Mindset in a “Seller’s” Market

As seasoned real estate investors will tell you, we’ve seen a lot of ebbs and flows in the housing market throughout our years of investing. As you gain experience, you too will come to see that even in the toughest and hottest of housing markets, investors can still create great deals. In today’s “seller’s” market it’s time to start thinking outside the box. Below are some suggestions as we all move forward in this, and any market.

 

As you go about looking for properties to make into deals, have you asked yourself this question: Have I told everyone that I know — friends, relatives, co-workers etc. — that I’m looking to buy a home from someone that is behind on their mortgage, behind on their taxes, or has inherited a home they aren’t interested in maintaining or keeping?  If you haven’t, do it. The result may be a pleasant surprise. Another option is to focus on homes that have a listing that has expired.  An overpriced house typically won’t sell causing sellers to get frustrated, and in some cases, let the listing expire or terminate their contract with their realtor, thus becoming an expired listing. Don’t contact the sellers right after their listing expires, as this is when realtors are contacting them and trying to get them to relist. Give the sellers some time. Look at listings that have expired 2-3 weeks prior. As a general rule, your success rate will be higher. In a “seller’s” market, making a purchase must be handled carefully, with planning, and a sense of calm and calculated urgency. We want to move quickly, but also in a smart manner.

 

Stick to your numbers! Let them be your beacon, and do not deviate from them. Run your numbers. At the end of the day, the numbers in your analysis don’t lie. Also, remember to not get emotionally involved with any offer you make or let the market condition determine your success. The offer will work or it won’t. Don’t go chasing a bad deal because you “have to get into the market” or run around like Chicken Little proclaiming the sky is falling because you have to get creative. Run your numbers, make the offer and move on to the next; whatever that is. Success only comes by moving forward.

 

A “seller’s” market doesn’t mean there aren’t deals out there to be made. The strategy of buy-and-hold is a great one to look at in this market. As you negotiate a deal, remember the property will still likely go up in value. In this “seller’s” market, instead of focusing on large, “home run” deals, focus on what you can control: you. When you focus on volume, you spread your risk across multiple deals. Don’t shoot for 2 or 3 “home run” deals a year; hit singles every 2 or 3 months and when one doesn’t work out, you still have the rest of the deals to bring you up. And remember, every deal is a learning experience. The more you do, the less anxious and overwhelming the market and conditions become. Do your research on the market and know it. Don’t go off what someone is telling you.

 

In this market, even though there appears to be fewer listings and prices are higher, investing wisely based on ratios, profit margins, and market trends will still allow you to make money. No matter the market, people are always going to buy and sell houses. It may not always be smooth sailing for us real estate investors, but learning to ride the rollercoaster known as real estate is half the fun.

The Advantages of Building When Zoning Changes

In this market, it is getting more and more difficult to find deals where an investor can simply fix up a home and flip it for a profit because sellers expect to get higher prices and there is an abundant of investors looking for the same deals. So don’t follow the crowd; find older homes in areas where the zoning has changed and build a new structure that will increase the value of the property. Here is an example of a deal I am working on in Los Angeles, California:

 

There is an area in North Hollywood near Universal Studios that is very desirous to live in. In this area, the zoning changed from single-family homes to multi-unit condos (three story condos with underground parking.) Because of the change in zoning, the property values in the area have risen tremendously, but that is okay, because the price of the condos units, when completed, are very expensive also; thus a great profit margin can be achieved. For instance, a friend of mine just inherited his mother‘s home which looks like a small, very old starter home: three bedrooms, two baths, and about 1500 square feet. It is not the house that is worth the money, but the property in its location. He was offered a $1,000,000 for his property by the next door neighbor. Should he take it? Maybe, but not necessarily. He asked me for advice.

 

First, I could see that the zoning had changed because all the properties surrounding him had three story condo complexes built on them. I investigated what the condo units were selling for and discovered that a 1450 sf condo demanded $700,000 and sold like a hot cake, and there were not a lot of units for sell. Then I laid out a building plan on the property after calling the building department to discover the set-backs and height requirements. I estimated that we could get 14 units on the property with a semi-underground parking structure. Fourteen units times $700K each equals $9,800,000.00 in retail sells. Then I calculated the building cost after talking with a local contractor to be $4,500,000.00 and I contacted a few financial institutions for a construction loan. By having the property paid for and the appraisal of the project as high as it was, one was willing to loan us the money to construct the building at a reasonable rate of 1 ½ points and 5.2 % ARM.

