Real Estate Investing Articles

Real estate investment clubs can be found throughout the U.S., in most big cities and many small ones. Sometimes free and often for a fee (which varies from club to club), you can participate in their meetings, and learn the basics, the how-tos, and the ins and outs of real estate investing.

A novice real estate investor needs all the help he or she can get. Fortunately, there is a great amount of research available online and off-line. You can read all the success stories in hardcover, paperback and e-books, hear the “Millionaire’” tale of how they made their first million, listen on CDs, or watch them prance and preach on DVD and online “webinars.” Or, you can make a monthly visit to your local Holiday Inn.

The Good:
This is an excellent venue for networking, the life’s blood of real estate investors. You never know who will bring you your next big deal, introduce you to the property manager of your dreams, or find the creative financing you’ve been seeking. Go to your first real estate investment meeting with an open mind, open ears, and plenty of business cards.

If you’re not too shy, and this is not the business for an introvert, introduce yourself, and state your goals and desires. Admit you’re a newbie; no one will shun you. In fact, you’re likely to get more help and information than you’d have thought possible; everyone looks kindly upon the newbie, and can forgive your ignorance and naiveté.

Grab all of the brochures and literature you can, take as many business cards as are thrust into your hand, and pass yours out freely; some clubs have a regular “give-a-way,” so drop your card into the fish bowl — wouldn’t it be nice to go home with a new toaster, in addition to those excellent contacts!

Besides all of the written paraphernalia you’ll pick up, what you’ll glean from these meetings is the testimony, experience and advice of other investors and “experts” in the field; those who have been on the front line, so to speak. Their insight will be invaluable, and you’ll likely learn more from their stories than you ever could from a book or CD-Rom. When you hear how someone “successful” was able to overcome a seemingly insurmountable problem, that’s really what you’ll remember, not how to calculate a Loan-To-Value (LTV) ratio. Take advantage of investment clubs special events and “boot camps,” too. They can be educational and fun, but don’t take them too seriously.

The Bad:
While the primary goal of most real estate investment clubs is to educate you, there are clubs that have a different goal, and that is to sell investment property, chosen “especially” for the investment club. Don’t hesitate to go to see the properties that they’re pushing; it’s always worth at least that. But bear in mind, what you see is only what they want you to see. You might not be surprised to learn that the property that they’re showing to you is worth considerably less than the price that it’s selling at. Here is some common sense advice – keep your checkbook home, and don’t make any commitments. If it’s a property that you’re interested in, do your own homework and research it, outside of the investment club.

The Ugly:
You’ve heard the news reports, about real estate investors scammed out of millions of dollars. How does this happen? Well, it’s part fear, part herd mentality. This is especially effective when the would-be investors are a gathering of retirees with only their Social Security checks and their pensions to their name, rather than savvy business people in power suits.

What happens is that a con artist will espouse the benefit of a property, and the urgent need for everyone to act quickly, or else the deal will blow apart, like so much dust in the wind. Before you know it, you’ve whipped out your checkbook or credit card and are signing and initialing documents left and right. This is not the way it’s supposed to happen. If you find yourself in the middle of a whirl-wind when you thought it would just be a lively meeting, you need to pick yourself up and leave.

The vast majority of real estate investments clubs are legitimate, and a valuable resource, especially as it pertains to your networking. Understand, though, that their agenda is the same as yours — to make money; it’s just that the way to make money differs. You do it through your real estate investments, and they do it through you. Once you’ve got that clear in your head, you won’t have to worry about being hoodwinked.

Barb Zigah is a freelance writer covering real estate and business topics.

If you are interested in reprinting this article on your website, newsletter, forum, printed publication or other communication medium, please consult our article licensing policy.

Posted by Barb Zigah under Real estate investor resources | No Comments »

House flipping is the purchasing of property with the intention of quickly selling it for a profit. It’s no longer an unknown concept, thanks to popular television programs such as “Flip This House” and “Flip That House.” They make it look pretty simple and exceptionally profitable. In reality, it is simple, provided you know what you’re doing, and understand the associated risks; it may or may not be as profitable, depending upon many factors.

Most properties with flipping potential are bargain priced relative to the market. The buy-fix-flip option involves buying distressed property that is in need of some cosmetic or aesthetic improvements; perhaps the owners didn’t have the time, money or inclination to do it themselves. That’s a good thing for the investor, provided that it is only cosmetic, and not structural, improvements that are required. How smug will you feel when you find out that the parquet flooring under the worn out linoleum that you’d planned to replace, is actually rotted through the floorboards, and you need to replace everything.

