Renttropolis Online Property Management

How to Make Money Investing in Real Estate Today

Buy smart. Research your market so you know how to find a bargain investment property. It’s difficult to understand your investment location if it’s too far from home, so choose an area that you enjoy visiting or one near your work or home. Study the area, watch the trends, and learn as much as possible about your location.

Finance smart. Check your credit and put yourself in position to qualify for the best interest rates, lowest mortgage costs, and avoid pre-payment penalties. You can buy investment property with poor credit, but you will pay much more for the financing.

Rent smart. Many investors purchased homes in other states believing that the property would pay for itself. You must understand local rental markets or be in the position to pay any negative monthly expense. Can you afford the difference between the mortgage payment and the rental income? What about vacancies? Don’t put yourself in financial jeopardy to purchase investment property.

Improve your property. Raise your profit potential by making improvements. You can raise the rent or sell for top dollar when tenants and home buyers fall in love with your unique offer. Learn about the latest interior design ideas that pay you a higher profit.

Sell smart. Home staging methods can increase your profit potential. Create a buyer’s dream with interior design strategies. Use new Marketing Psychology to sell your property. Sell the benefits to the buyer (just like Internet marketing). Avoid common pitfalls in the sale of your property, such as appraisals that don’t measure up to the sales price. Understand the sales process and watch over your pending sale.

You can profit in any real estate market, bubble or not, when you do your research, understand your location, buy smart, improve the property, and sell with Marketing Psychology strategies.

© 2005 Jeanette J. Fisher. All rights reserved.

(You may republish this article in its entirety with the following author’s information with live links only.)

In today’s volatile market house prices are taking a beating. Real estate experts state house values have dropped ten percent nationally, with some areas reporting decreases as high as seventeen percent. Add in the massive amounts of foreclosures and it can appear as if now would be the worst time to invest.

In reality, this bleak situation makes for a buyer’s market. Interest rates are lower than they have been in nearly five decades. Coupled with decreased market prices, many investors are seizing the opportunity to purchase distressed properties. However, unless you plan to keep the property long-term, investing in houses now may not be the best investment strategy.

Industry experts predict it may take two to three years for housing prices to rebound. In order to become successful investing in houses, the proper set of circumstances must be present before you become a player in the real estate game.

There are many housing markets which you can invest in. Currently foreclosure and bank owned houses are in abundance and oftentimes can be bought significantly under market value. However, these types of distressed properties usually come with their fair share of headaches and challenges. Although there are close to three million vacant homes, very few are great deals.

The majority of foreclosure houses require considerable repair. Some have been sitting vacant for several years, leaving them exposed to vagrants and vandalism. Prior to investing in foreclosed or bank owned houses, invest in a professional inspection and conduct comparable market research. Real estate market analysis can be obtained online or through a Realtor.

The main objective in purchasing investment houses is to buy them significantly below market value. If you aren’t able to purchase the home for 25- to 30-percent under value, it’s probably best to pass on the property.

Investing in real estate owned (REO) houses is usually less risky than investing in foreclosure homes. When houses aren’t sold through auction they are returned to the bank. Once the bank takes over ownership they negotiate to have creditor or tax liens removed, if applicable. Therefore, REO houses generally have a clean title and do not require as much work.

Oftentimes, the bank will make necessary repairs and prepare the house for sale. Other times, the properties are sold “as is”. In order to obtain the best deal, you’ll need to visit the properties and assess the advantages and disadvantages. Take along a notepad, digital or video camera and make note of structural damage, plumbing or electrical problems, and common problems such as broken windows, outdated appliances, flooring issues, etc.

Bank foreclosure houses usually have a higher price tag than foreclosure homes sold through auction. However, they are generally a better deal because you do not have to engage in the process of having liens removed, evict the previous homeowner, or invest time making repairs or hiring others to do the repairs for you.

Although investing in houses in the current market can be risky business, doing so can potentially net massive profits in the long-term. By investing now, you can take advantage of lower prices and interest rates. Additionally, you can choose from an abundance of distressed houses. If you decide to wait until the market turns upward, those deals might not be as sweet as they are today.

Only you can determine if investing in houses in today’s shaky market is the best option for you. If you plan to invest in houses for rental property and cannot afford to make the mortgage payment without tenants, you’re probably not in a position to invest at this time. However, if you’re looking for a phenomenal deal for your primary residence or a pro at house-flipping, there couldn’t be a better time to take the plunge.

The reason I am breaking my own rules here is because I get asked, way too often, in the lull following an after-dinner speech what is it exactly that makes me choose to focus on multi-family dwellings as opposed to single-family ones.

I know that the person who asks that question is usually a potential real estate investor themselves and I also know that at the forefront of their minds are all the big negatives associated with multi-family dwellings: costly maintenance, irate tenants, absconding rent payers and the usual nightmare associated with running a large property with many difficult issues.

