RISK VERSUS REWARD: A SIMPLE GUIDE FOR INVESTING IN REAL ESTATE
Published by Authorify Publishing Copyright © 2020 Authorify Publishing
All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. DISCLAIMER AND/OR LEGAL NOTICES: While all attempts have been made to verify information provided in this publication, neither the Author nor the Publisher assumes any responsibility for errors, inaccuracies, or omissions. Any slights of people or organizations are unintentional. This publication is not intended for use as a source of legal or accounting advice. The Publisher wants to stress that the information contained herein may be subject to varying state and/ or local laws or regulations. The reader of this publication assumes responsibility for the use of these materials and information. Adherence to all applicable laws and regulations, including advertising and all other aspects of doing business in the United States or any other jurisdiction is the sole responsibility of the reader. The Author and publisher assume no responsibility or liability whatsoever on behalf of any reader of these materials. If your property is currently listed with a Realtor, please disregard this notice. It is not our intention to solicit the offerings of other brokers. Printed in the United States of America
Table Of Contents
Thinking About Investing?
Options To Finance Your Investments
Homes For Investment
Making Money On Flipped Houses
A Guide To Flipping Houses
A How-to Guide For Wholesaling
Benefits And Risks Of Wholesaling
Home Renovation ROI
10. Protect Yourself From Flops
11. A Guide To Investing In Rentals
12. Property Management 101
13. How To Sell Or Rent Your Investments For The Most Money
14. Why Staging Makes All The Difference 133
15. Why Curb Appeal Matters
16. How Agents Help Investors
17. Why You Can’t Afford To Invest Alone 163
18. Introduction To The 1031 Exchange
Foreword When I first ventured into the real estate industry years ago, I did so with the hopes of helping sellers like you avoid the headaches often associated with the home-selling process. In my years of experience, not only have I helped alleviate the stress of selling for numerous clients, but I’ve also accumulated years of knowledge to help them get more money for their homes in the least amount of time. I decided to share all of my expertise in one place with potential clients. And that’s why you’re receiving this book. I want to help you have the best possible home-selling experience. And by that, I mean I want you to 1. Get the most money possible for your home, 2. Sell in the least amount of time, and 3. Avoid the headaches most commonly associated with the home-selling process. Think of this book as my gift to you. It contains insider advice on the home-selling process to help you achieve your ultimate real estate goals, including: • Secret strategies to sell your home for more money • Marketing techniques employed by top agents • Advice on how to appeal to today’s buyers • And much, much more If, after reading through it, you want to hire me to help you sell your home, I’d be more than hoonored to meet with you to discuss a specific plan to sell your home. Happy reading!
About SUSAN ORMONT & THE ORMONT GROUP After over 17 years as an Opera/Music teacher at Boston University, I retired and entered into Real Estate Full-Time. Never in a million years did I plan a career in the real estate industry, but you can’t always predict where or when you’ll discover your second passion/career in life, which clearly includes writing. For over 15 years I have lived in Brookline, and West Roxbury and sold real estate in the Boston Metro area including Brookline, Newton, Cambridge and Needham. I bring a wealth of knowledge and expertise about buying and selling homes/condos and investment properties here, and as a retired professor, I love to pass on my knowledge to you, the consumer. Real Estate is not the same everywhere. Our community is HOT and fast moving, so you need an Realtor whom you can trust for up-to-date information and skills to help you achieve your goals. I am eager to be that agent and serve you. Here are some of the things I offer with my Team, The Ormont Group And Concierge Realty Boston. Find Your Next Home or Investment Property I know the Brookline, Newton, and the Boston Metro area inside and out! I listen well to your needs and can work with you to find the right property at the right price for you, including all the crucial neighborhood amenities and the essential criteria you have for your ideal home. In addition, I am a certified Buyer's Representative (ABR), a Senior Real Estate Specialist (SRES), a Luxury Homes agent and am highly trained and skilled at Negotiations.
Consult on Home Selling Tactics Oftentimes buyers don't visualize living in your home the way you do. I can make your home attractive to its ideal audience with the assistance of my Concierge Team - which can help you get top dollar. We know and can provide what is necessary to stage the home, make repairs or minor improvements, or even simply paint some walls and your entrance to sell quickly and efficiently. I am thrilled to partner with Concierge Realty Boston, in preparing all your necessary projects to help sell your home. We are most unusual in that we will not demand payment until closing as that benefits you, the Seller. Sell Your Home When it's time to sell, you need someone who is current with what is most effective in advertising your home. I will personally show your home to prospective buyers and the enormous local Keller Williams Team of agents as well those of other companies. In addition, I am highly skilled to negotiate the purchase contract, arrange financing, oversee the inspections, handle all necessary paperwork and supervise the closing. I can take care of everything you need, from start to close. Awards Excellence Award: 2009-Present Top Producer Top Listing Associate 2009-Present CLHS - Luxury Home Specialist ABR - Accredited Buyer's Representative SRES - Senior Real Estate Specialist Negotiations' Specialist
I am extremely proud that my son, Caleb, has recently graduated from Brookline High School, during the 2020 Covid-19 Pandemic and hopefully will be attending the University of Rhode Island in Neuro-Science in the Fall. My personal hobbies, when I have some time, include all forms of music, art, theatre, animals, travel, and enjoying my RV. I am committed to provide the highest level of service to my clients and take deep pride in helping you achieve your real estate goals.
