One of the most challenging and important elements of real estate investment property for any investor—experienced or amateur—is finding deals.  Too many real estate investors take a passive approach to their deal search, simply waiting for good deals to come their way.  By contrast, the successful real estate investor is more likely to develop a concrete investment property marketing plan, an explicit and tangible explanation of what the investor wants to achieve for a given and upcoming period of time.  The marketing plan offers innumerable advantages to the  real estate investor; to name just a few: it provides the investor with a tangible goal to achieve, it allows the investor to lay out the course of activities needed to achieve that goal, it is a natural way to set deadlines and plan in advance, and it predicts low-income activities that can either be avoided or delegated to save time and money.  Ultimately, evaluation of actual investor performance against the marketing plan provides an excellent measure of the investor’s trends in success.

In order to effectively plan for the future, it is first essential that the investor understands the current state of his or her business.  Pretty much any investor could tell you how many houses they bought in a month, but very few could recall all the leads that had to be followed to produce that opportunity.  It is important to know where your deals tend to come from before you can set a goal for seeking them.  Before developing your investment property marketing plan, therefore, you need to carefully analyze your total number of leads, leads that produce sales (and the ratio between the two), money earned per lead, and the cost of locating new sellers.  Once the real estate investor has a solid grasp of this information, he can work to improve or eliminate those which are not cost effective.

The investment property marketing plan itself, generally laid out for the course of a month, is basically a list of the investor’s goals: total net income, number of deals located, number of appointments made, total number of leads, number of qualified sellers (as opposed to empty leads), and the average net income for each deal.  Once these goals have been set, the investor must detail a plan to achieve those goals, by predicting the number of prospective new deals that need to be generated for the math to make sense.  This is not to be turned in for a grade, or for pay; it is simply a tool used by investors to plan out every single day of work; stay on top of leads, deadlines, and employees; and achieve their financial and investment goals.

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Countless entrepreneurs of various types have had to come to the difficult realization that they are not, in fact, an entrepreneur or businessman; instead, they are marketers.  Once you start a business, the iron law of oligarchy takes command, and the primary objective becomes and remains to secure customers.  No business has ever succeeded without customers, and the sooner a real estate investor realizes that his business is no different, the sooner he can begin maximizing the earning potential of his business.  Traditionally speaking, there are two generally successful marketing approaches employed by companies and entrepreneurs: indirect and direct response marketing.

What I call indirect response marketing is what traditional real estate investment wisdom calls standard practice.  This is the notion that there are sellers out there (potential customers), and we will aggressively pursue them until they decide to sell to us.  This is not a targeted approach, rather it is a perpetual blanket outreach to the selling community, informing them of our business’ interest in buying.  This can be expensive, in the form of phone bills, classified ads, employee time spent working on reaching sellers, etc.  Although you reach a lot of people using the indirect response approach, when measured against the number of responses and then successful sales produced by that marketing, it becomes clear that there must be a more efficient way to acquire customers.

The alternative is what I refer to as direct response marketing.  This is a much more targeted, specific, and less expensive marketing campaign to reach only those potential customers who are selling the type of property which the investor in question is looking for.  This is done by generating material which advertises a specific service offered by your investment firm, through a variety of media types (ads, flyers, TV, radio, etc.), which will appeal to a specific set of sellers.  The advertisement will offer a benefit for sellers in that scenario, and request that the seller contact the investment firm to enjoy that benefit.  In a sense, it identifies a common problem shared by sellers, and presents the investor as a solution.  Then, interested and qualified customers contact you, rather than the other way around.

The obvious benefit of direct versus indirect response marketing is that, following the initial effort to disseminate the advertisements, direct response is fully automated.  That is, it continues to work regardless of the ongoing efforts of the investor.  With indirect response marketing, by contrast, the marketing stops when the efforts of the investor stop.  Therefore, although it works, indirect response markerting becomes much more expensive per sale produced than its counterpart.

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There is no shortage of approaches employed by real estate investors to find good deals.  It is arguably the most important facet of the business, that upon which all other facets hinge, since the initial deal determines many of the financial decisions which will invariably follow. Here is a brief analysis of a few common approaches and some that are more unconventional, and why there are some that should be avoided all together.

