Each of these three strategies boils down to the same fundamental formula: buy, resell, profit.  And in fact, none of them prescribe a specific way to buy or sell the property in question, so really the only difference among these strategies is what happens during your period of ownership of the home (that is, how do you—the investor—increase the value of the home for profit?).  Of course, you can attempt any strategy in any set of market conditions, but it is those market conditions that will be the determining factor when deciding among these three strategies.

In a steadily expanding housing market—like the one we enjoyed for decades leading up to the 21^st Century—making money as an investor requires little thought and even less effort.  That is because the nature of the expanding market is that property appreciates.  So all you have to do to profit is select a property, buy it, and sit back and wait for the market to work on your behalf to increase the value of your assets.  This is called speculation: sitting back to let the market do it’s thing, while you reap the benefits.  Obviously, this is a great approach to investing.  It requires very little input of time and energy, and the investor is almost guaranteed to turn a profit.  Unfortunately, however, speculation only works in a reliably improving market, and the housing market is one which (although once expanding rapidly like a bubble) has now burst, meaning profits are not quite so easy to come by.

That doesn’t mean you can’t profit, it merely means that in a slow economy, profiting is an active process rather than a passive one.  This means we can no longer sit back and collect our income; now we have to work to achieve it.  One conventional way to increase the value of our assets in order to profit, is to repair, update, and generally rehab the property.  The goal of this is to bring the home entirely up to retail standard, making it an appealing product on the open market.  Rehabbing works in any market conditions, because what drives the appreciation is raw labor, not the market.  Of course, you will have to fully account for the cost of labor, holding expenses and ownership in your consideration of profit margins and asking prices, but there is no shortage of guides to helping calculate the cost of repairs (a seasoned rehabber will definitely be your best bet for this). Also keep in mind that rehabbing in a buyer’s market means lower retail pricing and often longer holding time.

These are all legitimate investment strategies, but that doesn’t mean they all work all the time.  Know the climate of the market you are working in, both locally and globally, so that you can make an appropriate decision about how to increase the value of your assets—simply by holding them for a while, or by spending resources to make modifications, updates, and repairs.  Generally, rehabbing is reliable in any market, while speculating only works when the market is rapidly expanding (like a bubble about to burst), and an investor is able to hitch on to a “shooting star” property, and ride it all the way to success.

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Are you looking to upsize your home?  Perhaps you have outgrown your first home, but have been hesitating to pull the trigger on a big new investment due to the condition of the economy.  Or perhaps you have not quite been able to afford a larger, nicer home, until very recently when real estate prices fell through the floor.  Whatever your reasoning, now may be the right opportunity for you to take advantage of historically low prices and mortgage rates, to get into the living space that fits you.

The first major obstacle to overcome will be selling your home in a buyer’s market.  After all, the reason you are ready to buy is because prices are so low, so you can’t expect to be able to sell your home for some exorbitant sum.  Be reasonable and practical about your asking price, and do not expect to be paid the actual value of your home.  If you are feeling depressed about taking a loss, remember that you are moving into something more expensive.  This means if you take a 5% loss due to market conditions on your old home, you can expect to get a 5% discount due to market conditions on your new home (and 5% of a bigger number obviously means that your discount exceeds your losses).

Make sure you know what you’re getting into financially.  Speak with a mortgage specialist before purchasing the new home, and determine exactly how much your monthly payment will be—and make sure you can afford it.  If you pull the trigger, and later realize your new home is too expensive, you will take a major loss trying to sell the house and downsize in a buyer’s market.  Just as upgrading saved you money, downgrading will translate to a substantial loss.  Mortgage rates are at an all time low, and they are meant to be taken advantage of, but that doesn’t mean they are free.  Be absolutely certain that something bigger and better is something you can actually afford to pay for.

Generally when addressing real estate investors, you don’t have to advise them to remain emotionally detached.  For the most part, investors are in it for the money, and that goes a long way in keeping them level-headed versus enslaved by their emotions.  When dealing with someone purchasing a home to live in, however, it is a vastly different story.  I caution anyone looking to upgrade their home to be hyper-vigilant about remaining emotionally uninvolved.  Because people are looking for their next living space—a very intimate thing—people tend to be blinded by what they love at first sight, and it means they cannot negotiate with a clear head.  Houses are one of those things where what you choose is important, but you can set up a comfortable living space anywhere.  Don’t limit yourself to only one option; you will end up with a clouded head when negotiating prices, and you are almost certain to overpay.  Instead, wait until after you’ve closed your deal to get emotionally involved—then you can enjoy both the house you bought and the money you saved!