CHAPTER 1 Introduction
Have you ever watched one of those house-flipping or income property T.V. shows? They encourage Flippers just to update what needs to be updated, then sell or rent it — and quickly — at a profit. Sure, there are always unexpected expenses, but it seems to always work out in the end. It is exactly that portrayal of real estate investing that draws people in. Who wouldn’t want to do a little work to make a place look more attractive and walk away with thousands (or tens of thousands) of extra bucks in their pocket? I’m guessing perhaps You, since you’re reading this book, and I don’t blame you one bit. The problem is that there is so much more that goes on in real estate investment than television can show you in 30-60 minutes of heavily edited content. That doesn’t mean there isn’t potential to earn money this way — there definitely is. It’s just that there’s a lot you need to know in order to actually make this happen. This book will help someone exactly like you: hardworking, intelligent, realistic, and ready to change your financial situation — and your life — through real estate investment. In the following pages, you’ll learn about how to get started in real estate investment, including what types of properties to invest in and how to finance your purchases. (Note: If you’re already an investor, I suggest reading through this section anyway, just in case there are strategies you haven’t tried yet that could enhance your ability to make more money.) I’ll also teach you the different types of real estate investing, which includes resources and tips to succeed in each arena, the real ROI
(return on investment) for home projects (i.e., how to spend your money the right way), marketing techniques that will make you and your properties stand out, how to build your investing team, and the benefits of working with an agent.
CHAPTER 2 Thinking About Investing?
Before we begin, I want to point out that this section is geared more toward people who are interested in becoming a real estate investor but want to know more. If you’ve already started down this path, you could theoretically skip this section; however, if you flip through the pages of this section as you move to the next, you might find some new information. Maybe you’ll learn some new strategies you haven’t tried, or weren’t even aware of. Maybe you’ll just find validation that you’re on the right track, or a reminder of why you got into investing in the first place… There’s a lot of good information here, and I recommend you at least give it a quick glance. As for those of you who are looking to get into the real estate investment game, my goal here is to give you all the information you need to decide whether real estate investment is right for you, and then teach you how jump in. So let’s get started!
According to a 2019 article on Investopedia.com, the average returns on commercial real estate investment over 20 years are around 9.5%. Diversified and Residential investments average around 10.6%. Both of these are higher than the S&P 500 Index, which has an average annual return of about 8.6% over the last 20 years. By the way, all these figures include the housing price burst in the 2008 recession, during which time real estate investment still did better than the housing market as a whole.
These stats alone obviously show a great reason to buy real estate. But what do investors hope to get when they’re buying property? According to the 2017 National Association of REALTORS® (NAR) Investment & Vacation Home Buyers Survey, 37% plan to rent it for income, 16% for the possibility that the price will appreciate, and 15% because it was a good deal. This all sounds great, but I’m guessing the main stat you’re interested in is how much you can make. (Am I right?) Well, here’s the answer you’ve been waiting for: According to a survey of real estate investors done by ZipRecruiter.com in the Spring 2019, investors make an average of $123,937 per year, with the low end at $47,000 per year and the high at $261,500. Most make within the range of $100,000 to 150,000 per year.
CHAPTER 3 Options to Finance Your Investments Now that you know why real estate investment is a good idea, it’s time to learn how to do it. However, before we get into the nitty- gritty details of each investing method, let’s address the elephant in the room: To make money, you need to have money to invest, right? Well, yes and no. While you do need money to invest, it doesn’t necessarily need to be your own. If your only reference for real estate information is house-flipping T.V. shows, you might assume real estate investing is all about cash buying. There are many investment deals that transpire throughout the real estate market on an annual basis. The majority are achieved through traditional lenders and institutions such as banks, but some are accomplished through less traditional means. In most cases, it’s because the investor couldn’t raise the capital or didn’t have the credit score to do so. According to the 2017 NAR® Investment & Vacation Home Buyers Survey, 47% of investors financed less than 70%. And more than half — 64% — used a mortgage. So, whether you’re reading this as a newbie or a seasoned pro, you shouldn’t feel bad — not even for a minute — if you don’t have the cash to use. In fact, the ultimate goal for real estate investors is to not use any of their own money at all! This works to every investor’s advantage — those without the funds can still get in the game, and people who’ve been playing for a while can use other people’s money as a way to invest more, which leads to increased income. Obviously, there aren't a bunch of people out there willing to hand over their cash so you can invest. This is when developing your
solid network of potential investors is important. You’ve got to be clear whom you access for help and how to best use the help they give you. It is especially to your advantage to have a high credit score. Why does this matter in this business? First, you’ll get more access to working capital, but you’ll also have lower interest rates if you do take out mortgages or loans, which can lead to significant savings versus people with “so-so” or low scores. How you build your credit score is an important concept to learn so I encourage you to master this art!
