Monday, January 23, 2012

Finding and Evaluating Property for Real Estate Investing

Today, investing in real estate can be easier and more profitable than ever. But whether in a healthy market or a down one, and with new tools to find and evaluate potentially profitable properties, you can still lose a lot of money in a short time.

To maximize the odds of winning, consider these tips...

The process of finding those 'diamonds in the rough' of real estate investing has been revolutionized by the Internet.

You can spend hours online finding, evaluating, and comparing descriptions, prices, photos, and useful legal info about properties close by your neck of the woods, or thousands of miles away. Unless you restrict yourself to FSBO (For Sale By Owner) ads on eBay, Google Base, or Windows Classifieds, though, prepare to pay sometimes hefty realtor fees.

Visit Realtor or estate agent businesses.

If you can afford it, obtain an MLS, a multiple listing service, and get the same information they get. In some locations, a license is required, even if you have the cash to play.

Even if you use the web to find a great value, be prepared to do some 'leg work'.

The only way to judge property properly is to do due diligence. You have to visit the property and the surrounding area. Is the neighborhood maintained in a way that won't depress the selling price? While you're driving around, look for FSBO signs, For Rent signs, and talk to some of the neighbors. After all, the next door neighbor might know something about that impressive it turns into a swamp after a few days of rain!

Be prepared to make more than one visit, in different kinds of weather and at different times of day, if possible. Property, land and houses, look and act different in the cool of the night than they do in the heat of the day.

And the best way to check for a leaky roof is to go when it's raining - exactly the weather you don't enjoy evaluating property in...right?

Well, neither will your competitor for that property. Going that one extra step could be what puts you ahead in the race.

Information is power.

After the informal inspection, you can strike some sort of contingent deal.

'Contingent', here, usually means the deal is dependent on a satisfactory professional inspection. Find an inspector who is experienced and reliable, even if you have to pay a little more. The price will be repaid many times over, especially if you use them regularly in the future.

Learn the craft yourself if you have time and interest, but at minimum learn at least enough to keep the inspector honest. Most are, anyway.

Review the report carefully. It's not required that everything is 100%, but every major and minor flaw should be recorded. Leaky plumbing or roofs, stained carpets, damaged walls or floors, inoperative air conditioning or heating systems, etc. Look especially for any standing water in basements, near foundations, etc.

Everything is negotiable, so there's no rule about who pays for repairs, if anybody. But information is power. Still, be realistic. Very few properties, even newly constructed ones, are perfect. If they are they're expensive enough to eliminate your profit, unless you plan to keep the investment for an extended period.

If you are really serious about real estate investing, educate yourself. One place to get started is at your local library. There are also many publications and services available online, but, before you shell out a ton of money, pick up a copy of "Investment Property Success", and study it carefully. You can download a free chapter to get a feel for the book, and, if you like what you see, you can order your own copy for immediate download for less than $30.

Now, I am going to be a smart-aleck.

If $30 is too much for you to pay for a quick, in-depth look at the world of real estate investing, then you do not have enough money, or moxie, to get into the field. If you just want to jump in feet-first without at least studying some equivalent training materials, you will kiss a lot more than $30 good-bye! If you spend the $30 and realize that real estate investing is not for you, you just saved yourself thousands of dollars.

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Tuesday, January 03, 2012

Real Estate Investing - Creative Financing For Investors

For decades, just about the only way to finance a property purchase was 80-20, i.e. 20 percent down, 80 percent on loan.

Certainly, there have been many who put more down, but 20 percent was considered the bare minimum.

Happily for the real estate investor, things have changed.

There are now a dozen or more ways to finance a property purchase, whether for pure investment or to acquire a primary residence. One common method is to have more than one loan, usually in the form of a second mortgage, which is often used to finance the down payment.

The buyer puts 5 percent in, and effectively borrows the other 15 percent on a separate loan, usually at a much higher interest rate.

