Contractors

So if you are going to rehab a house, you need contractors. First you might want to read the segment on rehabbing.

 

Paint and Carpet

For a simple job, that people call paint and carpet, you would just go in and paint the house and either clean or replace the carpet and refinish any hardwood floors if they need it.

If you are going to get a carpet cleaning done, you should go for steam carpet cleaning. It is more effective. Otherwise, check around and get several prices for replacing the carpet.

 

Continue reading Contractors

Renting as an Investment Strategy

We discussed using rentals as a way of getting out of a changing market when you find yourself upside down. Much more pleasant is renting because that is your strategy. You want to build up a portfolio of properties so that you can retire on the income from the rents. Even better is if you have enough that you can hire a property manager so you don’t have to worry about the issues.

Cash flow

Renting has several benefits that investors know about but most people don’t think of. You only want to invest if you can get a positive cash flow each month. So the first benefit is positive cash flow. Another benefit occurs because of that. It means that your renters are paying your mortgage and insurance and taxes for you. Even better, rents typically go up over time but the monthly mortgage payment does not (unless you have a variable rate mortgage, then it might). That means your cash flow will increase with time. And when the renters have paid off the mortgage for you and the house if free and clear, the cash flow will really jump.

Capital Gains

 

And finally, there is capital gains. Typically real estate increases in value over time (assuming it is maintained properly). Yes, sometimes it dips in value like it did in the 2007-8 time frame. But over the longer term, it has always steadily increased. That means that besides the cash flow, you will be getting an increase in the value of you asset, i.e. capital gains.

Leverage

What is most impressive is the leverage. Typically you put 10-20% down on a house. Let’s use $100,000 as the value of the house because it makes the calculations easy. You put down $10,000 and get a mortgage for the rest. If you assume an increase in value of 3% a year, it won’t take that long for the value to go up 10%. Not bad, right?

Wrong, it is phenomenal. Why? Because you put in $10,000 and the value of the house has gone up 10% or $10,000 which is a 100 percent return on your money and that is not including the cash flow and the tax write-offs from depreciation etc.

Compare this with investing in stocks. If it goes up 10%, you money has increased 10%. If you invest in speculative stocks that can go up 10 times or more, the key word is speculative. You might also lose your money. You can also lose money in real estate, but you still have the underlying value of the property. So you have a leveraged upside but not a leveraged downside. Pretty nice.

Renting as an Upside Down Solution

There are several situations where you might want to rent. Hopefully you will never need to use one of them.

Upside Down

We will get the bad one out of the way first, but it can be a lifesaver if you need it.  In 2007 and 2008 when the market turned down fairly quickly it caught a lot of people flat footed. Rehabbers who had bought places to fix up and sell found that by the time they had finished the rehab, the value of the house was close to the mortgages on it or even less than the mortgages. If they wanted to sell it, they were going to have to come up with money out of their own pocket. In other words, they were going to lose money on the project.

So, one solution to this is to take the hit and move on before the value decreases further. The other is to wait it out by renting it. The one problem is that by the time the market comes back, renters will have done enough wear and tear that you will need to do at least a minor rehab again.

One thing you need to figure out is what are the rents in the area and will you be in a positive cash flow situation. If you borrowed from a hard money lender at a high interest rate, this might not be a good option. You will be losing money each month. And the problem there is that if the value of the house has gone down because of the market going down you won’t be able to refinance it with a bank at a reasonable rate to make it cash flow. You are kind of stuck.

Depending on where the property is located, you may want to investigate Section 8 which will be discussed in more detail in another entry.

 

Rehab

Have you ever rehabbed a house before? It can be a way to make a lot of money because you are increasing the value of the house and should get a premium for this. But beware about your choice of what to buy depending on what you have done before.

Experienced

If you are a contractor, electrician or something like that and work on houses anyway you are in pretty good shape. You should be able to estimate how much the job should cost fairly accurately. Your problem is going to be you want to do it all yourself. Remember that time is money. It is quite likely that you will make more money buy having some of the work done by other people you know in the business which will allow you to fix it up faster and sell it faster and get on to the next one.

Inexperienced

If you aren’t a contractor but fairly intelligent, you can learn what you need to know. For the first one you do, find a house that needs minor repairs. You don’t want to learn on a really complex one. Work up to it. You will be glad you did. Otherwise you could completely misjudge, take a bath on the first one and never want anything to do with real estate again.