WHERE TO GET YOUR MONEY
Investing Without Your Own Money
The first and most common option is hard (i.e., private) money lenders. In this case, people or businesses loan you money as an investment for themselves. They make money through fees and interest rates, both of which tend to be higher than other types of loans. One way to make sure you still come out ahead in the deal is to use these loans to buy homes at 50 cents on the dollar. Partnerships are another popular way to get funding. These can work in a variety of ways, but you want to make sure that you balance each other out well. For example, if you have a less-than- stellar credit score, make sure your partner has a great one. Perhaps you can be the one to find the ideal properties and your partner can get the financing, which will come with lower fees and rates thanks to that higher score. Keep in mind that you don’t want to partner with someone just because you already have a good relationship. The key to a fantastic partnership is being in sync, such as agreeing on what kind of risks you’re willing to take, determining what short- and long-term goals you have, figuring out who will do what, and
deciding what kind of return you’d like.
Investing With Your Own Money
If you don’t have access to private lenders or partners, you can still start your investing career without having all the money on hand. One way to do this without paying any money upfront is through home equity. You can use this by taking out a home equity line of credit (which leaves your mortgage as-is) or rewriting your mortgage and getting a cash-out refinance. Of course, this works only if a) you currently own property; and b) there’s capital in it. Another route is a lease-option, also known as option to buy. In this situation, you would rent the property, but sign an “option to buy” at a later date for an agreed-upon price. This legally binding path to property ownership might take a little longer, but is still a viable option if you have the funds. In the Boston Metro marketplace, this option is not popular. Seller financing is just like getting a loan through a bank — except you agree to the payback and terms directly with the seller. This loan should include a repayment schedule, interest rate, and consequences, should either party default on their agreement. Often, these agreements include a significant down payment (sometimes higher than mortgages). Most of these agreements also involve the seller holding on to the deed until the buyer has completed all the payments. An option that may or may not work for you is investing your retirement funds. This typically doesn’t work for people over the age of 60 because there’s not enough time for rental income to pay off the mortgages. The so-called “sweet spot,” age-wise, is around 35 to 40. This is because people this age have theoretically been paying into a retirement account for about a decade and might have a fair amount to spend. Also, there’s time to get a good
return. Perhaps the mortgage will be paid off in 10 years; after that, the net income after operating costs is all yours. Your retirement account can be used for purchasing and maintaining properties as well as collecting rent. However, none of that money can go directly to you until you’ve reached the age when you can start withdrawing money out of the account. (Well, you technically can withdraw in many cases, but if you’re younger than the legally allowed age for withdrawal, there might be a significant penalty. This could mean losing thousands of dollars, depending on how much you take out.) There are Self-Directed IRAs (SDIRA) which are traditional or Roth IRAs (individual retirement accounts) that allow you to invest beyond the usual mutual funds, stocks, etc. With an SDIRA, you can invest in precious metals, tax lien certificates, and —most importantly, for our purposes here — real estate. When you use your IRA to buy real estate, there are some important things to keep in mind. First, you’re required to report the value of your investment to your IRA custodian every year. Also, the fee structure can be complicated, so you need to understand what you’ll owe and how that relates to your overall profit. Also, your investment needs to bring in enough money to pay for both regular maintenance and any expenses that come up without you having to add cash. The major benefit of using an SDIRA for your real estate investments comes down to taxes. With a traditional IRA, it’s tax-deferred income, but with a Roth IRA, your gains are tax- free, and the money will also be tax-free when you ultimately withdraw it. If you go this route, you can move funds around from multiple projects without affecting your taxes. (Keep in mind that tax and another financial laws can change at any time, so make sure you keep on top of any changes, and make any adjustments, as needed.)
