As a landlord, one of your most important responsibilities is to manage your tenants.  This means two things: 1) getting monthly payments on-time and in-full, and 2) making sure your property is being taken care of.  Generally, property owners who fail are the ones who cannot accomplish one or both of these tasks.  They either have tenants who haven’t paid the rent in ages, or their property has been destroyed and left in shambles.  Either way, the landlord is bound to lose money and face quite a bit of unnecessary stress.  Most of this cost and stress can be avoided by being conscientiously up-front and firm from the onset of your relationship with a tenant.

            During the application process, make it very clear to the potential tenant that your business is very strict about the two tasks I mentioned above.  Clearly state that if payments are not made on-time and in-full, or if the property is not properly taken care of, then the tenant will be evicted without a moment’s hesitation.  Generally, this brief but important conversation can eliminate a whole population of “professional tenants”—those who enter into rental agreements with no intention of paying the rent, and live there for as long as they can before the landlord finally forces them on to the next location.  Don’t give anyone the impression that you can be taken advantage of during the application process.

            Once you have your tenant under contract, consider charging late fees on rental payments.  This will keep your tenants in check, and train them to respond to your rules and regulations.  If they know there are no consequences for making a late payment, then they will not respect you, and you will be paid whenever your tenants get around to it.  Most rent is due at the 1^st of the month—make the rent late after the 5^th.  Charge a percentage of the rent (5-7% is reasonable), and enforce it.  If you don’t enforce the late fee policy firmly and consistently, then it is worthless.  Don’t let a tenant slide simply because it’s the first time he’s been late; if he faces the penalty, it will be the last time as well.

            In addition to commanding the respect and obedience of your tenants, the late fee will also help put a little extra cash in your pocket.  Anything that increases your property’s monthly cash flow is good for business, especially when it ensures continued on-time payments in the process!  Although it may be difficult to establish yourself as the enforcer over your tenants, remember that you run a business, and you must maintain control over your interests.

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Although speculation is a bit outdated and irresponsible in the current market, flipping properties is still a viable way of earning income when it is based on finding bargain purchases rather than riding an expanding market.  There are three different levels of flippers—investors who take part in one or more stages of this process.  They are: the scout, the dealer, and the retailer.  The designation is generally a function of the flipper’s experience in the real estate world, as each bears a different set of duties and responsibilities.

The scout is also sometimes called the “bird dog”.  Bird dogging is the process of gathering information about potential deals by investigating leads from trusted sources.  When the scout finds a good deal under market value, he will sell that information to other investors.  Scouts are generally real estate investment newbie’s; it is a great way to get started, because it requires no money or credit, teaches valuable lessons about how to find deals and the way real estate investment works, generates income, and provides an opportunity for the scout to cultivate relationships with investors and other important members of the real estate community.

The dealer, somewhat like a scout, also gathers and sells information about deals.  The difference is that the dealer actually enters into a purchasing contract with the seller.  Now, the dealer has the option to either close on the deal and purchase the property, or to sell the contract to another investor.  This allows the dealer a great amount of leverage for profit, since his purchase contract effectively controls what will happen to the property.  However, the dealer often has to put money down to secure the purchase contract, so he assumes more risk than the scout (as is always the case when the opportunity to profit is greater).  Dealing provides a great deal of flexibility to retain, rehab, and resell the property, or to simply sell the contract for a quick profit without ever dealing with tenants or even the property itself.

The retailer assumes the most risk, and stands to earn the most profit.  After purchasing the property either through a dealer or agent, the retailer rehabs and fixes up the property until it can be resold at a much higher retail value.  This requires an investment of money, time, and energy; but it is by far the most lucrative element of flipping a property, because what the retailer does inherently increases the value of the house.  The flipside is that the investment occurs over a much longer period of time than it did for the scout or the dealer (who both made their profit instantly).  The retailer must work—sometimes for months—to reshape the property for resale.

Each type of flipping provides a different level of risk, and a corresponding level of reward.  It is a structure that allows for involvement of real estate investors at every level of the game, from amateur scouts to the most highly experienced and skilled retailers.

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As Real Estate investors, we all get into real estate to make money.  This is explanation—but not justification—for many investors’ reluctance to pay for an assistant, trying instead to run all the facets of their business alone.  Here are a few reasons why hiring an assistant should be approached like any other profit-generating opportunity: something which requires a principle investment, but which will ultimately result in much greater returns.  Having an assistant means more deals, more professionalism, a bigger business, and a better life.

