Mistakes in Real Estate Investing to Avoid

Vena Cox - E.

Vena Cox - E.

Vena Cox - D. Real estate is a less an investment than it is a business

Many new investors seem unprepared for this reality, but the fact is that the types of investments that small investors get into are, by their very natures, hands-on.

Unlike securities, CDs, and other investments with which most people are familiar, your real estate investments require your time and attention to continue to be profitable.

And while you can (and should) build a team of people to help you with the day-today tasks associated with owning properties, there are some jobs that you should NEVER delegate—they’re too important to your success and your financial health.

For instance:

You MUST research your purchases thoroughly. As you’ve already seen, buying properties at the right price is important. But in order to buy the right property at the right price, you have to know more than what other properties in the area sell for–and while your agent can be HELPFUL in evaluating some of these important factors, you should ALWAYS try to find out as much as possible on your own. Remember, you agent is a commissioned salesperson who’s trained to close deals–which means it’s in his or her best interest to paint the rosiest possible picture of a property. It’s in YOUR best interest to find all of the possible downsides, so that, at worst, you go in with your eyes open.

Some examples of important additional data are as follows:

• The true condition of the property.

Even if you’re buying a brand-new building–unusual, since it’s tough to get great prices or terms on these highly desirable properties–there could be hidden defects, or things that could present problems in the future. This is why you should always hire a professional home inspector to go over the property with a fined-toothed comb. An experienced, well-trained home inspector (preferably with an engineering or construction background) can find problems that you probably don’t have the tools or experience to locate–like carbon monoxide leaks from furnaces and water heaters.

Like grading problems that could result in foundation and water issues in the future.

Like structural issues caused by poor construction or settlement.

The list goes on and on.

And, no matter where you live in North America, always, always have a wood-destroying pest inspection. They’re under $100, and often turn up termite, carpenter ant, and other expensive-to-repair infestations that you never would have guessed at–even in properties that are constructed of brick or stone.

• The nature of the neighborhood. Is it right for your particular strategy?

For instance, if you plan to fix and sell the property, is it in an area of high demand among qualified buyers? How long to properties typically sit on the market before selling? Is the school system desirable? Are the property values steady, rising, or falling? Are there area-specific regulations that could affect your ability to renovate the property the way you plan to–for instance, is it in a historic district where you must conform to certain standards? Most of this information is readily available on the internet, or can be provided by your local city hall or by your agent via information in the Multiple listing service.

• The real potential cash flow. When listing rental properties, agents typically get a limited set of income and expenses from the owner–and, unfortunately, this information is not always completely accurate. For example, most sellers of rental properties will tell you that the rents are below market, and could be raised 10- 20% (which begs the question, why hasn’t the owner raised them?).

Also, the expense data does not usually include the replacement reserves, accounting and bookkeeping costs, and many of the other true costs of owning a rental. This means that, to get a true picture of the potential cash flow, you’ll need to do a market rent survey to discover what rents really are for a particular type of unit in a particular area. And you’ll need to see a copy of the owner’s last 2 years’ “Schedule E”, on which he reports the income and expense from the property to the IRS. And you’ll need to check with the utility companies to get the “level billing”–that is, the average monthly bill–for heat, electricity, water, sewer, and garbage removal.

Again, all of this information is readily available if you’re willing to do the legwork to track it down.

You MUST manage and maintain your properties.

Many new investors are under the impression that good tenants are easy to find and to keep. In fact, most newbies seem to believe that rental properties are not much different than stock investments–you buy right, put tenants in, and the checks just roll in each month without further effort.

However, the reality of owning rentals is this: you MUST stay actively involved in them to keep them profitable!

It’s crucial that you carefully screen your potential tenants–and not just to see whether they have decent credit and income. You also need to know their eviction history, whether they’ve damaged previous units, how long they’ve been on the job, how long they’ve stayed in previous rentals, and so on.

· And once you have a good tenant, you need to be very responsive to any maintenance requests, problems or questions.

· You must physically inspect each unit you own at least once a quarter to look for unreported problems–like roof leaks–that could turn into expensive repairs.

