Learning to be a strategic real estate investor is not as difficult as it may sound. However, it does force you to be more purpose driven in your activity. This is actually a very good thing because you will learn to accomplish more with the time you devote to your investing. This is in general how it works. 

    Initially think what your ultimate end goal is.  Not just some general goal.  Be specific. Something like this: I expect to be clearing $10,000 a month in passive cash flow within 3 years from today’s date.  Think of the SMART principle.  Your goal needs to be S = Specific, M = Measureable, A = Actionable, R= Realistic, T = Time limit.  Now that you have the ultimate outcome in mind, start doing some reverse engineering.  Keep in mind that you’re investing business, oh yes, this is a business and not a hobby, will go through the crawl, walk, run cycles just like any other business. As such, your dollar growth in the first year will probably be less than your second year and your second year less than your third year.  Start working backwards charting out “SMART” goals or objectives for each year even down to each quarter.     

    Now conduct a “SWOT” analysis of both yourself and of the market you plan to invest in.  “SWOT” stands for S = Strengths, W = Weaknesses, O = Opportunities, T = Threats.  Determine what you are good at and what you are not.  For those things you are not good at, find someone who plays with what you struggle with and get them on your power team.  By conducting a “SWOT” of the market, you can develop an overall plan that fits the market characteristics. 

     Next determine what resources you have available in time, contacts, credibility, money (yours and through private investors) etc.  If you are deficient in time, figure out how to leverage other peoples time who are experts at what they do as well as utilize virtual assistants. If you are deficient in contacts, learn how to leverage the contacts of the people you do know as well as meet new people.  If you are deficient in credibility, who do you know that has credibility and can you put them on your power team or leverage their contacts?  If you are deficient in money, learn how to raise private money and how to partner with people who do have money so it is a win-win for everyone. 

     Once you know where you stand in strengths and weaknesses and understand the market you are investing in, develop a strategy that will move you along in the process on a step by step basis.  If you are just starting out and have no money, then a relative risk free strategy would be learning how to assign, double close or possibly wholesale deals to other active investors.  Find out what your end buyer wants, then go find the deal for the end buyer.

     After you have created some cash reserves, then you can move on to other strategies like buy and hold, buy-rehab-resale, buy and lease option, buy and sell on land contract as well as others. Know specifically what realistic profit margins you can make out of each deal and the specific criteria of the deals you want to hold on to that fits your strategy.  This way, you will not get distracted by opportunities that come your way but don’t fit your strategy.  I hope you have found this helpful. Let us know what you think or what you would like to have addressed.

 Jay Redding 

SuperiorPrivateMoneyReturns.com

As I continue to consult with individuals who want to invest in investment real estate, I find that most novice investors and even some seasoned investors really don’t have specific objectives in mind when they are investing. Some want to just diversify their overall investment portfolio, others want to just earn more money and others want to get out of the 9-5 rate race.  These are all great objectives on the surface and real estate investing can provide you all of these benefits. However, you must go much deeper into your approach if you truly want to be successful. 

This type of investor is what I call being an opportunistic investor. The opportunistic investor purchases investment property on the premise that the property is a great opportunity. They end up purchasing properties here and there and have no real plan in place on what to do with the property, how to efficiently manage the property or what the best exit strategy is for the property. An opportunistic investor does not take into consideration how the investment property fits into their overall strategy.   

The investment property may very well be a great opportunity, the more important question to answer though is this; “Does the property fit into your overall strategic plan?” That question is a totally different question than answering if the property is just a great investment opportunity. It requires that there be a purpose and direction in your over all investing approach.  An opportunistic investor rarely demonstrates any direction.  If you follow the really great investors, you will find they have specific objectives they expect to achieve with their investments and that they have specific metrics in place to determine if they are on course.  

 If you want to be a successful real estate investor, you must learn to become more strategic in your approach than opportunistic.  This doesn’t mean you ignore great investment opportunities.  What it means is that you evaluate every potential investment against your overall strategic plan. If the deal fits your strategic plan, then by all means take advantage of it.  If it doesn’t, you can still benefit by referring the deal to another investor whose plan it would fit. This can be done through an assignment fee or a referral fee.  Either way, it can be a win-win scenario for you. 

The point to take away is to know the difference between being an opportunistic real estate investor and being a strategic real estate investor. The really successful real estate investors are strategic. I will share more on how to become more strategic in the future.  

Let us know what you think.