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Many investors—well, many amateur investors—think that when they invest in a rehab property, they can increase their profit margin by doing the actual repair work themselves.  It’s a romantic idea, but it does not take long either to realize that this is not a profitable way to do business, or to fail as a rehab investor.  Here is why circumventing professional, certified repair on your rehab project inevitably and invariably costs more than it saves.

First of all, if you are someone who is an expert in every field of home and property maintenance and repair, if you are certified in each of those fields and have plenty of experience working in them, then please disregard this article.  If you are not one of these people—and let’s face it, you’re not—then read on.  In fact, almost no one is an overall repair guru.  If it were possible, then we wouldn’t have so many specialists (plumbers, roofers, electricians); if everyone could master all of the trades, then everyone would or they would be out of business.  So in fact, no one should be working a rehab project alone.

Since you’re not an expert in all fields, if you try to make repairs, the work you do will almost invariably not meet the standards of quality.  One of three things will happen: you will not be able to sell the home for the price you planned (eating into or erasing your profit margin); you will not be able to sell the property at all; or you will have to hire someone anyway to come and fix what you’ve done (which is what you should have done in the first place).  There is no winning scenario here, and all result in a loss of money.

Furthermore, committing to repair the property on your own is committing to spend an obscene amount of time on this project.  You are no longer an investor, you are an investor, contractor, laborer, inspector, etc.  Do you have time in your schedule to take up five or more new jobs?  Do you have a day job in addition to your investment career?  For some, devoting this much time to one project is impossible; for others, it is simply absurd.  Even if the time you spend working on the rehab is “free time”, you are clearly depleting a limited supply of free time, which you could otherwise be using to spend with family, friends, or whatever other leisure pastime suits you.

Put it like this: the amount of money you will save by avoiding hiring contractors and labor is far, far exceeded by the amount you will lose in the form of rehiring labor down the road, taking a price cut at the time of sale, or failing to sell while you retain the cost of ownership.  What you end up with could be any combination (or all) of those scenarios, and your project will flop.  Be frugal, not cheap—that means be smart with your money.  Spend it on proper labor, the first time around, and enjoy the benefits down the road.

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Too many investors overlook the lease option as a viable investment strategy, maintaining that it doesn’t make any sense to pay rent for something that you ultimately plan to purchase and resell for profit, the logic being that every month you write a lease check, you are cutting into your profit margin.  However, the lease option provides the investor with considerable flexibility without losing too much money (flexibility is an option I would happily pay for).  Especially for start-up investors or those who lack the raw cash capital to make a down payment on a home, lease options can be a great way to secure the investment in a competitive market.

Almost every investor has had more than one great deal slip through their fingertips simply because they didn’t have available cash on hand to make an offer or down payment.  Although the seller was happy to do business with you, perhaps he was happier to do business with someone who could pay him.  What if there was a compromise?  It’s called the lease option.  The buyer, who perhaps can’t afford the full down payment on the home, negotiates with the seller to temporarily lease the home, with the option (legal right, actually) to purchase the home at a later date and for a specified price.  In many cases, that lease money paid can be at least partially applied to the eventual payment on the home, which means in fact you are not losing quite as much money renting the property as people presume.  The buyer is at no point obligated to buy, but the seller is bound by the terms and prices laid out in the contract.

This is a great way to secure your stake in a great deal that you might not be able to afford by conventional means.  The extra time during which you are leasing (but do not own) the property can easily be used to make the necessary repairs on a rehab project, and since you didn’t have to devote your resources to purchasing the house up front, now that money can be used to add to the value of your (almost) new home.  And don’t worry about the original owner recognizing the added value and jacking up the purchase price—he is bound by the contract terms.

After you’ve made your repairs, but before you’ve even purchased the house, you can use your extra lease time to line up a backend buyer to purchase your new home at its proper and newly adjusted retail value.  Effectively speaking, that means you could buy the home and sell it in the same day, even the same hour, and not have paid a dime to own the house during the period of rehab (because that cost will either be applied to the purchase, or at the very least covered by your profit margin).