So, what are some of the considerations you should be making to maximize your resale price?

1. Don’t spend too much money just acquiring the property. The less you pay, the better, obviously, and don’t assume that just because you got a low price that you got a good price. Do your homework and check comparably distressed properties in the neighborhood.
2. Unless you’ve got strong handyman qualifications yourself, consider hiring a home inspector to thoroughly check out the property. This may already be a requirement of your loan.
3. Calculate how much money your necessary improvements will cost for acquisition, installation, labor, etc. If you do the work yourself, factor in your cost of time element.
4. Calculate how much your carrying costs will be while you’re doing the repairs; what if you have to hold the property longer than expected? Include your mortgage payments, interest, taxes, insurance and utilities. Bear in mind that some insurance companies may not even be willing to insure a vacant house, especially one that’s under repair.
5. Consider the profit you’re hoping to obtain. If it’s 15 to 20% above your purchase price, will you be able to sell it for that? The improvements shouldn’t outpace the neighborhood. Don’t forget to factor in your selling costs, as well.

What if you’ve bought the property, made the improvements, calculated the price you need to sell it for to achieve the profit goal you’ve set, and the bottom drops out of the market? Don’t sweat it; you’ve created a wonderful rental property, haven’t you? And everyone has to live somewhere. Hold onto the property until the markets rebounds, and then re-price it, if necessary. Just be prepared for the fact that the rent check will likely be less than any mortgage payments you are making on the property.

It’s been said that you make money on your real estate investments when you buy your property, not when you sell it. That may or may not always be entirely true, but you’ll have a better likelihood of success if you make your property purchases wisely, especially as it pertains to the potential buy-fix-flip property. That can be easier said than done.

Barb Zigah is a freelance writer covering real estate and business topics.

If you are interested in reprinting this article on your website, newsletter, forum, printed publication or other communication medium, please consult our article licensing policy.

Posted by Barb Zigah under house flipping | 1 Comment »

REIT funds are the easiest way for investors to invest in real estate. While the real estate market has had its ups and downs over the years, real estate investing has generally remained a stable and safe proposition. It is also pretty easy to understand: you purchase property and sell it at a price higher than what you purchased or you rent the property out with the goal of the rental income eventually exceeding what you initially paid for the property.

There is, of course, a common denominator that many who wish to become involved with real estate investing may find troubling: how can they purchase property for investment purposes if they lack the funds? Yes, they could borrow but what if they are unwilling (or unable) to secure a mortgage? What about concerns the investor may have regarding paying property taxes and upkeep costs? It would seem that such individuals would be left out in the proverbial cold and unable to enter the world of real estate investing. Well, it would seem to be the case but the reality is there is another option for individuals with limited capital and it comes in the form of a real estate investment trust or, as it is commonly known, a REIT.

A REIT is similar to a mutual fund but with real estate rather than stocks. Instead of investing in a collection of different stocks the investment is in a collection of real estate properties or ventures. Not all REITS are created equal, however, and there are three common types of REITS:

• Equity REITs – Equity REITs center on investing in the management, rental and sale of real estate properties. Components of this type of fund would include property flipping ventures, apartment complexes, et al.
• Mortgage REITs – Mortgage REITs center on investing in the issuing and oversight of mortgage loans. Your investment is really in loans secured by real estate.
• Hybrid REITS – Hybrid REITs include a combination of investments in both equities and mortgages.

Any of these three types can be either publicly or privately traded. Publicly traded REITS are available on the stock exchange and can be sold at any time. Privately traded REITS are not to be found on the stock market and generally have limitations on when and if they can be sold. When you purchase a private REIT investment you are looking to earn dividend payments over a period of time with the intention that the dividends will exceed your initial investment. This is a much riskier investment than a publicly traded REIT, and will often require the investor to be accredited, but it has the potential to pay out significantly more money.

So which type of REIT is best for you? Ultimately, the answer to that is based upon your personal needs and risk level. If you are new to REIT investing you may wish to stick with publicly traded REITs because they can be sold if the investment is not panning out. Ultimately, REITs allow anyone looking to become involved with real estate investing a chance to smart small and start simply. The investment amounts are lower and the risks (in many cases) are not as high. They are also relatively easy to manage. As such, REIT investing is something anyone seriously considering a real estate investment should consider as a portion of their portfolio.

A.M. Caro is a freelance writer from Southern California.

If you are interested in reprinting this article on your website, newsletter, forum, printed publication or other communication medium, please consult our article licensing policy.