 Jay Redding

 SuperiorPrivateMoneyReturns.com

Investment real estate will always continue to have a certain inherent value mainly due to the fact that real estate all over the world is limited while other factors such as population and climate may change drastically. Even though real estate is viewed in general as long term investments it can generate substantial short term gains if handled properly. Therefore, we see great potential in investment real estate as part of a balanced investment portfolio.

The properties chosen as investment real estate can belong to any type that you see in the market. It can be straightforward properties or fall into the category of foreclosed homes, rental homes, REOs, REITS and HUD homes. The housing market and the real estate prices have seen a slowdown in the recent past due to the ravages of the recession and record numbers defaulting in sub-prime lending. Despite all these upheavals the real estate investment’s commercial value is strong as ever.

Property investments make a portfolio well balanced with its long term and short term gains for the investor. There are many strategies employed by investors and property managers to ensure that property investments are profitable at the end of the day. Investment property deals still continue to earn healthy returns regardless of the type of property involved. Investment real estate comes in all forms. It can be through REITS, non-public REITS, partnership deals, syndicates and other similar commercial ventures. For the institutional investor, real estate provides a great opportunity to balance his portfolio by including it in a mixed asset portfolio along with stocks and bonds.

The modern portfolio theory of managing mixed investments began with Harry Markowitz in the first half of the 1950s. His research showed that diversifying investments was the best way to manage risk by minimizing it one area and maximizing profits in the long run. The main objective of the investor should be to achieve the target rate of return on his investments. The investor is able to use ‘mean variance portfolio analysis’ to evaluate risk at all times.

All investment has risk as part of the deal and usually the investor hopes for higher returns with transactions that entail higher risk. This is the reason why portfolios should be geared to deal with volatility. A balanced portfolio is one where any investments that are showing fewer returns or none at all are covered by those with higher returns. Commercial real estate is extremely useful as it can target both long term and short term returns so as to balance the portfolio. Most of the time real estate is used to hedge other investments or inflation as it can easily outperform both stocks and bonds. And yet, despite all the evidence pointing to real estate being great for diversification purposes it lags behind and is typically underrepresented in mixed asset portfolios.

Of course, to reap the best results of a mixed asset portfolio the investor should take care to investigate the investment opportunity that is afforded by investment real estate and not just merely add it on to the portfolio. Investment real estate can give the investor a much needed boost or it can act as a cushion in difficult times. Whichever way you evaluate the importance of investment real estate in your portfolio, it has been proven to be advantageous to the investor to balance his portfolio with it as negative effects in some investments can be easily covered by the real estate investments.

Let us know what you think.

SuperiorPrivateMoneyReturns.com

Real estate investment is ultimately just that—an investment.  The object is to profit over a given period of time, and it is essential to the management of that investment that the investor be cognizant of the asset’s sources of cash flow.  Generally speaking, a real estate asset generates four types of income: net operating income, capital appreciation, tax shelter offsets, and equity accumulation.  The successful investor understands each of these categories, and knows how to maximize the opportunities to profit that they provide.

Net operating income—or NOI—is the sum of all positive cash flow (income) generated by a property, minus the property’s ongoing expenses.  Rental payments are a common source of net operating income, but any other money derived directly from the use of the property—advertising payments, for example—may be considered in the operating income.  The property’s ongoing expenses include bills for maintenance and utilities, taxes, and any other fees related to the daily upkeep of the property.  The NOI is an important consideration in analyzing the performance of an investment property’s value.  More specifically, the ratio of NOI to the asset’s initial purchase price is a percentage value representing the capitalization rate (CAP rate) of the property, which is a commonly-used real estate statistic.

Capital appreciation is the asset’s increase in market value over time.  For obvious reasons, this can be very difficult to predict at the time of investment, which is why investment strategies based on maximizing an asset’s capital appreciation as opposed to the other types of cash flow form their own category of investment, called speculation.  In most types of investing, capital appreciation manifests as cash flow at the time of sale.  That is, if the property has increased in market value, it can be sold for more than the purchase price.  Alternatively, appreciation may be seen in the form of increased monthly rental rates, or any other increases based solely on the property’s greater market value.

Tax shelter offsets are a way for investors to profit from loss, and they occur in three ways: depreciation of the asset’s value, tax credits, and carryover losses.  Although it may be difficult to imagine how one can profit from their property’s depreciation, consider first that a loss in value means reduced tax liability charged against the investor’s other sources of income, which ultimately means more money in the investor’s pocket.  Additionally, in most places (depending on local law) some of these tax shelter benefits are transferable.  This means an investor can sell benefits for cash or other types of benefits.

