Getting Started in Residential Real Estate Investing

 

Residential real estate investing is a business activity that has waxed and waned in popularity dramatically over the last few years. Ironically, there always seem to be a lot of people jumping on board with investments like stock, gold, and real estate when the market's going up, and jumping OFF the wagon and pursuing other activities once the market's slumping. In a way that's human nature, but it also means a lot of real estate investors are leaving money on the table.

 

By understanding the dynamics of your residential real estate investment marketplace, and acting in opposition to the rest of the market, you can often make more money, as long as you also stick to the real estate investing fundamentals.

 

Real estate investing, whether you're buying residential or commercial property, is not a get-rich-quick scenario. Sure you can make some fast cash flipping houses, if that's your bag, but that is a full time business activity, not a passive, long term investment. The word "investment" implies that you are committed to the activity for the long haul. Often, that's just what it takes to make money in real estate.

 

So, while the pundits are crying about the residential real estate market slump, and the speculators are wondering if this is the bottom, let us return to the fundamentals of residential real estate investing, and learn how to make money investing in real estate for the long term, in good markets, as well as bad.

 

A Return To The Fundamentals of Residential Real Estate Investing

 

When real estate is going up, up, up, investing in real estate can seem easy. All ships rise with a rising tide, and even if you've bought a deal with no equity and no cash flow, you can still make money if you're in the right place at the right time.

 

However, it's hard to time the market without a lot of research and market knowledge. A better strategy is to make sure you understand the four profit centers for residential real estate investing, and make sure your next residential real estate investment deal takes ALL of these into account.

 

Cash Flow - How much money does the residential income property bring in every month, after expenses are paid? This seems like it should be easy to calculate if you know how much the rental income is and how much the mortgage payment is. However, once you factor in everything else that goes into taking care of a rental property - things like vacancy, expenses, repairs and maintenance, advertising, bookkeeping, legal fees and the like, it begins to really add up. I like to use a factor of about 40% of the NOI to estimate my property expenses. I use 50% of the NOI as my ballpark goal for debt service. That leaves 10% of the NOI as profit to me. If the deal doesn't meet those parameters, I am wary.

Appreciation - Having the property go up in value while you own it has historically been the most profitable part about owning real estate. However, as we've seen recently, real estate can also go DOWN in value, too. Leverage (your bank loan in this case) is a double-edged sword. It can increase your rate of return if you buy in an appreciating area, but it can also increase your rate of loss when your property goes down in value. For a realistic, low-risk property investment, plan to hold your residential real estate investment property for at least 5 years. This should give you the ability to weather the ups and downs in the market so you can see at a time when it makes sense, from a profit standpoint.

Debt Pay down - Each month when you make that mortgage payment to the bank, a tiny portion of it is going to reduce the balance of your loan. Because of the way mortgages are structured, a normally amortizing loan has a very small amount of debt pay down at the beginning, but if you do manage to keep the loan in place for a number of years, you'll see that as you get closer to the end of the loan term, more and more of your principle is being used to retire the debt. Of course, all this assumes that you have an amortizing loan in the first place. If you have an interest-only loan, your payments will be lower, but you won't benefit from any loan pay down. I find that if you are planning to hold the property for 5-7 years or less, it makes sense to look at an interest-only loan, since the debt pay down you'd accrue during this time is minimal, and it can help your cash flow to have an interest-only loan, as long as interest rate adjustments upward don't increase your payments sooner than you were expecting and ruin your cash flow. If you plan to hold onto the property long term, and/or you have a great interest rate, it makes sense to get an accruing loan that will eventually reduce the balance of your investment loan and make it go away. Make sure you run the numbers on your real estate investing strategy to see if it makes sense for you to get a fixed rate loan or an interest only loan. In some cases, it may make sense to refinance your property to increase your cash flow or your rate of return, rather than selling it.

Tax Write-Offs - For the right person, tax write-offs can be a big benefit of real estate investing. But they're not the panacea that they're sometimes made out to be. Individuals who are hit with the AMT (Alternative Minimum Tax), who have a lot of properties but are not real estate professionals, or who are not actively involved in their real estate investments may find that they are cut off from some of the sweetest tax breaks provided by the IRS. Even worse, investors who focus on short-term real estate deals like flips, rehabs, etc. have their income treated like EARNED INCOME. The short term capital gains tax rate that they pay is just the same (high) they'd pay if they earned the income in a W-2 job. After a lot of investors got burned in the 1980's by the Tax Reform Act, a lot of people decided it was a bad idea to invest in real estate just for the tax breaks. If you qualify, they can be a great profit center, but in general, you should consider them the frosting on the cake, not the cake itself.Visit https://www.garrisonpropertysolutions.com/

Any residential real estate investing deal that stands up under the scrutiny of this fundamentals-oriented lens, should keep your real estate portfolio and your pocketbook healthy, whether the residential real estate investing market goes up, down or sideways. However, if you can use the real estate market trends to give you a boost, that's fair, too. The key is not to rely on any one "strategy" to try to give you outsized gains. Be realistic with your expectations and stick to the fundamentals. Buy property you can afford and plan to stay invested for the long haul.

