With all the fervor about real estate volatility, the high number of  foreclosures and the inability of many homeowners to sell their houses, investing in real estate right now might seem laughable.  However, real estate still, and will always, offer a way to generate a passive income stream.  Owning a rental property will allow you to receive a monthly income without being actively involved.  Let me modify that by saying you will have to be involved at certain points with renovations and fix-ups, but you are able to have a day job and be a landlord simultaneously.

Passive income only comes from rental properties, but of course there are many kinds of real estate investments that can also turn a profit.  Flipping properties, retail/rehab, and wholesaling are all actively involved methods for earning money in real estate.  Holding properties is a much more laid-back approach to real estate with occasional periods of active involvement.

The key in holding properties is knowing the Net Operating Income, or NOI.  This is the total amount that you will make on a monthly or yearly basis, and the objective is to have a high enough NOI to cover all expenses plus your debt service and still have enough money to put in your pocket. It is calculated by taking your total income and subtracting your total operating expenses, but excluding your debt service.  The amount of NOI should cover your debt service plus all expenses of operation.  If you do not have historical operating expenses to go off of, then error on the side of over estimating your expenses and under estimating your income.   The concept is simple, but the execution at times can be a little more challenging. Special consideration needs to be taken to ensure an accurate representation of the future, specifically, determining the occupancy rate and how many of those tenants will pay rent on time.  The NOI is useful in single family buildings, multi family buildings, and commercial properties.

Of course, there are many other ways of investing that will give you a passive income stream and do not involve real estate.  Real estate is just one of those ways, but it is a good one.  Long-term investing in real estate can help you to provide for your family, retire early, or create a vacation fund.  Learn more about how rental properties can generate income and get started today!

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http://www.indianainvestmentpropertygroup.com

http://www.practicallyfreehouses.com

Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

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There is an age-old debate as to whether it is more cost-effective to invest in single-family homes or multi-unit apartment complexes.  As with all types of investment, the more you put down, the more you stand to make on returns.  Generally speaking, multi-units provide a wider range of investment opportunities which will turn enormous profits, relative to those of single-family homes.  While investing in apartments is not neccesarily smarter or safer, the investor does stand to become much wealthier, much more quickly.

The first advantage of multi-units of single homes is simply the cash flow.  Renting a home provides one source of rent, while renting a series of apartment units provides as many separate incomes as there are units in the complex.  Although logic states that the rent is based on the expenses of the investors, so more rental payment streams should merely compensate the investors, consider the small margin of profit built into every rental rate, and then multiply that by the total number of units rented.  An owner of a multitude of units stands to make enormous income based on what may be a tiny margin of profit on each individual renter.  The owner of the home, on the other hand, builds whatever profit he can into the structure of his single rental contract and is limited to that profit thereafter.

Economies of scale favor multi-units.  That is to say, when many people share commodities, it becomes much less expensive to maintain those commodities.  Two families living separately in separate homes must each care for the home, the roof, the lawn, the repairs, etc.  However, if those two families share one building divided into two units, now they can pool their resources to maintain one home, one roof, one lawn, etc.  Because maintaining one building with a number of units is infinitely easier and more cost-effective than trying to maintain as many individual homes, for which the maintainance alone could bankrupt an investor.

Another factor favoring multi-unit investment is that observed fact that there is much less competition for multi-unit investment than for single home.  Although this cannot be explained with any degree of certainty, it seems that the house “flipping” market has been saturated by investors trying to make a quick profit rehabbing or reselling a home.  For whatever reason, the same saturation has not yet occurred when it comes to investing in apartment complexes, so it is much easier for investors to find a good deal.  At the very least, single-home investors should diversify their portfolios by adding in some multi-units.  The losses suffered by a failed single-unit purchase are too heavy not to be tapered by a different kind of investment.

Since multi-units generate more cash-flow, an owner can afford to hire management companies to mediate between owner and tenants.  This allows the investor to continue making a profit from his investment, while focusing his attention (and the profit he generated) on new investments.  Finally, when the investor finally decides to “cut and run”—to sell his property and try something new—he stands to make much more money selling a multi-unit property than a single home.  Obviously, if managed properly, the world of multi-unit investment is a potential gold mine for investors, but it has remained relatively undiscovered by the casual investing population.

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1. Determine your investment strategy.  There are hundreds of strategies you could use with a property, so figure out which one works best.  Do you prefer to buy, rehab and hold? Or buy, rehab and then retail the property? Do you feel more comfortable with wholesaling? Some properties can turn a profit with many different kinds of strategies, so you should pick one you have experience in or feel the most comfortable with.

