GET THE MOST MONEY FOR YOUR REAL ESTATE INVESTMENT
Published by Authorify Publishing Copyright © 2019 Authorify Publishing
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Table Of Contents
Thinking About Investing?
Financing Your Investments
Homes To Invest In
A How-to Guide For Wholesaling
Benefits And Risks Of Wholesaling
A Guide To Flipping Houses
Making Money On Flipped Houses
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 Curb Appeal Matters
15. Why Curb Appeal Matters
16. Why You Can’t Afford To Invest Alone
17. How Agents Help Investors
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 happy to meet with you to discuss a specific plan to sell your home. Happy reading!
AGENT was raised in CITY with X siblings. As a child, AGENT had aspirations of being a OCCUPATION. Never in a million years did he think he’d stumble into the real estate industry, but you can’t always predict where or when you’ll discover what you’re meant to do in life. AGENT was taught at a young age that if you want something in life, you have to work for it. So that’s what he did. And he worked hard. As the years went by, AGENT worked his way from FIRST JOB to LATER JOB, never wavering in his resolve to become the best version of himself with each career move. AGENT got into the real estate industry X years ago when STORY ABOUT HOW YOU GOT INTO REAL ESTATE/WHY. He set out to LIST ASPIRATIONS FROM WHEN YOU STARTED OUT IN REAL ESTATE. As his career advanced, AGENT found his stride working with NICHE MARKET/SPECIFIC MARKET AREA/TYPE. He’s an expert in LIST AREAS OF EXPERTISE/SKILLS THAT SET YOU APART FROM OTHER AGENTS.
Throughout his career, AGENT has earned numerous accolades, including:
• LIST ACCOMPLISHMENTS • LIST SALES STATS ix
• ANY OTHER IMPRESSIVE INFO YOU’D LIKE TO INCLUDE
AGENT aims to provide the highest level of service to his clients and takes deep pride in helping them achieve their real estate goals. AGENT aims to provide the highest level of service to his clients and takes deep pride in helping them achieve their real estate goals.
Testimonials & Reviews for Agent Name
Here’s a list of people whom I have helped buy or sell a home, and what they said about working with me:
Agent-Name had a tough job, but she did it!
We were tough clients! We were moving to City and didn’t have a lot of time to look at houses, having to deal with our employer’s relocation, and all of the other challenges that came along. But, Agent-Name went above and beyond to help us. Even now, one year after the sale closed, I can still call her for business and service recommendations in the area — she knows just about everyone, and is very happy to help.
Agent-Name is the best agent in City!
I’ve used Agent-Name twice so far, and I was impressed both times. I bought my dream home with AGENT a year ago. She worked long and hard to find me the perfect home. And she just recently sold another property of mine. Everything went quickly and smoothly. Both of my real estate deals were done very quickly and professionally. Agent is honestly the BEST in her business. I would highly recommend her.
Agent-Name perseverance got me the house
My experience with Agent-Name during the entire home- buying process, from start to finish, has been nothing short of exceptional. I have a unique work structure, and because of this, it was very difficult to find mortgage lenders that would approve me for a home. I was very frustrated and on the verge of giving up, but Agent-Name insisted that we continue searching. Not only did we find a mortgage lender but also a mortgage that I felt great about. His perseverance is the reason I am now a homeowner. He is professional, punctual, knowledgeable, and very easy to work with. With the highest regard, I will recommend Agent-Name to all my friends and family.
Very attentive to concerns, details, and negotiations
Agent-Name helped me find a house by literally picking it out for me. Every house I wanted to go to, I got there and didn’t love it. Agent-Name was busy taking note of the likes and dislikes I was stating and said “I have a house that you’re going to love”.... AND I DID! I went back 4 or 5 times to show other members of my family, and she accommodated me without complaint. I was a first-time homebuyer, and she walked me through the steps of everything, gave me advice, and constantly followed up to make sure I was doing OK. With her help, I was able to close on the house early, right before I started my new job. I would recommend Agent-Name to EVERYONE, buying or selling. Agent-Name made it so so easy. She guided us through the entire process. She recommended great people to work with
every step of the way. She was available 24/7 to answer any questions we may have had. With her high standards, expertise in the industry, and patience, we would recommend her as a Realtor to anyone looking! She was amazing!