 

The projected profits, after paying to design and construct the building and demolish the old building, as well as taking away the financial charges, the marketing cost to sell the units, the closing costs and the holding costs for taxes, insurance and utilities, and paying my friend $1,200,000.00 for his property ended up being $2,562,500.00. I told my friend I would do a joint venture with him where he would put the property up as his investment and I would procure the construction loan and supervise the project: line up the architect, hire the contractor, see that the interior finishes are up to par with what is selling, line up the real estate company, create all contracts (using an attorney) and oversee the project. My friend would receive $1,200,000.00 for his property out of the proceeds first ($200,000 more than he was offered) and half of the remaining profits after all expenses are paid for. I would receive the other half of the profits with no money invested, but dong all the work. (A cool $1,281,500 in a year to a year and a half, with no money down). The key was finding the construction loan and that is why it pays to network with cash investors who may end up becoming lenders on future projects.

 

So, look for those unique deals that are a little out of the ordinary and think about building new.

The Importance of Zeroing in on Your Buyer’s Tolerance for Profit

The language of business is numbers. So it is with doing profitable real estate deals. There are three (3) very popular rules for calculating your offer. They are referred to as:

  1. “The 70% Rule:” (Offer equals the ARV (After Repair Value) times 70% less cost of repairs.)
  2. “The 75% Rule:” (Offer equals the ARV (After Repair Value) times 75% less cost of repairs.)
  3. “The 80% Rule:” (Offer equals the ARV (After Repair Value) times 80% less cost of repairs.)

The “80% Rule” offers the least profit. However, it offers much greater likelihood of getting the offer accepted than “the 70% Rule.” What’s exciting is that there are investors who use “the 80% rule” and still make more money on the deal than investors using “the 70% Rule.” You will want to find them.

Regardless of which rule is used, there are closing costs, holding costs, and selling costs. Generally, those costs total 15% and break down like this:

  1. Closing Costs: (3%) Paid to the title company to insure the deed is free of liens or encumbrances.
  2. Holding Costs: (6%) These costs are mostly the costs of borrowing the money to do the deal, but also include taxes, insurance and utilities etc.
  3. Sales Costs: (6%) Usually paid to the realtors who help close the deal.

As a wholesaler, it is critical to find the buyer who will pay the most for the property. Some buyers have their own money. This eliminates most of the holding costs. The same buyer may also have the property already sold or have an agent on board that eliminates their sales costs. The buyer who doesn’t have many holding or sales costs can use the 80% rule and make more profit than another buyer who has borrowing and sales costs but uses the 70% rule.

When we interview buyers, we want to find out their “tolerance for profit.” Do they have money? Are they an agent or do they partner with an agent? Going out to the job sites of successful bidders can help you find those buyers who do rehabs more efficiently and at a lower cost.

Asking this simple question can help you sort out the buyers who should be at the top of your list. “Suppose I have a property you know you can sell quickly for $300,000.00, but it is going to cost you $30,000.00 to rehab. Your ad says you buy houses, where would I have to be pricewise for you to buy this one?”

Simply put, the greater your buyer’s “tolerance for profit,” the more money you will make and the more deals you will do.

Staying Motivated

Staying motivated in your real estate business is critical to your success and can sometimes be hard, especially when you are first building your business. Here are some ways to help you get motivated and stay motivated.

Goals: Goals are the first step to motivation. Knowing why you are doing what you are doing allows you to create a road map that you can use to guide you. Make sure you have a long-term goal that really excites you. Work that goal backwards so you have some intermediate and short-term goals. You want to break it down to weekly goals and daily action steps. Be sure to have your goals written down and read them daily.

Vision: Create a vision of your long-term goal. Imagine (visualize) it as if it is already real. Imagine it in enough detail that you catch yourself smiling. The emotion you feel while imagining your vision is the power that will fuel your motivation. Spend a minute or so when you first wake up imagining your vision, and again as you are falling asleep at night. This is called, “Feeding Your Vision.”

Vision Board: A vision board is another tool you can use to bring your goal to life. You want to find images that represent your goal as completed. You can put these images on a poster board or a corkboard. Be creative and have fun. You want to put your vision board where you will see it often. The power in a vision board comes not from just looking at it, but from taking 20 to 30 seconds while looking at it to let it take your there, so you can feel motivated and catch yourself smiling.

