Getting Started in Real Estate Investing: Part 2

I am text block. Click edit button to change this text. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.

Getting Started in Real Estate, Steps 4-5:

 

Step 4: Move Forward on Your Selected Approach to the Market.

Here are some recommendations on how to move forward with the following approaches:

  • If you intend to “Buy, Fix and Sell,” finding and screening a good contractor is critical to your success. Even if you already have a background in this, it is still part of your due diligence. Attending real estate investment clubs and seeking referrals from other investors can provide some of the best sources for this search.
  • If you are going to “Buy & Hold” a rental property, then working with a good and well-respected property management company will be key. They will also be a great resource for managing your rental rates, as well the market.
  • Wholesaling – Here are three ways investors conduct wholesale deals:
    • Bird Dog — This consists of finding a property that meets or exceeds another investor’s expectations and criteria, then getting them to sign a bird dog consulting agreement with a pre-discussed finder’s fee that they have agreed to pay after an offer is made and closed on.
    • Assignment of Contract —This is when you find a property that fits your cash-buying partner’s criteria and put in a written offer on the property. When the seller accepts your offer, you then sell the interest in the property and/or the contract to your cash buyer for an assignment fee.
    • Double Close or Back-to-Back Close — This is the last of the wholesaling techniques. This is when you find a property that fits your cash buyer’s criteria and put an offer on the property between you and the seller with a second contract between you and the end buyer. Both closings will be scheduled to take place within a few hours of each other or within a couple of days. Your profit is received after the second closing.

Step 5: Find the Active Cash-Buying Investors in Your Market.

If you are going to be wholesaling, then this is one of the most imperative steps for you to take. Look for those who have closed on more than two deals in the last year. You might want to consider the following types of cash-buying investors: LLC companies, holding corporations, and/or trusts. You will often find these are the investors that do multiple deals a year.

Well, that’s it for getting started. Happy hunting!

How Leveraging Your Real Estate Investments Increases Your Return on Investment

Leveraging your real estate investment means using financing to increase your return on investment.  So how does this work?  Let’s look at two scenarios to illustrate how this is possible.

Scenario 1:

An investor purchases a rental property for $90,000 cash and puts $10,000 into improvements for a total investment of $100,000.

He or she then finds a renter and leases the property for $1,300 a month or $15,600 annually.

He or she has expenses of 35% for taxes, insurance, management fees, maintenance and a vacancy factor, equaling $5,460 annually and creating a net operating income of $10,140.

Since the investor’s Net Income is $10,140 and his total investment is $100,000, his return on investment equals 10.1%.

  • $15,600           Gross Annual Rent
  • –  $5,460           Annual Expense
  • = $10,140           Annual Net Operating Income
  • Divided by   $100,000           Total Investment
  • ROI           10.1%           Annual Return on Investment

Scenario 2:

If this same investor finances the purchase of this property by securing a loan for 80% of the purchase price at 4.5% annual interest, amortized over 30 years, his or her mortgage payments will be $365/month.

He or she will put $18,000 down and $10,000 into rehab for a total investment of $28,000.

The investor’s annual mortgage payments will be $4,380, decreasing his or her net annual income to $5,760; creating an annual return on investment of 20.5%.

  • $15,600        Gross Annual Rent
  • –  $5,460         Annual Expense
  • = $10,140        Annual Net Operating Income
  • –    $4,380         Annual Mortgage Expense
  • =   $5,760         Annual Net Income after Mortgage
  • Divided by     $28,000           Total Investment
  • ROI            20.5%             Annual Return on Investment

You can see from this example that an investor can increase his ROI from 10.1% to 20.5% by leveraging; thus doubling his or her income from the same monetary investment.

Can Using a Staging Service Make Your House a Hot Property?

If you’re planning on selling, you might want to consider staging your house first. Staging is the process of renovating or redecorating your home before putting it up for sale. A private residence may have its own style while it’s occupied, but it will help to have it refurbished before adding it to the real estate marketplace.