The Multiple Listing Service (MLS) has a history of consistently producing good deals.  In basic terms, the MLS is an enormous list of every property currently listed for sale by a broker.  Although this is not simply a list of good deals, it does provide the investor an opportunity to sift through the properties, looking for those which meet their needs and have motivated sellers.  The MLS is such a great tool for investors, because it represents real estate in the information age.  It is a continually-updated, comprehensive list of properties that are actually for sale (some other approaches require investors to find good real estate, then inquire as to whether or not the owner is interested in selling); it provides almost everything the investor would want to know about the property, pictures and condition included; and it allows for easy organization of investment opportunities (for example, maybe you are only looking for homes that need to be fixed up or rehabbed).  What’s more, it all operates conveniently from your computer, so very little work is required on the part of the investor.

Often, cutting out the middle man is a good thing—it is always a less expensive way to do business, and it makes things simpler; however, in real estate it is not necessarily a reliable way of finding deals.  For example, homes listed as For Sale By Owner (FSBO) should be approached with caution for several reasons.  First, the seller is for whatever reason not willing to pay the 5% commission to hire someone or list the home professionally.  This is a red flag.  Either they don’t want to pay that money because they are not actually interested in selling (just testing the market, most often), or they are in so much debt that they can’t afford to pay a commission.  Whatever the individual scenario, history has shown that FSBO properties tend to be dead ends for investors searching for good deals.

It is always good to diversify, and seeking deals is no different.  Never rely on one source for generating leads; rather, put your name out there, get on lists, get on the phone—having a steady stream of reliable information about potential deals is paramount to finding good deals on a consistent basis.  Stick with sources that have worked in the past to produce the kinds of deals and properties that meet your business criteria, and always expand on those.  A drought can (and invariably does) occur for all sources, so—just like in the stock market—you need to spread your risk over a number of different crutches.

By the same token, try something unconventional.  Print flyers—they cost next to nothing to make, can be easily distributed by hiring someone at minimum wage, and can be used to target only the properties which fit your investment profile.  For example, if you’re an investor looking only for deals on 3-bedroom homes, you can hire any high school student with a car to leave a flyer in the mailbox of every 3-bedroom home he finds in a given area, once a month.  If you cover a big enough area, someone is always moving, which means someone is always selling.  You will be amazed at the number of sellers who will respond simply because you offered them the opportunity.

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One easy way to earn more income with a rental property, is to simply increase its market value and therefore the rent that you charge.  Often, demand for a property is out of the investor or owner’s hands; however, if he merely improves the manner in which the property is presented, than the demand for what is essentially the same property will increase.  This can be done with surprisingly little effort or money.  Bear in mind, these are simple, cheap, minor additions or improvements for which the earned benefits will outweigh the costs.

Start on the outside of the property.  Replace or repair the old mailbox.  It won’t take more than about $50 to stand out from the rest of the neighborhood and be noticed.  Remember, people want to have the little things taken care of when it comes to the space they live in.  Next, consider wooden shutters for the outside of the windows.  These can be purchased cheaply at any hardware store, and they tend to be very easy to install.  If a little style is applied (try offsetting shutter colors from the rest of the outside of the house), this can really enhance the appearance of a property.  Next, make an improvement to the front door—it is the face of the property, the first impression, and guaranteed to be closely scrutinized by the renter (who will use it daily).  You don’t necessarily have to get a new front door (although if you do, a nice one usually only costs about $150), but you should use the front door to make the statement that you want to be made about the entire property.

Moving inside the home, continue to look at the doors.  Standard, hollow, internal doors are easy to find for about $20, and like the front door will make a big difference in the renter’s perception of the property.  While you’re at it, look at door handles as well.  Old, rusted knobs are uncomfortable and unattractive, and shiny new handles will only cost a few dollars at the hardware store.  Even simpler than that, consider replacing electrical switch plates.  This seems like such minutia, but sloppy owners often repaint their properties without painting the switch plates (the logic being that it’s not a very big deal).  Sometimes they even paint over the switch plates, rendering them next-to-useless.  Instead, why not just spend $10 to replace them throughout the house?  Your renters will appreciate it, which translates to increased demand for your property.

