Real Estate as an Investment

There are many ways to utilize Real Estate as an investment opportunity.  Some investors view it as a way to make some serious money fairly quickly, others look at it as a method to supplement existing income, while still others assess it simply as a reliable hedge against inflation.  Which method you choose has much to do with your individual personality, personal preferences, lifestyle as well as your overall tolerance for risk.  Today, we will give you suggestions regarding the ‘Buy and Flip’ method! 

By far, this is the most romantic method of Real Estate investment, in large part due to several television shows which give the illusion of a sure-fire get-rich-quick scheme! In reality this path is wrought with risk! Nonetheless, there are many things you can do to minimize your financial exposure, here we’ll take a look at 7 of the most important principles:

  1. Buy right! Look for properties heavily discounted.  Bank-owned or Estate-owned properties, as well as Trustee sales and tax sales are common targets, however any property in which the Owner is highly motivated to sell can also be an excellent candidate.  Additionally, making ‘low-ball’ offers on homes priced at or near fair market value can also be productive, however this is generally effective only where Real Estate activity is slow or inactive.  In your offer to purchase, always include a unilateral right to cancel (in Washington state, it’s most common to see a 10 day period following mutual acceptance of the offer), in order to give you the time to thoroughly inspect the property and work the numbers.

  2. Buy on up-cycles of the Real Estate market! If the market is heading in an upward trend, all news following your acquisition becomes good news.  You expected to be able to sell the home for “$X” but in reality you end up selling for “$XX”—your entire team look like heroes, you’re ecstatic and very pumped up for your next endeavor!  The sun is shining, the birds are chirping and the grass seems just a little bit greener… okay, sorry about that…

  3. Create an unbeatable Team!  Your team should include a superb Real Estate Broker, Loan Representative (or private money source), Real Estate Attorney, CPA, as well as a skilled, reliable, affordable Contractor pool.  Beware of cutting too many corners when it comes to your team.  Experience has shown that a ‘Flipper’ who shops for the cheapest professionals is doomed for failure.  When you hire excellent team-members, you only cry once, while the ultra-frugal cry every day.

  4. Look for good bones! When scouring the market for your next rehab project, focus on those properties having a good location, roof, foundation, electrical system, well, septic system, plumbing system, as well as overall structure.  The reason is that, although defects in these items can always be remedied if you throw enough money at it, the eventual Buyer of the property most likely will not pay what it cost you to make the repairs.  If you make a habit of spending $100k to make $50k, you’re sure to become a millionaire- only if you started out a billionaire!  Renovations that involve expert painting, beautiful floor covering, exquisite kitchens, luxurious bathrooms and clean landscaping are the big money-makers!

  5. Use your skill-sets! If you have carpentry skills or other areas of expertise that can save you money, use them when at all practicable.  I have Clients who save tens of thousands on every project, by making use of their skills.  This is not a hard set rule though, for I have other Clients who have the necessary skills to perform certain tasks but still contract out to others, simply because their time is more profitably spent elsewhere.

  6. Do the math! It’s advisable to work the numbers backward before you’re committed to purchase (i.e. prior to the end of your unilateral right to cancel an agreement).  For example; once the rehab project is complete, what will the home sell for?  Your Real Estate broker can give you a reliable range, which will ultimately be influenced by the quality of the work performed, the location, characteristics and amenities of the property as well as foreseeable market conditions at the point of sale.  Utilize the low number if you’re conservative and the mid-number if you’re able to assume more risk (i.e. have deeper pockets) and then begin your subtractions.  Subtractions from the sales price are closing costs when you sell (your Real Estate broker can itemize these for you); Cost of the rehab project (your Contractor team can provide this for you- however build in extra for those unforeseen issues that may arise, especially where tearing out walls will be part of the process); Holding costs during the project which include loan interest, utilities, property taxes and insurance (your Contractor team can give you a close estimation of the time they’ll need to complete the project while your Real Estate Broker can give you an estimation of the time it will take from the first day on market to the date of closing with the new Buyer); Closing costs at the point of purchase (your Loan Rep will provide this to you); and finally, your desired profit (you can provide this to yourself, although you will want to plan taxation strategy with your CPA).  Once you know all these numbers, you know the ‘Buy it Right’ price!  Do beware of the ‘paralysis by analysis’ syndrome however, whereby many people never do buy anything ever, simply because they brain-drain every purchase.

  7. Adhere to the ‘Time-is-money” principle! Time lag can bleed your profit margins dry by the increase of your holding costs.  You can reduce the risks associated with this by the following: A). Map out on a calendar the entire project, from start to finish.

    B). Have your Contractor team ready to start work the very day after you close Escrow on the property.  C). Have your Contractor team committed to work that single project until the rehab portion is entirely completed.  D). If you have to wait days or weeks for the local Building Inspector to inspect a portion of the project, have your Contractor prepared enough to move to a different part of the project while en waiting.  E). Have your Real Estate Broker ready to hit the ground running by preparing marketing materials prior to the initial listing date.  This way, when you’re ready to launch the listing onto the market, it will be a simple matter of populating the marketing materials with photos, videos, aerials, panos, etc.  F). Don’t skimp on final market preparations- clean landscaping and other items to increase ‘curb appeal’ can attract more prospective Buyers and Staging the interior can help bring a faster sale. G). Require a loan pre-approval letter from any Buyer prior to accepting their offer.  If you fail to do this, you can waste days, weeks or even months of prime marketing time—all the while, you’re paying those dreaded Holding Costs.