· You must be unrelenting about on-time payment, and quick to file to appropriate paperwork with the court system to evict a late payer.

· You must keep the outside and common areas of the property looking good at all times to attract and keep good renters. And the list goes on and on.

· And, even if you’re buying larger multi-families that warrant on-site caretakers or outside management companies, you must keep careful tabs on what they are doing.

· When you are “cut off” from your tenants by a 3rd party manager, you can have major problems that you aren’t even aware of until it’s too late.

· Unresolved maintenance issues and pest problems, poor screening practices by your manager, and even discrimination and rent theft can go on unnoticed unless you remember the cardinal rule of owning rentals: always stay involved.

· You MUST actively oversee your renovations. Another common fantasy of the inexperienced real estate investor is this: you’ll be able to hire a competent contractor to do large renovations and small repairs quickly, inexpensively, and without any involvement on your part.

· But ask any seasoned investor, and he’ll tell you that the quickest, surest way to lose money in real estate is to turn a contractor loose on a property with no oversight. The horror stories are endless: you can be regaled by takes of contractors who left in the middle of a renovation to take another, more profitable job, leaving the investor months behind schedule in getting the property ready.

· Or contractors who substituted to quality materials you specified for shoddy, less expensive materials that fell apart just a few months or years later.

· Or contractors who left a property beautifully finished, but covered up the fact that they had NOT rewired the unit before hanging the drywall.

· Or contractors who hired subcontractors and didn’t pay them, leaving the owner with a huge lien against the property.

· Or contractors who didn’t carry worker’s compensation insurance, got hurt on the job, and sued the owner for his injuries.

· There are as many sagas like this as there are unknowing investors who didn’t carefully watch and control their renovations.

The ONLY way to avoid these problems is to visit the job site every day without fail. This way, you’ll know right away who’s actually working in your property, whether the work is progressing in a timely fashion, whether any “new” problems have turned up with the property (and they will, believe me), whether the “internal” work like wiring, plumbing, floor leveling, and ductwork is being completed before the finish work covers them up, etc. If you don’t have time to spend 30 minutes a day examining the contractor’s work, don’t do rehabs. It’s as simple and that.

You MUST keep an eye on your income and expenses, and be prepared to cull your properties or change your strategies if necessary. Even experienced investors fall into the trap of assuming that, since there’s money in the bank, everything must be going well. But it’s a good practice to examine the cash flow from each property on a quarterly basis to see if there are problems that need to be resolved. For instance, a sudden increase in the water bill for a particular property could indicate a leak, or could be a sign that one of your tenants has purchased a washing machine and is taking in laundry. An unusually high heating bill could indicate that a tenant with access to the thermostat (always a bad thing when you’re paying for the heat) is cranking the furnace up to 90 degrees, then opening the windows when it gets too hot. And an upward trend in vacancies could mean that the building is not being kept in good repair, or that your tenant screening practices need revision, or that the market has changed in such a way that you need to reevaluate your strategy.

For example, in 1996 I noticed that my lease/option properties were staying vacant an average of 3 months–a significant increase from the 2 weeks I’d seen in the past.

The reason?

The ready availability of mortgage loans for people with B and C credit.

The folks who were my best prospects in prior years were suddenly able to BUY homes with little or nothing down–which meant that I had to make my lease/options more attractive than buying.

I lowered the up-front money required to get in, added “rent credits” to help the tenant/buyer save up for downpayments and closing costs, and changed my marketing to show my customers that waiting a year until their credit scores increased actually saved them tens of thousands of dollars in interest payments over the life of the loan.

I changed my strategy to meet the realities of the new lending market–and, of coursed, revised them again when the bottom fell out of the B/C credit market in 2000.

Otherwise, my income would have taken a significant hit during this 5-year period.

And, by the way, don’t be afraid to sell off a property that loses money year after year, or that is not performing as well as the rest of your portfolio. It’s often better to free up the equity in that property to invest in a more profitable building, rather than expend an unreasonable amount of effort bringing it up to par with your other investments.