One tax downside is that if your property has a net loss, you don’t get the tax breaks other investors get. You also can’t claim depreciation. Another advantage of real estate over traditional retirement accounts is the return. Real estate can net you perhaps an 18-20% return over 30 years, whereas the more common accounts, IRAs, 401(k)s, etc., might only get you 3-6%. Not only that, but you can use compounding to your advantage. If you keep investing your money for the first 20 years, you can leave it for the last 10 and just let it grow. Doesn’t doing almost nothing while still making plenty of money sound great? As with any investment, there are risks to using an SDIRA. You might make a bad decision or get scammed, which is so common that the SEC has an investor alert about the scamming risk for SD- IRAs. Other risks include not having enough diversity in your investments (it’s hard when you have limited funds) and potentially not being able to access the money — even once you’re retired, due to liquidity issues. This means you might not be able to take out the required minimum distributions. Again, this is why diversification is important; you need to have enough cash to meet all the requirements. Speaking of “following the rules,” it’s vital you know them all. If you do something wrong, you might accidentally disqualify the IRA, which means you’d owe taxes. This includes not purchasing property for yourself your immediate family members. (You can’t buy property from them or sell property to them, either), but there are many other more nuanced rules, as well.
TAX BENEFITS FOR REAL ESTATES INVESTORS Because both federal change and state local taxes can vary, and Massachusetts taxes are changing, there’s no specific guidance I can give about that here. Also, please understand that the tax ramifications of any kind of real estate investing will depend on your particular location and circumstances as well as annual changes in the tax code. I do not pretend to be a tax expert so I strongly recommended that my clients consult with a CPA or tax attorney before beginning any real estate transaction or investment. With that said, at the time that I write this book, there are some general tax-related benefits for real estate investors that I want you to know about. The first has to do with all the deductions real estate investors can get: mortgage interest; business expenses, such as property management, office, mileage, travel, educational events, etc.; repairs; and improvements made that increase your property’s value. All of these can be immediately deducted, with the exception of improvements, which are depreciated over time. Depreciation of the property itself, regardless of any work done, is also a tax deduction, and it’s done over the course of time. Commercial properties can depreciate over a longer time than residential (currently 39 years versus 27.5 years). The land on which the property resides never depreciates. If you rent out a property, sometimes depreciation can get you a phantom gain. Here, on paper, the numbers look like a loss; however, because of the depreciation amount, you actually come out ahead. A tax attorney or CPA can help you figure out exact numbers for your situation.
sale to buy another property. This makes your income essentially tax-free, and you can put all your profits toward the next property, which is called trading up. A 1031 exchange covers only business or investment properties. In general, vacation or second homes don’t qualify, but you should check with a tax expert to see if there are any exceptions, especially when it comes to the usage test. There are three specific requirements to qualify for a 1031 exchange, and you must meet all of them: • The like-kind exchange. The property you buy must be similar to the one you sold. The purchase price of the new property must be the same as, or more than, the one you sold.There’s no switching from commercial to residential or vice versa; however, you can often exchange property and land. • Time restrictions. You must officially record identifying a new property within 45 days of selling your old one. There are different ways to identify replacement properties: 1. Find three properties, not worrying about their fair market value. 2. Identify as many properties as you can, as long as their aggregate fair market value is less than 200% that of the sold property on the date of the transfer. 3. If the above two rules are exceeded, you can buy 95% of the aggregate fair market value of the identified properties. Another benefit is the 1031 exchange, which allows you to put off paying capital gains taxes if you use your profit from a real estate
You also have to close on the new property within 180 days of the previos property’s sale.
• A qualified intermediary. Not only can you not be directly responsible for the transactions or money, your intermediary must be someone with whom you haven’t worked for at least two years. Let’s use this example from a March 2019 interview that “The Motley Fool” conducted with Thomas Castelli: Let’s say you have a property you bought for $100,000. Ten years pass, and now it’s worth $150,000. You have a $50,000 capital gain. Break it up in between capital gain and depreciation recapture however you want. You’re still going to have to pay tax on that $50,000. So, when you pay tax on that $50,000 of capital gains, you’re going to have less money you can reinvest. What a 1031 allows you to do is invest that entire amount so you’re not paying the taxes today, and you can purchase a larger property. You could continually purchase larger and larger properties and continue to use the 1031 exchange pretty much forever. And if you really wanted to — I’m just going to be honest, as it’s easier said than done — you can eventually leave the property to your heirs and they’ll receive that property at the fair market value on the date of your death by eliminating all of this capital gains depreciation recapture that you should have paid during your lifetime. In theory, you can just keep purchasing larger and larger properties, making more and more cashflow, but n ever actually paying any taxes on that property. In the interview, Castelli also talked about opportunity funds, a new way to possibly put off or completely eliminate capital gains taxes. Opportunity funds are a way to invest in opportunity
zones, which low-income communities’ governors have identified, and the Treasury has approved. The funds come with tax incentives, including the ability to defer capital gains on a variety of capital assets. zhese include not just real estate, but also stocks, bonds, and more. A CPA can give you all the specifics. zhe timeline has the same 180 rollover as the 1031 exchange, but you’re only required to roll over the capital gain, which means you’re free to do what you want with the money you invested.
