Real Estate Investment Financing Strategy

Financing is currently a challenging issue for investors with several properties (generally more than 4). The issue is that the lending institutions view someone with several properties as an increased risk.

When you are qualifying for a new loan to purchase your next investment property, the prior investment property loans show up on that credit report. Depending on the lender, they may decide not to loan you any more money.

One of the strategies currently being used to address this issue is to deed your properties over to an LLC and then seek commercial financing for those investment properties.

The investment real estate now deeded to separate entity and financed through a commercial lender shouldn’t show up on your personal credit report. This helps to free up your personal credit report, potentially making it easier to get financing on your next great real estate investment purchase.

Your investment real estate should already be held in a LLC for purposes of liability. But before implementing this strategy you should contact your professional advisors (residential and commercial mortgage brokers, real estate attorney, etc) to research this strategy for your specific situation and develop a plan to move forward if it is determined to be feasible.

Onward.

Real Estate Investing and The Media

I was listening to one of the local real estate radio shows, and the guest was Alan Langston the Executive Director of the Arizona Real Estate Investors Association (AZREIA). The discussion was Phoenix area real estate market and the benefits of being a member of his organization.

AZREIA has been in existence for about 6 years and is one of the largest, if not the largest, real estate investor organizations in the country. Anyway being the Executive Director of a large industry organization gives the advantage of being connected with a lot of local real estate investors and industry experts, i.e. he knows and understands what’s going on in the Phoenix market place.

He made several good points during his discussion. They were talking about how negative the media is on the real estate market right now. (Remember the media is in the business of “SELLING” the news.) Anyway Alan made a great point about the media. To paraphrase he said the media helps to keep the noninformed investors out of the market. Which is a great way to look at the service the media provides. If you are not informed about the market (applies to all industries) you should not be investing. He also mentioned the informed real estate investors (like myself) have been watching the market closely and are now buying real estate.

If you are a long-term real estate investor, the simple fact is that if a property has positive cash flow, it has some good long-term potential. As with any type of investment or business endeavor it depends upon your goals and perspective.

If you are interested in investing in real estate or buying a personal residence, then get your financial house in order, put your Financial Success Team together and get informed about your local market.

Join your local real estate investing club or organization. In Phoenix Arizona and surrounding areas go to www.AZREIA.com to find out more information and become a better informed investor.  Be one of the few that take advantage of this real estate market to increase your financial position.

If you are in the Phoenix area and would like to work with an Investing REALTOR contact me at Tips@RealMarketPros.com

Make your day GREAT!

10 Reasons (7, 8, 9 and 10) Why I Like Real Estate As An Investment

(To read the prior posts regarding Real Estate Reasons To Invest select the desired post: 1-2, 3, 4-6.)

Number 7

Assignment of the agreement. You can assign the real estate agreement for a fee. If you are not interested in actually owning the piece of real estate you can negotiate a stellar deal and then sell or assign the agreement to another buyer for a handsome fee. You don’t even have to take possession of the property to make money from it. Sweet deal eh. But of course you want to have a contingency plan in place in the event you need to go through with the purchase.

Number 8

Little or No Money Down! You can buy a piece of real estate with little to no money out of your pocket. By finding the right type of seller (motivated) you can purchase real estate by taking over payments (make sure you understand the details of the loan you’re assuming).

Depending on your exit strategy (selling on a Rent-to-Own, or Lease Option contract) you can put down a little money to purchase and get a return of your initial funds while your tenant is renting and improving their credit and financial situation to be able to purchase the property from you at sometime in the future.

Another scenario is buying a deeply discounted property with a short-term loan and then refinancing to pull your funds back out to use again.

Number 9

Legally Pay Your Taxes Later. You can sell the investment property and purchase another one and legally defer any taxes on the profit owned. This means you get to use that money that normally would go to Uncle Sammy to make YOU more money. Why pay tax now if you can use the funds to accelerate your returns.

Number 10

Leveraged Wealth Generation. You can use other people to pay your mortgage payments on your real estate investments. If you have purchased right, you get to use tenant payments to pay your monthly payments associated with your property. So while they are paying the bank, you get to sit back relax and watch your assets grow in value. This growth in value comes one from the appreciation of the asset over time and two from the reduction of your principle on your mortgage over time creating more equity in your property.