Rehabs are an especially good opportunity to use the lease option, since the extra few months provide the perfect opportunity to get all of your business done before you spend any money: pool your resources for purchase, make your rehab repairs, and line up a buyer for profit.  When all that’s done, it’s just a matter of signing a few documents and cashing your check!

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There is a class of investors out there who believe that, because they are investors and not lawyers, they don’t need to trouble themselves with the details of the real estate contract.  These investors couldn’t be more wrong.  The contract is what lays out exactly what you are buying, what you are bound to, and what is owed to you.  It is essential to know exactly what you are getting into on every deal that you make, so that you can plan accordingly and protect your profit margin.  The good news is, the real estate contract is pretty standard, simple, and easy to navigate and understand.  In simple terms, here is an explanation of a basic real estate contract.

The contract will clearly identify both (or all) parties involved, as well as the property in question.  This means an address and description of the property.  The main ingredient in the contract brew is mutual agreement, whereby both or all parties agree to the same terms of a deal, following an offer, usually a counteroffer, and finally acceptance of terms.  These must all be clearly laid out in the contract.

In addition to identifying parties and mutual agreement, here are some other elements which all real estate contracts should and in fact must possess.  It must be in writing in order to be enforceable.  An oral agreement is nice, but unfortunately if things go south, then the victimized party will be out of luck trying to cite the contract is binding.

A price for the property must be stipulated.  This does not necessarily mean a number of dollars that the buyer must pay (although it could); rather, it has to point to a value which can be reasonably ascertained at a later date, such as an appraisal value.  This, like everything else in the contract, must be as specific as possible: not just “an appraisal value”, but a specific appraisal done by an agreed-upon appraiser at an agreed-upon time.

Usually, a contract will include some consideration.  Consideration is essentially the value of the agreement itself (as opposed to the transaction), and it comes in the form of a small good-faith fee paid by the buyer to instill confidence in both parties.

Finally, signatures are required, as in all contracts.  No third parties or notaries have to be used, but both parties (or representatives thereof) must ink the contract.  Beyond that, it’s just about filling in the particular details of your transaction.  As stated above, the real estate contract is standard and simple, but you need to know what you are looking for when reviewing a contract.

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There is nothing unethical, sleazy, wrong, or dangerous about knocking on doors to generate some leads for your real estate investment business.  The truth is, it may be the best way to get good information on exactly the type of property you want to buy.  If you only had 3 days to close a deal, wouldn’t you show up at the doors of the homes you wanted, gauging any interest in selling?  People are generally deterred by one of three factors: it’s too dangerous, it’s a waste of time, or it’s an invasion of privacy.  All are false presumptions.

Here’s what you do: target exactly the kind of home you want to buy, in a neighborhood with a number of comparable options; knock on the door on a weekday evening, and politely explain that your business is interested in purchasing a home in the area, and you are wondering if anyone in the neighborhood is interested in selling.  It’s that simple.

The responses you will get will range from being told not to return, to being given a list of motivated sellers.  Generally speaking (and assuming you are not targeting destitute neighborhoods), you will not have anyone yell in your face, no doors will be slammed, and you certainly don’t have to be concerned about having a gun pulled on you.  But if you are concerned about safety, consider these common sense tips.  If you are a woman, bring a man with you.  If you are a man, bring a woman (people tend to be less threatened that way).  If you are invited into someone’s home, use good judgment and consider your safety; if you have a bad feeling at all, stay outside.  Don’t overdress when knocking on doors, as people tend to put their guard up when suits show up at their door; for house calls, business casual is best.  Be mindful not to intimidate anyone who might answer the door; take a step back after knocking to maintain the homeowner’s sense of personal space.

If you follow these guidelines and remain unfailingly polite, you will be amazed by the response.  People love to talk, and if they do not have their own reasons to sell, then you may still be likely to hear all about this neighbor’s divorce, or that neighbor’s impending foreclosure or debt.  In five minutes of work, you could walk away with 2 or 3 really solid leads that just happen to be right next door.  It is not a waste of time—you can easily cover 5 target neighborhoods in one evening of work (between 5-7pm), and even if that only generates one sale, it has been a good use of time.  Imagine if it generates three!