The first and most tangible benefit you will see with an assistant will be an increase in the number of deals you find and do.  We all know that marketing is the most important part of generating and sustaining cash flow in the long-term; unfortunately, marketing involves a lot of tedious, mind-numbing busy-work (stuffing envelopes, writing emails, making countless phone calls, generating lists, etc.).  Enter an assistant, whom you will have to train to do all of these things right, but who will ultimately expand your ability to market constantly, and dramatically increase the number of people that your business reaches.  More qualified people equates to more deals, and more deals equates to more money.

When you show up to explore, negotiate, and close these deals, you will discover the second benefit offered by a good assistant: it makes you seem much more professional.  Regardless of the facts, people tend to view an assistant as a benchmark of success and legitimacy.  When a buyer or seller receives a call from your assistant, they are more likely to feel confident in your skill as an investor, simply because you have done well enough to afford employees.  Similarly, private lenders are sure to feel more assured when they write a check to your business.

Of course, your business will grow if you hire an employee.  If you are both lucky and choose to do so, it doesn’t have to stop there.  Your assistant will help start to increase the rate of your returns, and you will probably find yourself able to afford to delegate even more of your responsibilities.  As your skills in training, team-building, and management develop, you can hire and organize more and more employees to do your legwork and match your increasing returns.  Although it’s not common, this is how real estate empires are born, and they never survive without an investor who’s willing to shell out for employees.

Finally—and this one can’t be overstated—having an assistant will improve your quality of life.  Stress is rooted in busy work, mountains of paperwork and deadlines, and a chronic lack of time to enjoy your personal life.  When you have someone by your side, working to help you, it can take an enormous amount of the load off your shoulders, relieving your stress and freeing your docket.  Not only will your business earn more money, but you will also find yourself with more free time to enjoy that money with family and friends.  It all hinges on finding an honest, hard-working assistant and investing in their development.

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Fair housing litigation essentially requires that no tenant or prospective tenant be discriminated against and treated unfairly by a landlord or property manager.  Consequently, most real estate investor/owners believe that they are bound to treat everyone exactly the same—which is certainly not the case.  Fair housing calls for consistent, nondiscriminatory enforcement of all policies. That doesn’t mean every jerk that comes through your rental property should be given a place to live and treated like a saint.  Don’t make the mistake of accepting a bad tenant because you are afraid of the Fair Housing Act (FHA).

This is every landlord’s nightmare: a young, single, disabled Hispanic mother of two is looking for a place to rent.  This is fine.  The problem is, she is incredibly hateful and making nasty and threatening remarks to you and your staff.  Obviously, you do not want her as a tenant—not because of who or what she is, but because of the way she behaves.  You must protect your interests by not accepting her application.

Landlords have learned to fear the FHA, however, since the young woman could easily file a discrimination claim against you, and you would then have to prove in court that you denied her application for valid reasons.  In this case, that might be a tough sell, and a jury might think it more likely that you rejected her tenancy because of her race, ethnicity, disability, family, or whatever else.  Then you, the landlord, would be in violation of the law.

So then how do you avoid taking on bad tenants while not getting sued under the FHA?  Basically, the answer is to have very clear policies when it comes to criteria for tenant admission, and very consistent enforcement of them.  If you include a “no-jerk” clause in your policy, which basically states that it is up to the management’s discretion whether or not a tenant’s behavior is suitable for the property, then you will have something concrete to refer to if a claim is ever brought against you.

Again, the key is to be consistent.  If that same hateful, threatening, obnoxious personality comes to you in the form of a 40-year-old employed white man, you obviously can’t accept his tenancy.  If you reject his application on the same grounds as the above example, then you have a solid policy and consistent enforcement of it.  This should be obvious.  The problem is that for some landlords/property managers, it’s not obvious.

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With myriad options to flip, speculate, lease, rent, and the countless other ways to sink your money into real estate, it is my concern that investors have lost sight of the most fundamental strategy to earning money with property: buying and holding.  We find ourselves currently in a market that allows for the kinds of discount buys that have not been seen for decades, and in all likelihood will not return for years to come.  If you are a typical real estate investor, you entered into this industry in order to earn passive income (making money even when you aren’t clocking into and out of work), and there is no better way to do that over the long-term than to be the outright owner of properties that both appreciate and cash flow.