So there you have it, just a few of the many, many, many different benefits of investing in real estate. There are also several very passive, secure ways to invest in real estate that I did not mention in the 10 Reasons (Click here to find out more.).

The Simple Warren Buffett Approach to Real Estate Investing

From what I understand about Warren Buffett, is that he likes to keep things simple.  He is said to have two basic rules of investing that he follows.

Rule 1: Never Loose Money

Rule 2: Always Remember Rule Number 1.

By following this simple approach in any aspect of investing whether it be stocks, or real estate you should consistently do well.

Why does this approach work so well?

I think Phil Town’s Rule # 1 investing approach, simplifies Warren’s (like I know the guy) approach to investing. The key is in doing the back ground research (due diligence) required to be able to attach a value to the company you are investing in. Really get to understand the company or in our case it is a real property.

By doing the research on the company’s past performance, and the people in charge, a level of predictability can be established. By looking at the numbers a value can then be established for that company today and in the future based on its past performance.

The risk can be reduced through the purchase of the company at a deep discount, which gives a margin of safety for any miscalculations or hidden issues that may come up in the future.

The company should also be one you would be willing to hold for the next 100 years.

It makes sense doesn’t it? If you know what should happen in the near future, and how an asset should perform, then the otherwise tough decisions become easy decisions when the asset doesn’t perform. Good decisions can be made based on the numbers instead of emotions.

My approach is similar, only the principles are applied to real estate. I’m looking for those situations in which the value of a real asset can be purchased at a significant discount. By sifting through the numbers a realistic value can be determined as well as the future expectation for appreciation performance (yes, properties are appreciating even with the current market conditions).

Once a market value is determined then comes the way to realize or create the equity in the property. This happens either through negotiating and buying the property at a 20-30% discount, or through property improvements, structural changes, zoning changes, income changes or simply by changing the perception of the property.

Knowing the numbers in a particular area and buying at a discounted value, allow us to ride out these market fluctuations. Buying a property at a 20% discount in a good area allows us to hold when the market declines 5-10 or even 15%.

Makes sense doesn’t it.

Anyway… there is HUGE money to be made in finding the discrepancies in value.

Risk is further reduced by having a contingency plan for each asset that works in both the short-term and the long-term.

In reality there are few things that are 100% predictable, and stuff happens out side our control. So in order to keep the cash invested and the assets safe, there is also a long-term plan. This plan allows us to continue to benefit from holding the property in our long-term portfolio.

As everyone is aware with the current market conditions not all real estate continues to appreciate without pull backs. With our approach we are able to ride out these market fluctuations.

So in reality our approach works in markets that are appreciating and markets that are depreciating.

Email me and we’ll set up a telephone appointment. This is a no obligation initial consultation on some of the strategies you can use to build your personal cash generating machine.

Real Estate Knowledge Is Not Power!

It is often said, “Knowledge is power.” Although I think knowledge without action is just knowledge, I like the phrase “Applied Knowledge is power.” I heard this initially first from Dolf de Roos (Real Estate investor and educator) in his Property Investors School. (Remind me to tell you about his REAP investment analysis software.)

The concepts of these posts are not intended to short-cut the process of building wealth, but to accelerate it. I personally believe that It’s OK to get rich quick! Although you must beware of the short comings of most of the get rich quick opportunities, as many seem to be for the benefit of the originator and not so much for those who come later. Perform the necessary due diligence and understand the business or opportunity before investing your funds.

I mention accelerate the process of wealth building verses short-cutting it, because a short cut implies skipping or leaving out some of the steps in the process. Whereas accelerating the process means you gain the required knowledge and experience by being involved in the process, but in a much shorter period of time. (Concept from 20/20, John Wingert)

Knowledge and experience are essential components to grow and maintain your assets, especially as your asset base becomes larger and larger.

10 Reasons (4, 5, and 6) Why I Like Real Estate As An Investment

(To read the prior posts regarding Real Estate Reasons To Invest select the desired post: 1-2, 3, 7-10.)

