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Instant Appreciation - The Higher Use Option

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Many properties that you purchase have only one use. A single family house is a single family house is a single family house. At least most of the time.

For the purpose of this article, we will use a single family house as an example but it could really be any type of property.

For the most part, real estate is bought and sold in the class it is presented. Thus someone sells a single family house to a person looking for a single family house. A warehouse is sold to someone looking for a warehouse, etc. This same to same modality covers more than 99.9% of all real estate transactions. And in most cases, it is the only option.

But sometimes, you can buy a property in an area where either current zoning or potential rezoning of the property offers some attractive options.

For instance, perhaps that single family house is right next door to an attorney’s office and is sitting in a section of town that allows for professional offices Since the zoning is already approved, it is usually simply a matter of filling out some paperwork to turn that single family house into a professional office. (There are quite a few homes turned offices in our town and in towns all across the world.) Now the house you purchased is considered an office and its value is now dependent on the monthly rent you can charge for that office rather than the appraised value it had as a house. If the rent is high enough, you just added instant equity to your property.

Another example is when you purchase a house on a large lot in a neighborhood where the zoned lot size is much smaller. If the house is situated correctly, you can break up the extra land into one or more lots to either sell outright to build new houses and sell them. To make this determination, you would need to get a survey done and submit it to the zoning board for approval. But consider that the cost of the property probably was not much more than the cost of the other properties in the area so the cost of the additional lot(s) is going to be very small compared to its value.

A third example is buying a large house in an area zoned multi-family. A quick trip to the zoning office with a plan to break up the large house into apartments is usually all it takes to convert that big single family house into a two family, three family or four family house. This is yet another opportunity to add value to your property by looking it as a series of possibilities rather than a fixed, static entity.

So next time you are looking at a property it might be worth doing a little extra footwork and seeing what potential zoning changes could be made to give you even more value if you decide to close on the deal. Heck, if you are unsure of the ability to get the zoning changed, you could negotiate a subject-to clause in your contract and make it subject-to the zoning change being approved before purchase.

The above is just one of the many ways professional real estate investors evaluate properties to determine if they are first a good deal and second a good deal that can be made into a great deal.

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Real Estate Investing - From Finish to Start

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Sort of a strange title but one that most successful real estate investors live by.

So what does it mean?

It simply means that before any successful real estate investor makes a purchase, that person already knows the exit strategy for that particular investment. And by knowing the exit strategy, the investor knows how to structure the deal.

Let’s take a look at a few examples.

Example 1: An investor wants to buy a fourplex apartment building to add to his portfolio as a long term investment that will generate a positive cash flow from day one.

In this instance, the investor is going to look at two things. The first is the acquisition and holding costs vs revenue generated. The second is the long term trend for the neighborhood. Since this acquisition is meant to be a long term hold type investment, the investor may not be interested if the trend for the neighborhood is negative. And he definitely won’t be interested if he can’t get the numbers to work to give a positive cash flow from day one based on his projections of vacancy factors, etc.

Example 2: An investor purchases a 25, 000 sqft office building with the intent of increasing its cash flow by 50% in the next twelve months and then selling it.

Since this is a short term investment, the investor has to know what can be done with the office building. Is it in a place and a market where it can be filled to 100% occupancy if it is currently not at that level? Are the rents significantly below market? Is the investor locked in by long term lease commitments or can the tenants be handed a new lease on the day after closing? Can the building be renovated cost effectively to make it more attractive to higher paying renters?

If the investor can get a yes to the above questions that are relevant to the particular property, this could be a good investment. If some things can’t be changed, like being locked into long term below market rate leases, this is a deal the investor will pass on because it did not meet her exit requirements.

There are obviously tons more examples that could be offered but with these two you get a clear idea why the exit strategy would be so important in each of the above two examples. Without knowing it, the investor could make a choice that turns a seemingly good deal into a don’t wanter deal.

End result - do your planning before you start knocking on doors. And make sure any potential deal fits your checklist of requirements before you open negotiations.

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Is now a good time to invest in real estate?

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With all the market toumoil, prices crashing, tight money supplies, is it a good time to invest?

Yes AND No.

Why both answers? It all depends on your expected outcome.

For instance, if you are investing in a declining market and expect to make your money from price appreciation, you are probably making a mistake. Even if you are fortunate enough to catch a property at the exact market bottom, the chances are that we will not see the almost nationwide rapid appreciation that was occuring before the "crash."

But if you are purchasing discounted properties for a quick turn at below market rates or purchasing for cash flow AND the cash flow works, it can be a very good time to buy additional properties for your portfolio.

The simple fact is that no matter what the market is doing… appreciating prices, flat prices or declining prices, real estate investors are making money. But not every real estate investor understands every market enough to always profit from it.