You MUST have systems and policies in place to run your real estate business.

Winging it, or making decisions on a case-by-case basis, is a mistake for a number of reasons.

· First, it’s too easy to make a decision based on emotion rather than on business sense on the spur of the moment. If you don’t have a policy in place that says that all rental payments must be made by the 4th of the month, and your tenant calls with a sad story about how her sister stole her paycheck, or there wasn’t enough money for the kid’s Christmas presents AND rent this month, or the bank closed her account without telling her, how will you react? The softie in you will let her slide this month–which will soon become next month, which will quickly become a consistent practice.

· Second, without policies that are both written and followed, you could open yourself to lawsuits that you can’t win. A great example of this is in the Fair Housing arena. Fair Housing–that is, discrimination suits–are expensive, lengthy, and embarrassing, and are often won or lost based on policies and documentation. Let’s say that an applicant whom you rejected based on an abysmally low credit score later claims that you didn’t want him because he has children. If you have a written policy that applicants who don’t have a certain minimum credit score, and if you document the disposition of each application you’ve received and why youaccepted or rejected it based on these criteria, your opponent will have a hard time proving that you turned him down due to his children or any other “protected” reason. If you don’t have these policies and documentation, it’s your word against his.

· Finally, systems and policies make your life easier. When your policy is that every tenant who hasn’t paid by the 4th of the month gets a late notice and pays a late fee, you know what your job is on the 4th. When your policy says, “No one who’s been evicted in the last year gets to move into my property”, you won’t waffle over a accepting a bad tenant just because he’s the only applicant you have.

· When your system is to record every contact with a tenant, whether in person, on the phone, or in writing, you’ll have no problem remembering what you promised to whom, and when.

Again, the real estate business is a BUSINESS. Run it like one, and it can be endlessly profitable. Treat it like a passive investment, and it will be more trouble than it’s worth.

Vena Cox - C. It’s never safe to pay retail

2. It’s never safe to pay retail

There’s an old saying among experienced real estate investors that goes, “You make your money when you BUY.” This refers to the traditional (and, in my opinion, correct) thinking that a property is a good investment only when it’s purchased at a below market price, or with financing terms that are better than those offered by conventional lenders.

Unfortunately, with the recent decline in interest rates and the higher-than-average appreciation in real estate values, new investors are getting a different kind of advice: that it’s OK to pay close to retail price for a property, because the low interest rates guarantee cash flow, and the yearly inflation in value will allow the investor to build equity quickly.

In some of the strategies we discussed earlier, it’s obvious that you can’t pay retail: if your intention is to repair and sell the property quickly, or to wholesale it to another investor immediately, your profit is only guaranteed if you pay an under-market price. But many new investors who plan to hold their properties long-term for rental fall prey to the thinking that paying full price is OK for the reasons mentioned above. There are several problems with this strategy that, unfortunately, only become clear AFTER the property is purchased.

The first problem is that, even with interest rates in the 6% range, most rental properties, when purchased at retail price with retail terms, will NOT produce a true positive cash flow when all expenses are taken into account.

Let’s look at an example:

In most of the country, a decent 3 bedroom single family home in a relatively nice area can be purchase for around $90,000 (if you don’t happen to live in one of these areas, do the math for the higher or lower values and rents–you’ll find that the overall numbers remain pretty much the same). This property will rent for about 1% of it’s total value per month, or $900.

Retail lenders–that is, banks and savings and loans–require that investors who do not plan to live in a property make a downpayment of 20% of the purchase price of the property. In this example, that downpayment would be $18,000. In addition, these lenders charge application fees, points, closing costs, appraisal fees, and title insurance premiums that average, when all is said and done, about $2,500 per loan. So borrowing $72,000 to purchase this $90,000 requires an upfront investment of $20,500.

Because these “non-owner occupied” loans are considered more risky that loans to homeowners, most lenders require a shorter payback period, as well. 15, 20, or 25 years are common amortization periods–it’s possible for investors to get 30 year loans, but they are normally adjustable rate loans, not fixed interest.