Number 4

Depreciation. You’re able to depreciate your investment property year after year, even if the value of the asset is increasing. This can significantly affect your annual tax situation. By owning enough real estate you can significantly reduce the taxes you owe, and own a on property that is putting money into your bank account. To maximize this process and better understand this strategy you should be consulting your tax professional.

Number 5

Maximum Flexibility. You have maximum flexibly of what you can put in a real estate agreement. For example if you are unsure of the quality of the deal or have reservations about certain areas of the contract, you can include a clause that allows you to run it by your attorney or other professional before committing to going through the purchase.

You may also be interested in making repairs or improvements to the property before actually closing on the deal. What would be the advantage to doing this? Well as we discussed in one of the earlier points, improvements often increase the value of the property in an amount greater than the improvement. An example may be, if you have a home that you have an agreement to purchase for $200,000, and go in an make improvements increasing the value to $230,000, then you are buying the property with a nice already established equity position.

Number 6

Equity Use.  You can access the increased value of the real estate without needing to sell the asset. Meaning you can pull the equity out of a piece of real estate simply by getting a second loan or line of credit. The key to this strategy is to put the new available equity to work making you more money vs. spending it on a boat, new entertainment center or other doodads (for those of you who are Rich Dad, Poor Dad students).

While there are many more than just 10 Reasons Why I like Real Estate As An Investment, I’ll only mention 4 more.

10 Reasons (3) Why I Like Real Estate As An Investment

(To read the prior posts regarding Real Estate Investment Reasons select the desired link: 1-2, 4-6, 7-10.)

Number 3

Leveraged Improvements. There is the potential to make improvements to the asset and affect its value. The improvements made are often (when done correctly) create a perceived value greater than the original cost of the improvement. For example I have done some research in a particular neighborhood. I found that houses in this neighborhood with a garage and 3 bedrooms bring a significant amount more in sales price and sell faster than houses that only have a carport and two bedrooms. I’m guessing you may be saying “Duh of course they do.” But the real question is how much more does the 3 bedroom home with a garage bring? Is the amount to upgrade the house worth the increased sales price?

Well my research showed the difference between the two types of homes after subtracting the cost of repairs/improvements, closing costs and commissions had a projected net profit a little over $25,000! In case you haven’t been able to tell I’m very conservative and increase my projected costs by 10-15% and my projected sales price to about 95-96% of the current market price for similar homes.

Now to some $25,000 may not seem like much and to others it may seem like a significant amount. Just to be conservative lets say it takes 6 months to sell the house (instead of the 3 months it currently takes to sell in this neighborhood). What if you set yourself up to do two of these per year? An extra $50,000/year for a few hours of extra work and supervision, is an extra $50,000 worth it to you? That’s obviously an answer you will have to answer yourself.

Whether you think an extra $50,000 is a lot or not, I hope your seeing the main point I’m making. You can easily do something to affect the value of the asset. Try doing that with a stock you own.

More to on the way…

10 Reasons (1-2) Why I Like Real Estate As An Investment

(To read the posts regarding Real Estate Reasons To Invest select the desired post: 3, 4-6, 7-10.)

Now I know I’m going to hit a nerve with a few people. These may be the people who are saying, “Have you seen the market lately? Are you nuts?” These are the people and maybe your one of them, who purchased homes and property banking on continued high levels of appreciation. Buying at those inflated prices and now sitting there now owing more than what the property is worth. Not a big deal if you are getting a break even or positive cash flow. Oh you say you have a negative cash flow.

No doubt about, there is significant depreciation going on in many areas. Those of you who are in negative property situation need to pay close attention. If you would have purchased your property at a significant discount to begin with (at least 20% to the current market value) then you would not be in quite the same position of financial pain, as you are now.

If you are not able to purchase a property at a significant discount or realize a significant equity position in a month or two period of time without relying on appreciation alone, then you need to wait for the next deal.

There are many different reasons for the current state of the market. Which I may explain at some point in time in the future. The point is real estate has many great advantages as an investment when you BUY IT RIGHT. The key is putting together a team of professionals to assist you in finding those properties and the areas in which you can significantly reduce your risk and buy right.