Like all investment portfolios, the best real estate investment portfolios are diversified.  This means that whether you are a flipper, speculator, developer, or whatever else, it can only be wise to taper those risks with investments which are designed to be held for appreciation and cash flow in the long run.  By the same logic, no one can expect with any degree of certainty to become a multi-millionaire by only buying and holding homes (obviously your capital would all be spent on your initial purchases).  Instead, play the short-term real estate game; accumulate some money; learn the important lessons of what to invest in, where, and when; and then buy that property, with no intention of ever selling it.

Owning properties is like having leverage in your own life.  Say you buy and hold five investment properties.  Every month, you will open your mailbox to find five new rent checks (totaling perhaps $5,000 – 10,000).  Your net worth is most likely a millionaire, since you are the outright owner of those properties.  You reserve the right to sell any or all of those properties in an expanding market to cash out.  Finally, you put in virtually no work hours to those properties to perpetuate their cash flow or appreciation, leaving you free to pursue other interests, hobbies, careers, or investments.

Although there is plenty of opportunity to earn a profit in the short-term real estate market, there are still some remnants of the age-old notion that buying property is always a smart investment.  Although it is no longer true that investors can expect a perpetually-expanding housing market (as in decades past), it is still true that owning a home can provide both income and opportunity for the savvy investor who manages the task responsibly.  Buying and holding an investment property should therefore not be overlooked even by the most motivated investors looking to get rich immediately, as it will be a healthy addition to any investment portfolio.

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One of the most frustrating elements of real estate investment is being so close to a sale that you can hear the money being deposited into your account, and then losing it because you failed to make some simple consideration that ended up costing you thousands of dollars.  Here are some of the countless very simple mistakes that could corrupt your investment property sale, but that can be readily avoided.

            Not having good enough curb appeal.  This means your home or property simply doesn’t look as appealing as the surrounding properties from the curb.  It is a function of landscaping, the outside of the home, the mailbox, etc.  Generally, people drive by a property they are interested in before stopping to go inside.  If, as they drive by, they are not appealed, then they will never come inside, and there will be no sale.  Make sure that if you walk outside and look at your neighbors and across the street, your home looks just as nice—if not better—than the comparable homes surrounding it.

            Another mistake a lot of real estate investors make (especially when trying to sell in a hurry—and who isn’t?) is showing the property before you’ve finished working on it.  Bringing someone into a dilapidated home and saying, “I’m going to paint, refurnish, and add carpeting,” is encouraging for the buyer to hear, but they are not likely to be an expert at visualizing what that will look like when you are done.  More likely, they are just looking at a dilapidated home and listening to the empty promises of a seller.  Don’t waste your time and energy showing the home until you are able to present it in the way you want to sell it, and in the way your buyer wants to buy it.

            Once you have a buyer express genuine interest in purchasing your investment property, stop selling the home.  The old adage, “quit while you’re ahead” is perhaps nowhere more applicable than in real estate sales.  Many times, an owner will oversell a property beyond the buyer’s tastes (eager to reinforce the sale), to the point that an interested buyer walks away empty-handed and annoyed.  Don’t make this very frustrating mistake.

            Another common mistake is to let the buyer be present during the appraisal process.  There is nothing wrong with getting an appraisal (in fact it’s usually required), but when the buyer follows the appraiser in-tow, listening as an expert picks apart every little flaw in your home, they are bound to become a bit disenchanted.  There may be nothing seriously wrong with the property, but walking around for two hours listening to fault after fault, complication after complication, is bound to deter any buyer.

            It may seem like common sense, but if you know there are problems with the property, get them fixed before having an appraiser or inspector come.  This is because if you can hire an all-purpose handyman to come fix whatever problems he can, the appraiser may not notice something he otherwise would have been inclined to investigate.  When an appraiser notices a problem, more than likely it will require hiring someone who is certified (and therefore expensive) to fix it.  Hire a handyman first take care of the simple items to avoid having to hire a licensed professional later.  This will save you money up-front, but also avoid blemishes on the appraiser’s report.

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The first mistake made by every new real estate investor is assuming they can ride an appreciating market for profit.  This “market mentality” is a vestige of the old days of real estate investment, during the housing market bubble, when you could purchase pretty much any property nationwide and assume its value would appreciate.  In a stagnant real estate market and a struggling economy, this is no longer the case.  This does not mean that you can’t expect to buy and flip property for profit, and it does not mean that you can’t invest if you think the market is at a peak.  Rather, the smart investor now must look for discounts or bargains—which you can find in any market at any given time—which can be rehabbed and resold at an appreciated rate.