Staging a home increases its chance of becoming a hot property in the market. It doesn’t require a total renovation of the house. Some people may opt to replace some old furniture, add decorations, or maybe make landscape changes. Some may also want to repaint, change tiles or wallpapers, and such. Anything added or modified to make the house look newer, neater and more attractive will make the house more appealing to potential buyers. While it’s true that staging will cost quite a bit of money, it can potentially increase the market value of the home, depending on the extent of changes and how long they take.

Although you have your own idea of how you want the home to look before selling it, you might want to consider hiring staging services. Having someone professional do the job may help increase the home’s market value after staging. Yes, you will be spending an additional cost for hiring a designer, but a professional stager can make a difference in the selling price. There are certain things you can do on your own, but there are also some things that are better left in the hands of a professional if you really want your house to be a hot property.

The Real Estate Closing – Policies and Procedures

It was quite the transition in my life to go from mom and wife to business mogul! It was a long and winding road for me to really develop a business mindset, especially one that felt comfortable to me in my own head. You cannot be someone else, but you are leaving your old lifestyle behind.

Be patient with yourself. Pay attention to what gets you excited in your new world. That’s where you are going to be most successful. That’s where to put your energy. Once you know where to focus, you will be better at treating it like a business because you will believe in what you are doing. You have to be on guard with your emotions. This is not an emotional business.

One thing that never occurred to me until I was attending an event at a real estate investment club is that I should have policies and procedures for my business. It seems insanely obvious now, but really, it never even occurred to me. However, much like a business plan, you can’t really establish these in much detail until you get some experience. I’ll give you an example of a procedure I have for purchasing a new property:

  1. Inform the title company this will be a remote closing. Documents are to be emailed and sent back overnight.
  2. Get wiring instructions for funds.
  3. If using a private money lender, contact a local attorney to draw up the promissory note and mortgage.
  4. Contact the insurance company and get coverage.
  5. Once email of documents is received, read carefully. Sign documents that do not require notarizing. Go to notary and sign the remaining documents in front of notary as needed.
  6. Go to Federal Express or UPS to overnight and return documents.
  7. Track closing progress with the title company.
  8. Call utility companies.

Now, why is this important? Number one, you don’t want to have to rethink this every time. It’s easy in the rush of the moment to forget something important. Number two, you are building your business so you can sell it. What? You have no intention of selling your business? Well, at a minimum someone needs to be able to step in and run it for a few weeks while you are on a beach in the Caribbean. OK?

Policies, practices, and standards of operation: document what works and revise it over time.

Financial freedom likely sums up what you are willing to do. Is it possible? Is investing in real estate your answer? It can be. You are going to have to work hard, especially in the beginning. You are going to have to be persistent. You are going to have to pick yourself up and push hard when you really don’t want to. You are going to fail a lot on the way to success. Success did not just fall in my lap, and it won’t fall in yours either. You must struggle and strive. It will be worth it.

Gypsy Real Estate Investing

Gypsy real estate investing is a great way to build a strong rental portfolio. My wife and I started our real estate investing this way by accident. We had a house built and had lived in it for a few years when we decided to move. I had just finished real estate school and received my realtor’s license. While attending real estate school, I met a mortgage broker who introduced me to real estate investing. I decided to research lease options and liked what I found, so I decided to give it a try. We decided to move and do a lease option on our house instead of selling it. After we moved, we acquired a couple of other properties that we lease optioned also. During this time, we kept looking for another great deal on a house for us to live in. When we found one we wanted to buy, we moved and lease optioned the one we had been living in instead of selling it.

The strategy is to find a great deal on a house to live in that gives you a better interest rate and smaller down payment. Live in the house long enough to find another great deal on a new house that you can move into, and then rent out the house you move out of. You can buy ready-to-move-in properties, or you can buy properties that need a little work. You can then work on fixing the house up while you are looking for another great deal.

One thing with this strategy that helped us be successful is to not be in a hurry to find the next deal. We were able to acquire other properties using creative terms in between each move, which helped.

Of all the properties that we have owned and rented out, or lease optioned, the ones we lived in before renting them out have brought us by far the largest returns. Obviously, you have to be okay with moving that often. But if you have a long-term plan, you can create a very profitable passive income using the gypsy method.