These reasons for my liking real estate are in no particular order, and are just a few of the many reasons… Why I Like Real Estate!

Number 1

Leveraged Buying Power. You can buy assets worth greater than the amount you invest. For example Say we have $20,000 to invest in something. If you invest that amount in stock you control $20,000 of stock. If you were to purchase real estate you could use that $20,000 as a 20% down payment to purchase a $100,000 home. Or a 10% payment on a $200,000 home. (There are some other strategies in which you can legitimately, honestly and legally purchase or control a piece of real estate with using only about $5,000 (sometimes less) of the $20,000 and have $15, left over as a safety net).

Number 2

Leveraged Appreciation. This is where it is important to do your due diligence and consult with a professional so you can buy in the higher appreciating areas. Take the $200,000 house in the above example. Say in today’s current market conditions we have an area that is only appreciating at 1% per year. 1% of $200,000 is $2000 for that year. So if your initial investment was $20000 your rate of return is 10%. If you invest the same $20,000 in the stock market you need to get a 10% return. If you were working with a knowledgeable professional who has a team in place and can purchase that same house for only $5000 out of pocket your return on investment would be 40%. Realize there are also some other factors you have to consider into the equation, like taxes (depending upon how long you hold the investment), management fees and other expenses. But I hope you see the potential.

Stay tuned as the next few reasons are on the way…

Get Some Real Estate In Your Portfolio

I believe nearly everyone should have some real estate in their investment portfolio. When you understand all the benefits to owning real estate, it becomes almost a no brainer.

Yes, I know the state of the real estate market. One of the keys to understanding the real estate market is that, it is not a national market, so therefore not every community of the country is experiencing a decline. In reality some markets are actually experiencing significant gains (I know hard to believe). Real estate is local, which means that with a little due diligence you can find some great deals, across the country or maybe even in your backyard depending on where you are located.

(To locate some of the highest appreciating markets visit: RealMarketMastery.com)

There are basically two ways to be involved in real estate. One is through the business of real estate. Often a shorter term perspective involving buying and selling it, rehabbing it, flipping it, developing it, or some type of activity that lends itself to a repetitive activity often lending itself to regular, predictable cash flows due to the continuous business activity.

The other way to be in real estate is through the investment of real estate, which is generally a longer term perspective often involving buying real estate notes or deeds of trust, buying property and holding it as a rental, buying land and holding it, or private lending. I will explain some of these terms in the coming posts.

For now just realize that although many of the papers are portraying doom and gloom, many of the people and businesses that know and understand real estate are now searching for buying opportunities.

Don’t wait for the newspapers and magazines to tell you the market is turning around. Begin putting your team of professionals together now and begin your due diligence and research. You’ll be able to determine when the time to buy is at hand.

REALTORS vs. Non REALTORS When Investing

Many people have heard the term REALTOR^® and often think it is synonymous with a real estate agent. Most REALTORS^® are licensed to sell real estate but not all people licensed to sell real estate are REALTORS^®.

You may be thinking, so what is the difference? In general A REALTOR^® is person who is licensed to sell real estate and has agreed to follow a code of ethics and a standard of practice as determined by the National Association of REALTORS^®.

Areas that are addressed in the code of ethics are: Promotion of Client’s Interest, Misrepresentation, Cooperation, Property Disclosure, Disclosure of REALTOR’S^® interest (ownership in the property), Rebates, Compensation, Commingling of Funds, Written Real Estate Agreements, Discrimination, Specialization or lack of, Advertising, Practicing of Law, State Board and Association Tribunals, False or Misleading Statements Regarding Competitors, Representation, Disputes and Arbitration.

(The specifics regarding these areas can be found here: REALTOR^® Code of Ethics.)

So the question is when you are putting your team of professionals together to assist you in carrying out your asset accumulation plan, do you want someone who has agreed to follow a strict code of ethics, or someone who has not agreed to any formal ethical code or standard at all? The choice is always yours to make. Ask, inquire and find out the details of the professional that you are considering.

Being creative in real estate can easily be done by following ethical guidelines. Investing and operating with ethical guidelines creates an even better scenario. When everyone involved in the transaction understands the details it truly becomes a win-win transaction.