One last tip: When you wake up in the morning, ask yourself, “What do I get to do today”?

 

Jump Start Your Career In Real Estate Investing

So you’ve done your research and due diligence and are ready to start your career as a real estate investor. How do you take the step from considering investing in real estate to becoming a full-blown investor? Follow these 5 ways to jump-start your career as a real estate investor.

 

#1 Stop Waiting for the Perfect Moment

You can track market trends and interest rates forever and never pull the trigger. If you ask any real estate investor what their biggest regret is, it’s most likely not starting sooner. Stop waiting for the perfect market and instead focus on finding the right deal, right now, for your long-term investment goals.

 

#2 You Don’t Have to Start Small

There is no rule that you have to start with a small property. Carefully examine the pros and cons of large and small properties and see what works best for your financial and personal goals. The same rule applies for your real estate investment portfolio, invest in additional properties as soon as you are able.

 

#3 Focus on Appreciating Assets

You can buy and sell in hot markets across the US. However, you won’t see the full potential of real estate investing until you wait and cash in on appreciation. This sounds counterintuitive, but you can jump start your career in real estate investing by holding on to appreciating investments for future paydays.

 

#4 Get Creative with Financing

You don’t have to have a full cash offer on hand before investing in your first real estate deal. Get creative with finding the money for your first investment property. You can use traditional, low down payment financing or even use your IRA to purchase your first investment property. Once you start seeing monthly cash flow, you will have the funds to invest in future properties.

 

#5 Network in Person and Online

Don’t let the deal of a lifetime pass you by simply because you didn’t know about it. Create a network of professionals online and in your local community and always be in the know. From social media to networking sites, like biggerpockets.com, there are endless opportunities to make connections in the world of real estate investing.

 

Once you have the tools and resources, jump start your career in real estate investing today!

How to Create Wealth through Real Estate Investing

There are many ways to make money investing in real estate, but how do you create real wealth? There are four key factors that contribute to your long-term success and wealth creation in real estate investing.

 

Positive Cash Flow 

Real estate is an investment, and your cash flow is the return on the investment.  Your cash flow is the money left over after all expenses are accounted for.  Whether it’s the difference between the purchase price + repairs + carrying costs after a fix and flip OR the monthly rent – expenses – mortgage on a buy and hold investment, the numbers must add up to a positive cash flow.

 

Potential for Appreciation 

There are two types of appreciation when looking at real estate:

  • Appreciation over Time: The US real estate market has traditionally shown a 3% increase year over year, and if you buy in a “hot market,” you can hope for appreciation above the average.
  • Forced Appreciation: An increase in value due to improvements made to the property.

 

Paying Off a Loan

When you purchase an investment property using a traditional mortgage, the rent you collect from your tenant helps pays off your loan.  Even if your monthly cash flow is modest, you are rewarded with the eventual payday of cashing in on the equity that you build over the years through your tenant’s rent checks.

 

Tax Benefits 

There are significant tax benefits to generating income through real estate investing.  These benefits differ from state to state and property to property, so be sure to consult a tax professional before each purchase.

 

Building Wealth Through Real Estate Investing

Every property will not check off all four boxes.  If you purchase a fix and flip home, you will not be collecting monthly rent to slowly pay off the mortgage.  A fix and flip property is all about the forced appreciation you collect when you sell the home at its increased value.

 

Making sure these four factors are represented in some combination in your real estate investment portfolio will help you create wealth through real estate investing.

 

  • Cash Flow Potential
  • Appreciation
  • The Prospect of Loan Pay Down
  • Tax Benefits

Nursing Home Bird Dogs

Building a team of bird dogs is a great way to get deals done quickly and with more ease. One market I found that has been overlooked is adult dare facilities, such as nursing homes, assisted living facilities and active adult communities. Do a quick google search for these senior living properties in your area.
The way I see it is this, when a senior citizen needs to make changes to their living situation, they will talk to the executive director of a facility to get information about the specific facility’s cost, amenities, services and so forth. They will then budget because Medicare and Medicaid do not cover these costs for them. These administrators will know if the possible client has a property to sell off to help pay for the cost of the facility. This is where you would come in.
I would encourage you to talk face to face with the executive director in charge of admissions and let them know that you are a real estate investor who can buy properties quickly and with cash from their possible clients. You’ll want to ask them for leads to anyone who has a property to sell. This way you can go to the homeowner, or their heirs directly, and work out a deal. If you make a deal happen, then offer the administrator a referral fee, cash at closing. I usually give $1,000 referral fees, but the price is totally up to you. If your offer does not conflict with their business interest, they should be willing to work with you.
Now you are building a captive audience as your bird dogs. Seek out as many of these types of facilities and market to them all. Build your business with leverage — and this is a good type of leverage.