Posted by A.M. Caro under REITs | No Comments »

House Flipping is an aggressive real estate investment technique, that can lead to large profits, but can also come with some sizable headaches . While it has been said “home is where the heart is” a home is also an investment based on equity growth. In other words, it is assumed that over time a house’s value will appreciate beyond its initial purchase price. Yes, there are instances where a home can depreciate in value as evidenced by the current mortgage crisis but real estate. In general, real estate remains a safe investment centering on conservative increases in value over time. It is because real estate is a rather conservative (nee safe) approach to real estate investing that attracts people to it. The conservative approach is not, however, the only type of approach one can undertake. There are also more aggressive approaches. House flipping or flipping houses is an example of one of the more volatile approaches to real estate investing and is simply a real estate variant on the traditional concept of buying low and selling high quickly.

Basically, an investor who looks to flip houses will purchase a home below its market value and then sell it at a price that is greater than the initial market value. In some instances, a little “stimulation” is required on the part of the investor in order to make this plan work. For example, say the average sale price of a home in a particular neighborhood is $250,000 and you notice that there is a home selling in the neighborhood for $210,000. What is the reason for the $40,000 deficit? This particular home is in dire need of a new roof. However, the price of a new roof will run $15,000 and the owners are not in a position to make such improvements. So, the house flipper comes along and purchases the home at $210,000 and then fixes the roof for $15,000. This makes the total investment $225,000 but the repairs raise the equity of the home to $250,000. That is a $25,000 profit right off the proverbial bat and the home can be sold for a quick profit. Additionally, the value of the home will now appreciate as well and this means one could hold on to the home for a few more years in order to increase the profits on the investment.

This may sound like an easy venture and, to a certain extent, it is. But, there are still inherent risks associated with house flipping. For example, if you underestimate the costs of the repairs or even more extensive repairs are necessary then you may find yourself earning far less of a profit than you initially conceived, or maybe even losing money. Then, there is also the potential problem of the real estate bottom falling out as evidenced in the subprime mortgage crisis. In Florida, for example, a significant number of foreclosures were the result of people attempting to flip houses that dropped significantly in value.

There are also significant sales costs to selling houses. Taxes, commissions and escrow fees can add up quickly and eat into potential profit margins. That’s even before considering the costs of short term capital gains on any profits. Once again, this type of real estate investing does come with risks and flipping houses is best utilized during periods of real estate booms. Considering that the prices on real estate properties are lower now than ever before perhaps giving consideration to house flipping once again has value and merit.

A.M. Caro is a freelance writer from Southern California.

If you are interested in reprinting this article on your website, newsletter, forum, printed publication or other communication medium, please consult our article licensing policy.

Posted by A.M. Caro under house flipping | No Comments »

By simple definition, leverage is investing with borrowed money as a way to increase potential gains. This is one of the biggest benefits of real estate investing; using the equity in your property to acquire new property.

For example, let’s say you are the owner of a $100,000 duplex; your down payment was $20,000, your lender financed the remaining $80,000, and since you first bought it, you’ve repaid another $10,000 against the loan balance. Your equity in the property is now $30,000; you can apply for a home equity loan for $30,000, and (provided it’s approved for the full amount) you’ve got $30,000 to use for other property investments. You could, theoretically, use that $30,000 exponentially as down payment on other projects, which convert to equity as soon as the loan is closed, and so on.

That sounds like a great deal, doesn’t it? Well, it is, provided you can get a home equity line of credit for an amount that you can use as a down payment for the acquisition of another property. That will depend on your own creditworthiness (or lack of it) and how much equity you’ve actually got in the property – the higher the percentage of equity you own, relative to the loan amount and the property value, the more likely the lender will be to offer you an equity loan equal to your equity. After all, a bank is in business to make money and how they make it is through interest and fees. Home equity loans, as a general rule, have higher (and often variable) interest rates than standard mortgage loans, so even in a tight market they’ll still be willing to give you a home equity loan.

Let’s say your lender gives you your home equity loan, and you’ve got $30,000 just burning a hole in your pocket. You spot a great investment deal with your name on it, and put in an offer, which is accepted. You can use the entire $30,000 as a down payment, or split it evenly, and use it as down payments on two properties.

With ownership of several properties, hopefully all of them income generating, you can afford to pay the monthly principal and interest on your equity line(s) of credit using your rental stream, and any remainder will be your profit. Don’t forget, the interest you pay on your home equity line of credit is also tax deductible.