Don’t be put off by showing up at people’s homes.  If they don’t want to talk to you, they won’t.  No harm done, you can simply move on to your next target home, having spent a total of about one minute on this failed lead.  For those who want to find deals quickly, why not go straight to the source?  Find motivated sellers in target neighborhoods simply by knocking on their doors and talking to them.

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Many investors new to real estate make the faulty assumption that it is like most other investments, in that it depends mostly upon the quality of the product.  But in real estate, the product comes and goes and must adapt for each consumer at different stages of their lives—which means it’s not about the house, it’s about the seller.  When you are filtering through phone calls and emails to gather your leads, you need to put on your “seller motivation” glasses, and observe your leads through filtered lenses.

For the vast majority of investors, an initial phone call with a lead is most often centered around the property in question.  After a five minute conversation with a strong lead, you might hang up the phone knowing every single relevant detail about the house, everything it has and everything it might eventually require.

That’s all great, and you will need that information.  But where most investors go wrong is failing to get information about the seller’s motivation up front, in that first conversation.  Perhaps people’s reluctance to do this is a perception that they could be prying too much into the personal lives of strangers, and that is fair.  You must be delicate and approach personal matters with great sensitivity, but usually it doesn’t take much more than asking, “Why are you considering selling?” for the seller to talk your ear off about their personal problems.

And if they are offended by your question, simply explain that you are considering spending a lot of money on this property, and you are someone who insists on researching all aspects of your investment before risking your business’ resources.  That usually satisfies them.

Uncovering seller motivation should not be a bonus when going through leads; rather, it must be a priority, even more so than acquiring details about the property itself.  A house is a house; each has some intrinsic problems, but all can be sold.  The details of the house can be investigated thoroughly once you’ve determined that your seller legitimately needs to sell (hopefully for a discount, if you’ve done your job of selectively filtering your leads).  Rank the leads in order of seller motivation, and start at the top.  While you are looking for a property that fits your business model, you should be looking in order of how much or how fast the homeowner needs to sell.  This is the best way to generate good deals, great discounts, and opportunities for creative financing which will keep the money in your bank account right where it belongs.

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If you are interested in purchasing and repairing a property for resale at a higher price (or rehabbing), then you’ll want to avoid each of these mistakes commonly made by unsuccessful rehabbers.  Most are the result of trying to save too much time or too much money.  Remember, rehabbing is neither instantaneous nor sure—it requires time, money, and effort to eventually turn a profit.  The first mistake is not understanding this fact; but if you can overcome that, then the rest will be easy to avoid.

The second killer is failing to do proper research.  The bulk of the rehabber’s work is not in fixing a home, but in searching for a home to be fixed.  To lay down that kind of capital, an investment property should meet all of your business’ needs (location, design, price, size, type, etc.).  You need to find the right size and style of home, in a proper neighborhood, and in a good location with access to shopping, culture, and transportation.  As much as 90% of your time should be spent not on your current property, but on your next one.

Another major mistake is assuming you can cut corners, and do repair work yourself in order to save money.  This is like the owner that sells a house themselves to forego the  listing fee—they often end up getting screwed.  Buckle down and spend the money to hire a certified professional to make repairs.  Not only will avoiding the shoddy repairs save you money down the road, but having that certified work on record will increase the value of your property for resale, and it will also free up the time you would otherwise have spent doing manual labor, to pursue your next investment opportunity or to line up your backend buyer.

Be mindful of your cash flow.  Too many start-up investors find a great deal and jump on it, not realizing that sometimes even a great deal is simply too big.  If you can’t afford to pay the bills while you own the place, then the possibility of selling the property for a $100,000 profit is pretty much worthless.  Make sure you go into the process with enough cash reserves to cover your costs of ownership, etc.  If you don’t have these reserves, then you must understand that, and avoid deals that will be too expensive and crippling for you to own.  Instead, do a couple of small deals until you’ve built up the proper reserves to sustain you through a bigger one.  Investing success is about moderate growth and consistent work; it is only very rarely the product of a one-time, major deal for a brand new investor.  Understand this, and the strategies to avoid, and it can be a tremendous chance to profit!