2. Conduct Due Diligence on the Property. You should be able to estimate all your costs and potential profits in order to accurately predict the cash flow.  It’s important to include all costs, such as taxes, insurance, the cost of using private money (or a mortgage), maintenance, holding costs, liens, inspections, closing costs, and any other expenses.  A good general rule is to overestimate your expenses to allow yourself some wiggle room in case you have overlooked something or prices increase.  Also, set aside an emergency fund for the unexpected.  These precautions will help you to realize your profit in spite of a bad situation.

3.  Know Your Area. Thorough market research will allow you to make educated guesses about what the market will do, reducing your chances of unforeseen complications, such as attempting to sell or rent the property without success.  You want to be able to identify if the area is contracting, expanding or is stable.  This will also influence the type of investment strategy you will decide to follow.

4.  Have an Exit Strategy (or three). Work the numbers with a few different strategies to see if your property still positively cash flows.  These strategies, such as renting, lease options or wholesaling, are exit strategies that would still allow you to make a profit in case there is a complication with your primary strategy.  It’s a good idea to employ three exit strategies that cover all possible market activity. For example, if you purchase a property to rehab/retail on the assumption that the market is stable or growing, but it actually contracts, you can still rent the property to the increasing number of renters that a contracting retail market produces.

5.  Don’t Over-leverage. Leverage is one of the beautiful benefits of real estate, but over-leveraging is it’s evil twin.  If you are over leveraged, you are vulnerable if the market goes down.  If you see an amazing property but you have funds tied up in others, perhaps you could assign a contract instead of agreeing to purchase a property with only 5% or 10% equity. A safe rule of thumb is to have 20% equity in a property upon purchase. Less than that, and you’re needlessly risking your profit margin if the economy tanks.

Following these basic criteria will give you confidence in determining if a property is a good deal or not, which is the cornerstone to success in real estate!

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http://www.indianainvestmentpropertygroup.com

http://www.practicallyfreehouses.com

Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

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A private placement offering, or private placement memorandum, is a way to secure funds.  The reason for the fancy name is that the person securing the funds does not need to be a licensed broker.  This type of method is a legitimate way for an experienced real estate investor to raise capital for deals which he/she does not personally have the adequate capital to invest.  If you’re interested in real estate but don’t like the idea of holding your own property, lending to an investor is a great way to earn a profit without having the hassles of rehabilitating a home or confronting unruly tenants.

The first step to investing with a private investor is finding them.  There are people out there who want to start private placement memorandums and are looking for investors.  The trick is linking up, and the easiest way to do that is through networking.  Start by asking people you know if they have any real estate background, or know anybody who does.  If they do know somebody in the real estate business, then ask to be introduced.

It’s important to remember that the rules of networking apply.  You have to build a relationship with your potential investor before you begin to discuss specifics.  Meet them for lunch, get a feeling for their lifestyle, and what they are looking to accomplish.   It’s ok to talk about your past experiences in real estate and why you are considering investing.  It’s not a good idea to say that you’re looking for a deal with 10% returns.  The reason for the relationship building prior to negotiating a deal is that it develops trust, and trust should never be underestimated when it comes to investing.  You will have to trust their judgment and that they have your best interests at heart.  If there is a tense period where the returns are not where you’d like them to be, you have to trust the investor to make the correct adjustments.  If the property is foreclosed, you have to trust the investor to have enough honesty to reimburse your investment before attending too their own.

If networking is not successful, either because you don’t know enough people or the people you do know are very removed from the real estate realm, you can try other venues.   If there is a local real estate investors association or something similar, you should consider joining it.  Getting spam email and mail is a light price to pay for potentially meeting some very experienced real estate investors.  You may want to take an instructional course on real estate, because some of the teachers are sure to be experienced investors.  Additionally, you may learn something useful!

If you’re the investor, you can find lenders through websites like angel-investor-network.com, but those investors are generally interested in large deals.  It is illegal to post ads looking for lenders on Craigslist or similar websites, because the SEC considers that public solicitation and the penalty can include jail time.

Just remember to be persistent, and you will find an experienced investor that you think has the potential to make a large profit.  Real estate isn’t going anywhere, (contrary to what some of the sensational media stories may have you thinking ) and you want to make sure that you don’t just find any real estate investor, but one you can trust and you believe will be successful.

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Many investors are scared away from investing in real estate because of the sensational news stories that depict crying homeowners in front of their foreclosed homes and heated discussions about plummeting house prices, making it seem as though the real estate doomsday will never end. Although, yes, housing prices have declined, and yes, the number of foreclosures has risen, there are still opportunities in real estate to make money.