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Lease Option Real Estate Investing: Advantages and Disadvantages

 

 

One creative way to get started investing in real estate is to use a lease option. The biggest advantage of using lease options to invest in real estate is --control. This method of investing, basically gives the investor the right to possess -- be in control of -- and profit from a property without owning it.

 

A real estate lease option contract is a combination of two documents.

 

The lease part of the contract is where the owner agrees to let you lease their property, while you pay them rent for a stated period of time. During the lease period, the owner can not raise the rent, rent it to anyone else, or sell the property to anyone else.

 

The option part of the contract represents the right you purchased to buy the property in the future, for a specific price. If you decide to exercise your option to buy, the owner has to sell it to you at the negotiated price. The option part of the contract obligates the seller to sell to you during the option period -- but it does not obligate you to buy. You are only obligated to make rental payments as agreed during the lease period.

 

When the lease option contract is written and structured properly, it can provide tremendous benefits and advantages to the investor. If the lease option includes the "right to sub-lease", the investor can generate a positive cash flow by renting the property to a tenant for the duration of his lease, or lease option the property to a tenant-buyer for positive cash flow and future profits. If the lease option includes a "right of assignment" the investor could assign the contract to another buyer for a quick profit.

 

Lease option real estate investing, is a flexible, low risk, highly leveraged method of investing that can be implemented with little to no money.

 

High Leverage

 

It is highly leveraged because you are able to gain control of a property and profit from it now--even though you don't own it yet. The fact that you don't own it, also limits your personal liability and personal responsibility. Only if you decide to purchase the property by exercising your "option to buy", would you take title to the property.

 

Little to no money

 

The real estate investor's cost to implement a lease option contract with the owner requires little to no money out of pocket, because it is entirely negotiable between investor and owner. Also, there are a variety of ways the option fee can be structured. It can be structured on an installment plan, balloon payment or other agreeable arrangement between both parties. The option fee can even be as little as $1.00.

 

In order to secure the property for purchase at a later date, tenant-buyers typically pay a non-refundable option fee of approximately 2%-5% of the negotiated future purchase price to the seller. Depending on how the lease option agreement is written and structured, the investor could possibly use the tenant-buyer's option fee money to pay any option fee owed to the owner.

 

Flexible

 

Lease option real estate investing is a flexible method of investing because the terms of the agreement, like payment amounts, payment dates, installments, interest rate, interest only payment, balloon payments, purchase price and other terms are all negotiated between seller and buyer. Responsibilities of both parties are also negotiable. For instance, if the investor doesn't want to act in the capacity of a landlord, he could specify in the lease option agreement that tenant-buyer will be responsible for all minor maintenance and repairs and the original seller will remain responsible for any major repairs.

 

Financially Low Risk

 

It is low risk financially, because if the property fails to go up enough in value to make a profit, you have the purchased the right to change your mind and let the "option to buy" expire. Even if your tenant-buyer decides not to buy the property, you have profited by a positive monthly cash flow from the tenant-buyer's rent payments, and upfront non-refundable option fee.

 

Let's look at an example of a lease with option to buy structured in a way that the investor profits in 3 separate phases of the investment.

 

Profit #1: non-refundable option fee

 

Future sales price negotiated with the current owner is $125,000 with an option fee of 2% of the sales price. Option Fee you owe the owner is $2,500. The future sales price you set for your tenant-buyer is $155,000 and the option fee is 4% of the sales price. Option fee the tenant-buyer owes you is $6,200. You collect $6,200 from tenant-buyer and pay $2,500 to the owner and your profit = $3,700

 

Profit #2: monthly cash flow from rental payments

 

The Monthly rental payment you negotiated with the owner is $1,000. You set the monthly payment at $1,250 per month for your tenant-buyer. Each month you collect $1,250 from your tenant-buyer and pay the owner $1,000 each month. Your profit is $250 monthly positive cash flow during the lease period.