How a Real Estate Closing Works

You’ve showed your client the property and he seems very interested in it, then he decides he’s going to buy it. Now you have reached closing, which is the final step in executing a real estate transaction. But you’ll have to go through a few processes before the transaction is actually over.

Several things happen during closing: the buyer and the lender deliver a check for the balance owed on the purchase price. Then the seller signs the deed over and gives it to the buyer. A recorder’s office, which will record the deed, will require the seller’s signature to be notarized. Commonly, the seller delivers possession to the buyer by giving them the keys to the property. Unless otherwise specified in the real estate contract, delivery of possession should be on the closing date, which is usually several weeks after the offer is formally accepted.

A title company, lawyer, notary, or the buyer will register the new deed with the local land registry office or recorder’s office. A declaration or statement by the buyer or seller regarding the purchase price may have to be filed with the government. Conveyancing taxes and recorder’s fees will typically have to be paid, which are part of the closing costs. The seller receives a check or bank transfer for the proceeds of the sale, minus the closing costs and mortgage payouts. Prepayments for real estate taxes and insurance may be taken from the funds allotted for closing costs, and fees charged by other parties are paid. Sometimes, closing in escrow, which is a neutral third party, may occur to prevent the two parties from getting ripped off.

At a closing, the basic idea is this: the buyer gives the seller their money and the seller gives the buyer the deed.

How to Run Numbers to Get Your Desired CAP Rate

When investing in cash flow or rental properties it is important to understand what your return on investment is going to be. Investors refer to this as a CAP rate. Investors will target a specific CAP rate to make sure the properties they are buying are going to give them the desired return they are targeting. We will go through numbers to show you how your offer amount will be able to give you your desired CAP rate.

CAP rate is defined by Net Operating Income (NOI) divided by the cost of the asset. I’ll call the cost of the asset the all-in cost, which may include rehab costs as well. To get the NOI, I have to know the amount I can rent the property for minus all the expenses associated with owning that property. Let’s go through some numbers to show you how to calculate CAP rate.

Let’s say I need an 8% CAP rate to buy a rental property. The property will also need 15K worth of work to make it rent ready. Once it is fixed up, the property will rent for $1,100 per month. Taxes and insurance will cost me $150 per month. This is information I will need to get my numbers dialed in.

First, let’s get our NOI. We are getting $1,100 monthly for rent but we have to take off the monthly expenses.

  • $1,100 – $150 (taxes and insurance) = $950
  • $950 – $110 (10 % property management company) = $840
  • $840 – $110 (5% for maintenance and 5% for vacancy) = $730
  • $730 * 12 = $8,760 (Yearly NOI)

Now we have our NOI. Here is the rest of the calculations to get our offer amount:

  • $8,760 / .08 (desired CAP rate) = $109,500
  • $109,500 – $15,000 (rehab cost) = $94,500
  • $94,500 – $2,835 (3% closing costs) = $91,665

This formula has given me an MAO (maximum allowable offer) of $91,665. This offer will give me an 8% CAP rate. Now, if we go one step further and want to wholesale this to an investor that wants an 8% CAP rate, we only have to subtract our assignment fee.

  • $91,665 – $3,000 (assignment fee) = $88,665 (MAO for an assignment)

By using this formula you should be able to calculate whatever CAP rate you or your investors are hoping to get from a rental property.

How to Accumulate Rental Properties with Very Little Money Down

Do you want to own rental properties but have very little money or none at all? Then you need to listen to the following article on buying rental properties using seller and existing financing. In today’s seller’s market, it can be difficult to purchase properties to fix and flip because you have to buy the property for a price that allows you to make a quick turnaround profit and that usually means making offers at 25-30% below the asking price with very few offers accepted. Rental properties, on the other hand, can pencil out financially, even if full price offers are made, as long as the rental income is sufficient to justify the investment and especially if seller’s financing is put into place.