Although repainting the inside of the property could be an expensive and time-consuming endeavor, you can compromise by simply repainting the trim.  Modern houses tend to have beige or white trim, and distinguishing the trip from the rest of the walls and ceiling is like accessorizing the property.  Similarly, you could repaint kitchen or bathroom cabinets, etc.  Again, it’s a little thing on the part of the owner that will go a long way for demand on the part of the renter.  The accumulated effect of each of this minor adjustments is a property which appears much better-kept and high-quality, which of course means the renter will be willing to pay more to live there.

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Real estate investment can be a difficult career path to begin, especially for young people who have little money to invest and few connections in the business or investment community.  One standard approach to get started is called bird dogging (sometimes known as real estate jobbing), which is essentially a person who finds qualified leads for professional investors.  In order to be a successful bird dogger, one must be proactive, systematic, and diversified in their approach to locating leads; if a passive approach is employed, then the jobber is of no added value to the investor.  If done correctly, the bird dogger can gain access to the real estate and investment community, learn valuable lessons without any risk of losing money, and earn money with practically no initial costs or investments.

Bird dogging allows for great flexibility.  You can do it in your spare time or while working another job; obviously, the amount of money earned will be proportional to the number of leads ultimately closed on, but the jobber generally has no contractual obligation to the investor to continue finding leads.  It requires no schooling, books, tests, or any other process that requires payment, which means that start-up costs for bird doggers are negligible.  Further, the jobber never makes an investment, which means he is never at risk of losing any money.  As a jobber, you would be paid a referral fee for every deal closed by the investor.  This can be a flat rate (the same amount for every closed lead), a percentage of the purchase price, or a combination of the two.

The successful bird dogger is the one who works for his investor.  That is to say, he understands the needs of the investor’s business model, and only searches for leads and properties which meet those needs.  If you are willing to stick to those needs and go the extra mile to provide all the available information about the property (not just the name and phone number of the seller, but all public records, property conditions, etc.), then your investor is sure to find what he is looking for (and be impressed your work, which brings me to the next point).

The biggest advantage of starting as a bird dogger is cultivating important relationships that will ultimately be of value for a career in investment.  Meeting and dealing with the sellers and investors alone—getting your name and face in their memory banks—can be invaluable (if you’re remembered for the right reasons!).  Pick an investor whom you think does it well, and whom you’d like to emulate.  As you are finding deals, try to develop a mentor-mentee relationship with your investor, and it could prove a very fruitful avenue into the investment world.  Don’t be too presumptuous as a jobber though; chances are, the investor will not be interested in taking you under his wing right away.  Just work hard, find good deals no matter how many leads you have to explore, try to learn something about investing, and good things will come.

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Getting started in real estate investment can be very tricky, especially if you’re not one of the lucky few who start with an enormous amount of capital to invest.  But just because you don’t have a pile of cash and all the real estate connections yet, doesn’t mean you can’t break into the investment world by capitalizing on special and highly lucrative opportunities.  One such opportunity—which tends to present itself on a fairly regular basis—is investing in preforeclosure homes, or homes which are in the default stage of their foreclosure.  These are homes for which the bank has started the process of foreclosure by filing paperwork classifying the property as such; however, preforeclosures have not yet been subjected to the next step of the process—the trustee sale or sheriff sale—when the bank auctions off the house or repossesses it.  If an investor knows how to find preforeclosure homes, he can purchase them at a hugely discounted prices, quickly reselling them at the market price for a pretty profit.

This works for very little money for several reasons.  First, the investor incurs no holding costs, since the seller has already defaulted on his mortgage by the time negotiations begin.  This means that right up to the point that you purchase the home, no one is paying the bank (and the investor is not responsible for this).  Second, since preforeclosures are such a specifically-defined market, the investor does not have to waste time and money developing several different marketing strategies to find good leads of various types.  Having a focused marketing campaign allows the novice investor to develop experience, relationships, and funding without overexerting himself.