Also, do you want to have the house inspected? If you don’t know what to look for, that might be a good idea, but if someone else puts in a contract without an inspection clause, you probably won’t get it. You also won’t know how to bid because you won’t know how much repairs are going to be.

How to get around this problem?

Have several contractors come in and bid the job before putting in the offer. You will be amazed because the prices will be quite different most likely. There will be a learning curve and a cost associated with it. Offer to pay the contractors for their time to come in and give you advice as well as a quote.

Get 3 of them and walk through with them and have them tell you what they think the property needs. This will vary as well. Take notes as you walk through. You will learn a lot, especially comparing what the 3 of them say. Based on what they say, figure out what you want done and then tell them what you want them to give a price for. Otherwise, each of their quotes will be for doing different work and you won’t be able to compare them.

Use that to figure out how to put in a bid on the house.

Subject To Purchase

What is Subject To?

It means buying subject to the existing mortgage. You write a contract with the owner but the original agreement between the bank and the seller stay in place.

The terms can be whatever are agreed to. For example, you agree to pay the mortgage for 2 years and then pay off the mortgage. In this case, the price is the amount of the mortgage. Or you could agree to pay the mortgage but when you pay off the loan by refinancing or selling, you have agreed to pay another amount besides just the mortgage.

The amount of sale could possibly be below the amount still due on the mortgage and the seller would have to come up with the difference.

Who owns what?

So once the transaction is done, the buyer owns the deed and has control of the house. The mortgage is still in the seller’s name. The buyer has not assumed the mortgage and has no obligations there unless something has been written into the purchase contract. But the mortgage company has no rights over the buyer. If payments are stopped, the only person who will be hurt is the seller. But it is completely unethical to go into a transaction expecting to never pay the mortgage and screwing the seller. This will quickly destroy your reputation. Don’t even think about it.

Due on Sale Clause?

Basically all mortgages have a due on sale clause which says that if ownership changes or other factors change, the bank has the right to call the full amount of the mortgage due. BUT, It is at the bank’s choice. It doesn’t have to call the loan due and if the loan is current and being paid on time, it is unlikely to. Why?

When interest rates on existing mortgages were 6-8% and the going rate for new mortgages was 12-14%, it made sense for the banks to exercise the due on sale clause because they could make more money with a new loan.

And now? Say the existing loan is 6-8% and rates are in the 3-4% range. Why would a bank call a loan that is being paid? In addition, if they have to go through the foreclosure process, they have significant expenses and probably aren’t getting paid anymore.

In addition, because of regulations banks need to keep a certain amount of assets as cash or liquid assets that are easily sold. But they are also able to lend out multiple times their assets. If the reserve requirement is 10%, they can lend out 10 times their assets. So, if they foreclose on a $200,000 loan, that is considered a bad asset and that is $2 million less that they can not loan out and make money on.

Why sell subject to?

People are frequently willing to sell subject to when they need to sell quickly or have a financial problem and are worried about their credit being hurt. There may also be no equity in the property and they want to sell but can’t afford to pay the costs. They may be moving or getting married or divorced or buying another house and need to sell this one quickly.

Frequently the main worry is that the mortgage will be paid. You can explain that you have incentive to pay or you will lose any equity in the house. You can also set up payment through a third party. That way they will know it is getting done and you definitely don’t want to pay them and hope they pay the mortgage. You could set up a joint bank account with autopay to the lender as a solution too. Other than autopay you would want any withdrawals to need both signatures.

Why buy subject to?

It is a no money down way to buy property unless you have to catch up some back payments. You don’t need to qualify for a mortgage and don’t need to come up with a down payment. It is great for investors, people with damaged credit and can’t get a loan but who have cash flow, or young people trying to get into their first house.

How to Make Money?

If the rents in the area are $1200 a month and the mortgage is $1000 a month, you will be making $200 a month. (Put the money aside and don’t spend it in case you need it for repairs.)

What if the rents in the area are $1000 instead? You would have no interest in the deal because you don’t want to just break even, you want a minimum of $200 per month cash flow to be worth it. Some sellers will pay you the $200 per month just to keep their credit from being trashed. It is far better than paying the mortgage of $1000 per month.

If rents are below the mortgage amount it is still possible the seller will pay the difference and your $200/month postive cash flow.

Another way to make money is to spend the money you might have paid on a downpayment in fixing up the property. Then sell the property and make your money that way.

A book that goes into all of this is by Wendy Patton.

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The above is informational only and not legal advice. Each state has different laws and frequently there are differences between counties, cities and towns. You need to check with your lawyer and other appropriate professionals.