Signs indicate that the economy is stabilizing; unemployment is slowly starting to improve, and depending on what city you are in, fewer people are defaulting on loans than in 2008.  Although the economy is still slow and many people are still unemployed, growth is starting to pick up.  Slowly but steadily we are coming out of the recession, and there are ways to capitalize on this trend.

A great opportunity to sell a home in this market is through a lease- option contract.  This entails two separate contracts.  The first contract is the option contract which usually requires a non-refundable fee minimum of 3-5% of the purchase price of the property.  I usually require at least 5% of the purchase price of the home.  In my opinion, the more the resident can put down, the better. The option agreement allows the resident the exclusive right to purchase the property at a specified price within a specified time frame. The option fee is credited towards the purchase price of the home, but if the resident does not or cannot exercise their option within the specified time frame, the resident forfeits the option fee.

The second contract is a standard lease agreement for the same specified time frame as the option agreement.  The ability to exercise the option agreement is contingent upon the resident fulfilling all of the duties of the lease agreement- mainly paying rent on time and maintaining the property. Maintenance of the property is the responsibility of the resident and at their expense.

Any time during the option period, the resident has the exclusive right to purchase the home.  This approach allows the resident a specific time frame to clean up any issues preventing them from securing a bank loan, but still providing them the opportunity to secure the home they wish to purchase.

There are many nuances and variations of the lease-option approach. There are also potential pitfalls for both the resident and the investor that are beyond the scope of this post.  But if executed with specific metrics and standards in place, this strategy can provide a tremendous win-win for both parties involved.

This is a great approach for people who have tarnished credit due to job loss, bankruptcy, or a foreclosure who are now getting back on track and starting to show a positive history. This approach allows the resident to get into a home ownership position and provides the investor cash flow each month, with what I call, chunks of cash at the end.  A true win-win for both in my opinion.

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http://www.indianainvestmentpropertygroup.com

http://www.practicallyfreehouses.com

Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

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Over the course of the past few years, one of the benefits of our otherwise-ravaged economy has been new initiatives from the federal government to provide incentives for consumers of various types.  It’s like a psychological stimulus plan.  The government is doing everything it can to hold consumers by the hand and say, “It’s OK, everything’s going to be fine and back to normal in no time.  Here’s some money to spend, and we’ll go ahead and get rid of these taxes.  Just go out and spend some cash!”.  Obviously, it’s not been quite that simple, but some of the government’s new initiatives do in fact seem to be overt attempts to stimulate consumption.

Many investors (both seasoned and amateur) as well as start-up homeowners seek to make the most of their money by purchasing property under the market value.  Unless you strike gold and happen to find the one seller on earth who doesn’t care about money, getting a home for less-than-market-value is most likely going to require making sacrifices in terms of quality, and this inevitably means sinking additional funds into repairs, replacements, and improvements.  Due to this additional, post-contractual expense associated with rehab properties, many buyers fail to properly plan for this process, and end up with a defaulted mortgage and a failed investment attempt.  For that reason, it is essential to research thoroughly what will be required to bring a property to market value, and factor that into both your profit margin and your mortgage considerations.

The federal government’s new way to keep us pumping what little money we have into the economy (especially banks and other lenders) is called the 203k Rehab Loan.  This is a loan program through which home buyers can apply for funding from the federal government to purchase and repair the property.  The catch?  The property must be your primary residence.  It’s not all bad though, you merely have to reside there for any 2 years (not necessarily consecutive) during a period of 5 years.  This means you can’t simply use the government’s money to buy up and repair investment properties and become the next American billionaire.  However, there is room to navigate within the rules, and many investors use the 203k Rehab Loan as a means of doing just that—meeting minimum residence requirements in order to maximize profit opportunities.

The 203k is largely ignorant of credit history.  It is designed to give low-income families opportunities during difficult economic times to raise a family in a home and neighborhood whose quality exceeds that which they could have otherwise afforded.  It is a reliable and safe source of funding, and with the number of available rehab properties below market value reaching record levels, there has never been a better time to take advantage of federal incentive programs to buy a rehab home!  Who knows, in ten years, it could make you $1 million!

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If you are someone who is in the business of selling or renting property, and that business requires you to give prospective customers tours of that property (whether infrequently or multiple times per day), then you need to at least be considering video tours—if not relying fully upon them.  A video tour, sometimes called a talking brochure, is a perfect way to conserve your own precious resources while reaching a broad target audience.  Here is how it works.