Equity accumulation is essentially the increase in an investor’s equity ratio over time, and it is achieved as more and more debt service payments devoted to principal are made over a given period time.  This may be considered positive cash flow only if the payments are made directly from the income generated by the property, not from independent sources of funding.  Therefore, this is profit more in the sense that the property pays for itself over time, rather than adding money to the investor’s account.

If each of these four categories is managed correctly, then the investor will have a clear picture of where his asset’s earnings are coming from.  He or she is therefore much better equipped to make decisions concerning the ongoing strategy of investment in and management of that asset.

Thank you for reading and provide us some feedback on what you think.

Cliff Redding

SuperiorPrivateMoneyReturns.com

Utilizing self-directed IRA’s to fund real estate investment deals is a great way to leverage other people’s money (OPM).  Your private lender receives an above average rate of return and you can fund more investment property acquisitions; a great win-win all the way around. 

     I am not here to bash self-directed IRAs. They are a fantastic tool when used correctly. I utilize private lender self-directed IRAs routinely plus execute deals of my own in a self-directed IRA. However, I am here to voice a resounding word of caution. There are a lot of people out in the real estate world talking about the benefits of utilizing self-directed IRAs for private funding; that is great, but make sure you are receiving your information from reputable sources.   Too many people are not providing the full story either because they don’t know or they are just being reckless.  I am not sure which. This is not child’s play people!  

     The penalties for self-dealing or executing a prohibited transaction can be quite severe, including disqualification of the IRA status, early distribution penalties and punitive damages up to 100% taxation. Ouch! If you don’t know what the rules are concerning “self-dealing”, what a “prohibited transaction” is, or who is a “disqualified person”, you need to educate yourself.  A great place to start understanding prohibited transactions is IRS publication 590.  Here is an example. 

 The IRS defines a prohibited transaction as follows:

“Generally a prohibited transaction is any improper use of your IRA account or annuity by you, your beneficiary or any disqualified person. Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendant, and any spouse of lineal descendant).”–Source IRS Publication 590.

     Another great place to start learning about what is legal and what is not, is reading in the education sections of some of the major custodians for self-directed IRAs.  Here is a short list of some of the major names that come to mind: 

Equity Trust Company   – www.trustetc.com

Guidant Financial – www.guidantfinancial.com

Pensco Trust Company – www.penscotrust.com

The Entrust Group – www.theentrustgroup.com

 My personal experience has been with The Equity Trust Company. However, there are multiple companies available that provide custodial services. The key factor I want to get across is that you need to educate yourself from reputable sources.  Just because you hear someone talking about self-directed IRAs or read a blog post about self-directed IRAs (including this one) take the time to verify what is being said and the source it is coming from.  You will be happy you did in the long run.  

Thank you for reading the article and feel free to provide us some feedback.  We are working to get better every day.  Let us know what you would like to have addressed in the future and we will provide a post to address it. Have a great day.  

Jay Redding

SuperiorPrivateMoneyReturns.com

To enjoy life one need is for a long term, solid and certain source of income to provide us with a comfortable and secure lifestyle.  With massive economic and global changes continuing, a traditional 9-5 job is not secure nor does it afford us a style we consider comfortable.  Many people are now creating their own businesses and other income sources.  Due to steady clientele and potential wealth building people have purchased investment real estate for long and short term financial growth.   The term Investment Real Estate indicates a property bought and sold for the purpose of leasing, growing equity and selling for a profit.  This is a property that is lived in by many. While getting rich and building long term wealth have happened, there are some significant dangers too.  I call them dangers as they have the capacity to ruin one financially.  Of the many dangers possible the significant ones are constant reparations, empty units, bad renters (both non payers and destructive renters), and the big one; foreclosure.

Ideally, you acquire a property in good condition, below market value, rent it out for a profit over payment, and watch the equity grow.  But not all is ideal.  Many of these homes are in disrepair from either lack of funds for maintenance during the previous owner’s tenancy or vandalism in retaliation for the foreclosure.  Getting a property with numerous problems costs you up front money, increasing your investment, decreasing the ‘equity profit’.  Excellent home inspections save you thousands.