 

Profit #3: is set up when the lease option contract is initially written

 

The third profit is the difference in the negotiated future purchase price with the owner, and the future purchase price set for your tenant-buyer. Let's say the property goes up in value to appraise for at least $155,000. Your tenant-buyer decides to exercise their option to buy. You buy the property from the owner at $125,000 and then sell it to your tenant-buyer for $155,000. $155,000 - the $125,000 you pay to the owner = $30,000 profit.

 

Of course the key to making lease option real estate investing work, is finding motivated sellers and buyers. Finding these motivated sellers and buyers shouldn't be difficult. The continuing down turn in the real estate market, has created a large number of sellers who can't sell their property and buyers who can't get financing to buy. The seller could possibly get a fair offer to be paid in the future, by selling their property to a real estate investor on a lease option basis. A potential tenant-buyer could obtain home ownership, without having to qualify through traditional home loan guidelines.

 

One disadvantage of lease option real estate investing, involves the tenant or tenant-buyer possibly defaulting on monthly rental payments. This would make it necessary for the investor to come up with money out of pocket to pay the owner, and possibly have to proceed with eviction process. However, there are certain provisions that can made, and also various "contract clauses", that can be included in the lease option agreement, to deter buyers from defaulting on payments.Visit https://www.garrisonpropertysolutions.com/

 

If the investor fails to do "due diligence" before entering into a lease option agreement, he could end up with a property that is unmarketable. There could be a number of liens on it, issues involving ownership of the property or it might be in foreclosure. By diligently performing research before entering into a lease option agreement, the investor can avoid these mistakes. A few things the investor could do is-- perform background and credit checks on both the seller and buyer, search public records in reference to ownership and property status, or do a title search.

Despite the few disadvantages, lease option real estate investing continues to be an excellent way to invest in real estate with little to no money and low financial risks. It also remains to be an excellent way to gain control of a property you don't own, to generate cash flow now, and possible future profits on flexible terms.

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What Is Turn-Key Real Estate Investing?

 

This is a simple concept in which the investor buys, rehabilitates, and then resells a property at a profit. This is also known as "flipping" a home. This process usually happens remotely, because the investor remains in his or her own home, sometimes in a locale where flipping doesn't make sense, and utilizes the Internet to find and invest in opportunities. The goal here is to make the process of investing in real estate as easy as possible, so all the investor has to do is flip a switch or "turn the key."

 

Typically, then, you're purchasing a single-family home, fixing it up, in order to bring it in line with current codes as well as make it more appealing to buyers. Here's how it works:

 

A turnkey retailer or company purchases the property.

One or more investors purchase a share in or all of the shares in the house.

The retailer or company "fixes up," or rehabilitates, the property to make it current and appealing to buyers.

Once the property is rehabbed, it's put back on the market for resale.

As soon as a sale is closed, the investor gets his or her money back plus whatever profit was earned, according to what share of the investment he or she owned.

If done properly, this can be a very sound investment strategy. You, as the investor, have earn a profit from flipping the home, and you can have as little or as much involvement as you wish. You can be as involved or uninvolved in the flipping process as you desire, helping to oversee the contractors rehabilitating the home or leaving the entire process up to the turnkey retailer.

 

Why not just buy a house myself and flip/rent it?

 

You might be thinking you can just eliminate the middleman, the turnkey retailer or company, and do all of the legwork yourself. While many investors do just that and succeed at it, there are some drawbacks. In most cases, you'll end up undertaking much more work than you would as an investor. Here is what you would have to do if you became a flipper, rather than utilizing a turn-key solution and having the turnkey retailer handle the process for you.

 

Finding the property: First, you would have to locate a suitable property, which means knowing which neighborhoods are going to appeal to buyers or tenants.

 

Rehabilitating the property: Next, you would have to renovate and rehabilitate the property, making it adhere to current codes and also be an excellent single-family property. This requires proper budgeting and attention to contractors and laborers, something that requires an on-site presence.

 

Marketing the property for sale or rent: Once the house is move-in ready, you would have to find a buyer or a paying tenant to move into the location.

Should you decide to rent out the property, you would be entering a whole new dimension. For more information on turn-key real estate investment where you rent instead of resell, check out our outline of that investment strategy.

 

If this sounds like a lot of work, that's because it is. With turn-key real estate investing, as little or as much of that work can be taken off your shoulders and put on someone else's. Let's look at the advantages of turn-key real estate investment.

 

The advantages of turn-key real estate investment

 

In a full-fledged turn-key real estate investment situation, you are an investor, not a flipper or landlord. You're hiring someone else to manage the property for you, so all you have to do is collect on the profit. Here are some of the primary advantages of turn-key real estate investment.