The payment on a $72,000 loan amortized over 25 years at 6% interest is $463.90. Add in property taxes and insurance, and the number grows to approximately $600 per month. If the property rents for $900 per month, the cash flow based on these expenses is $900/month rent

- $600/month principal, interest, taxes, and insurance payment

$300/month cash flow, or $3,600 per year in profit.

BUT, this calculation does not take into account the real expenses of owning rental property.

For instance, the average tenant stays in a property for one year. When he moves, the unit must be “turned over” (that is, painted, cleaned, carpeted, and made ready for the next tenant). The cost of a simple turnover averages $1,500–and no, this money cannot be taken out of the tenant’s damage deposit if the repairs were a result of “normal wear and tear”. Therefore, the annual profit is reduced by this amount:

$3,600/year profit

- $1,500 turnover cost

$2,100/year profit

It also takes an average of one month to turn over a unit, get it on the market, find and screen the next tenant, and get the first month’s rent and damage deposit from the next tenant. During this month, no rent is received, so the annual profit is reduced by one month’s cash flow:

$2,100/year profit

- $300 “vacancy loss” for one month’s unpaid rent

$1,800/year profit

During this month where the property is not occupied, the investor must still keep the utilities on so that the property can be turned over and shown. Depending on the part of the country and the time of the year, this could mean heating or cooling the unit as well as keeping the lights and water running. And, of course, the property must be advertised for an average of 2 weeks, which again reduces the yearly cash flow:

$1,800/year profit

- $100 utility costs

- $200 advertising costs

$1,500/year profit

Now, $1,500 per year may sound like positive cash flow–although it’s a return of less than 10% on the cash you invested to buy the property–but there’s still one major expense unaccounted for. In fact, it’s a major expense that very few new investors are even aware of–an expense called replacement reserves.

Replacement reserves are a way of accounting for the fact that parts of the building are deteriorating each year, and will eventually have to be replaced. A roof, for instance, has a life span of about 20 years, and costs about $3,000 to replace. Most investors look at the replacement of the roof as a once-every-20-year expense that reduces the cash flow FOR THAT YEAR

ONLY by $3,000. But the proper way to look at it is an expense that accrues each year in the amount of the replacement cost divided by the life span–in this case, $3,000/20 years or $150/year. After all, the roof doesn’t actually go bad all at once in year 20–it loses 1/20th of it’s usefulness each year for 20 years. And because the usefulness of the roof declines each year, it

should be deducted from that year’s income.

In fact, a smart investor actually sets aside the cash each year from the income of the property so that the money to replace the roof is available when the roof needs to be replaced. Otherwise, the investor must come out of pocket that year to make the repair–remember, this property only produces $1,500 per year in positive cash flow, and the roof costs $3,000 to replace!

But here’s the kicker about replacement reserves: there are many, many items in a rental unit that depreciate from year to year! Here’s a partial list–the range in life spans for same items is a function of the type of unit and area.

For instance, a refrigerator in a 4 bedroom home will be used more that one in an efficiency apartment, and will therefore last for a shorter period of time.

Item Life span Replacement cost Annual reserve

Refrigerators 5-10 years $500 $50-$100

Oven/Ranges 5-10 years $300 $30-$60

Dishwashers 3-5 years $225 $45-$75

Carpeting 1-3 years $9/yard $3-$9 per yard per year

A/C units

Window 5-10 years $250 $25-$50

Central air 20 years $1500 $75

Roof

Flat, roll 10 years $1500 $150

Flat, membrane 20 years $2000 $100

Sloped, asphalt shingle 20 years $3,000 $150

Heating Systems

Boiler 30-50 years $2,000 $40-$66

Gas forced air furnace 20-30 years $2,000 $66-$100

Water heaters 10-15 years $300 $20-$30

So the cash flow on your 3 bedroom home with it’s refrigerator, stove, dishwasher, 5 rooms of carpet, central air, gas forced air furnace, asphalt shingle roof, and water heater now has to be reduced by $1,340 per year, leaving $1,500/year cash flow

- $1,340/year replacement reserves

$160/year cash flow

And, needless to say, $160 cash flow will quickly turn negative with an unexpectedly long vacancy period, or the costs of an eviction, or tenant damage, or an increase in property taxes, or any one of the dozens of other things that can happen with a rental property. In fact, the only thing that generally redeems a rental property for which the buyer has overpaid is the tax

benefits–but remember, the depreciation the IRS allows on you rental must be “recaptured’–that is, paid back, when you sell.

