Making Money By Investing In Real Estate by U-PLR - HTML preview

Chapter 1

Strategies in Real Estate Investing

Is Real Estate Investing for You?

Real estate is an intricate business that involves many different legal, financial, and interpersonal aspects. Are you ready to jump into this complicated business? Think about these essential questions before you make your first move.

1. How much money can you invest?

Investing in the real estate market requires capital. The initial outlay of cash needed upfront to acquire a property may be large or small. However, once you assume ownership of the property, you are legally responsible for the full loan amount. Be sure you can afford to invest by looking closely at your personal financial situation. How much cash do you have? What amount of debt and how much interest can your finances handle? Think about how much you can lose.

2. Are you risk tolerant?

Risk and capital go hand-in-hand. How much risk are you comfortable taking on? A large loss to a small investor has a much larger impact than the same amount to a wealthy investor with deep pockets. While risk-taking can be exhilarating, be honest about your finances and think about the level of risk that will be comfortable to you. Do you naturally enjoy taking chances, or do you tend to be more risk adverse? It’s essential to success to know your comfort zone.

3. What are your future financial plans?

Are you interested in investing to maintain capital or to get the highest return in the shortest amount of time? Consider the amount of time, money, and risk associated with each scenario. Be logical. A straight 15% profit over a couple of weeks is not realistic. If you are interested in a high return, this usually means there’s a longer time commitment, which means your money will be tied up. The value of property can change quickly, leaving you in a higher risk situation.

4. Do you have what it takes?

To be successful in real estate investing, you need to be detail oriented, a quick learner, and have excellent interpersonal skills. You need to have the self-management skills required to determine what you need to know, then go out and learn it and apply it.

5. How much time can you spend?

Think carefully about how much time you can commit to the day-to-day tasks required to be successful in this business. In the beginning, you’ll need to spend a lot of time researching and learning about the business. With every endeavor you’ll need to spend time working on legal issues, zoning and town issues, insurance, tax concerns, contracts, market research, financing.

If after considering these questions you are still interested in real estate investment – congratulations! This field is one of the most exhilarating ways to make a living.

Your First Real Estate Investment

Making your first real estate transaction, either as your primary residence or as a planned investment, can be profitable and exciting, but it can be overwhelming too. Follow these steps when starting out in real estate investing.

1. Educate yourself. This doesn’t mean that you need to go back to school, but you do need to take responsibility for what you need to know, and learn it. Study the market you’re interested in entering. Use the internet, local land records, and area real estate agents to find the sales prices of comparable properties. Learn about the transaction process, each person’s role and responsibility, the legal requirements, and insurance. Each component carries fees that vary, and by researching prices you can avoid losing money.
2. Get your financing in order. A common mistake made by first time investors is to find the property first, then get financing. Before you go out to find that hidden gem, get pre-approved for financing. Decide on a lender by choosing a bank, mortgage company or online loan company. When talking with your lender, tell them how much you are looking to invest. They’ll gather lots of financial information about you – income, credit history, liabilities – and give you an idea of how much they’ll finance. With the many different financing choices available today, you’ll need to decide which option works best for you. Financing plans have different variables including different rates, initial cash investment, and tax implications.
3. Look for your property. Finding real estate that you can make a profit with can be tricky. Use the internet and local newspaper’s “Real Estate” section. Look for abandoned and “For Rent” homes. Drive around the area you’re interested in and try to find “For Sale by Owner” properties.
4. Negotiate a fair deal. Once you’ve found the perfect house, you’ll need to negotiate for the best price. Don’t expect that you’ll get a steal.  Sellers are trying to the most money for their property, and buyers are trying to pay the least amount. Negotiating well involves working together with the seller to find a win-win situation. Be assertive, but plan to make concessions. Inflexibility often causes expensive delays and added stress.

Profiting in Real Estate

One report indicates that over 23% of total home sales in 2004 were bought as investment properties. This is not a surprise, since home prices have had a high percentage increase in recent years and the market has been experiencing high returns.

There are many ways to make money investing in real estate. “Flipping” a property means that you buy it, fix it up quickly, and resell it for a profit.

Foreclosures are another way to get investment property, which is when a home owner defaults on a loan and the mortgage holder then puts it up for auction.

With abandon property, it’s often unclear who holds the title to the property, so there’s extensive title research and legal work that occurs with these properties. Paper investments, or non-property real estate investments, are when you invest in a mutual funds or bond that is directly related to the real estate market, but not actual property. These investments should be made with advice of a professional broker.

Manage Your Exposure

Managing the risk associated with investing in real estate is key to protecting yourself from loss. The most important aspect of risk management in real estate is to know the law. It’s essential that you have a working knowledge of the real estate legal structure and requirements.

After you’ve researched property availability, cost, and buyer interest, you’ll need to hypothesize about what the future holds for your market. Will prices go up or down?