While it's nice to invest less for the same property, the downside is not limited to the higher interest rate on the second mortgage loan. Since the buyer doesn't meet the standard 20 percent minimum, lenders almost always require PMI (Private Mortgage Insurance). Fees can be pretty hefty for this coverage.

Though it's certainly theoretically possible to have the lender remove the PMI requirement after enough payments have been made, it rarely happens in the real world...or "real estate" world. In theory, once the loan(s) have been paid down so that the LTV (loan-to-value ratio) is at 80 percent — usually by a combination of paying down the second mortgage and appreciation of the value of the property - the lender will be willing to consider removing the PMI cost from monthly payments.

Most often, before that happens, the loan is refinanced or the property sold.

The ambitious real estate investor, however, can find other sources of financing. When considering property in a new development, such as a planned community or new housing tract, manufacturers will often be willing to fund a home loan for early buyers. Such loans are frequently available at only 5 percent of the purchase price.

For the really daring in the world of real estate investing, it's possible to 'buy' a property, then sell it, without ever owning it - at least not for long. It is indeed possible to buy a property, establish a contract, and then sell the contract for anywhere from $500-$5,000 without ever taking possession or even being on the title. Profits on this form of real estate investing are usually smaller, but the cash is obtained quicker, though such deals require excellent credit.

'Sub2' deals are another form of creative financing. The typical 'subject-to' deal involves having a seller deed you the property while leaving the existing mortgage in place. You, the real estate investor, never legally assume the loan, but simply start making the payments. There are lots of variations on this new way of buying property.

This one is NOT recommended for the beginner.

Another way to finance a property investment is by forming a limited partnership. Types of arrangements cover the spectrum. In some, each partner puts up some percentage of the cost, usually half and half, but sometimes profit is apportioned according the original percent invested. In some cases, it's possible for one partner to invest money, while the other(s) performs services...such as repairs on a 'fixer-upper'.

The deals are as varied as the people involved.

For those with low incomes, with military service, or other special circumstances various government loan programs are available - though they're usually not good for serious real estate investing as they are commony limited to individuals intending to occupy the property.

In the last few yeras, it's even become possible to fund a property purchase with personal credit cards, but there are several obvious downsides to this method. Apart from the substantially higher interest rates, lenders will look at all outstanding debt when judging whether to grant a loan on the remaining balance. Taking out a cash advance to cover a shortfall between the needed 5-20 percent down will usually get you turned down.

Friends, family, and other sources of money are usually viewed the same way, unless you can prove to the bank that the money is a gift and not just a loan.

Mortgage lenders have seen it all! Don't try to fool them.

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Saturday, December 24, 2011

Commercial Real Estate Investing: Complicated but Profitable!

According to a recent study in The Economist, residential property investment in developed countries amounted to $48 trillion, while commercial real estate investment (CREI) was 'only' $14 trillion. Though the number may be smaller, CREI is much more complex.

Real estate, unlike stocks or other investments, is always local - property is always somewhere, but somewhere specific. The actual investor may be far away, but the property has a location that forms part of its local market.

That affects how it's appraised, bought, used and sold. Unlike residential property...even though one in four homes are bought by investors...commercial property is usually intended to be used for a business purpose.

It may be a multi-dwelling apartment complex used as residences by others, but to the investor it's a commercial enterprise. As often, the commercial property is a multi-tenant commercial building on land zoned for that purpose. That introduces different considerations for valuing, financing, leasing, maintaining and a host of other tasks.

The commercial real estate investor has, usually, to invest a larger amount...requiring superior credit and incurring greater risk...and to estimate capitalization rate (cap rate) and Gross Rent Multiplier (GRM).

The cap rate is calculated by dividing a property's annual net operating income by its purchase price. Historically, good investments had a 10% cap rate, but the last few years has seen that decline to 8% corresponding to a greater risk and lower expected return. The GRM is arrived at by dividing the purchase price by the property's monthly gross operating income. These, along with consideration of assessed vs appraised value, and comparables, total income and replacement costs form the hard-fact base for estimating the worth of a deal.