While it would seem that leveraging your home equity is an entirely win-win proposition, you should be aware that real estate values don’t always go up, and that your ability to leverage could suffer if the property or credit markets experience a downturn. Consequently, the value of some properties may decline after an appraisal by the lender. Let’s look at the two scenarios below, which show a property which increased in value over a 3–year period and another property that decreased in value over the same period, both scenarios assume the repaid equity is $10,000.

It’s clear from the above example that, in the case where the property value fell from $100,000 to $90,000, the home owner will not be able to borrow against the equity in the property. Recently, some lenders have begun recalculating the value of homes in their loan portfolio, flagging borrowers whose home equity line and mortgage debt are more than 80% to 90% of a property’s current value. For these homeowners, their equity line of credit is either frozen or reduced.

The moral is that you should use your leverage, but don’t overuse it. It’s essential that you save enough money during the “good times” so that you’re ready when the “bad times” roll around, as they inevitably will, to cover your property carrying costs and still grow your real estate investment portfolio.

Barb Zigah is a freelance writer covering real estate and business topics.

If you are interested in reprinting this article on your website, newsletter, forum, printed publication or other communication medium, please consult our article licensing policy.

Posted by Barb Zigah under mortgages | 2 Comments »

Ebay may be the “world’s largest marketplace,” and the ideal venue for buying and selling your grandmother’s salt and pepper collection, but it’s not the forum you first want to turn for buying and selling your real estate investment property. Nor, should it be your last option. Ebay not withstanding, you shouldn’t underestimate the benefit of an auction as a means of acquiring or disposing of your real estate property and maximizing your return.

Given the current real estate market difficulties, resulting in a glut of houses, many of which are in pre-foreclosure and foreclosure situations, auction sales are becoming much more common. Lenders with huge real estate owned (REO) portfolios, homeowners and real estate investors are turning to the auction as a viable means of quickly and effectively disposing and acquiring assets.

An auction is a process of selling or acquiring an asset at a fair market value. Depending on the competitive nature of the auction and the speculative future value of an asset, the bid prices may be higher than the true market value at any given point in time. Under certain circumstances, an auction may be a more beneficial option to all parties involved, rather than a foreclosure or short sales.

There are essentially three different categories of auctions:

• Absolute Auction – the property is sold to the highest bidder, irrespective of price. From a buyer’s perspective, this is the best auction to be a party to.
• Reserve Auction – the property is sold to the highest bidder, only if the (confidential) reserve price, which is set by the Seller, is met. A Buyer may find that they overbid their own price threshold, in an effort to reach the reserve.
• Minimum Bid Auction – the auction prices begin at a minimum price, set by the Seller. Similar to a Reserve Auction, but no “secret” as to how much the Seller is looking for.

From a seller perspective, there are many additional benefits to holding an auction, aside from the price factor:

• Immediate cash is obtained, allowing the seller to move forward with other investment opportunities.
• Swift disposition of a property means the elimination of a seller’s high property carrying costs, such as property taxes, interest fees, maintenance, utility bills, etc.
• The seller maintains control of the property, while simultaneously setting the terms, conditions and (sometimes) price (through the reserve mechanism) of the auction.
• Eliminates the need for numerous property showings and playing the waiting game.
• The seller can require that potential buyers have pre-certification and qualification, ensuring that their participation in the auction is genuine.
• Sale of the property is made on an “as-is where-is” basis.

But of course, those benefits are only from the seller’s perspective. Now, from a buyer’s perspective, can bargains be found at an auction? Absolutely yes. Provided you time it right. So, when should you start looking? Right now. There’s no time like the present. Foreclosures and pre-foreclosures are occurring at an astronomical rate. Statistics show that lender-initiated auction sales that don’t have any takers increased over 2,000% from last year.

From a buyer’s perspective, there are numerous benefits to purchasing investment property at an auction:

• Buyer determines the purchase price
• There is no extended negotiation period
• Sellers who required pre-certification knows that you’re serious about buying
• Opportunity to buy many properties at once
• Quick closing, often with 4-6 weeks
• Buyers may receive a due diligence packet, providing comprehensive information about the property

Naturally, the auction process is not entirely risk-free to a Buyer, and the words “Caveat Emptor” should be burned into your collective being. Here are some of the shortcomings of an auction that the buyer should bear in mind:

• Buyer may not be able to preview the property
• Property is sold “as is” with no Home Warranty; structural faults will be your problem.
• Uncertainty to good and clear title; even if lender-initiated, the property may still have mechanics liens and other attachments.