Castelli gave this rundown of the numbers:
If you hold that capital gain in the fund for five years, you’re going to receive a 10% stepped-up basis in that gain. Let’s just say you have a $100,000 capital gain, and in five years, you receive the 10% step-up; you’re only going to pay tax on $90,000 of that capital gain. If you hold it for another two years for a total of seven years, it’s going to step up [an additional] 5% for a total of 15%, and you only pay tax on $85,000 of that gain. Now, if you hold that investment in the fund for 10 years, your investment in the actual fund itself will be tax-exempt. Just, say, that $100,000 you put into the fund; 10 years from now, it’s worth$150,000. zhat $50,000 capital gain is completely exempt from tax. Now, this is a little longer-term play. You have to keep your money in there for at least five years to see any benefit from it. I think there’s over $7 trillion or some crazy number of appreciated gains in the United States. So all of those appreciated gains are technically eligible for opportunity funds, and I think the background behind this is they want to take those appreciated assets and move them into low-income communities that need
renovation and raise the status of those communities and opportunity zones. Opportunity funds are the way to do that. Castelli pointed out one important aspect of opportunity funds for investors to keep in mind: Because of the requirements to have an opportunity fund… You have to substantially improve these assets, which means doubling the property’s basis. Essentially, it’s the building’s basis, but just think about it, I guess for this purpose, as the purchase price. You have to add as much as the purchase price basically in capital improvements, so it’s substantial. Or you have to develop the property from the ground up and you have to hold it for 10 years.
RENTAL TAX SPECIFICS
Rental property owners are open to a variety of benefits, which I’ve listed below. You’ll notice that several are the same as for other real estate investments. Also, as with all properties, if you sell within a year of buying, you’ll be taxed at your income rate. If you hold on to a property for a year or more, as is usually the case for rental properties, you’ll deal with capital gains tax, which is a lower rate. Your overall tax deductions can depend on what type of investment business you have (sole proprietorship, partnership, or corporate entity). And, as always, do your research to make sure you’re up-to-date on all the latest tax laws, as these can, and do, change.
• home office, office supplies, computer software • mileage Rental property tax benefits:
• travel • meals (50% aslong as you're having a business meeting while eating) • mortrage,unsecured loan, and credit card interest • loan origination fees or points (they're considered kinds of interest) • utilities • property taxes • licensing fees • occupancy taxes • insurance, including liability, hazard, fire, sewer backup, flood, and loss of income(talk to a tax professional if you have an umbrella liability policy or a landlord liability policy) • maintenance, repairs, improvements, and cleaning • advertising • commissions to real estate agents or property managers who find tenants and renew leases (this is considered part of marketing, not management) • propety management fees, salaries, and benefits (if you manage your self and your business is an LLC or corporation, you may be able to be employed and have your salary be deductible) • homeowners' association fees (HOAs), as well as whatever HOA requires, such as specific "For Rent" signs • professional and legal fees, including bookkepping, filing taxes, and all legal work • any losses incurred up to $25,000 per year; anything over that can be carried over to the next year.Note that your tax savings will be less than you lost
• incentives from your state or locality to invest in lower- income areas • Social Security (FICA) or self-employment taxes (the benefits vary, but can range from about 7.5% to 15.3% of your profit) • second/vacation homes rented out for atleast two weeks per year might allow you to write off advertising and rental commission and propate other expenses • some state have historic tax credits that include both the rental operatin and/or any renovations You’re also required to take a deduction for depreciation. Just know that when you sell a rental property, you’re subject to depreciation recapture. Any gain that has to do with depreciation is taxed at 25% (as opposed to 20% for regular capital gain). The depreciation-related gain is also called unrecaptured section 1250 gain. One way to mitigate this is to always keep track of passive activity losses. While they may not be deductible while you own the property, they are when you sell it, which means the amount you’ll owe will be less. By the way, if you’re thinking, “Well, I just won’t claim depreciation, then,” I’m sorry to tell you that this simply won’t work. The IRS states that the recapture’s calculation is based on “allowed or allowable” depreciation, meaning that even if you didn’t claim it, you’ll still have to pay it. You might as well get the deduction while you can, and perhaps consider setting it aside for when you do end up selling the property.
ALL ABOUT CREDIT SCORES
Credit scores are often based on the FICO scoring model. They can range from 300 to 850: First, your score is a number that tells lenders how likely you are to pay back the money. When you have a higher score, you get better rates, which leads to long-term savings and more money in your pocket. As I briefly mentioned, credit scores can play an important role in getting financing and the rates you’ll need to pay. I want to talk in detail about what makes up a credit score so you’ll know what you need to do, should you want to improve it.