And what about the appreciation in values rescuing the deal? The current trend of 7-15% per year appreciation is unusual and expected to level out to a more normal 3-5% this year. But even if it doesn’t, remember that 7% appreciation will be eaten up by commissions and sales costs of you sell 12 months from now.

Let’s see what happens if you, like most smart investors, pay no more than 80% of value for your property.

Property value $90,000

Purchase price $72,000

Downpayment $14,400

Closing costs $2,500

Cash investment $16,900

Mortgage balance $57,600

Rent $10,800/yr

Mortgage paymt -$4,453.44/yr ($371.12x12)

Taxes & insurance -$1633.20/year

Turnover costs -$1500

Vacancy loss -$300

Utilities -$100

Advertising -$200

Replacement reserves -$1,340

$1,273.36 positive cash flow

AND, by purchasing the property below market, you control $18,000 in real equity the day you buy. AND, by purchasing the property below market, your out-of-pocket costs for downpayment and closing costs are reduced from $20,500 to $16,900, increasing your return enormously.

By the way, the same cash flow can be achieved by paying full retail price, but letting the owner carry the financing on the $72,000 balance at 4.75% interest for 30 years. And if you’re wondering where these sellers are who accept an offer of 80% of value to sell their home, or who are willing to carry terms, the answer is that they’re all around you–you just don’t know where to look yet.

Even in super-hot markets, where everything seems to sell at full value, there are sellers who have properties that need they’re willing to sell cheap–or on terms–in return for a quick, easy sale. The sellers may be motivated by a job transfer, a divorce, a pending foreclosure, a property they’ve inherited, when they live in another part of the country, a need for quick cash, a property that they’ve let run down to the point where a retail buyer isn’t interested in purchasing it, or any of a dozen other reasons.

Simply put, these sellers don’t have the time, inclination, money, or energy to expose their property to the retail market and wait for it to sell.

One of the very first skills you’ll need to learn to be a successful investor is how and where to find these sellers.

But we haven’t yet run out of reasons for you to buy all of your properties–whatever your exit strategy–at below-market prices. Here are a few more:

• Buying under market means that you can liquidate quickly, if necessary. Each and every week, I talk to landlords who desperately want to sell their rentals. Sometimes the reasons are personal (job transfer, can’t handle the tenants, divorce, increase in hours spent at work), and sometimes they’re financial (property is losing money, lost job, facing foreclosure).

When these landlords have purchased their properties at retail in the last 2-3 years, they usually end up walking away from all or part of the original downpayment they paid. The home that they bought 2 years ago for $90,000 is now worth about $99,000–assuming it’s in as good a condition as when they purchased it, which is unusual when tenants have been at it–and the costs of selling it retail (6% commission, transfer taxes, closing costs, and fees paid on behalf of the buyer) bring the landlords net selling price down to less than the $90,000 they paid in the first place. And if the buyer is a seasoned investor, the purchase price will be no more than $80,000 cash. Even taking the real estate agent out of the equation, the seller will lose money on the sale–something that they are often willing to do, if the problems with the property or in their lives are pressing enough.

On the other hand, the seller who paid just 80% of value to begin with will walk away with at least some profit, even if he has to sell soon after the purchase. Everyone plans to keep their rentals forever, but sometimes life gets in the way. If the worst happens, would you rather take a loss, or make a profit when you sell?