Obviously, this is merely a synopsis of the more important issues pertaining to real estate auctions; there is extensive information available on the Internet, and you should do your homework.

Whether or not you’re the buyer or the seller at a real estate auction, it’s a great feeling to hear the auction caller yell, “SOLD!” and know that it’s meant for you.

Barb Zigah is a freelance writer covering real estate and business topics.

If you are interested in reprinting this article on your website, newsletter, forum, printed publication or other communication medium, please consult our article licensing policy.

Posted by Barb Zigah under real estate marketing | No Comments »

Not long ago, many homeowners were reluctant to consider a short sale of their property as an alternative to foreclosure. A short sale, in simple language is the sale of a house at a price below the outstanding loan payoff amount. The reason for that reluctance was because the IRS taxed the difference between the mortgage loan balance and the amount at which the house was sold. For example, if a mortgage loan balance was $100,000 and the house sold for $80,000, the IRS considered the $20,000 difference as income. Many homeowners weren’t even aware that they would have to pay tax on this “phantom” income, and were (unpleasantly) surprised when they received a 1099 form from their lender.

Thanks to a recently enacted law, the Mortgage Forgiveness Debt Relief Act of 2007, which permits tax payers to exclude that so-called “phantom” income (up to $2 million) from federal taxes, more and more financially distressed homeowners are seeing the benefit of the short sale as an alternative to foreclosure and a way to avoid long-term damage to their credit history.

Foreclosure rates are skyrocketing, up 60% over the same period last year, and there is a good opportunity for investors to make money from the housing crisis created by the sub-prime debacle. On average, 1 in every 577 homes will go into foreclosure; in some areas of the country, namely Nevada, California and Florida, those numbers could be as high as 1 in every 165 homes.

So, where are these pre-foreclosure homes and where can I get information about them, anyway? They’re everywhere. Find your own contacts by picking up a local newspaper, checking the courthouse filings, or simply word of mouth. Then get busy with cold-calling or mass mailings. It may take a great deal of work, just to get a single qualified short sales candidate.

Your next step is a visit to see and thoroughly inspect the property and neighborhood. Oddly enough, the worse condition the property is in, the better for you when dealing with the lender… the bank does not want to have to fix up a foreclosure property. Get a list of all outstanding liens, attachments and encumbrances on the property, in writing, from the homeowner. You need to verify this; don’t take it at face value.

If a short sales opportunity is feasible, you’ll need to go back to the homeowner and get authorization to receive their mortgage information from the lender, as well as release forms assigning you their property rights, subject, of course, to outstanding liens.

Your destination at the bank or mortgage company will be the Loss Mitigation Department. There, it’s your responsibility to convince the lender that you are presenting the best possible deal. It’s a matter of salesmanship and presentation; the better you are at PR, the less likely your offer will be declined.

Why would a lender be willing to accept a short sale offer? Basically, from a lender perspective, it’s a choice between the lesser of two evils. The banks know that the short sale may be their last best hope to avoid an expensive and protracted foreclosure process. They are cognizant that, either way, they are taking a loss on the bad debt; the real question is how much of a loss and how soon? In general, banks like to write off their bad debt sooner than later.

At a minimum, and each lender or mortgage company has different requirements, you’ll need to present to them:

• A letter of hardship from the homeowner, detailing the reason why they can no longer make payments or their inability to fully repay the loan;
• Proof of hardship, including federal tax returns, pay stubs and bank statements;
• Authorization from the homeowner allowing the bank to release personal mortgage information; and
• Proof that the homeowner has attempted to sell the property through traditional methods, before resorting to a short sale; typically, an advertisement, sales flyer or a copy of the listing agreement with a realtor will suffice. Some lenders require that the property be on the market for a specific period of time.

The lender will either commission a new appraisal or a broker’s price opinion (BPO) on the property, to determine the fairness of your offering price. While it’s tempting to lowball your offer, you should know that, in general, most short sales are between 5 and 35% below the market value. However, given the expected surge in short sales as a result of the new IRS law, you may be able to make an offer of as much as 40 to 45% below the market, and have it accepted.

Though it seems implausible, short sales can be a win-win-win situation; investors can acquire a property below market price; homeowners can avoid foreclosure and maintain their credit rating and lenders can reduce their loss on a bad loan.

Barb Zigah is a freelance writer covering real estate and business topics.

If you are interested in reprinting this article on your website, newsletter, forum, printed publication or other communication medium, please consult our article licensing policy.

Posted by Barb Zigah under foreclosures & short sales | No Comments »