Finding Properties

One of the biggest problems is not financing, it is finding good deals. Financing was somewhat of a problem at the worst of the recent recession because banks had pulled back so much of their activity, but there were still private funds available. As we have heard many times and seen it proved, if you find a good deal, the money will happen.

Assuming you have money, the easiest is to use a real estate agent or develop a network of finders. (Discussed in Acquiring Properties) Or you can use a wholesaler.

Real Estate Agents

Real Estate Agents – The problem here is that most are used to vanilla transactions with homeowners and they don’t know any investors and they don’t know what a good deal looks like. Others do know what they are doing, but they keep the good deals for themselves. Others know but aren’t interested because of the work involved. Why? Because every offer you make is not going to get accepted. Your offers will follow a formula and they are often well below asking price. A lot of offers will be rejected. There is a lot of paperwork for the agent to put together an offer, so he or she can get tired of only 1 in 10 or 20 offers being accepted.

The odds might get better over time as you get a feel for who to make offers to, but it is still a numbers game. Another problem is that frequently it is easier to find deals in lower priced housing. It takes the agent the same amount of work to create the paperwork for a million dollar house as a $50,000 dollar house. There will be more expenses in marketing the million dollar house, but their commission is also a lot larger.

You are probably going to need to train an agent you work with on what you are looking for. Most agents don’t think the way investors do. There are exceptions. The fastest growing real estate company in the country and one of the largest is Keller Williams. Its head is Gary Keller who has written a number of books and believes that agents are perfectly positioned to find and invest in real estate. Despite this, many Keller Williams agents still just stay in the traditional model. However, he has written some excellent books on investing.

Gary’s books include the Millionaire Real Estate Investor as well as the books Flip and Hold.

Bird Dogs

You can also get people to find property for you and pay them a fee.  This is often called a bird dog. There may be some legal issues here, but there are ways around it. One way you can find people is through Craigslist and another is going to your local real estate meetings. Most are known as Real Estate Investment Associations (REIA) and the name of the area they are in. If you google that, you should find clubs in your area. Or go to http://www.nationalreia.com/ and check out their list of local clubs. They are a good place to find contacts and information.

Wholesaling

This is where you can also find wholesalers. These are people who find properties and put them under contract and then flip the contract to you before their deadline to close on the property. This is perfectly and done by people selling malls and apartment buildings and other transactions in the millions of dollars. Flipping got a bad name because some people were doing it illegally. They were getting inflated appraisals and doing other fraudulent things. Flipping in and of itself is perfectly fine and legal. For that reason, many investors now call it flipping. Banks who were burned a few years back can also be leary.

Drive & Learn

If you don’t use other people to find properties, how do you find them? You can look at Craigslist ads or place them yourself. A tried and true method is driving. Pick an area and get familiar with it.

So, how do you pick an area? You want middle income homes. Why? You may find a deal in the $800,000 to $2 million dollar houses, but is will not be often. Plus, how many people will then have the capital to be able to purchase it. You are dealing with a very small slice of the market. Not a good idea.

What about the low end? That market is mostly renters so you are only going to be dealing with investors. Also not a good idea for this particular purpose. For buy and hold it might not be a bad area but not for this.

You probably want houses  in the $150,000 – $300,000 range. That will change depending on where you are. In some really high priced markets it may be a bit higher and in some areas of the country where real estate prices are much lower overall it will be lower than this range. Check out the pricing in your region. You want where the bulk of the home buyers can afford.

If you drive all over randomly it won’t work well. The idea is to get familiar with an area so you know what is going on there. Take a map (if they still make them) and lay out a pattern. Drive every street. Take notes on what you see. Be on the lookout for houses that need paint badly or the lawn hasn’t been cut in ages. Write down these addresses. You can also walk a street and talk to people and ask them if they know anyone that needs to sell. People don’t like rundown houses on their street. It brings down everyone’s value. If you tell them that you are looking to purchase, fix up and sell to a homeowner, they will probably be willing to point you in the right direction or if you give them a card, they might call you if they hear of something. You want to get known as the go to guy/gal in the area.

Once you get home, go in the internet and find out who owns the house and then contact them. This is very easy in some states and in other states who are way behind the times technologically it can be tough. In the worst case, if you know a real estate agent or a title attorney, you could ask them to find out for you. Repay the favor by using them in the transaction where it makes sense.