The true key to success in investing is to be sure each deal works now and for any forseeable future trend. Many times that means passing up on many seemingly good deals where the projected cash flow is perhaps break even or slightly negative or where the holding costs during rehab are cutting it close to the edge.

We are currently in a time when end buyers have many choices in housing. In some areas, the inventory levels are stated in years rather than months. That means that if you as an investor are buying a property at retail in that market, there really needs to be a strong and convincing business plan to justify that purchase. Something like the property being in a prime location where some small renovations will deliver proven cash benefits to you. If not, you should not be looking at that deal.

Another thing to consider in your investing right now is migration demographics. For instance, there are many, many houses in the rust belt sitting empty with no buyers even at 90% off the last sale price. While buying a house for $10,000 or less in these areas may seem a great bargain, there are two reasons they may not be. The first is that the property tax charged on the property may not reset to the lower price so you may be stuck paying property tax on a value of $100,000 for that bargain house - and in some areas that can be quite a bill. The second reason is that the migration demographic suggests that people are leaving these areas. Declining populatins means less demand for housing - both for purchasers and renters. If you have a declining market, that bargain property could sit empty - with no takers to either purchase it or rent it.

Untimately the key is to really understand the market you are investing in - and that includes future trends in terms of projected job growth, population growth, the tax situation and the insurance situation. If one or more of these factors in your are are not positive, you need to do that much more homework before jumping into a deal.

To sum up… the deal is the thing. If all the parameters work on the deal, it will work in that market. If all the parameters do not work, you could be investing in trouble no matter how good the deal seems.

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Six Reasons to Join a Real Estate Investment Club

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Whether you are just getting started or are an experienced real estate investor, there is great value in joining a real estate club in your city. If you are in a city with an active real estate club, you will find it an invaluable resource in a variety of ways. You can be exposed to new ideas from members in your own community, shop and find deals, arrange creative financing, get referrals and much more.

 

Here are six powerful reasons to join and be active in your local real estate group.

  1. Networking - Networking is really the number one reason for joining a real estate investment club. In any fair sized city, there will be anywhere from 50 to 200+ people at the monthly real estate meetings. That is a large number of folks out there just like you doing deals, having specific knowledge of neighborhoods, creative ways to make a complex deal workable and much more. Chances are only about 10-20% of the group are really active and extremely knowledgeable with the rest either learning or just doing a small number of deals a year. So not everyone can help you with every issue. But with those percentages, you can find an answer to just about any question in the group or from contacts that the group has.

    Of course networking works only as well as your skills at networking. If you go to the monthly meetings, take a seat, listen to the talk and leave you won’t get full value out of the meetings. If you are new, you may find it more comfortable to do this for a few meetings but you really need to stretch yourself and strike up conversations with fellow attendees. You will find the conversations and relationships you build rewarding - personally, professionally and financially.

  2. Monthly Education Program - Most real estate groups have a monthly keynote speaker discussing some aspect of real estate investing. Sometimes it is a local speaker discussing strategies that work in your city right now. And sometimes it is a national speaker talking about his method of investing in real estate. While all education is good, a local speaker who is an active investor is a gold mine. Getting current information about your local market and trends in the local marketplace is a huge help in investing - and local speakers are accessible so you can network with them on a variety of issues that are germane to the local marketplace.
  3. Shopping Deals - Did you find a great deal that doesn’t fit your investment parameters. You can often shop it to other investors at the meeting. If it is a deal you have under contract, you can sell the contract and make a few bucks. If it is a deal you just know about but don’t have under contract, you can make a lasting friend by passing the information along.
  4. Finding Deals - The reverse of number three. If you put the word out about the kinds of deals you are looking for, other members will approach you with opportunities that are perfect for your investment portfolio.
  5. Finding Funding - Funding is a foundational key to real estate investing. Some group members offer direct funding and many have access to private and hard money lenders - or high level contacts at banks and other traditional financing institutions. By chatting up your deal and your needs, you are likely to find a way to make the funding work with the advice or assistance of another member of the group.
  6. Getting referrals - Another cornerstone of real estate success is being able to work with quality people - Realtors, insurance agents, attorneys, contractors and craftsmen. Anyone who has been alive for any length of time knows that quality in any service industry can vary greatly. By discussing your needs with other investors and getting referrals you can take a shortcut in the school of hard knocks and work with the better service people in your community.

There are of course many more benefits to being a member of a local real estate club. The bottom line is that as an investor, your network is important. A real estate investment club is a great place to build/supplement your network and it is highly recommended that you use this valuable resource to your fullest ability. The positive result of this will show up in your bank account pretty quickly.