Perhaps the biggest advantage of investing in a preforeclosure is the motivation of the sellers.  These are people who are on the brink of losing their homes, are being persecuted by the bank, and are desperate to have a little breathing room.  For the investor, this means an opportunity to make a very low offer.  It is not uncommon for investors to produce equity spreads in excess of 30% when purchasing preforeclosures.  Further, since so many foreclosures have been caused by recent economic uncertainty, banks are under tremendous pressure to sell the homes rather than repossessing them (which would be an overexertion of bank and FDIC resources).  Therefore, with a little savvy, the investor can negotiate huge discounts that produce even higher equity spreads, all amounting to more money in the investor’s pocket.

Finally, since the preforeclosure purchase agreement allows the buyer to simply take over the existing financing structure of the previous owner, no credit qualification or approval is required to purchase the preforeclosure home.  This is good news for the thousands of people interested in breaking into the world of real estate investment, but who are disqualified because their line of credit is not good enough to purchase a property in the first place.

Overall, although you are not likely to find high-end properties, investing in preforeclosures is a relatively safe and reliable way to get involved in real estate investing, without spending too much money you don’t have.  It requires only paying attention to foreclosure listings, a bit of capital, timely and aggressive negotiation, and a bit of luck (like all investment) to be successful, but the rewards can be huge considering the low level of risk involved.

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The short answer is no, flipping a property—or buying a property and then quickly selling it at a higher price—is far from illegal; in fact, one could argue that profiting from the responsible prediction of market trends is the essence of the very capitalism that defines our nation’s character, and which the laws are designed to preserve.  There is absolutely nothing wrong with finding and purchasing an investment property, investing in that property’s value, then selling it to someone willing to pay more than you did.  That’s simple supply and demand.  Then why is there so much on the news about real estate investors being arrested and imprisoned for flipping homes?  Generally speaking, the headlines are incomplete in that they fail to report that the investors were not arrested for actually flipping the home, but rather for some fraudulent activity during the process which illegaly increased the property’s perceived value.

The fraud associated with flipping is most often simple mortgage fraud.  That is, people at different levels of the process collaborate to create a more valuable picture of the property than its actual value, which they can then present to the purchaser (who will think the home is worth more than it actually is).  This can occur at almost any level—investors, mortgage brokers, appraisers, loan officers—from anyone who makes an effort to mislead the purchaser, and it is highly illegal.  Most commonly, investors cooperate with appraisers to provide dramatically increased property appraisals, but this type of fraud manifests in many other forms as well: writing false w-2 forms, gifting down payments, fabricating pay stubs, forging credit letters, etc.

On the other hand, the set of investors that makes their living by legitimately “flipping” homes and properties is doing nothing illegal or unethical, and is in fact doing a great service to the housing market.  They purchase and invest in a property, either by paying for remodeling and repairs or by simply riding out an expanding housing market, and then sell the house for its actual value (as determined by the buyer’s current demand) for a profit.  The process is only illegal in the case of mortgage fraud, or some similar process by which the potential buyer is misled as to the value of the property, thereby enciting him to overpay.  Those who perpetrate this crime should be, and often are, imprisoned.

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Land Trusts are one of the tools of the real estate trade that are grossly underutilized.  This living, revocable trust allows an investor to hold title to a piece of real estate.  Since each individual property is represented by its own land trust, the investor can rest assured that he is maximizing his privacy and security, and not putting all of his investments at risk on every transaction.  There seem to be countless arguments in favor of possessing a land trust—here is an abbreviated version.

The most important benefit afforded by a land trust is investor privacy.  Any trust agreement is not public record.  This means that the average Joe can’t simply hop on the internet and find out who owns a certain property through land trust.  However, simple property ownership is public record, which means anyone can access sensitive information about an investor and all of the investment properties in his portfolio.  Although this in itself is a nasty adverse effect of ownership, it says nothing about the legal ramifications of making that information available.  If an investor owns a number of buildings in the same area, then the local government could easily track the accumulation of that owner’s violations (however minor), and eventually take him to court.  With a land trust, however, it is much more difficult to find the owner of a property; and it is infinitely more difficult to compile a comprehensive list of the owner’s properties.  This also makes it much more difficult (or perhaps just less appealing) to sue an owner bearing a land trust.  Successful litigation is based on the money made through suit, so lawyers aren’t likely to file a case against someone with no assets.  You could own 1,000 properties, but if they are all owned by a land trust, then a search of your name will not reveal a single one.  It seems a lawyer would be more inclined to take a case against the owner of 1,000 properties than against someone with no assets.