Make a video of yourself (or whoever gives the tours for your business) giving a perfect tour through a listed property.  The video can simply be shot from the perspective of the tour-taker, following the presenter through the home.  This tour differs from a more conventional tour in that you will obviously have no interaction with your customer.  Think back on your previous tours—there have undoubtedly always been questions that interrupt your tour, and you are expected to provide that information to your customers.  In a video tour, your customer will still have all the same questions, but no way to stop the tour to ask you.  Therefore, this particular presentation needs to be very thorough; you need to sit down and come up with all of the relevant questions that a prospective buyer or renter would want to ask, and you need to be sure to answer them clearly and concisely in your tour.  I say concisely because—as in all matters which require acquiring and maintaining peoples’ attention—you can’t put out a 45 minute video and expect people to remain focused.  Keep it under five minutes, but pack it full of all the useful information you would want to know before moving forward with a major transaction.

Once you’ve made your five minute video, you’ll need to distribute it for viewing.  The easiest, cheapest, and most practical way to do this is using the internet.  Your business should already have a website, but if you don’t, that is the first step (we won’t deal with that here).  When you add the video to your website, don’t bury it behind links tabs and URLs and whatnot.  Present it up front, make your tours clearly visible and easy to click and play.  This is your product—advertise it!  Finally, be sure you make it very easy for your customer to contact you.  We all know the frustration of using the internet to search for an email address or phone number, only to click link after link finding no way to reach a human being.  Make your business email and phone readily available both on and around the video tour in your website.

Going through this one-day process will save you countless hours of meeting customers for tours, driving time and gas money, and where you could only do so many tours in one day before, with a video on the internet you can reach an unlimited number of people in any period of time.  It’s a marketer’s dream, and it’s a tool that must not be overlooked by real estate professionals.

Let us know if this article is helpful by leaving a comment.

http://www.indianainvestmentpropertygroup.com

http://www.practicallyfreehouses.com

Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

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One of the real oddities of life occurs when kids can—simply put—just do stuff.  Have you ever experienced this?  You may struggle and struggle to learn a new skill, and you turn to the left and see a 6-year-old pick it up and master it in five minutes.  Sometimes we chalk it up to the increased synaptic plasticity associated with youth, sometimes we call it instinct.  But you might also say that, somewhere along the line, those of us that aren’t kids lost the inherent ability to do some of the things we may once have done naturally.  Now it’s time to observe, and learn those lessons once again.

The classic example of a kid’s ability to stump an adult (other than perhaps learning languages and new video games) is a kid’s simple ability to get what he wants.  This is not done artfully, skillfully, or even tactfully; rather, kids are successful be means of the bluntest, broadest, but perhaps deadliest tool in the arsenal: persistence.  Consider:

CHILD: “Can I have this toy?”

MOTHER: “No.”

“Please? Can I have it?”

“No.”

“But I want it!”

“No, honey.”

“I want it! I want it! I want it!!”

“No! Stop it!”

“I want the toy NOW!!!”

“OK, I’ll get you the stupid toy.  Stop screaming.”

Sound familiar?  The mother didn’t do anything wrong, but the child did two things right: relied on his relationship with his mother, and refused to give up (despite his repeatedly rejected requests).

This is a skill set many investors have lost, and need to find.  Implemented with perhaps a bit more control and precision than the child in the above example, persistence and the establishment of a rapport with your negotiating opponent can be the recipe for getting exactly what you want out of the negotiation.  Most investors now realize that negotiating means compromising, and you must be prepared with an asking price and a more reasonable price for which you would settle.  But where those investors go wrong is by jumping too quickly to their compromise price.  Instead, they should learn from their children or the former version of themselves that sometimes when you ask two, three, even four times for the exact same thing, you might just get lucky.

This becomes especially true when you’ve established some sort of relationship with your opponent (not necessarily friendly, but he shouldn’t hate you going into the discussion).  This ensures that—provided your opponent has some degree of conscience—it will be more difficult to write off your repeated requests (just as it was for the mother to refuse her son over and over).  If your opponent has no connection to you as a person (rather only as an opponent), it will be infinitely easier for him to simply get up and walk away from you.

The combined effect of this relationship with a bit a juvenile persistence is often your opponent’s—albeit reluctant—willingness to accept your offer.  And the difference between achieving your asking price, and settling for your compromise price, is the very difference between being an average investor, and a great one.