• Buying under market bullet-proofs your investment, whatever happens in the economy. One of the fears in the minds of former stock market investors is that a “real estate bubble”, similar to the stock market bubble to recent years, will eventually burst, driving property values down. In most of the United States, this is an irrational fear–yes, there will be a decrease in the level of appreciation, but no, real estate will not lose value–it is not unheard of in some markets at some times. In some markets on the east and west coasts, real estate is clearly cyclical in nature–California, New York, etc–and in some markets, local economic factors can drive property values down, as in Houston during the crash of the oil market.

But think of it this way: if you’ve purchased your property at a below-market price to begin with, a drop in values will simply bring the value of other properties in line with what you paid to begin with. You’ll lose net worth on paper, but you won’t lose money even if you sell. Or if you do, it will be significantly less than those around you who paid full retail for their units.

Perhaps more importantly, by buying under market, you’ll have more flexibility to ride out economically troubled times than other, less savvy investors. Imagine that America enters another depression, with 30% of all adults out of work. Will people still need a place to live?

You bet.

Will they be able to pay as much rent as before?

Probably not.

Since you bought right in the first place, you will be able to afford to lower your payments, thus attracting tenants even when noone else can. • All things being equal, buying under market will make you richer, quicker. Remember our example of the $90,000 property. Let’s say that you go on a buying spree and purchase 10 such properties this year. Look at the difference in your net worth and cash flow if the property values, rents, and expenses each increase at 5% per year:

At Retail At 80% of Retail

Property Value $900,000 $900,000

Purchase price $900,000 $720,000

Cash out of Pocket $200,500 $169,000

Mortgage Balances $720,000 $576,000

Net Equity Controlled $180,000 $324,000

Net Cash flow $1,600/year $12,734/year

Return on cash invested .8% 7.5%

After 5 years

Property Value $1,093,953 $1,093,953

Equity Controlled $448,066 $577,243

Net cash flow $1945/year $15,478/year

Return on cash invested .97% 9.2%

At the end of the loan term–that is, after 25 years, the two strategies equalize in that you control 100% of the equity in both cases. But in the meantime, your net wealth, return, and income are significantly higher when you pay less to begin with. And more wealth and income mean more opportunity to leverage those assets into even more below market deals.

Vena Cox - B. There’s more than one way to make money in real estate--and it’s crucial to choose your strategy carefully

Not only are there multiple types of properties and areas in which you might invest–fortunes have been made in single families, apartments, mobile homes, commercial properties, raw land, options, mortgages, great areas, awful areas, middling areas, and dozens more–but there are also multiple ways to make each type of property make money.

Most people are initially familiar with just one or two of these strategies. Renting is certainly the one that comes to mind for most people; fixing and reselling is another fairly wellknown strategy. But these are just two of the possible ways to make properties make money–and in some ways, they are the two most risky and difficult.

The problem is, most people are not cut out to be landlords.

They don’t have the time, patience, or personality to deal with the hassles that tenants cause. And even fewer have the money and skills to successfully renovate and resell properties, which is cash-intensive and depends on the investor’s knowledge of inspection, estimation, rehab, and sales. And although landlording and “retailing” are both extremely profitable for the right people under the right circumstances, they create totally different types of profit: renting properties results in long-term tax-advantaged cash flow and wealth building, while retailing creates a large, one-time, highly taxed cash profit. So not only is every strategy different in the knowledge, resources, and skills it requires; each strategy is different in terms of the financial goals it meets.

That’s why it’s so important to pick your strategy wisely.

And this means deciding before you start what it is you hope to gain from your real estate investments.

· Is it cash to pay off debt, or build a fund for downpayments, or buy a dream?

· Is it income, for retirement, or to replace your salary, or simply to realize a higher standard of living?

· Is it tax benefits, to offset a high working income?

· Is it appreciation, to build wealth?

And at the same time, it’s important to take stock of your own assets and liabilities, so that you can match your skills and personality and resources to your strategy.

· Do you have cash and good credit, or are you lacking in one or both of these areas?

· Do you have time to commit to your investing, and if so, how much?

· Do you have experience in renovation?

· Negotiation?

· Sales?

· Are you patient?

· Good with people?

· A great manager?

· Fearless?

· What’s your risk tolerance?