Repairs and maintenance are key to your to success as livability and appearance keep you from having another danger occur, empty units.  Every day your unit sits empty you still make the mortgage, insurance, and tax payment.  Making one mortgage payment can be a challenge, but having another one and no income to cover it can cripple you financially.  Add the growing risk of homeless squatters, vandals, and other things that happen to vacant properties.  And the cash to cure this is RIGHT NOW cash or credit cards, which is another monster but adds to the issue.

Occupation is the desired result for success, but sometimes you get more than you bargained for.  With the recent economic downturn the number of non paying tenants has grown, as has the number of destructive tenants.  Studies show that poverty creates petty crimes of passion such as vandalism and domestic issues.    If they are already so broke you are not getting paid the likely hood of them having first and last for another place is small.  Pepper this with legal fees for eviction and even more repairs.  Becoming a vicious cycle it only takes a few months of carrying 2 or more mortgages and your neck is on the line.

That line is foreclosure.  Yes, the same list you got that beauty on will be where it returns to.  While it is wise to create an LLC and put the properties under that name to lessen or avoid losing all of your personal assets your credit will never be the same.  Depending upon the type of foreclosure, HUD, Government, Bank, standard, it is the biggest black mark credit wise you can get.  Also, the type of foreclosure dictates the time and process of repossession and additional fees.

When you  create the financial success plan for your life and Investment Real Estate hits the idea list it is wise to remember the dangers, that are talked about here.

There is no shortage of real estate in which to invest—it is simply a matter of finding the properties that are likely to be profitable.  Although much of this is based on the investor’s involvement in and knowledge of the local community in which he works (therefore providing for informational gaps that give some investors a competitive advantage over others), there are some reliable sources for finding investment properties which can be accessed by anyone.  This includes, but is not limited to: real estate agents, market listings, wholesalers, and public auctions.

Real estate agents tend to be a good source for finding property for those who are not intimately aware of the real estate available in the community.  One would not be hard-pressed to find an experienced real estate investor working through an agent, for those who are relatively new to the process, real estate agents can be an extremely advantageous source of information.  It is the job of an agent to be aware of the local property that is available for purchase, and they tend to use software which organizes those properties into a more effective form where the investor can narrow down the options based on price, location, or any of a multitude of other parameters.  Although agents can be very helpful, the drawback is that their income is derived from the investor’s pocket.

In order to cut out the middle man, one approach is to subscribe directly to market listings.  Although this, too, requires payment from the investor, the market listings do not earn a percentage of the price of purchase of the real estate; rather, there tends to be a relatively small monthly or yearly subscription fee to gain access to a list of available real estate.  Subscribing to market listing organizations requires a proactive investor who is familiar with the language and process of real estate investment, and who is himself willing to search for the right property (as opposed to delegating that responsibility to a real estate agent).

Wholesalers can be anyone or any organization which owns a great deal of real estate—enough that each property does not need to be sold at exorbitant prices in order for the organization to profit.  The most common type of wholesaler is a bank, which usually has a Real Estate Owned (REO) department to manage all properties owned as a result of foreclosure.  Accessing this source requires an even greater familiarity with the process of real estate investment, but the reward is property that tends to be sold well under the market value.  It is something akin to buying groceries from an enormous national supermarket, as opposed to the small mom-and-pop store at the end of the block.  Sometimes REO properties are auctioned off publicly.  This is a forum where anyone can purchase bank-or-wholesaler-owned properties cheaply, but—as all auctions do—it requires competing with whoever else happens to attend on that day, and it can therefore be unsuccessful.

A tax lien is imposed by the government to secure the value of unpaid or delinquent taxes by acquiring the rights to personal property or real estate.  Unlike most debts, tax liens are transferable from owner to owner, or generation to generation.   This is called running with the land, and it means that a lien on a house does not simply vanish when a home is sold; rather, it becomes the responsibility of the new owner to pay the government.  It is relatively simple to research whether or not a title has a lien imposed on it, and so payment of the delinquent tax is usually finalized in the terms of the purchase, and using the profits from the sale.  For this reason, tax liens can be very crippling for a real estate owner, who no longer stands to profit even from selling the property.

Although it is the responsibility of the real estate owner to pay the debt incurred by taxes, it is not always—and in fact rarely is—the owner who pays the government directly.  Most often it is the bank that holds a mortgage for the property.  It might seem strange that such a creditor would be willing to offer more money to pay the delinquent debts of someone who has clearly demonstrated an inability to uphold the terms of such a transaction.  However, if the debt associated with the tax lien is not paid, then eventually the property will be foreclosed by the government, and the value of the property (and therefore that of its mortgage) will plummet.  For this reason, banks are often willing to pay to remove tax liens and the risk of foreclosure, but they then must turn around and demand payment from the owner.  This is why banks run credit checks before handing out loans.