 

Does not require your presence locally

 

With turn-key real estate investment, you acquire single-family properties in remote locations. This allows you the freedom to remain living where you want, while still maintaining a cash flow from a location that has excellent real estate values. You can continue living in your gated community in Florida, for example, where flipping houses might not make sense, while investing in flippable or rentable properties in Seattle or anywhere else that has a strong demand for such properties.

 

Easy diversification of your investment portfolio

 

turn-key real estate investment can be a wise move, if done correctly. One aspect of correctly executing a turn-key real estate investment strategy is investing properly in multiple markets, something that is easy to do since it requires little to no time of your own. The benefits of investing in multiple markets is simple: it provides you with protection from an unexpected downturn in an economy. For example, an investment in single-family properties in Seattle might seem like a guaranteed cash flow scenario, but what happens if Boeing announces major layoffs? If that were to happen, home prices would fall and properties would be more difficult to sell, negatively affecting your profit.

 

Since turn-key real estate investing makes it so easy to have multiple properties, this is a significant advantage of the investment strategy if you do it right. In other words, don't put all of your eggs in one basket.

 

You don't have to be a real estate expert

 

When you deal with a reputable turn-key real estate retailer or company, that provider knows the real estate markets with much more precision than an outsider would. Sure, you could do some basic research on an area, checking out the local school ratings, crime reports, and price ranges, but a turn-key provider will know all of that and more; they'll know the heart of an area, such as why people prefer one neighborhood over another.

 

The disadvantages of turn-key real estate investment

 

If turn-key real estate investing sounds like a sure-fire way to make money, you should be aware that there are disadvantages to the strategy. First and foremost, you will come across turnkey retailers that try to maximize their own returns at the expense of cutting corners, but beyond that there are other drawbacks.

 

The "middle man" needs to make money

 

The turn-key company is a business, and that business needs to make money. This means buying property at a discount and then selling it to you at a higher amount, of "flipping" the property, often for a hefty profit margin. Following that, the turn-key company can make an additional profit by managing the sale or rental of the single-property property for you. One thing to remember about this drawback, though, is that turn-key companies often have a marketing machine running at all times and can find incredible deals in their market, allowing them to give you a great deal even as the company makes its profit.

 

You gotta trust someone

 

There are "shady" turn-key companies out there. These companies will encourage an out-of-state investor to buy a bad property in a bad location, meaning more money leaking out of the investor's pockets than coming in. You have to rely on the turn-key operator's knowledge, expertise, and credibility to actually make you a good deal. This means you have to be dealing with someone you can truly trust.Visit https://www.garrisonpropertysolutions.com/

 

Conclusion

 

There are serious benefits to turn-key real estate investment, and it can definitely be an attractive cash flow strategy. However, there are also drawbacks to take into account before you proceed with any deals. You will need to investigate the turn-key provider and make sure they are both reputable and profitable, and ensure that the cash flow opportunity they are offering you is actually feasible and realistic. turn-key real estate investment is a fantastic way to make money, as long as you are smart about it and take care of your own due diligence throughout the process.

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5 Essential Features That Make Real Estate Investing Profitable

 

Every now and then persons trying to make up their minds where to put their money ask me if real estate ventures are more or less profitable, compared to other businesses opportunities around.

 

My response is always that apart from its potential for yielding significant profits, investing in real estate often confers long terms benefits.

 

I discuss five such advantages below:

 

1. You Can Refurbish (to Enhance the Value of) Real Estate

After you buy a stock, you hold it for a period of time and hopefully sell it for a profit. The success of the stock depends on company management and their corporate success, which is out of your control.

 

Unlike other conventional investment instruments, like stocks, for instance, whose rate of returns, depend on third parties (e.g. company management), real estate investments are directly under your control.

 

Even though you will not be able to control changes that may occur in demographic and economic aspects, or impact of nature induced changes, there are many other aspects that you can control, to boost the returns on your investment in it.

 

Examples include aspects relating to adding repairs, or improvements/enhancements to the physical property and tenants you allow to live in it.

 

If you do it right, the value of your investment will grow, resulting in increased wealth for you.

 

2. Real Estate Investing, When Done Right, is Proven to be Profitable Even During a Recession (like the one we're in right now)

It has on several occasions, been used to effect a bail out, from financial setbacks, such as those that many have experienced during the economic downturn happening in Nigeria today.