Each of these resources is important for certain strategies–and completely unimportant for others. And, of course, each can be obtained with study and experience. But knowing where you’re coming from and where you want to end up are crucial for choosing a path that will allow you to make the kind of money you want to make in real estate–and make it as easily as possible.

Having said this, here’s the world’s shortest course in real estate strategies.

Note that entire books and week-long seminars have been written about each of these techniques–and I suggest that you take advantage of one of these before diving in. This is simply an overview of some of the basics of the most popular strategies used today, so that you can compare and contrast the benefits they provide, the resources they require, and the hassles they produce.

Landlording.

• The basics: buy a rental property, keep it occupied, managed, and maintained for as long as you can stand it.

• The benefits: cash flow, long-term wealth through appreciation and pay down of the mortgage balance by rental income, tax breaks through depreciation.

• The hassles:

· management and maintenance can be time-consuming, tenants can be frustrating, often takes many years for a property to show significant cash flow.

· You can’t pull cash out without refinancing or selling the property, and there’s a long and growing list of liability issues, including lead paint, black mold, radon, asbestos, personal injury, discrimination that come with owning rental properties.

• What you’ll need to do it:

10%-20% of the purchase price in cash as a down payment plus good credit, OR

a cooperative seller who’s willing to carry the financing privately; cash, in the amount of approximately $2,000 per unit, as “capital repair fund” for turnovers, emergency repairs, upgrades, and so on; good people skills and patience for dealing with tenants;

time to deal with management and repairs; an education in tenant-landlord law in your state; and understanding about how to screen tenants carefully; and entity, such as a limited liability company, to own the properties and shield your personal assets from liability.

• Good for: people who are building income and assets for retirement.

Retailing

• The basics: buy a 1-3 unit property that needs repairs and upgrades in an affordable but desirable area at an under-market price. Bring the property into good condition for the neighborhood; sell it to a qualified homeowner for full retail price.

• The benefits: a cash profit of $20,000 or more in 6 months or less

• The hassles:

repairs are ALWAYS more extensive and expensive than predicted;

finding and keeping skilled, affordable contractors; finding qualified buyers and moving them through the purchase process without incident;

not tax-advantaged.

• What you’ll need to do it:

10%-20% of the purchase price in cash as a down payment plus good credit, OR

a cooperative seller who’s willing to carry the financing privately; access to cash in the amount of the repairs and holding costs; a working knowledge of renovation, including how repairs are made and how much they should costs;

a trustworthy general contractor, or a team of subcontractors;

a good real estate agent or the ability to show and sell the property yourself.

• Good for: people who have renovation experience and access to cash who want relatively quick, cash profits with no long-term obligations.

Wholesaling

• The basics: find a 1-4 unit property that can be purchased at least 30% under market (typically because it needs significant repairs), get a purchase agreement with the seller, assign your right to purchase the property for a fee of $5,000-$10,000 to an investor. The investor steps into your shoes and purchases the property at the agreed-upon bargain price, then fixes and retails it for a profit or fixes it and rents it for cash flow. • The benefits: a cash profit of $5,000 or more in 3 weeks or less with NO repairs or cash out of pocket

• The hassles: creates a one-time profit–if you want another check, you’ll have to find another deal; taxed as a short-term capital gain.

• What you’ll need to do it: the time and ability to talk to many, many sellers (usually takes about 20-50 contacts to find one good deal; contacts with a number of investors who will buy your contracts, and who can buy the properties with cash

• Good for: anyone who needs quick cash; new investors who have no experience in renovation or rental management; people with limited cash and credit.

Lease/Optioning

• The basics: find a 1-3 unit property that can be purchased 20% under market or with favorable seller terms. Lease the property to tenant who wishes to purchase it after 1-2 years. • The benefits: 3 paydays–one in the form of an “option fee” of 1%-5% of the sale price when the tenant/buyer moves in, plus monthly cash flow from rents, plus a final payoff when the tenant/buyer purchases the properties; tax benefits similar to renting; tenant/buyer typically takes care of repairs and maintenance as part of his option agreement.