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Many investors—well, many amateur investors—think that when they invest in a rehab property, they can increase their profit margin by doing the actual repair work themselves.  It’s a romantic idea, but it does not take long either to realize that this is not a profitable way to do business, or to fail as a rehab investor.  Here is why circumventing professional, certified repair on your rehab project inevitably and invariably costs more than it saves.

First of all, if you are someone who is an expert in every field of home and property maintenance and repair, if you are certified in each of those fields and have plenty of experience working in them, then please disregard this article.  If you are not one of these people—and let’s face it, you’re not—then read on.  In fact, almost no one is an overall repair guru.  If it were possible, then we wouldn’t have so many specialists (plumbers, roofers, electricians); if everyone could master all of the trades, then everyone would or they would be out of business.  So in fact, no one should be working a rehab project alone.

Since you’re not an expert in all fields, if you try to make repairs, the work you do will almost invariably not meet the standards of quality.  One of three things will happen: you will not be able to sell the home for the price you planned (eating into or erasing your profit margin); you will not be able to sell the property at all; or you will have to hire someone anyway to come and fix what you’ve done (which is what you should have done in the first place).  There is no winning scenario here, and all result in a loss of money.

Furthermore, committing to repair the property on your own is committing to spend an obscene amount of time on this project.  You are no longer an investor, you are an investor, contractor, laborer, inspector, etc.  Do you have time in your schedule to take up five or more new jobs?  Do you have a day job in addition to your investment career?  For some, devoting this much time to one project is impossible; for others, it is simply absurd.  Even if the time you spend working on the rehab is “free time”, you are clearly depleting a limited supply of free time, which you could otherwise be using to spend with family, friends, or whatever other leisure pastime suits you.

Put it like this: the amount of money you will save by avoiding hiring contractors and labor is far, far exceeded by the amount you will lose in the form of rehiring labor down the road, taking a price cut at the time of sale, or failing to sell while you retain the cost of ownership.  What you end up with could be any combination (or all) of those scenarios, and your project will flop.  Be frugal, not cheap—that means be smart with your money.  Spend it on proper labor, the first time around, and enjoy the benefits down the road.

Tell us what you think.

SuperiorPrivateMoneyReturns.com

Too many investors overlook the lease option as a viable investment strategy, maintaining that it doesn’t make any sense to pay rent for something that you ultimately plan to purchase and resell for profit, the logic being that every month you write a lease check, you are cutting into your profit margin.  However, the lease option provides the investor with considerable flexibility without losing too much money (flexibility is an option I would happily pay for).  Especially for start-up investors or those who lack the raw cash capital to make a down payment on a home, lease options can be a great way to secure the investment in a competitive market.

Almost every investor has had more than one great deal slip through their fingertips simply because they didn’t have available cash on hand to make an offer or down payment.  Although the seller was happy to do business with you, perhaps he was happier to do business with someone who could pay him.  What if there was a compromise?  It’s called the lease option.  The buyer, who perhaps can’t afford the full down payment on the home, negotiates with the seller to temporarily lease the home, with the option (legal right, actually) to purchase the home at a later date and for a specified price.  In many cases, that lease money paid can be at least partially applied to the eventual payment on the home, which means in fact you are not losing quite as much money renting the property as people presume.  The buyer is at no point obligated to buy, but the seller is bound by the terms and prices laid out in the contract.

This is a great way to secure your stake in a great deal that you might not be able to afford by conventional means.  The extra time during which you are leasing (but do not own) the property can easily be used to make the necessary repairs on a rehab project, and since you didn’t have to devote your resources to purchasing the house up front, now that money can be used to add to the value of your (almost) new home.  And don’t worry about the original owner recognizing the added value and jacking up the purchase price—he is bound by the contract terms.

After you’ve made your repairs, but before you’ve even purchased the house, you can use your extra lease time to line up a backend buyer to purchase your new home at its proper and newly adjusted retail value.  Effectively speaking, that means you could buy the home and sell it in the same day, even the same hour, and not have paid a dime to own the house during the period of rehab (because that cost will either be applied to the purchase, or at the very least covered by your profit margin).

Rehabs are an especially good opportunity to use the lease option, since the extra few months provide the perfect opportunity to get all of your business done before you spend any money: pool your resources for purchase, make your rehab repairs, and line up a buyer for profit.  When all that’s done, it’s just a matter of signing a few documents and cashing your check!

Tell us what you think.

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