• Bad credit: 300-600 • Poor credit: 600-649 • Fair credit: 650-699 • Good credit: 700-749 • Excellent credit: 750-850
The determining factors and how much weight they carry vary between credit agencies (TransUnion, Experian, and Equifax). However, the following five are the major contributors to your score:
• Payment history: 35% • Outstanding balances: 30% • Length of credit history: 15%
• Types of accounts: 10% • Credit inquiries: 10%
By knowing your credit score, you’ll have a clearer picture of your investment strategy. If your score is high enough, you might be able to get a traditional loan and help with down payments. If your score is lower than you’d like, take a look at the determining factors and see where you can improve — making on-time payments should clearly be a priority. You can also consider paying down balances as you’re able, and not opening up a bunch of new credit cards. BEWARE OF SCAMS With so many people out there looking to make money in real estate, it’s pretty much expected that there will be people out there ready to take advantage. The two main types of scams to watch out for are seminar scams and lending scams . Seminar Scams can give some truly helpful tips, but it’s always used as a way to gain people’s trust. Once they have the trust, they’ll offer “limited-time” investment properties or expensive classes. When people fall for the trick and buy a property, they often find that it’s got a lot of issues and is quite likely a money pit. However, signing up for classes can be negative, too. Why? Because people often end up spending thousands of dollars for little to no new information when that money (and their time) could’ve gone toward their investments. To make things even worse, people who get taken in by scammers often sign agreements without reading them through. These documents often include a section that keeps the scammed people from taking legal action against the scammers.
So how do you find genuinely helpful seminars? (Yes, they do exist.) Do your research! Look up the organization, the presenter, the properties, and the courses. You can also start by looking up certified experts and see if they offer any educational opportunities. Lending Scams are another common scam in real estate. It’s a fairly easy type of scam for real estate investors to fall into because often they’re looking for alternative financing (i.e., private lenders) that doesn’t have the same qualifications required by traditional mortgages. This kind of financing often has a requirement to pay back the money more quickly and tends to have higher interest rates than mortgages. Those things alone don’t mean they’re a scam, though. The problem is that lenders don’t have to be licensed to hand out money, so it can be a bit tricky to make sure the lender’slegit. So, how do you make sure the lender you’re working for is on the up-and-up? First, you find the lender through one of the following ways: • Through a certified real estate investing website • Through referrals from people in your network who’ve personally worked with the lender Second, you should ask the following questions (and if the answer to any is “yes,” it’s probably a red flag, pointing to a scam): • Does the lender seem to know details about investing and lending, including the correct jargon? • Is there a major upfront fee? • Does the lender seem a little too eager to give you the money? In other words, do they skip asking you essential questions and get right down to the “money talk?” 19
CHAPTER 4 Homes for Investment
So now that you’ve got the financing in place, how do you know which homes or properties to buy? There are plenty of factors you need to consider to ensure the purchase makes sense. As the saying goes, you make money when you buy , not when you sell . This is why it’s key to buy the right property. This entails being clear from the start where you’re trying to resell and who your buyers will be. Also, keep in mind this saying: “You don’t have to like the house, just the numbers.” Read on for more details on how to make the best choice, particularly when it comes to flipping homes.
WHERE TO START
The first thing you have to do is choose your market area. If you’re flipping, consider looking for the location closest to you that has a population of at least 100,000 people. (Bigger market = more opportunity.) This is considered your local market . Another option is remote investing , which could theoretically be anywhere. However, be sure to choose some area that’s not only familiar to you, but also a place to which you feel you have some connection. This might surprise you, as most people have been told that emotions should stay out of these kinds of decisions. I don’t disagree when it comes down to the details, like which specific property to buy, what to fix up, etc. However, in this one case, emotions are important. You’ll be spending a significant amount of time there doing some pretty hard work, and being in a location that you enjoy and feel connected to will help. Plus, you’ll
know the area well, which can be advantageous in many ways, as well. Once you’ve decided on a market area, it’s time to look at inventory levels . This means finding out how many homes are for sale. Keep in mind that low levels (e.g., few houses for sale) can be a good thing, because it means it’s a seller’s market. Ideally, you want your market to have less than four months of inventory. The following are the different types of markets that exist: • Hypermarket: Less than one month of inventory; no competition regarding inventory but major competition from buyers for all properties that are priced right. Listings tend to sell above asking price after receiving multiple offers. • Seller’s Market: Less than four months of inventory; low inventory competition. You will likely sell for a good price, often above asking with much competitive interest. • Stable Market: Four to six months of inventory. Properties might take longer to sell, and could sell at or below asking (if they sell above, it probably won’t be by much). • Buyer’s Market: More than six months of inventory; lots of inventory competition. Properties take a while to sell, and often sell below asking. As an example of how the market evolves, let's discuss 2020 in Massachusett's Real Estate. Much of Massachusetts usually hovers between Hypermarkets and Seller's Markets when it comes to Investment Properties. There is an enormous population of Contractors, Investors and Developers, who constantly create competition. During the Covid-19 epidemic, real estate was active, but the road was bumpy with setbacks regarding access to professionals, city departments, mortgage companies, etc.. During the first phases, good Realtors immediately settled into creating 22