Imagine that.  Making money in real estate now requires a bit of effort and savvy, whereas before all you had to do was hitch on some shooting star property and ride the expanding wave of the real estate market.

The second major mistake made by amateur investors is to invest blindly in a property.  This means throwing your money at an idea you know very little about, like for example something a friend recommended, or something you passed by in your car and just had to have.  In real estate, as opposed to the stock market, an investor’s knowledge of the subject of his investment is inversely proportional to the risk he takes by investing.  In other words, the more you know about a property, the less you stand to lose.  As an investor, if you do the research responsibly and learn everything you can about the property—its condition, its systems, its style, its financing, its surroundings—the more likely you are to invest in a property which will actually profit.  The alternative is, again, a recurrence of the market mentality, where making money in the stock market is not necessarily a function of how much you know about the companies in which you invest.  That is not the case in real estate investment.

Another common mistake is getting into an investment with no cash reserves.  While its easy to buy a property with no money (financing instead with loans), it is much more difficult to maintain that property responsibly during periods of negative cash flow if you don’t have any reserves.  Generally, an investor with no cash is forced into disadvantageous scenarios—doing substandard repairs, working with unqualified tenants, and generally losing leverage for fear of vacancy and default on loan payments.  With a little cash in his pocket, the investor can hold out for better tenants at higher rates, make repairs which increase the value of the property, and operate with much less pressure to make whatever money he can scrap together right now.  Ultimately, this will mean a better-maintained property and greater long-term profit.

Perhaps the worst mistake a new real estate investor can make is that of his expectations.  Again, during the housing bubble, thousands of real estate investors made this business seem like a grand “get rich quick!” scheme.  In truth, no one makes their money instantly in real estate anymore; the really impressive careers these days still take about five years to get going.  Most people get into investment to make a quick buck, attend a seminar, and then work for three months before realizing it is not the fast-paced money-making machine that it once was.  This produces an incredibly high fallout rate in the first year of the investor’s career, due to overstated expectations of the opportunity to make instant big money in real estate.

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Between 1970-2000, investment real estate speculation was an exciting and lucrative field, which enticed countless investors to buy and quickly resell properties whose values were increasing with an ever-expanding housing market.  Purchasing property was considered in almost all cases to be a safe and smart investment, and many of those who speculated for a living were masters of playing the housing and property markets that were expanding the fastest.  It was a great way to make money.

Like all market explosions, however, the housing market was an expanding bubble—bound eventually to burst.  Now, following an economic downturn and a relatively stagnant real estate market, it is much more difficult to hitch on to a “shooting star” property and profit from its appreciation.  But that doesn’t mean that purchase and resale for profit are out of the question.  It has just altered forms.

Where flipping—purchasing, rehabbing, and reselling of real estate—used to be considered more of a hobby than a business for those interested in fixing up old homes, now it is the only way to profit that is left over from simple market speculation (which, at the moment, is a poor business model).  Flipping involves a much more engaged effort on the part of the investor; but the amount of time, money, and energy invested in making the home or property more marketable will translate into profits when the property is resold—at least that is the idea.

Where speculation meant finding properties in expanding markets, flipping means  finding properties which do not maximize their value in their current market.  This means damaged homes, unkempt properties, outdated systems, etc.  Sometimes it is a very simple matter of restyling a home—repainting, installing carpet or hard wood floors, landscaping, furnishing, home accessories.  In other cases, flipping can require an enormous rehab effort—remodeling, adding structural components, updating and installing property-wide systems.

The amount of effort the investor wants to spend reshaping the property to meet the expectations of a higher market will determine the type of property for which the investor searches.  A classic mistake of flipping is the underestimation of the amount of work a property will require to be resold at a higher rate (and therefore an overestimation of profits, considering the cost of rehab).  Do not overexert yourself; if you are new to flipping, look for a property which will only require minor changes to be resold.  Then, once you have a better understanding of the things which can be done to increase the value of the home (and how much they cost), you can have a better sense of what level of rehabbing your resources will allow.