The other benefits of a land trust all deal with the security of the investment.  First, liens may not be applied to trust-owned properties.  That is to say, if an investor has a land trust, then all personal judgements or liens that have been applied to him, may not then be associated with the value of the property.  This secures the investor’s opportunity to profit from the investment, regardless of what else is happening with that investor.  The trust is also not subject to title claims, which means if there is any controversy over the title and a title claim is made, then these claims are applied not to the owner, but to the trust which is attempting to sell the property.  This means, once the property is sold, the trust has no remaining assets to which the claim or lien could be applied.  Alternatively, such a claim made against an investor who had signed his own warranty deed could be financially devastating.

There are many other specific benefits of holding title in a land trust rather than in the name of the investor.  Most are applied to specific scenarios (ways to avoid losing money in a homeowners’ association, transferring contracts, etc.).  While you don’t need to know every single benefit of a land trust, it is important to know that it is an extremely useful—though underutilized—tool of real estate investment which adds a layer of increased privacy for the investor, and security for his investments.

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Appraising a property is one of the most crucial steps in real estate investment.  Underestimating the value of the commodity at the onset of the investment process could cause the investor to lose a substantial portion of their potential profit; on the other hand, overestimating the property’s value can result in pricing that exceeds market demand, which will almost invariably result in frustration and reappraisal on the part of the investor.  You want to get the appraisal right, so that you can maximize the opportunity to profit from that initial value.  There are three basic strategies to doing this properly: the comparable sales method, the replacement cost method, and the income valuation method.  Each can be applied with equal efficacy to evaluate a property.

The first—and by far the most popular—method is to use comparable sales figures.  This strategy is generally reserved for small properties, limited to free-standing homes, single apartment units, or very small apartment complexes.  Basically, to determine the value of a property, the investor will find very similar properties that have recently been sold in the same location to gauge the market value.  Obviously, the investor will have to compensate for any major difference in the features of the properties (fireplace, garage, utilities, etc.), and also for any difference in square-footage (which can easily be done by dividing the property’s price by its square-footage, thereby converting to a price-per-square-foot rate).  Although an appraiser will be familiar with this method, an investor can circumvent that cost by doing this comparable sales research himself—either by searching local courthouse information, by recruiting a cooperative realtor, or simply by searching for the relevant figures online.

The replacement cost method is a bit more complicated, and therefore not quite as reliable at providing a property’s value for the relatively inexperienced investor.  This strategy requires the investor to estimate what it would cost right now to rebuild the same piece of property in the same location.  This requires in-depth knowledge of the construction industry and building market, including labor and materials costs, and also requires that the investor make considerations for the depreciation in condition of the actual (already-built) property in question.  Generally, this method is reserved for large, commercial or industrial properties, and it is most often done with the close cooperation of a local contractor who has intimate knowledge of the costs of construction.

The income valuation method basically determines how much money the property will make in the future, and therefore how much it is worth now.  This type of appraisal is reserved almost exclusively for commercial properties or large residential properties with more than five units.  It is a simple formula: determine the property’s gross income, subtract all expenses (including debt service), multiply by ten, and that is the property’s value based on income valuation.  Clearly, this can only be employed when the property stands to make money, but it allows the investor to easily tweak a property’s value simply by increasing gross income, or decreasing expenses.

Whichever method is used for appraisal, having confidence in the correctness of your estimation of a property’s value is the first step to making money on that investment.  Too low, and the investor will be fleeced—too high, and he will never make his money back.  This crucial step must be approached seriously and with proper care using one of the above strategies to determine the value of an investment.

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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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