new practices of selling homes by Video Tours and Floor Plans, followed by safe private visits by appointment only and open houses with scheduled private tours. Safety immediately became a priority. With the opening after Phase 1, we experienced a Hypermarket jump in real estate sales. This major jump in actvity felt like a Spring Market in the Summer. Everyone was "free" at last and anxious to settle their real estate issues. It especially immediately became competitive in the Multi-Family and investment category. It did not take more than a few weeks for the action to calm because of the July 4th holiday. The normal pattern of real estate sales especially in the more expensive communities is that after July 4, people start to be in Vacation Mode going to the Cape (even many agents) and the market slows down to only the most serious buyers who need a home before the school year begins. Some agents and owners become less accessible, and therefore, their listings drag. This summer, I believe, may prove to be different. We expect more activity, especially because many people may need to sell some of their investments, and towards August and September, we anticipate an increase of short sales and forclosures especially outside of the Metro area. Also, there will be people who still need to transition homes before the school year starts. Even with the fresh activity, inventory of more expensive homes and condos in towns such as Brookline and Newton seem to be sitting longer on the market as consumers question what is happening in the economy and are more cautious in spending top dollar. When properties sit longer this suggests that buyers see them as over-priced, and that the economy may be dropping a bit. The question is are we moving gradually to more of a Buyer's Market, and sales then often go below asking. So, in one volatile season, an area can experience three transitional markets due to economic and health concerns. Buying investment properties does not seem to me to be seasonal. It can be year round, whenever a good opportunity arises. It
might be hard to find that initial right property, but it will be worth waiting in the end. I suggest that flippers focus their efforts on Selling in Hypermarkets and Seller’s markets, as these will usually bring in the most profits. In addition to looking at the overall inventory, you will want to look at the average Days on Market (DOM) , so you’ll be able to make an educated guess about how long it will take a property to sell. An Investment Realtor can assist by researching similar types of properties that have closed in the previous 30 days and doing Market Research for you.
MAKING THE NUMBERS WORK
The most important thing you can do is to conduct your research about the structure, the land, and the surrounding areas. This includes seeing if there are any new roads or construction planned, ensuring there aren’t any liens on the property, looking at comparable properties, and researching anything else that could affect the value of the property. If you’re just buying land, go over the deed with a fine-toothed comb. A competent real estate lawyer helps in this situation. After you’ve accumulated sufficient information on all applicable factors, it’s time to decide whether it’s a wise investment. That said, remember that even with the most detailed research, things can change. Maybe the up-and-coming neighborhood takes an unexpected downward spiral, or maybe it up-and-comes more quickly than expected. Also the over-all economy can be quite volatile as it is post the first phase of Covid. This too affects the immediate risks. Sometimes, one may take short-term losses, but if you retain a property longer than 5 years, the risk is usually minimal, and still will exceed the profits of stocks during that period. Plus you have income!
Unless you’re psychic, there’s just no way to predict what will
happen, so making the most well-educated decision you can is the best way to mitigate — but not eliminate — the risk. The most important part of running the numbers is calculating your Return on Investment (ROI) . Here’s how to do that: • Figure out the investment gain . This is the amount of money you’ll make before expenses. So, if you make $500 per month on your rental property, multiply it by 12 months a year, and your investment gain will be $6,000. • Add up all your operating expenses. This should include taxes, insurance, repair costs, and any other expenses you know or think you might have. If you pay $1,200 in taxes, $450 for insurance, and $900 in repairs, your total expenses would be $2,550. • Subtract your expenses from your investment gain: $6,000 - $2,550 = $3,450. • Divide the figure from step three by the price of your investment. So, if you bought the property for $75,000, then $3,450 ÷ $75,000 = .046 • Finally, turn the figure from step four into a percentage. In this case, 4.5%. This number is your ROI, Return on Investment. You need to know what your bottom line is, i.e., how much you want to spend and what your ROI should be. If the price of buying and/or fixing up the property is too high and/or the ROI is too low, it’s time to move on and find another property that better fits your goals.
WHICH HOMES TO BUY
While some investors might look at For Sale By Owner (FSBO) properties, many others focus mostly or completely on purchasing bank-owned properties or distressed properties. Some go to sheriff ’s sales or other auctions. But what type of properties should you be looking for? 1) Distressed properties; 2) foreclosures; 3) short sales; 4) and REO/Bank-Owned properties. Let’s take a look at each of these options in more detail.