Commercial real estate investment properties are at greater risk of unpredictable changes in general economic conditions. A building that enjoyed a 100% occupancy rate can quickly become only half full because of factors far outside the local market. Events in Asia or elsewhere around the globe can turn business conditions for some upside down overnight, whether the tenants are located in California or Barcelona.

Commercial property real estate investment requires increased knowledge of law, maintenance and finance. Zoning, leasing regulations, and other legal issues are more complex than for residential property. Where properties are rented, rather than just bought and sold — often the case with CREI — owners usually have to consider large electrical, air-conditioning and security systems, along with fire suppression, telephone and Internet facilities. Even plumbing is more complicated in commercial structures. Mortgages are more complicated and insurance is more costly.

The exception is the triple-net lease. In this arrangement the tenant is responsible for all the expense and arrangements for maintenance and repair as well as insurance.

But not to be gloomy, there are great potential rewards from CREI. The risks are greater, but often the return is as well — especially during good economic times. And the satisfaction of being part of sustaining and helping grow the dreams of other entrepreneurs is a great bonus for the commercial real estate investor.

And, after all, sometimes, "more complicated" means "more interesting".

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Tuesday, December 20, 2011

Cheap Repairs Can Make for Big Profits When Investing In Real Estate

You want the most profit you can get for that property you sweat blood to buy. Is there anyway to improve your chances, without investing a lot more? Fortunately, there is.

Even a person who is not really very skilled in carpentry, plumbing, and other traditional trades can improve the saleability of a property with modest effort and a few common tools.

One of the first things a potential buyer will notice when viewing your property is the condition of homes and other properties around it. Encourage your neighbors to clear away children's toys, junk cars, or other unsightly objects before buyers come looking.

If necessary, you can offer to mow the lawns of those to the left and right, or take their trash to the dump as an incentive. A small cash offer oin the event of a successful sale might also motivate cooperation.

At the same time, you can show them that you're getting your own house in order.

Curb Appeal

Mow the lawn carefully and repair any bare spots. Trim the edges. And invest in a few dozen inexpensive flowers and plants if the season permits it. The exterior is always what is seen first and first impressions linger.

Since a professional home inspection will almost always be done prior to a final bargain being struck, take the opportunity to make those inexpensive plumbing repairs BEFORE showing the house. Some of the more expensive ones might wait, and may even be used as a bargaining chip. But fix that leaky sprinkler head that sprays outside the tub and replace that dripping bathroom faucet.

Replacing the carpeting in a house, or even one room, can be expensive. But getting it cleaned can cost a lot less. Repair any small damage or try to cover it with a piece of furniture. Clip a piece of carpet from the back of a closet and patch the room carpet with that if necessary. Eventually, you'll have to show every flaw when you have a concrete deal. But it doesn't need to be the first thing they see. Replace those old welcome mats and small entrance rugs with new ones.

New screens are another low priced quick-fix which can make the exterior look fresh and new. To save even more, you can replace the screen itself with mesh and rubber kits, provided the frames are still in good shape.

Definitely, replace any cracked or broken windows. You'll usually have to do this anyway as part of closing the deal. Of course, all the windows should be cleaned thoroughly to give that shiny new feel. Even a brand new house that's dirty will fetch a lower price.

If your house has air conditioning and heating ducts, replacing defective or worn conduits can get very costly. But many parts in a house that are not seen use silvered duct tape anyway, so patch any holes carefully to give a professional look. Replace old filters to give the appliances a newer look and the air a fresher smell.

A bit of spackle and a coat of paint on those rooms that have seen accidents needn't cost a lot and don't take a lot of effort. Be sure the work is done carefully, though, or it can come out looking worse than before you started.

A buyer that sees that you've made efforts to keep the property up will be more inclined to offer a better price. Think of the last time you bought a car. Didn't you favor the one that was well maintained? You were probably willing to pay a little extra to get that one. They will be too.

