extremely small minority of real estate investors out there that engage in these unscrupulous practices, you need to know what you have to deal with out there.

Submitting offers and closing the deal can be a complicated process – but it doesn’t have to be. By following these simple steps you’ll be getting a leg up on your competition – and in this business, a small edge may be all you need to make thousands of dollars in profit.

How to Beat Other Real Estate Investors by Using Full Price As Is Contract Offers

There are two main reasons why a property for sale will  a ridiculously low listing price, far below real market value:

1)The seller is desperate to get rid of the property
2)The seller is ignorant of the true worth of the property

Offers generally come rushing in for these sellers. Some will be from real estate investors and some will be from people looking for a home. Now let’s assume you’re interested in purchasing this home as an investment property so you submit an offer to purchase. If you write a typical offer, your offer is just going to be thrown into the pile of offers that the homeowner has received. You need to make your offer stand out. The way you do this is by carefully writing and constructing your offer in such a way that it’ll be accepted. You need to write your offer with the thought of how the homeowner is going to perceive your offer.

Personally, I generally consider anything a property that’s listed at $25,000 or more under market value to be an excellent deal. Most real estate investors are going to be trying to low-ball the owner, knowing that the owner is likely to be desperate to sell. If you absolutely know that you want this property and that it’s going to be profitable for you, then what are you waiting for! Don’t lowball, offer full price! In fact, I would suggest you offer at least $1000 above the listing price – this means you’re likely going to beat any other offer on the table.

Some investors are scared that the seller, if they receive multiple offers, are going to want to start a bidding war. For the most part, this doesn’t happen. What usually happens is that the property owner just takes the best offer available and closes the deal. Homeowners selling their property are generally not professionals at real estate negotiation! They aren’t comfortable with the whole process and just want to get their money and move on with their lives.

Here’s another tip to get an edge over the other offers on the table: Offer to pay closing costs on the contract. Let’s say you do this and the owner accepts your offer. What you want to suggest to the seller is that you’ve spoken with your mortgage broker and your broker has suggested that you finance these closing costs into the price – this is done by attaching an agreement to the contract which will raise the purchase price of the home by the amount of what you anticipate the closing costs to be. Remind the seller that this will not affect the amount of money the seller will be getting at closing nor will it affect the seller’s taxable gain. Remember to speak to your mortgage broker about this and be clear about your local laws – what generally happens is the appraisal will then come in at a higher price than the original contract price which will then help cover the closing costs. Of course, this will increase your monthly payment by a few dollars per month.

When writing the offer, to further sweeten it up for the seller, you may want to very seriously consider taking the property “as is”. Here’s a tip to make this even sweeter for the seller, which multiplies your chances of getting this offer accepted. In the special stipulations section of your contract (the blank area at the end for additional terms), write something like this:

Buyer is purchasing the property as is. Buyer will not ask Seller to make any repairs to the property nor will the Buyer ask the Seller to expend any money on fixing any items on the property.

In order to protect yourself, I would also add an inspection clause like this:

Buyer has the right to inspect the property for four (4) days. If this inspection is not satisfactory to the Buyer, Buyer may then invalidate this contract and receive a refund of earnest money.

This gives you an out clause in case the house really is beyond repair. To go really extreme, you could even leave the out clause in there, but instead offer that the seller will keep the earnest money if the inspection shows you reason to cancel the contract.

A lot of people reading this article might feel very nervous about submitting an offer to purchase a property “as is”. The reason why you want to consider this tactic for certain “high-demand” real estate opportunities is that the seller is going to love it and is already going to see you as being easy to deal with. I know you don’t really care about making the seller your friend, there’s a strong negotiation reason for this. By having the seller put you in the “easy to deal with” frame, it’ll help you gain a helpful negotiation stance for later.

For example, let’s say you use the clauses I’ve given you above and the seller accepts your offer. Of course you added the inspection clause and upon inspecting the property you’ve found $9,000 worth of serious repairs you’d have to make to the property. What you now do is that you explain in writing (writing is generally less confrontational than face-to-face) that you anticipate making $5000 worth of repairs. Those repairs you need to make include painting, roof repairs, kitchen updates, bathroom updates, and new carpet. After those initial findings, you’ve also found significant structural repairs that need to be repaired. These repairs were not mentioned in the disclosure statement by the seller, so it was impossible to know of these serious repairs before you presented your offer. Be sure to also include a statement you’re sure that the seller didn’t know about them either as this was only found by using an extremely thorough inspection – you don’t want to accuse the seller of lying to you! You continue this letter to the seller by stating that these repairs would need to be done before the seller could sell the house to anyone at all. Tell the seller in the letter that your own carpenter can make these repairs at a cheaper price than any retail structural repair company. In our example, perhaps make a suggestion that the seller credit you with $6000 at closing for the repairs. The seller may come back with an offer for $4000 or $5000 which may want to consider accepting.

One of the reasons this tactic is so effective is that you’re leaving yourself room to negiate with your inspection out-clause. Homeowners generally don’t want to have to make repairs, they just want to rid themselves of the property and get some cash. By you taking the property “as-is” and stating that you will not ask for repairs, you’ll be beating out any other offers that have an equal or lower price that also includes a repair request. Another great thing about this is that you’re also automatically beating out owner-occupant contracts because almost all potential owner-occupants ask for repairs to be done. In fact, by you including this non-repair request contract you may even beat out other contracts that may offer slightly more money. Always remember that homeowners want the easiest way out of the situation – so this means you’re in prime position to get the investment property you’re looking for.