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Overcoming Seller Resistance

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If you purchase your investment properties from a private party (i.e. for sale by owner), you have the opportunity to interact with and negotiate with the seller directly. There is no realtor to present your offer.

As long as you are comfortable with real estate contracts, this is really a good thing.

If a realtor made your offer, it would be passed to the selling agent who would present it to the seller. And it would go something like this.

"Joe - we got an offer. It is for only $150,000. It is nowhere close to the $200,000 we can probably get by waiting but that is up to you."

Not exactly a powerful close technique, is it? If I was the seller, I’d reject the offer.

And the same thing will happen in a private sale if you present it in such a cold manner. The words would be different but just coming out and saying "Sorry, $200K is way too much. The best we can do is $150K."

But suppose you took a different approach. One that spelled out in detail how you arrived at offering price of the house. There are very few steps and it makes many deals work - or at least keeps the line of communication open.

Step 1: Build rapport as you are examining the house. Point out defects but don’t beat the seller over the head with them. The seller knows they are there and is just hoping that they will slip by as part of the price negotiations.

Step 2: Discuss the neighborhood, how hard it is to sell a house, how long it can take to sell a house in the neighborhood and the challenges of having your life on hold while selling.

Step 3: Assuming that you believe that $200K is a fair top of the line retail asking price, show the logic of a lesser price before presenting it.

a) Show the typical discount from asking price for the neighborhood (5%, 10%, etc.?)

b) Show how much commission they would pay a realtor if they used one (and explain that the other houses that sell at the discount in "a" have a realtor commission figured into the prices.)

c) Go over closing cost concessions a buyer typically asks for - 1-2 points, etc.

d) Go over the repairs needed to make the house a nice, clean problem free house.

e) Explain that you are an investor and need structure the deal to make a reasonable profit on it - something like 10% is fair.

As you do each step, calculate the costs and show the discount from the asking price. If you have rapport with the seller, he may not like what he is seeing but he won’t argue with it as the number keeps going down and down.

After the process, you arrive at your offering price and the seller saw exactly how you got to that number. If it came to $150K, it is no longer a number just thrown on the table. It is a reasoned and emotionlessly calculated number based on reality.

Does this process guarantee that the seller will take your offer? No, it doesn’t. But it does pretty much guarantee that the door won’t be slammed into your face and allows for more negotiations to occur - negotiations that might result in a profitable deal by the time the dust clears.

Give it a try next time you are negotiating directly with a seller. You might find yourself pleasantly surprised with the results.

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FICO - The Inside Scoop

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Your FICO score - long a secret scoring formula concocted by Fair Issac - has become a bit more transparent in recent days.

Fair Isaac, at their website myfico.com, has recently added a discussion forum where they answer visitors questions about FICO and how it works. Just go there and click on forums and read to your hearts content. Or ask a question. They answers are quite explicit.

The forum is broken up into several useful sections all related to credit. The ones of most interest to real estate investors include:

  • Understanding FICO Scoring
  • Using myFICO Products
  • General Credit issues

There are over 20,000 messages covering every imaginable technique for manipulating credit and its impact on your FICO score.

If you ever wondered if a technique - like piggybacking on someone else’s credit by securing a joint credit card - would benefit you and how, this is the place to get the answers.

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Understanding Your FICO Score

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If you are dealing with any type of institutional lender for your real estate investments, you literally live or die by your FICO score. But do you know what it is or how it is calculated.

If you are like most people, it is a bit of a mystery,

Fair Isaac has published a free ebook called Understanding your FICO Score which explains in great detail how a FICO score is calculated and why it is used by lenders to determine your creditworthiness.

You can download a copy here.

On the same page, you can also download a free book titled Identity Theft and You. It gives a variety of good tips to protect yourself from identity theft.

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The Hidden Costs of a Rehab Property

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Buying a rundown property, rehabbing it and selling it for a profit about the purchase and rehab costs has long been a standard tool of the experienced real estate investor. Profits on a properly planned rehab deal can be spectacular. Especially when you have all the elements in place to perform rehabs in a smoothly running manner.

In the past several years, many would be investors have been attracted to this marketplace, primarily because of shows like Flip This House, Flip That House, Property Ladder and others. And of course, the bookstore shelves are filled with a variety of books that teach you how to rehab a house.

The TV shows are very exciting because in every instance, they show the rehabbers making a spectacular profit no matter what unexpected problems crop up during the rehab process. And that gets naive investors very excited and prone to believe they can do this without any education. After all, it is so easy to make 20K, 30K or more even when mistakes are made.

Unfortunately, this is not a case of TV reflecting reality. What a surprise, right.

Let’s look at a real scenario in a real market. We will break it down into its components.

We purchased a fixer upper fo 43K. We estimated it needed 20K in repair work and would be work 100K when finished.