The mortgage holder pays the government using an escrow account, and although it seems like something done to help the home-owner, it is in fact an act of self-defense on the part of the bank, who is acting to prevent its mortgage investment from losing value.  Understanding this, the government sends notices to both the home owner and the mortgage owner in the event of the imposition of a tax lien, and often the bank will set up an escrow account and simply pay the government with no involvement of the homeowner whatsoever.

A promissory note, or just a “note”, is essentially a contractual legal form of an IOU—it is an acknowledgement of a debt between two parties, and a promise of one party to pay that debt either by a certain time, or at the request of the lender.  Traditionally, the borrower has to pay by a certain date; however demand promissory notes allow the lender to call for repayment of the debt at any time, within the parameters laid out in the contract.  Most notes also include clauses that deal with the borrower’s failure to repay the debt, which in most cases results in the seizure of personal or real property to retain the value of the loan.

This contractual framework is closely paralleled by the mortgage, but there are subtle yet important differences.  The mortgage also involves the acknowledgment of debt, and it also offers real property to ensure the payment of that debt in the event of borrower default.  The difference is that a mortgage tends to be strictly regimented in advance as opposed to allowing for the debt to be repaid in full and at short notice issued by the lender.  This means that with a mortgage, the borrower knows exactly what he owes and when he will owe it; on the other hand, a note can reduce the borrower’s certainty as to the amounts and due dates of payments.

Another important distinction between notes and mortgages is revealed in the event of borrower default.  A mortgage considers the borrower’s real property in the reacquisition of its loan.  In other words, if the borrower fails to pay on time, then the bank may seize the real estate property in question.  By contract, a promissory note can be much less forgiving, as it allows the lender to seize both real and personal property in the event of failure to pay.  This means the bank is entitled to seize income, assets, and possessions, as opposed to just a house or a plot of land.

The safest and most reliable approach—for both lenders and borrowers—is to use these two contracts in conjunction with one another.  By spreading the debt load, the borrower is less likely to have to make bulk payments and is therefore less likely to miss payments, which ultimately benefits all the parties involved.  Having a mortgage to dampen the effects of the promissory note is a good way to ensure that the borrower will not have to pay the entire value of the property at any point in the process.

A lease-option is essentially a two part contract: a traditional lease or rental agreement for a real estate property, with an option for the renter to purchase that property within a certain time period.  As with most property contracts, there is no standard structure with lease-options; rather, it is up to the buyer and seller to reach agreeable terms.  Most lease-options have a few characteristics in common, however—a fixed price for the future purchase of the property, and an increase in price to cover the “option” (this can either be an upfront payment, or an increased monthly rental rate).  The lease-option framework holds a few real advantages for a seller, but it comes with inherent risks as well.

The lease-option contract is a great option for a seller, especially when the real estate market is low—or more accurately, when the market is going to be low.  When the market is struggling, a seller cannot realistically hope to sell real estate for a profit; instead, the seller can increase the cash flow of the property by renting it.  Using a lease-option contract allows the seller to make a profit in the short-term while still planning in the long-term for the sale of the property.  Furthermore, the framework of the lease-option contract provides for increased opportunities for the seller to profit by providing terms for the payment of the option.  In other words, the seller can charge an upfront fee for the option to purchase, or he can justifiably increase the monthly rent in order to cover the option.  In the vast majority of lease-option cases, the contract does not produce a sale (this is most often due to the renter’s inability to raise the necessary funds to purchase the real estate).  Although this seems at first glance like a negative result, the seller—at this point still a landlord—has actually made a considerable profit because he earned the additional money that was being paid toward the option to purchase.

Setting the price of the future sale of the home can be problematic for the seller, because it requires some insight and foresight into the real estate market.  When the market is low, the seller can often get away with writing a price higher than the market value into the contract, and still find buyers based on the contractual structure allowing the buyers to rent for a while before making their purchase.  However, if the real estate market is very strong, then it is generally more profitable and easier for the seller to simply sell the home outright.  The worst scenario for the seller would be to enter into a lease-option, and then watch the market increase along with the value of the real estate for which the price is now fixed.  For this reason, great care should be taken to research the property and market before entering into a lease-option contract.