 

Here is what you do. Look for properties that are already rental properties with tenants that are taking good care of the property so there are no rehab costs. Then make offers on the property at no less than 90% of the asking price so that sellers are interested. Ask the seller to carry a note for 99% of the offer price. Then take the property subject to the existing loan so that the owner is only carrying paper for the difference between the 1st mortgage and your offer price minus the 1% down payment. An example is as follows:

The asking price is $100,000 so you offer $90,000 and ask the sellers to carry a note for $89,000 with a $1,000 down payment and take the property subject to the existing 1st mortgage of possibly $75,000. You will then pay the seller a month fee based on the total loan amount of $89,000 at an agreed upon interest rate amortized over 30 years with a balloon payment at the end of 5-10 years. You will set up an escrow account with a bank or title company (neutral third party) who will collect your payment and make the payment on the 1st mortgage. You now have a rental income property with a loan in place for 1% down, no origination fees and a reasonable monthly loan payment in place. You have no out of pocket cost for rehab and the place starts paying rental income immediately.

 

All you have to do is make sure the rental amount is sufficient to return a positive cash flow that makes you a sufficient return on your investment. An example is as follows:

The house cost $90,000 to purchase with only $1000.00 down. The monthly payment on the seller’s financing at 6% interest amortized over 30 years is $539/month or $6,432.00 annually. The rental is $1,000/month or $12,000.00 annually with a net income after expenses of $7,800. 00. The net income minus the mortgage payments equals $1,368.00 annual income along with paying the principle debt off. Since your investment is only $1,000.00, the income of $1,368.00 equals a 136% return on investment.

 

With $10,000.00 you can purchase 10 homes and let them pay themselves off over time until you eventually have 10 homes bringing in $7,800.00 each annually for a total annual rental income of $78,000.00. Plus the original value of each home will increase over time by 3-5% annually.

Pros and Cons of Condo Ownership

Condo ownership is appealing to many prospective homebuyers. With convenient locations and low-maintenance living, it may seem like the ultimate solution! Before you go all-in, take a look at the pros and cons of condo ownership:

Pros of Condo Ownership

Amenities: Many condo associations offer resort-like amenities. Because the cost of the pool, gym, and common spaces are split across so many owners, you can get access to luxurious amenities for a fraction of the price.

Security/Safety: Some condo associations offer a doorman or private security. Apart from security, proximity to neighbors provides peace-of-mind.

Price: Condos are often much more affordable than single-family homes, especially for their location. Many condos are located in desirable neighborhoods, city-centers or resorts, making them an affordable option for first-time homebuyers who don’t want to sacrifice their ideal location.

Maintenance: The biggest advantage of buying a condo is that maintenance is included. Exterior maintenance and lawn care are all taken care of by the homeowners association. While you do pay dues, unexpected expenses are kept to a minimum.

 

Cons of Condo Ownership

Homeowners Association Fees: On top of a regular mortgage payment, most condo owners are responsible for monthly homeowners associations (HOA) payment. Most HOA fees range from $200-$400 per month[1]. This can be costly on top of mortgage payments.

Privacy: If you live in a condo, be prepared to share a wall with your neighbors. Even though proximity to your neighbors can offer increased security and safety, condo owners do give up privacy.

Rules and Regulations: Most condo developments have strict rules and guidelines for residents. There are small rules such as no outdoor grills or parking restrictions. You are also limited to the improvements you can make to your unit. If you want to install solar panels, for example, you will have to get permission from the HOA.

Appreciation: Condo owners are purchasing a unit, not the land. Land is one of the main forces behind appreciation, so condos appreciate slower than single-family homes[2].

Pros and Cons of Condo Ownership

Condos ownership is an excellent option for a prospective homeowner looking for a safe, low- maintenance, affordable living situation with access to amenities. If you are looking for freedom from rules and regulations, an appreciating asset, low additional monthly expenses and privacy, condo ownership many not be the best option.

 

 

 

[1] http://www.investopedia.com/articles/mortgages-real-estate/08/housing-appreciation.asp

[2] http://www.investopedia.com/articles/mortgages-real-estate/08/homeowners-associations-tips.asp