The fact is that when you sit down and really analyze the scene you begin to realize that the trouble involved in closing a deal with a multi-family dwelling is not that much more than what you have to go through for a single-family one. In a single-family dwelling you may think you are in control more but that is an illusion. It takes just a month or two of the property being vacant and you having to run around to advertise it, screen the new tenant and get them in, to wipe out your profit for the year, or as good as.

In a multi-family dwelling the risk of that happening is spread amongst many tenants as opposed to one. An apartment can run up a large repair bill, or remain empty for four months and you can still show up a profit at the end of the year because you have spread the income stream you expect to several tenants rather than just one.

It was exactly this ability to spread risks and achieve greater savings through an economy of sale that led me to focus on multi-family dwellings as a powerful real estate investment tool. In addition the larger scale of owning more than just one apartment or housing block has allowed me to put in place a professional management company that deals with all tenants and manages the properties on my behalf.

This way I am free to focus on the important aspects of my career like my next real estate move and where I will go on holidays, which is what life in the real estate investment business should be all about in the first place.

Once you have found the property then you need to put together a pro forma in order to see what the numbers look like. The quickest way to do that is to request a pro forma from the seller or the seller’s agent. Obviously the seller is going to try and paint the prettiest picture that they can for you so don’t be surprised by how good the numbers look up front. Once we have the property under contract we will request the real numbers on the property also know as financials, which should consist of at least two years of rent rolls and two years of tax returns.

Keep in mind that the pro forma is to paint a rosy picture and the tax returns are designed to paint a terrible picture (to pay the government the least amount possible if anything at all). So reality should fit nicely somewhere between these two pictures. What we are looking for is to be as accurate with the numbers as we can so as not to miss anything and make mistakes.

To help us not forget anything here is a checklist that you need to do before purchasing a property. You may use all of these suggestion, you may have to do a few more or you may not use hardly any of them depending on the deal you are working on.

Commercial Property Check list

Move forward only on green lights

1. Why is the seller selling their property?

a. This is a critical bit of knowledge that most people overlook. The seller will teach you how to sell them on your deal.

2. www.ofheo.gov to take a look at statistics in the area

3. www.bestplaces.net to check the statistics and demographics of the area

4. www.uschamber.org to find the local chamber of commerce and see what the future holds for the area and specifically this property.

5. Go to the city planning department and find out if the area is pro-growth

6. Check with the local police department for calls to the property over the last year

7. Call the local fire department for fire code violations and regulations that need to be in place for safety issues

8. Check with the local planning department to see what plans are for the area

9. Get a one page appraisal by licensed appraiser

10. Personally inspect the property

11. Order a phase one environmental report

12. Have a property Inspector inspect the entire property for foundation, termites, pests, roof, CO, radon, mold etc. problems

13. Get a full appraisal

14. Review the Rent Rolls for the past two years

15. Review the Financials for the past three years

16. What is the normal lease term?

17. What is the physical occupancy level last year:_____%

18. What is the property condition: ____ Excellent____ Good____ Fair____ Poor

19. Property value as of the last appraisal: $_________

20. Date of last appraisal: _________

21. Current lease rates at the property are: ____ Above____ At____ Below market rates.

22. What percentage of the property is occupied by Students?: _____%Military?: ______%Seniors: ______%

23. List any tenants or entities that occupy or control more than 20% of the space:________________________

24. What percentage of the income is attributable to retail tenants?: _____%

25. Do any units have…

a. Aluminum wiring?:____

b. Less than 60 amp electrical service?: ____

c. Well water?:____

d. Septic system?:____

e. Balconies?:____

f. Do any units require space heaters?:____

g. Furniture that is included with the rent?:____

h. Deferred maintenance (interior or exterior):____

i. Is the property in a flood zone?____

j. Is the property in an earthquake zone?:____

k. Is the property / leasing manager located on-site?:____

l. Are there any ground leases? (attach detailed terms of the lease if Yes):____>

m. Is the property dependent on a single industry or school for tenancy? (attach details if, Yes):____

n. Do any tenants receive government subsidies? (attach details if Yes and not on the rent roll).____

o. Has the property benefited from tax exempt bond financing or government subsidies?:____

Once you now better understand the overall picture of what is taking place then don’t be afraid to renegotiate the original contract using the new information that you have found. You will have much better leverage after having dug up all the secrets about the property then before. On the other hand somewhere along this process you may find some yellow or red lights so let me explain what those are.

A yellow light isn’t something that will kill the deal but can and should be resolved before moving forward. If you can’t get it resolved then you need to be willing to walk away. So for example you find out that the roof has not been replace in the past 30 years and it leaks. Here you would renegotiate with the seller to either have them replace it or have them lower the purchase price accordingly.

A red light is an item that will stop you right in you tracks and you immediately back out of the deal. For example you find out that the property is sitting on a toxic waste dump. You wouldn’t renegotiate with the seller (unless you specialize in this kind of clean up) you would just back out of the deal.