A Couple of No-Down Financing Options

Typically, when you buy a home you must have some sort of down payment.  When you use a FHA loan (which usually requires the smallest down payment) you will need to have a down payment of 3.5 percent of the amount you offer on the property.  There are less known options available to homebuyers that will allow you to get into a home without having to have any down payment at all.
The first option to look at is an USDA loan.  USDA loans will give you 102% of the appraised value of the home, which will cover your closing costs. This loan will be a 30-year fixed rate loan, with an interest rate based on what the market is currently at.  You will need to have a 640 minimum credit score unless you have been through a short sale, then you will need a 660 credit score.  The draw back with this type of loan is that it is only available for specific areas, which are mostly rural communities.  There are income limits as well, which means if you make over a certain amount of money you will not qualify.  This loan is only for a personal home that you plan on living in, but most existing single-family homes and new construction single-family homes will qualify. Some condominiums and modular homes will qualify for this loan as well.  It will work for both first time homeowners and those that would like to move to a different home.   To find out more about this type of loan and to see if you qualify you will need to call mortgage lenders in your area and ask them if they do USDA loans and what the qualifications are.
There are also local banks and credit unions you can work with where you can get into a property without a lot of money out of pocket.  To find these banks, start calling local banks and ask to speak to their mortgage department.  Ask them if they have a low cost, or no down payment option loan to get into a home.  There are a lot of options for first time homebuyers in this area.  My son went through this experience last year.  He found a bank with a no down payment option and got prequalified (Getting pre-qualified is a must to know how much they will loan you to buy a home).  As he went through the process, he had to pay for the appraisal out of pocket which was around $500.  He chose to pay for a professional inspection on the property about $250-$350.   At closing he had to bring in $200-$300 for some closing costs.  All in all, he got into a $150,000 home for around $1,000 out of pocket, of which $250 was optional.
Lending rules have relaxed a little so there are now options to get into a home with little out of pocket money. If you want to buy a home and you do not have a lot of money saved up, consider these options, as there may be a way to get you into a home.

A Unique Way to Invest in Commercial Properties

One way to invest in real estate is by investing in commercial properties.  Commercial properties consist of retail, office and industrial buildings with a subcategory of industrial buildings that include multiple storage units.  Storage units are a great investment because they are easy to build and easy to maintain.  Storage units are usually block buildings with metal partitions that can have either exterior roll up door entrances or interior hallway entrances.  The units can vary in size from 5’x5’ to 10’x30’ and rent from $50.00 to $175.00 per month.  These would be non-heated units; heated units would rent for a premium of $25.00 per month more.
A great way to create these units is to find one-story industrial buildings that are vacant, outdated and need a lot of work.  Purchase the industrial building for 70% of the ARV (price per square feet of an industrial building in good shape) minus the rehab cost to convert the building into storage units.  Once owned, gut the building and install simple partitions to create a hallway and individual storage units with 4’ to 6’ wide roll up doors on each unit depending on the size of the unit.  Put an electronic security lock on the exterior door and allow each individual renter to put a padlock on their unit.  Put security cameras on the inside hallways and security lights on the exterior of the building.
It is very easy to get a 20+ cap rate on storage units bought this way.  Taxes and insurance are low and maintenance is minimal.  Utilities are paid for by the landlord, but they are minimal also; one light bulb per unit and no gas or water.  You can hire a manager or manage the storage unit yourself.
These industrial buildings should be located near residential communities on a commercial corridor so they are easy to access by renters needing to store furniture and other items.  The industrial building should be a minimum of 4000 sf and 10’ tall on the inside.  The partitions can be built with wood studs and one sheet of plywood or metal studs with corrugated aluminum panels.  The hallways should be a least 5’ wide and have doors at each end for easy access.   You can create 40 units of varying size in a 4000 sf shell and lease them for approximately $1.00 /sf. Smaller units go for more per square foot than larger units.
This is just one more way to make a great return on your money by investing in real estate.