The above is informational only and not legal advice. Each state has different laws and frequently there are differences between counties, cities and towns. You need to check with your lawyer and other appropriate professionals.

Acquiring Properties cont’d

Another way you can acquire property is with lease options . Once again, check with your lawyer to make sure you are doing this correctly. You may need some money for this.

Here is what you are looking for. Find someone who wants to sell their house but is upside down. In other words, they owe more than the house is worth or about the same as what it is worth but they still need to pay closing costs. Even better, they might have lost their job and really want to move. (If they owe too much more than the value, it may not be a good deal because you want to eventually be able to sell the house for a profit.) The other consideration is what are rents in the area. Because you need the rent to be higher than the monthly mortgage amount.

You then write a quit claim deed with the owner which transfers ownership of the property but not the mortgage, but with the promise that you will pay the mortgage. (The rules vary by state and in places have gotten a bad name because some people have misused them and taken advantage of people. Use a lawyer to make sure you do it right.) Or you could write an option to buy the house written in a way that gives you control of the house.

You then find someone to rent the house. But you do this as a lease option. Typically you would want someone with bad credit because of a large hospital bill, a divorce, job loss etc. but who is starting to bounce back. They have good income, maybe savings, but because of the hit to their credit, they can’t get a mortgage for another year or two. They would lease the house with an option to buy.

You can get an option fee or downpayment which can be fairly large. This is usually non-refundable. The rent is also higher than market rent because the amount above the market rent goes towards the downpayment for the house as well. John Reed did a nice article on the problems with lease options.

So after 1-3 years,  whatever the term, the lessee will need to buy the house or the option terminates.

In this way, you can control a house and generate cash flow without actually buying it in the traditional sense.

The above is informational only and not legal advice. Each state has different laws and frequently there are differences between counties, cities and towns. You need to check with your lawyer and other appropriate professionals.

Acquiring Properties

Acquiring properties depends on whether you have money or not. If you have money it can make things easier, but it is also easier to make big mistakes as you are learning.

Act as a Finder / Bird Dog

If you have little money, one way to get started in real estate investing is to find property for investors with money and get paid finders fees. Some will pay $500 per deal, others will pay some sort of percentage. Some investors are real tightwads and others are more generous because they want you to keep coming back with more deals. We have heard of some investors paying finder’s fees of $1,000, $2,000 and even $10,000 for a really good deal.

Wholesaling

Another method you can use is wholesaling. This is a bit riskier than acting as a finder. In this case, you find a good deal and put a contract/offer on it and then sell the contract to an investor. This requires that you know what a good deal is. You need to find a deal that not only has enough profit margin for the investor but enough for you to make some money as well.

Why would an investor pay you a finder’s fee or buy a contract from a wholesaler? Time. Frequently, they are so busy arranging for the contractors and then selling that they don’t have enough time to find deals. All aspects of the process take time and resources. But also, if you bring deals where they can make money based on the criteria they are searching for, they don’t care whether they found it themselves, a real estate agent brought it to them, or you brought it to them. Remember, if a real estate agent brings the deal to them, they have to pay for that as well.

One thing to note. As far as we know, there are no restrictions on wholesaling since there are no restrictions on signing a contract to purchase a property, and the same goes for selling the contract. Real estate agents tend to protect their turf and in many states, you need to be careful about receiving fees where you could be seen to be acting as a real estate agent without a license. You should find an attorney in your area and ask them for clarification.

The Right Attorney

Regarding attorneys – You can probably have a first meeting and ask some basic questions without having to pay. After that, they will probably want some compensation but it may not be that much depending on what it is. Finding the right attorney is important. Some states require attorneys to do the transaction and others don’t. But, a lot of real estate attorneys (primarily title attorneys) just do vanilla deals of regular home buyers and regular mortgages. You don’t want them. There are lawyers who do that but also work with a lot of investors. That is who you want. They can give you a lot of great advice, but can also give you some good contacts for other aspects of the investing business.

I think that is enough for now. We will cover some more things you can do without much money such as lease options and other things if you have some money. Till later.

The above is informational only and not legal advice. Each state has different laws and frequently there are differences between counties, cities and towns. You need to check with your lawyer and other appropriate professionals.

Welcome to The Real Wealth Blog!

Welcome to The Real Wealth Blog ! We are going to have a lot of fun here and hopefully all get wealthy. Unfortunately, no matter what great information you give, some people will just never follow through. More millionaires have been made through real estate than any other way and we plan on sharing information with you to help you on your way to success. Look here for more details to come.