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Real estate, like most areas of investing, is all about predicting future value.  When using statistics in order to help you predict value, the knowledge of where those statistics come from and how they are calculated could be the difference between a great investment or a disastrous one.  Remember, all calculations are subject to human error if the numbers used in the calculations have not been derived accurately.

One such important statistic is the CAP (Capitalization) rate, which is a percentage used to evaluate your property’s market value.  The Net Operating Income (NOI) divided by the CAP rate gives you the property value, and this market value is more sensitive to the CAP rate at higher NOI’s.  For example, a property with an NOI of 200,000 and a CAP rate of 10% has a market value of $2,000,000.  The same property with a CAP rate of 9.8% has a market value of $2,040,816.  That .2% difference in CAP rate is equivalent to about $41,000.  Therefore, it is important that you research how this number was determined in order to verify its accuracy.

The CAP rate used in the evaluation of your property is determined using data from other similar properties.  The key assumption in this is similar.  Somebody picked which properties were similar, meaning that this is a potential area for human error.   On what criteria were those properties chosen, and do you agree with that reasoning?   Even more importantly, the CAP rate should be the average of those similar properties.  If the CAP rate used is based only on your next-door neighbor’s property, it may not be accurate.

The CAP rate is determined by dividing the Net Operating Income by the sale price.  The Net Operating Income is a complicated number to calculate.  You must research that the expenses of the rental property include all expenses, and no hidden fees have been overlooked. You must also understand the income: is this income based on last year or an average of the previous years? Is it likely going to change in the near future?  The income is also a prediction, and therefore, is also subject to error.  It is vital to research if the future income will likely be the same as it has in the past, which can be done in various ways like researching market trends.  Remember, there is always a risk that the predicted income is wrong, which will drastically change your CAP rate.  A good idea is to have a range of predicted incomes, so you know the range of CAP rates, and thus the range of your property value.

Let us know if this article is helpful by leaving a comment.

http://www.indianainvestmentpropertygroup.com

http://www.practicallyfreehouses.com

Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

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Dealing in foreclosed homes and buildings can be an excellent avenue for real estate investors to make substantial profits, if the right approaches are employed.  A foreclosure occurs when a piece of property is used to secure a loan—this is called a mortgage, and usually occurs through a bank—and that loan cannot be repaid in a timely manner by the property’s owner.  The bank reserves the right to foreclose the loan and acquire the property as compensation, at which point the bank or creditor generally attempts to resell the property in a public forum to secure the money that was lost in the foreclosed loan.  Typically, foreclosed homes and properties are not in excellent condition—otherwise the owner would simply have sold the property in order to repay their debt to the bank.  Combine the often-poor condition of these properties with the fact that the bank tends to be more concerned with making back the money it lost (as opposed to devoting the resources to try to profit on the transaction), and the result is often the sale of the foreclosed property at a price well below the market value.  With a little work, a real estate investor may seize this opportunity to purchase cheap property, and in turn make a profit on its resale or rental.

Foreclosed properties are most often sold in public auctions.  A savvy real estate investor, who understands the direct relationship between increasing variable interest rates and foreclosed loans, will pay close attention to their local economy and market to find opportunities to purchase inexpensive property.  If they are successful at an auction, they have most likely achieved one of the primary goals of real estate investment: purchase property below the market value.  At this point, the investor will have options as to how he intends to sell or rent that property at or above the market value (therefore earning a profit on his investment).  Which option he chooses will be a matter of the condition, location, and context of the property, as well as the investor’s personal preferences.

One classic strategy is to improve the quality of the real estate, enabling the investor to sell the building or land at an increased price.  This tends to be the most labor-intensive approach, as it requires actual work towards property management and improvement (or at the very least contracting actual work) to make repairs, renovations, updates, etc.  Obviously, as the condition of the real estate increases, so follows its value.  Once the investor feels he can sell at or above the market value, based on the improvements made, he will attempt to do so for a profit.  This processing of buying, fixing, and selling is often called “flipping” a property, and although it is risky, it can be extremely lucrative if managed carefully.

Another option is to essentially employ the same strategy of purchasing and fixing up a foreclosed property, but in lieu of reselling, the investor may choose to retain his investment while still making marginal profits.  This is done by renting the property to a tenant.  Again, the value of the property is a function of the property’s condition, so the more improvements that are made to the home or land, the more the investor (or in this case the landlord) may charge for rent.  While the investor may not earn one lump-sum profit as with resale of foreclosures, the rental process allows him to retain and profit marginally from his investment over as long a period of time as he chooses.  Whichever strategy the investor employs, the same rule applies: purchase under the market value, sell or rent above the market value, and profits will be earned.

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