Flipping will always work in any market, bubble or not.  This is because the investor is inherently and necessarily increasing the value of the home by investing not only the purchase price, but also his energy during ownership.  Appreciation does not depend on market conditions, as it does in speculation, and is therefore a safer way to profit in a slow market.

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Conventional wisdom dictates that if you want to make a purchase with money you don’t have, you go to the bank to get a loan.  It’s a time-honored system used by thousands of Americans every day.  But it consumes an enormous amount of resources, either in the form of your actual monetary payments, the amount of time and energy put into appeasing the bank, and the opportunity costs of not borrowing more cheaply.  Instead of rushing to the bank to fork over your money, why not try to find private investors?  Although it requires a bit more cultivation of relationships on the part of the real estate investor, the benefits of acquiring private funding are myriad when managed responsibly.

The most convenient thing about a private loan is that it’s fast.  There is no bureaucratic or administrative process to wait for—as soon as you reach an agreement with your lender, the money is yours.  Presenting that cash up-front and in-full is a reliable way to buy fast and at a discount.  Second, credit is not involved.  This means two things: 1) you do not need to have good credit to secure a private loan, only the ability to pitch your idea effectively, and 2) the loan will not follow you for the rest of your life by showing up on the credit report.  For an investor, debt can be crippling, and acquiring funding without affecting credit is a very valuable skill to learn.

One other advantage of private versus bank loans is that there is no limit imposed on the amount of funding provided.  In other words, you may be approved for a bank loan, but not for one in excess of $20,000.  If you can find someone with the demand (funds and will) to support your investment project, then you can ask for as much money as you deem necessary or fit.  Further, rather than jumping through the legally-enforced hoops of a bank loan, the private loan allows you to control your environment, by actually participating in the drafting of the contract, rather than merely reading and signing it.

Perhaps the greatest advantage offered by the private loan is the tremendous flexibility it allows an investor.  Especially in the world of real estate and investment, having cash in your pocket allows you to play by whichever rules make sense to you.  It always affords you an exit strategy without leaving unfinished business with the bank.  It means you can make offers on properties with the confidence that you are the buyer who will show up with the cash in hand.  And it is much cheaper than having an investment partner, who will invariably take a larger share of your profit than a simple investor.  If you can, work hard to cultivate your relationships with private investors, which may ultimately prove profitable for your business.

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For anyone looking to buy or sell an investment property, it is important to know those things which the law requires the seller to disclose to the buyer.  That is, a buyer should be aware of what he is entitled to know, to avoid problems in the future; and a seller should be aware of what he must share, to avoid arrest for unlawful failure to disclose important information.  The five basic categories of disclosure for an investement property being sold are: federal, state, realtor, and common law.

Federal law requires that a seller inform the buyer of any lead-based paint hazards on properties built before 1978.  It also stipulates that the buyer is entitled to ten days during which they can have the house tested for lead-based paint.  State disclosures are a bit harder to describe, since every state has its own standards concerning the disclosure of information on real estate transactions.  A prudent buyer or seller will research his state’s laws before entering into negotiations.  Some common state disclosures include asbestos, mold, and radon.  There are many less common disclosures, however, including California’s disclosure of seismic hazards.

Realtor disclosures are not required by law, but they are often a contractual obligation demanded by the buyer.  In these cases, a realtor gives the seller a questionnaire concerning the condition of the investment property, and the seller is to disclose all information as truthfully and accurately as possible.

Common law stipulates that the seller must inform the buyer of all “latent defects” concerning the investment property.  In other words, any problems with the property that are not clearly apparent upon a visual inspection of the house must be divulged to the buyer.  An example of this would be, for example, the inside of a chimney requiring repairs, or something else to this effect.

Finally, many real estate sale contracts include a clause in which the seller says the home is being sold “as-is”.  Many buyers think this can be employed in place of full disclosure, which is not the case.  A home may be sold as-is—meaning with damage, nonfunctional systems, or other latent problems—but disclosure laws at the federal, state, and common levels still apply to those transactions.  In other words, selling a home as-is does not excuse a seller from the full disclosure which all other sellers are subject to.

A seller must know what information he is legally responsible for sharing with a buyer, and a buyer should know what information he is entitled to access before making a purchase.  Knowing the details of these disclosure laws is a matter of researching the laws at a local level, and understanding how those laws are applied and enforced in your area. This can be done with ease by visiting www.findlaw.com.  Anyone entering a real estate transaction should be aware of these laws.

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