Agent-Name even advised me on how to prepare my house
Agent-Name was a gem. In addition to being highly knowledgeable about the real estate market, with many years of experience, he is a consummate professional. He was extremely easy to work with, gave me very good advice about preparing my house for sale and was very responsive during the entire process of receiving offers, selling and closing. I would work with him again in a heartbeat. He’s that good.
Agent-Name is the first agent I would call
Agent-Name and his team were able to rapidly list, show and sell my property. Being an expert in real estate, he was spot on in his pricing of my property and getting this deal completed. Overall, I highly recommend him and his team. If I want to buy real estate, AGENT would be the first person I’d call.
Agent-Name got us an offer in three days!
Agent-Name was the consummate professional during our stressful and difficult process. In the midst of juggling a ‘failed’ marketing effort with another agent, she presented a
well thought out plan and strategy to sell our home in short order. We needed to move quickly due to a growing family and another baby on the way. She helped alleviate that pressure by securing an acceptable offer with 3 days of listing. We put pressure on her, and she delivered. We couldn’t thank her enough.
Agent-Name kept us calm throughout the process!
Agent-Name always made herself available to answer questions. She worked hard to sell our home and find the best fit for our new home. She and her team worked with us through the entire process and kept us calm when we got anxious.
I am 100 percent satisfied!!
Agent-Name is professional and knowledgeable about everything. She is also always available. I would definitely recommend her to anyone. Very smooth transaction from start to finish. I felt confident with her experience.
Agent-Name found us our dream home
Agent-Name was very efficient and helped us find our dream home within a few short months. She was able to negotiate the price that we wanted for the house. Overall, I would look for her again to help us look for a house if need be in the future. Thank you so much!
Efficient communication and service
Agent-Name and his staff were very helpful in selling our condo. They kept me informed frequently with email, sending reports on showings, offers, and feedback from potential buyers. We are very satisfied.
Agent-Name will get your house sold fast!
Agent-Name is great and has the expertise to get your house sold. The communications throughout our sale (from beginning to end) has been outstanding. Agent-Name understands the stress involved in selling your house, and she updated our family consistently! This made us feel we were in good hands. I have worked with numerous agents, and I highly recommend her to represent you when it comes time to sell your home.
Excellent experience topped with a personal touch
Excellent experience all around, not only knowledgeable but Agent-Name and team have a very personal touch I felt like family throughout the entire process. He always took his time; we never felt rushed or like “just a number.” I sold my home and bought with him. We had lots of questions he gladly answered them with no problem and guided us through the entire process, eliminating lots of stress. I truly appreciate that and would recommend him and his team to family and friends.
CHAPTER 1 Introduction
Have you ever watched one of those house-flipping or income property T.V. shows? They seem to just 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. And it’s 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 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 strategies you haven’t tried yet, or weren’t even aware of. Maybe you’ll just find validation you’re on the right track, or a reminder of you why you got into investing in the first place…
What I’m saying is that there’s a lot of good information here, and it can’t hurt to give it at least 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 commercial real estate investment returns 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 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 Financing Your Investments
Now that you know why real estate investment is a good idea, it’s time to learn how to do it. But 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 isn’t a bunch of people out there willing to just hand over their cash so you can invest. This is when having a solid network is important. You’ve got to be clear on whom you access for help and how to best use the help they give you. It’s also 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.
WHERE TO GET 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. 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). Many 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.) Self-Directed IRAs (SDIRA) 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 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, there’s no specific guidance I can give about that here. However, 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 strongly recommended that you 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.
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 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. You also have to close on the new property within 180 days of the previous property’s sale. • A qualified intermediary. Not only can you not be directly responsible for the transactions or money, your 12
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 never 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. These include not just real estate, but also stocks, bonds, and more. A CPA can give you all the specifics. The 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. That $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.
Rental property tax benefits:
• home office, office supplies, computer software • mileage • travel • meals (50%, as long as you’re having a business meeting while eating) • mortgage, unsecured loan, and credit card interest • loan origination fees or points (they’re considered kinds of interest) • utilities, trash, and recycling • 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 property management) • property management fees, salaries, and benefits (if you manage yourself 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 bookkeeping, filing • property taxes • licensing fees • occupancy taxes
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 • 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 at least two weeks per year might allow you to write off advertising and rental commission and prorate other expenses • some states have historic tax credits that include both the rental operation and/or any renovations • incentives from your state or locality to invest in lower- income areas 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
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. 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.
Credit scores are often based on the FICO scoring model. They can range from 300 to 850:
• 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’s legit. 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?”
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