Lets start with the purchase costs. First the financing. We went to a hard money lender. The costs were 4 points plus 13.75% interest for 6 months, renewable for another 6 months at no additional points. They financed 100% of the purchase price plus 100% of the rehab costs. That represents a loan of $63,000.

Closing costs were 4 points to the lender and other closing fees totaling around $2500 (including one year prepaid property insurance), for a total acquistion cost of about $5000 in fees. The $43K was paid to the seller and the other 20K was put into a draw account that we could access as we hit specific milestones in the project.

Holding costs - Every month, we had to make an interest only payment to the hard money lender of approximately $700/mo. There were costs for electricity, water and sewer during the ownership period of about $100/mo. There was also the cost of money borrowed against a credit card to pay the contractors in between draws. For the total renovation time - about 2 months - this ran about $500.

Rehab costs - Total rehab costs ran $22K - $2K more than was calculated in the loan. So that came out of our pockets.

Selling costs - The selling costs include time on market to sell, real estate commission (at 6%) and closing fees - including property taxes.

The total time the property was owned was 7 months before the sale to the end buyer was finalized. It sold for 97K.

Lets run down the expenses and profits.

Sale price $98,000
Purchase Price ($43,000)
Purchase Closing Costs ($5000)
Holding fees ($6100)
Total Rehab Costs ($22000)
Sale Closing Costs ($7800)
   
Total Pre-Tax Profit $14,100

All in all, not a bad profit for finding and managing a small rehab project. But it is a far cry from the $35,000 that would have been reported on one of the Flip This House type of TV shows because they never include all these extra costs. I guess financial reality makes for too much complexity for the viewing audience.

So, is it worth a new investor’s time and energy to learn how to do rehabs? Absolutely. Can a new investor, or even an experienced investor, get burned when doing a rehab? Absolutely.

Numbers are absolutely critical when you make a rehab purchase. Be sure you understand all your numbers and make sure there is enough of a cushion there to ensure a profit when you finally close with the person who buys your house. Do this, get good at it, and you can make a very serious income year after year in any real estate market.

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City Cost Of Living Calculators

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Here are a collection of cost of living calculators run by various websites. The tools are interesting forecasting tools and are useful if you are thinking of buying real estate in other areas. They will give you a snapshot view of the costs of living in that area compared to where you currently live - valuable information when evaluating things like potential offering prices for investment houses.

Bankrate—com: http://www.bankrate.com/brm/movecalc.asp

CityRating—com: http://cityrating.com/costofliving.asp

Homestore.com: http://www.homefair.com/homefair/calc/salcalc.html

Relocation Essentials: http://www.relocationessentials.com/aff/www/tools/salary/col.aspx

Salary-com: http://swz.salary.com/CostofLivingWizard/layoutscripts/coll_start.asp

CNNMoney.com: http://cgi.money.cnn.com/tools/costofliving/costofliving.html?step=form&x=36&y=3

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The Power Of Thank You Notes

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A simple thank you note is one of the most powerful ways to build a strong relationship with those who are important to your real estate investing career.

Just think back to the last time you received a thank you note. Chances are it was from your insurance agent or the car dealership of the last car you purchased. You didn’t think too much of these mass produced notes, did you?

But take a moment to think back to the last time you received a hand written, specific thank you note. Chances are it was from the last wedding you attended. And the note most likely made reference to something specific to your participation.

I bet when you received that one you felt good - because the other person reached out to you in a very personal way.

Why not do that with all the professionals you reach out to every day - your realtor, closing attorney or title company, the contractors you work with AND even FSBO properties you looked at?

Do you think they will be favorably inclined towards you the next time you make contact with them? I guarantee that when they speak with you next it will be with fondness and respect (as long as the initial encounter was favorable.)

Now before you rush off and sit at your computer to dash off a thank you note, stop and think a bit. Is email really personal? Or does it just get buried in with all the other emails that were received.

I strongly recommend that a thank you note be hand written in your best handwriting and physcially mailed to the person. A card with the handwritten note is better than a note on a plain piece of paper but both are effective. Better yet is a gift if the interaction warrants it.

A real life example.

When my wife and I moved from Florida to South Carolina, the coordinating of our house sale in Florida and our purchase in South Carolina became a bit complex and the back office worker in the SC real estate office handling everything for us up here had to do extra work. She never complained and always said it was just part of her job (which it was) but when it was all over, we sent her a flower arrangement from proflowers.com.

She was simply stunned that someone would do that. Apparantly in all the years she worked there, we were the only client who did that to show their appreciation.

And now, even more than a year later, whenever we talk with her she still comments on those flowers and always goes the extra mile for meeting our needs. All in all a $40 investment well spent.

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