 

A considerable number of clients have confided in me that due to the present economic situation, they are not sure of profitable channels to invest their money. Some of them are done with bonds and treasury bills, but are in dire need of a new investment.

 

We had extensive discussions, and based on my expertise as a real estate consultant, I recommended landed property investment, as the most suitable and secure alternative channel of investment.

 

This is because, even if all businesses crumble, land will always appreciate greatly. Then to drive my point home, I ended by sharing the following apt quote, by a former American president:

 

"Real estate can't be lost, nor carried away, managed with reasonable care, it's about the safest investment in the world" - Franklin Roosevelt.

Not surprisingly, the client chose to take my advice - and signed up: it was the obvious, common sense thing to do!

 

3. Real Estate Investments Are Immune to Inflation

In other words, investing your money in ownership of viable real estate can protect you from the harsh effects that inflation usually has on other conventional investments.

 

This is because the value of real estate generally tends to rise in positive correlation with inflationary pressures. This is why property values and rental rates go up with rising inflation.

 

The nature of real estate, therefore affords owners the unique advantage of being able to adjust the rates they offer, to match inflation.

 

Monthly rents for example can be raised to compensate for inflation - thus providing a cushion effect against inflation induced losses that other monetary investments suffer.

 

4. Real Estate is Uniquely for Being Universally Acceptable as Collateral, Towards Securing Funding from Banks

Today, real estate in form of either building or lands, with proper titles (i.e. Certificate of Occupancy - aka "C of O") is the most recognized and accepted form of collateral in Nigeria - and some other parts of the world.

 

It has the unique feature of being able to protect the interests of both the borrower and the bank (that's doing the lending), so that funds can be released i.e. after due verification, and terms and conditions are agreed.

 

This is one of the key advantages a private C of O has over the global C of O, because the former (i.e. private C of O) is what will be needed by the intending borrower, in the event of any future financial dealings with bank in Nigeria.

 

5. Real Estate Investing Allows Use of Other People's Money

In other words, you can do it even if you do not have enough money. You just need to know how.

 

This is possible because real estate is physical property or what is called a hard asset. That is an attribute that makes it attractive to financiers i.e. people with money to invest.

 

This is why many times real estate products are bought with debt - unlike conventional investment products like stocks which are NOT tangible, and therefore perceived as being more risky to invest in.

 

So real estate investment can be done using cash or mortgage financing. In the latter case, payments can be so arranged to allow payment of low initial sums, provided by you or a willing third party.

 

Those payments will be happening on landed property which will continue increasing in value throughout the duration of such payments - and indeed beyond. That further inspires confidence in the minds of those financing the acquisition, that their investment is safe.

 

Little wonder that real estate investing has continued to prosper for so long!

 

[A WORD OF CAUTION] The listed benefits notwithstanding, I still tell prospective investors that due diligence is a crucial requirement for succeeding.

 

Whether you do everything yourself or use industry professionals like me, it is imperative that you exercise caution and arm yourself with relevant information and education.Visit https://www.garrisonpropertysolutions.com/

 

This is something I advice my clients to do all the time, so they can make good decisions in investing.

 

The importance of the above cannot be overstated, especially in Lagos where quite a number of individuals, have had their fingers badly burnt, because they failed to take the needed precautions.

 

My purpose is to help clients avoid having such horrible experiences, by bringing my years of experience in this field to bear in serving them.

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Can I Do Owner Financing In Washington If I Have A Mortgage On The Property?

 

 

Do you have a house to sell? Perhaps you’re thinking about selling, and maybe you’re thinking about seller financing. But if you have a mortgage on your house, you might be wondering, “Can I do owner financing in Washington if i have a mortgage on the property?” We get this question a lot so we decided to answer that question here… Keep reading in this blog post and we’ll answer that question and give you some strategies to move forward Read more.

5 Benefits of Offering Owner Financing To Home Buyers In Tacoma

 

Utilizing owner financing or a rent-to-own agreement is an excellent way for investors and homeowners who want to sell a house quickly and for the price they want. While the home won’t be sold outright until the end of the agreement, it can be a way to increase what you’re making each month, while almost guaranteeing a sale on a pre-determined date. Many people don’t consider this option when selling their Tacoma house. However, if you don’t need the entirety of your proceeds upfront, selling your house in Tacoma with a rent to own agreement may be right for you Read more.

5 Things You Need To Know About Buying Your First Investment Property in Tacoma

Real estate investment is one of the best ways to build wealth. The truth is, anyone can do it when they are armed with the right information. In this post, we offer things you need to know about buying your first investment property in Tacoma Read more.