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Monday, July 12, 2010

Real Estate Investing - The First Time

Buying a property for the first time, whether as a home or purely an investment, is exciting and risky — and one because of the other. You read or hear about rapidly rising prices and think 'I gotta get me some of that!' Excellent idea — if you keep in mind, too, that there are risks. Here are some suggestions about how to keep the excitement, profit from the opportunity, and minimize the risks.

Before investing in your first property, do some homework. You don't have to get a PhD in Real Estate, Finance, or Law, but you need to get a good chunk of information and think about your own situation realistically. Buying and selling real estate is not so simple as changing cars.

Familiarize yourself with the market you're interested in and find out what the average property is going for. It can vary considerably even within a single housing tract. That information is easily gained by talking with local Realtors or looking on the Internet.

Study a little bit about legal restrictions and requirements, about contracts, escrow, titles, insurance, closing procedure, and the roles different individuals play in the process. Each has a cost. Shop around.

Once you're ready to take the plunge the next step is to find a potentially profitable property. The Internet makes that a lot easier these days, but you need to drive around the area, too. Look for 'For Sale By Owner' signs and scour the local newspapers for 'For Rent', abandoned properties, etc. And talk with friends, family, and local Realtors.

Look at properties nearby. Are they maintained in a way that will not depress the selling value of your property? Even if you buy a 'fixer-upper', and turn it into a castle, it can be tough to sell profitably in a deteriorated neighborhood.

Once you've found that diamond in the rough, unless you've won the lottery or invested well in the stock market, you'll need to finance the purchase. Bzzz! Mistake number one. You should have your financing in place BEFORE you find a property.

Talk to mortgage lenders — banks, mortgage lending companies, Internet home loan businesses. Discuss how much you want to invest and answer their questions about income, etc. They'll examine your credit history, so make sure your report is clean of any outstanding negative marks.

Ask them about financing options. Today there are a dozen different ways to fund a real estate investment, with variations in rates, up front funds required, and tax consequences. You're about to put out a chunk of money, but also to take on a substantial liability. Be prepared.

Got that dream deal and ready to buy? Perfect. Negotiate the best price you can, without expecting to get something for nothing. The seller wants to get as much as possible, and you want to pay as little as possible.

Out of that tension can come two satisfied parties, or two individuals who both lost. Be firm, but prepare to compromise. You want the seller to repair that bad water heater prior to closing, the seller wants you to give them an extra two weeks before having to move. Give a little, get a little. The alternative is usually a lot of expensive and life-draining legal action. Strike a mutually beneficial arrangement and you'll save money and stress.

Enjoy your first time. It's an adventure!

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Saturday, July 03, 2010

Acting Into Appraisals

Investments, terms for loans, processes, and other parts of real estate can often be overwhelming to someone who hasn't received a degree in real estate. If you are looking for definitions and actions behind those definitions, then don't forget about getting the right appraisals. This will help you if you are looking for the right market for your home.

An appraisal consists of a professional opinion that is made about a property. Included in this opinion are several factors that allow for this statement to be made. Overall, the appraisal will lead to the conclusion of what the market value is. If the market price can not be defined easily, then someone can look at the different parts of the property and determine what they believe the market price should be. Usually, this will be done by an inspector looking at the various mechanics that may have been swept underneath the rug.

An appraisal is a necessary requirement when one is looking into selling a home or having the property insured or financed. It may use several external resources and definitions of what market value may include in relation to the opinion being made in order to determine the price value of a home. When getting an appraisal, you can expect that the estimates will be based around the various factors that are related to the market at the time. Instead of just examining the parts of the property, an appraiser will also examine the neighborhood and see what everything else is worth in relation to the property.

By appraising a property, you will know how much the home is worth in relation to your own needs on the property and in relation to everything around it. By observing the standards that are set both inside and outside, you will have the ability to know when the timing is right to get involved with your piece of real estate.

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Monday, March 09, 2009

Real Estate Investing - Rental Property Resale

How to Buy Rental Property and Budget For Resale Profits
By James Kobzeff

The object of investing in real estate is to make money. Whether a rental property is purchased and held for months or for years, the goal of every real estate investor is to sell investment property for a profit.