Owners of distressed properties tend to be pretty desperate to sell, which means investors can often get them for less than market value. Remember that the price should already reflect the fact that it is distressed, so this doesn't necessarily mean that you can bargain lower, especially in the first two weeks on the market. For these types of buildings, a popular option for investors is to wholesale them. This means the investors get the home under contract, then market it to other buyers for a higher price than their contract, and ultimately assign the contract to another buyer. The investor ends up with the difference between the new contract with the new buyer and their contract with the seller. For example, if an investor gets a home under contract for $60,000, then finds new buyers who agree to pay $70,000, the investor will make $10,000. A major advantage of wholesaling is that you don’t have to have a lot of capital, and there are many cheap — or even free — options to find them. They can use auction websites, including Hubzu.com, Hudsonandmarshall.com, Auction.com, and Zone.com.
Because I have access to advanced search techniques in MLS
(Multiple Listing Service) , I can help by designing a search for desirable properties for you. I can create a search specifically for distressed properties which saves so much time. Also, in addition to our local area MLS, I can look throughout MA and Rhode Island, which helps to expand your search. I can also refer you to Realtors in other states who would be especially good at Investment properties, and we can all work in conjunction.
According to the 2017 NAR® Investment & Vacation Home Buyers Survey, 18% of investors buy foreclosed homes. In order to purchase these properties, investors must go through auctions. If they’re the highest bidder, they have to pay the full amount at that time. They will then get the trustee’s deed once the sale is complete. Foreclosed properties’ prices are determined differently from other properties. Instead of using what the home is worth, the starting bid includes the following:
• How much is still unpaid on the loan • Interest owed from attorney’s fees • Any costs stemming from the foreclosure process inclouding possible liens
Sometimes, properties don’t even get that starting bid. When this happens, it becomes bank-owned, or Real Estate Owned (REO) property. The loan lender owns the home and will use a real estate agent to try to get it sold. One thing to note is that these properties are sold as-is, so if you’re looking to buy one, that’s something to keep in mind. There are three main ways to find pre-foreclosed homes. The first is to check with the County Clerk at the County Recorder’s Office. There, you can look up Notice of Default (NOD), lis pendens (“an 27
official notice to the public that a lawsuit involving a claim on a property has been filed,” as defined on Investopedia), or Notice of Sale public records. There’s also a good possibility that you’ll find properties that aren’t yet online. This type of research is done by the Investor, not the Realtor, because it fits under the category of doing your own due diligence. Speaking of online, that’s another good way to find properties. There are national and regional listing services. Most have a weekly fee but offer a free trial so you can get a “feel” for them and how they work. I suggest taking them for a trial run so you can see which site or sites best fit your needs. You’ll likely find out all the important details, including name, address, amount owed, and outstanding loans. Sometimes you’ll even find contact phone numbers. Usually closings may take much longer in this situation. These listing services may also have REO properties, but don’t let that be a factor in deciding which sites to use, as most of these properties will already be listed on their lender’s (e.g., bank’s) website, which you can access for free. The third option is to look through newspapers and business journals. This is because when a foreclosure is filed, the Notice of Sale has to be published. You can look in the Public Notice section for trustee sales to find these notices.
The main advantages of buying REO properties is that you can get them at below market value without having to worry about unpaid taxes or liens. The downside is that it can be an intense process to buy one of these properties, but the ultimate profit is usually worth the effort and much longer closing delays. Earlier, I mentioned these homes tend to be sold as-is. However, buyers are allowed to have an appraisal and inspection done which
sometimes needs to be stated "for informational purposes only". The bank won’t make any changes to the property itself, but they might negotiate the price down so you can use that money to make the repairs yourself. If you want to buy an REO property, you have to have your financials ready. Lenders set the prices low so properties will sell quickly, and if your finances aren’t in place, you could miss out on a great deal. To prepare, you need to make sure you’re pre-approved and have a letter from your lender. The letter must include the pre-approval total, how much you’ll pay for the down payment, and how to reach the loan officer. If you’re paying cash, you’ll still need a letter from the bank. This will state that you have enough money to cover what you’ve offered. One step that’s different in making an offer on REO properties is that you include an earnest money deposit . Essentially, this is a show of good faith that you’re truly interested in purchasing the property. The deposit will stay in an escrow account, then go toward your down payment and closing cost. These deposits tend to be 1-2% of the full offer, and may or may not be refundable. For example, if you decide not to buy after all, you likely won’t get the money back. However, if the bank backs out of the deal, you will probably get a refund. There are a few ways to find REO properties. A good place to start is by enlisting the help of a real estate brokerage that can search lists the general public can’t access. Sometimes the brokerage has one or more realtors that focus solely on REO properties; sometimes, they have an entire department dedicated to REO. Second, you can look online at websites like Foreclosure.com, Auction.com, and RealtyTrac.com. Just be aware that you might have to become a paid member in order to search these sites.
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