When considering your risk, keep the following points in mind:

1. Think about the local economy. Are there jobs available or are most companies in the area losing jobs? Are new homes being built more or less than over the past 5 years?
2. Make wise financing choices. When picking your funding source, think about how long you plan to keep the property. Adjustable Rate Mortgages (ARMs) are attractive because of their lower down payments and lower rates. You can pick the duration of the loan – typically either 1,5, or 7 year ARMs – and your rate will be adjusted to the prevailing rates after this period of time. If you plan to hold onto a property longer than the ARM, ARMs can cost you more because of the higher interest rates. It may be more prudent to opt for a fixed rate mortgage with the shortest length you can handle financially.
3. Pay a large down payment to reduce your risk. If you can put down 10%, you’ll have instant equity in the property, and most likely get a better interest rate.
4. Be creative with your mortgage payments. Make larger monthly payments then require, or make one extra payment a year you’ll reduce your principle.

Getting the Highest Return

To make the most money possible in real estate, the standard philosophy is to “buy low, sell high”. Most people try to do this, and many do not succeed because it’s hard to do. When trying to get the highest return possible, keep your costs down and do everything possible to draw in the highest bidders.

Once you own the property, do as much of the repair work yourself, as long as it is of a professional level. Shoddy work and inferior materials will cost more to correct later. With difficult projects, hire a trained professional from a small scale operation. Large contractors with several employees have to factor their large overhead into their prices.

When looking to maximize your profits, try to save money with your lender. Look around for cheaper loans with the less popular lenders. The large banks and financing companies usually have high fees and rates. Don’t accept overpriced fees. For example, your lender is charging $75 to deliver a few papers a short distance, ask for it to be reduced.

By educating yourself on the legal and accounting aspects of real estate transactions, you can save yourself thousands of dollars. If you learn the basics of these two areas you will know when to ask for a professional’s help.

When negotiating, be firm but flexible. Attempt to find a win-win situation where both you and the other party walk away from the table happy. Be clear on what you want, and what you can be flexible on. If the other party walks away angry and feeling cheated, they might try to sabotage your attempt to make a profit.

If you are selling your property, it’s important to also shop around and negotiate for the best prices on high priced items, real estate commissions, and closing costs.

“Staging” is setting the scene by making your property look its best. You will get the highest price for a property that has been properly prepared.

Actively market your property and you’ll get the largest pool of potential buyers possible. It is a benefit to the seller if there are several interested parties in your property.

Buy and Sell at the Right Time

Timing is important in all investments, but unlike other investments – bonds, stocks, and mutual funds to name a few - there are two characteristics specific to real estate investing.

1. Real estate transactions take a long time.
2. Each piece of real estate is unique.

In order to buy or sell property it takes a long time, and while the transaction is taking place, the market is constantly changing. This makes timing the purchase or sale of real estate tricky. When you are investing in real estate, you are trying to sell high and then jump back into the market by buying low. Timing the market in such a way is a challenge.

Look for property that is a “fixer upper” to get a good deal. If you have an aptitude for home repair or you know an inexpensive worker, you can increase the value of a home by over 10%. Search for foreclosure auctions and Notice of Default alerts in the area newspapers and online. Find a good deal on property by anticipating positive change in depressed areas. Up-and-coming neighborhoods, in areas where people have been leaving tend to have lower prices. Find areas where the government is involved in development efforts.

The key to employing any of these strategies is the access to capital. This doesn’t mean having an account with a large sum of money in it. Instead, you need to have access to money. By maintaining a high credit score, nurturing an efficient relationship with your lender for quick approval for financing, and having access to liquid assets, you’ll be prepared to jump when the right deal comes along.

Even in a slow market, the chance to make a profit investing in real estate is still likely. To do this, however, you’ll need to do your homework, have a long-term outlook, and be able to walk away from any deal.

Saving Cash on Little Things Adds Up

Buying property is one of the largest purchases you’ll ever make. Even if you aren’t putting up a large down payment, by having a mortgage you are making yourself responsible for a sizable amount of money. There’s also the possibility of tax consequences.

By saving as much cash as you can, you’ll have money for the things that inevitably pop up. As it is, you know you’ll need to pay for the closing costs and the initial down payment. Closing costs include the mortgage, fire and hazard insurance, title fees, and many other costly items.

Follow these tips to save money:

1. Get the best financing deal you can find. First and foremost, be sure to have your financing in place BEFORE you make an offer. To get the best deal, research the rates available for your credit score and try to get financing companies to compete for your business. Ask what options are available given your credit rating. Negotiate with your lender to lower or eliminate costly fees and charges. Avoid paying an application fee if you can.
2. Find your own providers. You don’t have to use the companies that your agent or lender recommend. This is important when selecting your title and insurance company. Your agent and lender have lists of recommended companies because they have pre-established relationships. Keep in mind that you are the one paying them. Carefully review their fees and rates before making a decision. You can use any company you wish.
3. Be willing to negotiate. Even a seller in a seller’s market needs to be flexible. People sell for many reasons – death in the family, divorce, job transfers, etc. Sellers in these situations are highly motivated to complete the real estate transaction quickly at almost any cost. If you’re willing to work with them and be flexible, you may get a good deal.