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Rules for Buying Rental Properties

According to experienced landlords, the difference between a rental property being a profitable investment and being a disaster is how much work an investor is willing to do. Anyone buying rental properties must choose properties that generate a positive cash flow, and this involves more than the rent covering the mortgage payment. It is a mistake for someone buying rental properties to think they can deal with negative cash flow by waiting a while for the property to go up in value and then “flipping” the property for profit. Just ask the people who bought property in 2007 and tried to flip it in 2008 or 2009. The three big mistakes people buying rental properties make are underestimating expenses, expecting to put no money down and get instant riches, and not screening prospective tenants.

Big Mistake Number 1 is underestimating the expense. To be safe you should estimate that on a monthly basis, 40 to 60% (depending on whether you hire someone to manage the property) of the rental income will be spent on things like insurance, taxes, vacancies, and damages. Why such a high percentage? A major repair such as a roof or new furnace can really set you back. One way to figure out how much you should pay for a rental property is to find out what rents go for near your property, and divide that by 0.01. That would mean that for a house that rents for $1,000, you should spend no more than $100,000 on the purchase of the property.

Big Mistake Number 2 is believing those infomercials about “no money down and instant riches.” Those people on the commercials who live on a yacht within months of buying rental properties for no money down have nothing to do with the real world. Owning and operating rental property is more of a business than it is an investment that you sit back and watch grow. If you plan to manage the property yourself, be prepared for your phone to ring at any time, and be prepared to take care of the burst pipe or broken window that your tenants report. If you hire someone to manage the property for you, expect this to cost around 10% of the gross monthly rent.

Big Mistake Number 3 is failing to screen new tenants. If you’re in a hurry to rent a place out, or if you feel sorry for someone, prepare to pay big for it. Credit checks can be done for as little as $10 to $20. Verifying references may seem like a pain, but you should do it anyway. Contacting previous landlords to ask about their rent payment history, cleanliness, and damage to rental units is time well spent. Even if you hire someone to manage the property for you, take the time to learn the landlord-tenant laws where you live. You can bet that the “professional bad tenants” know the law forwards and backwards. Just remember that legal forms may cost a few dollars and getting them signed will take some time, but the time and money spent on an eviction is far more expensive and time consuming.

Buying rental properties can be a good or bad investment just like anything else. There are a number of rules of thumb for calculating expenses and cash flow. You also need to know how to analyze rents in the area you have in mind beyond just what the rents are at a given address. You will need to learn how to consider capital investments and determine whether a big repair on a property you are considering buying is a dealbreaker or not. Buying rental properties can be a satisfying way to make a side income or even a primary income as long as you go into it with your eyes open and don’t believe the infomercial hype about no money down and instant wealth.

 

Article Source: http://EzineArticles.com/?expert=Paul_Beauchemin

How to Choose a Property to Renovate

It is never risk free to renovate a home or investment property. In fact, you might tear down an old ceiling and find things like termites or plumbing leaks. This is hard on your budget and home equity. Here are a few things you can do to reduce risk:

Consider the location of the property

Rarity, scarceness and low supply add or subtract the value of a home. It will can maintain or increase when demand is more than the supply too. You’ll want to chose a property to renovate that is in a place everyone wants.

Everyone wants to feel unique

Unlike stocks and shares, houses each have unique quirks, qualities and features from other homes. Even with the same floor plan, people want to feel unique.

Unique qualities can make a buyer is be willing to pay that little bit more for a house than one that is like everyone else’s home.

Surroundings

Not all suburbs are the same. The surrounding including: streetscape, facilities, transport, shops and school qualities will be different. If you’re choosing a home to renovate, pick one with all of the above to maintain the home’s value.

Being close to good schools, quality medical care, good shopping, etc. will always be worth more than those miles from the nearest shop a long drive to a good school.

Selecting one to renovate in an area of the suburbs close to those things that isn’t built but planned will improve in value around the time of the announcement. Buying a home then, renovating, and selling when the planned project is finished, will allow you a profit, because value will increase even more.

Make sure to renovate correctly

A falling housing market is seldom the right time to renovate to add value. Most experts say to hold on to your renovation money unless you really need to create more space and the building costs are cheaper.  Improving to “go green” and lower home’s energy usage is a good move. Federal Government is encouraging us all to do it.

Highly personal renovations like “dream” kitchens, swimming pools or home theatres may sometimes detract from a home’s price. Not all buyers share your tastes. A new owner may see your huge kitchen is a waste of space if they don’t cook.

Buy and sell in market cycles

The top end of the property market is suffering now more than the lower end. This is due to low interest rates and first home buyer grants.

Some real estate predictions see the price falls of up to 40 % that have occurred in the United States or Britain. Other experts say that some capital cities could have stagnant property prices. This means they value decreases in real terms.

Every property will respond differently to market cycles. You can’t do much once you own your home and the cycles change. Wait until the cycle swings back to stability and any value drop shouldn’t matter to do your renovation. Renovating a new home and selling the old one in the same market cycle should deliver the same bottom.

For more information and to get access to our free video series on finding, renovating and selling check out: http://www.FindRenovateSell.com.au

Article Source: http://EzineArticles.com/?expert=Chelle_F