• The hassles: not every tenant/buyer purchases the property, which means you have to start the process all over again.

• What you’ll need to do it: 10%-20% of the purchase price in cash as a downpayment plus good credit, OR a cooperative seller who’s willing to carry the financing privately; access to cash in the amount of the repairs and holding costs; a good mortgage broker who can get financing for “B” and “C” credit buyers.

• Good for: people who want medium-term cash flow and tax benefits without the management hassles of renting

Selling with Owner Financing

• The basics: find a 1-3 unit property that can be purchased 20% under market or with favorable seller terms. Sell the property with owner financing (usually a land contract, contract for deed, or seller-held mortgage) to a homeowner.

• The benefits: Cash flow with no management or repairs responsibilities

• The hassles: Foreclosure, if the buyer stops paying; no tax advantages

• What you’ll need to do it: In order to sell a property with an owner-held mortgage, you must own it free and clear–in other words, pay cash for it. The sell via land contract or contract for deed, an understanding lender–these strategies both trip the due-on-sale clause in a typical mortgage.

• Good for: people who want medium-term cash flow without the management hassles of renting

And yes, there are other strategies for making money in real estate: becoming a private lender, investing in group homes, and developing land are just a few. But these 5 are the easiest to understand and easiest for most people to handle in terms of the cash and credit requirement.

None require special licenses, and each is a proven money-maker.

But as you can see, each also provides different benefits and requires different types of skills and resources to accomplish.

Choosing the right strategy (or combination of strategies) will allow you to reach your income and wealth goals with a minimum of work; choosing the wrong ones is a recipe for financial disaster.

Vena Cox - A. Intro - General Mistakes - Vena Jones Cox

Want a sure-fire way to get rich?  Invest in real estate.

Want a sure-fire way to go broke and be miserable?  Invest in real estate the wrong way.

Real estate has long been the most effective vehicle for building wealth. Andrew Carnegie is credited with saying, “90% of the millionaires in the United States made their money investing in real estate.” Read the best-sellers Rich Dad, Poor Dad and The Millionaire Next Door, and you’ll quickly see that experts and regular folks alike agree: real estate is an awesome way to earn income, build wealth, and minimize taxes.

But people who have never invested in real estate don’t always have a clear picture of what it’s really like. They compare real estate investment to other, more familiar investments, like securities. They figure that you buy a property, do some repairs, put a tenant in it, and wait for the checks to start rolling in–sort of like dividends. Or they imagine that buying bargain properties and reselling them is similar to day trading–all you have to do is call a broker and put the property on the market, and, presto! A buyer comes along the next day.

Real estate investing is not like the stock market. This is both its strength and its weakness.

Unlike the stock market, real estate doesn’t lose 30% of its value overnight, except in certain areas at certain times–and these mini-bubbles are almost always predictable.

Unlike the stock market, real estate is always in demand–people always need a place to live, even when they don’t need new cars, or restaurant meals, or gadgets.

Unlike stocks, real estate is both highly leverageable–you can OWN a property by paying less than 10% of its value up front–and highly tax advantaged–you can even sell at a profit an not pay capital gains taxes if you handle the transaction right.

On the other hand, real estate is, unlike the stock market, a hands-on investment.

Properties have to be managed, and repaired, and maintained, and kept occupied. There is liability associated with owning property that is simply not a factor when you’re a stockholder. No stockholder was ever sued personally for discrimination, personal injury, lead paint or mold issues, or any of the variety of other problems that could affect a property owner.

And finally, real estate, unlike securities, is relatively illiquid. A burnt-out shareholder (if there is such a thing) can rid himself of his investments in moments; a burnt-out landlord, depending on the number and type of buildings his owns, can expect to wait months or years to divest himself of his properties.

A successful real estate investor is one who has determined in advance what it is he hopes to get from his real estate; who has chosen his properties, areas, and strategies wisely, and who has educated himself thoroughly on the possible pitfalls, and taken steps to overcome them. A real estate investor cannot truly be a success unless he reaches his financial goals and does so in a way that allows him to enjoy the fruits of his labors.