Property analysis or due diligence is one of the most important steps that you will take and you will quickly realize that this is where your money is made and lost as an investor.

Three Keys

There are three key reasons for buying income-producing investment real estate; cash flow, appreciation, and the tax benefits.

A word of caution here, if the deal does not work without the tax benefits, do not let them be the deciding factor. Tax benefits are purely a deal sweetener and should never be relied upon to make the difference.

Cash Flow is defined as the positive income stream generated from rentals paid by the tenants, less any operating expenses incurred in the operation and ownership of the property, including debt service. In general, investors look for a positive cash flow, where the income exceeds the expenses at an annual rate of return commensurate with the risk. The higher the risk, the higher the expected return to the investor. In some cases, investors see opportunities even if there is negative and/or little cash flow. In this case the investor sees a clear trend that will create a “value added” opportunity.

Appreciation – defined as the increase in value of the property during the period of ownership. Typically, the investor anticipates that the property will increase in value, and the debt owed on the property will decrease, thus the investor’s equity in the property, as well as their net worth, also increases. The beauty of investment property is that the tenant is doing all of the work and is paying down the debt. I like to think about that on days when I am on the beach and my property is working for me.

Tax Benefits can be defined in several ways but the two most often cited are mortgage interest deduction and property depreciation. A second word of caution is that this is a very technical area, and a qualified tax professional should always be consulted prior to making any decisions. You are allowed to deduct any interest paid on the debt used to acquire the property. In the early years, this can be a significant amount. Later on, as the interest on the loan is reduced and you are paying down more on the principle, you may wish to look at selling and trading into another property. The other benefit typically taken is depreciation or cost recovery. The IRS provides for several different means of determining the amount of depreciation an investor can take on a property. Some of the keys to how large your write off is to determine the investor “basis” in the property, whether they are engaged in the business of real estate, and the adjusted gross income of the investor. A second consideration is whether or not the property is acquired through a 1031 exchange. While cost recovery deductions increase an investor’s after-tax cash flow, a Section 1031 Exchange allows for an investor to continually “trade up” to higher value properties while deferring the capital gains taxes due on the appreciation.

Who invests in real estate?

Private real estate investors are a wide cross-section of people: a fireman, a lawyer, a retired businessman, a regional manager for a Fortune 200 company. I’ve worked with all ages, creeds and points of view and they all have a couple of common interests. They enjoy making money, they feel good about investing for their retirement and they love the tax benefits. Most use the tax-deferred exchange method on a regular basis to upgrade their portfolio and defer the tax until later. Some investors start young while others wait until their kids have completed school and they have some extra money each month. All of the investors I have worked with believe strongly in the wisdom of real estate investing, have a good sense of value, and are great with “the numbers.”

How do I get started?

You can do it the old fashioned way and drive around taking note of the income-producing properties you see. They’re everywhere. You probably won’t see “for sale” signs on many of these properties, but that doesn’t mean that they can’t be bought. You will have to visit the Courthouse and check the ownership records. In some counties, you will be able to access the property ownership on-line through the assessor’s office.

As the saying goes, “everything is for sale, at the right price.”

Poking around and doing it yourself is time consuming and unless you have the right skill set, it will be frustrating and not very fruitful. I would recommend you retain the services of an experienced investment property broker, to help you investigate, analyze, and acquire property.

The final means of acquiring investment property is to investigate acquiring a Tenant In Common interest in a stabilized property. The advantages of a TIC investment are: they are tailor made to the exact amount you are investing (because it is a fractional interest);higher leverage (pre-arranged by the sponsor); institutional properties with credit-worthy tenants; predictable cash-flow;easy tax reporting; no management obligations; and all of the due diligence has been completed and ready for your review. The primary disadvantages include high loads; the potential lack of liquidity; some unscrupulous sponsors, primarily lacking in experience; risk of partnership treatment; and the nature of the TIC itself (it can be burdensome). Further, TIC investors generally must be accredited investors, meaning they must meet certain income or net worth thresholds. Nevertheless, for passive investors, the advantages of TIC’s clearly outweigh the burdens.

I always recommend that you work with a professional adviser, be it a CPA, a lawyer or a real estate broker to determine a target price for an acquisition. Other professionals can include a property manager, a commercial insurance broker, a commercial appraiser, and a commercial lender. The lender can play an important role in qualifying the buyer prior to an acquisition, or in pre-qualifying a property for financing before acquisition.

Overall, an investment in income-producing real estate is a great long term investment, realizing that it is not as liquid as stocks and bonds; it should be approached with a healthy dose of estate planning first. The TIC industry has made investing even easier and deserves a good hard look into the possibilities.

Here comes my own disclaimer

IRS Circular 230 Disclosure: Exchange Equity, LLC and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with Exchange Equity, LLC, of any of the matters addressed herein, or for the purpose of avoiding U.S. tax-related penalties. You should always seek the advice of a tax adviser, lawyer, or real estate broker when investing.