In this article, we want to discuss how to budget for that resale profit by estimating the eventual sales price of a rental property less the total amounts that you will invest from purchase until resale.

Estimate the Sales Price First

Resale price is always dictated by the buyer. Buyers determine the price at which you can sell your income property. Never add your dream profit or rehab costs to your purchase price to estimate a future sales price for that income property. When you plan for profits, start with the price that a reasonably well informed buyer will pay for your property.

How do you determine that price? Research recently sold properties that most closely resemble your building. It is difficult to compare a 5-unit apartment building to an office complex, therefore select properties that are mostly identical to your property in configuration, condition, and location.

Appraisers and tax assessors typically use a market cap rate to estimate rental property value. So determine at what cap rate those properties on your list sold for and apply it to your own property. Don't be shy to confirm the cap rate you plan to use with a local appraiser or a qualified real estate professional.

Stay conservative. Beware of pricing your property as if it were a cut-above the rest. For budget purposes, stay on the safe side and aim for a sales price that sits somewhat below the highest-valued income property in the area. The closer you push toward (or above) the top price limit of the area, the more difficulty you will face in trying to get your price---even when your property is expected to show clear superiority over the others.

Estimate Costs

After you've set a realistic sales price for the property, develop your cost estimates--what it will cost you to achieve that sales price.

Just bear in mind that investors are only going to pay you for the income that the property generates. Cost-plus pricing doesn't work. Investors aren't going to care how much money you put into the kitchens or landscaping, they will just be concerned about how much rent the tenants are willing to pay due to those improvements.

Structural issues, of course, are a different matter. The building must have a sound infrastructure such as a roof, electrical, and plumbing. The warning here is simply not to expect an investor to pay you for a superfluous grand over-hauling of the building.

Learning how much you might spend to upgrade the property is a skill that should develop through experience. In the meantime, until you get the hang of it, you can follow these suggestions.

1. Research materials cost. Visit home improvement suppliers, lumberyards, and hardware stores. Talk with knowledgeable store personnel. Learn alternative solutions to various types of common problems and price/quality trade-offs.

2. Educate yourself. Many home improvement centers offer classes and seminars for beginning remodelers, renovators, and rehabbers. Study books and magazines devoted to this subject.

3. Consult property inspectors. Accompany your property inspector as he performs your pre-purchase inspections. Ask for advice about potential costs and remedies.

4. Secure multiple estimates. Contractors and trades-persons typically provide free cost estimates. Discuss with them alternative ways of curing any property deficiency.

5. Talk with property owners. Ask those who have improved their properties to tell you what they know. Learn from their experiences.

Sales Price - Costs and Profit = Acquisition Price

Let's look at an example: You find a property for sale at $500,000 that after your improvements is expected to sell in one year for $780,000. You further figure that your costs and profit to achieve that sale in one year will total as follows:

Acquisition expenses and closing costs = $5,000

Cost of borrowed funds (interest) = 20,883

Selling expenses @ 6% = 46,800

Materials for fix-up = 42,000

Labor = 22,000

Closing costs at sale = 7,800

Profit = 25,000

Total = $669,443

Result: $780,000 equals what you estimate to be the realistic selling price of the income property so you should not pay more than $610,567 for the property.

Your sales price $780,000

Less: Costs = 144,433

Less: Profit = 25,000

Maximum acquisition price = $610,567

There it is. By setting a realistic (conservative) future resale price and then backing out your costs (also realistic) and required profit, you set a top limit for your acquisition price. With this technique, as long as you accurately estimate all of the costs associated with purchasing, repairing, and disposing of the rental property, you guarantee yourself a profit in your next real estate investment.

About the Author

James Kobzeff is the developer of ProAPOD - superior real estate investment software since 2000. Start working with rental property today. Discover how to create cash flow, rate of return, and profitability analysis presentations in minutes! See how at =>

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Real Estate Investing

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