Real estate investing has the potential to be both a side business for the investor who prefers to dabble in rehabs or wholesaling here and there as well as a way of livelihood for the full-time investor.  Although the real estate techniques and skills utilized by these two types of investors do not vary significantly, the part-time investor must make a leap to create a full-fledged business around real estate.  Structuring one, or several, businesses around real estate involve not only real estate strategies to turn a profit, but also corporate strategies.  Strategic corporate structuring will help you to reduce your taxes significantly come April, saving you hassle and potentially thousands of dollars.

There are three steps before you can determine a corporate structure that is the most advantageous.   The first is to decide on what kind of strategy you want to implement, i.e. buy and hold, flip, wholesale, etc.  It is a good idea to pick one or two strategies and focus on them, thereby improving your skills in those areas and networking with people who are also concentrating in those techniques.  Some beginners feel as though they have to master many real estate strategies to build a diversified business model, but the truth is it is better to become an expert in one or two strategies than mediocre at four or five.  All real estate techniques have the potential to make money: it’s the types of properties and deals that dictate how much profit can be realized.

The second step is to understand the tax implications of the strategy you are going to use.  Property tax is a complicated subject and the best way to go about this is to consult a professional, either attorney or accountant, in this area.  There are many minute laws that vary among counties and in order to be secure and legally protected, it is worth consulting a property tax law expert. Overlooking this crucial step could result in losing as much as 35% to 45% of your profits in a year, which is enough to turn a profitable business into a precarious one.  Investors are hit harder with taxes than homeowners: for example, investors do not qualify for the Homestead Act, which can reduce the assessed value of your property by as much as $45,000.  Similarly, investors only qualify for one mortgage exemption of $3,000 regardless of the number of properties they might have.  The government allows real estate investors to lower their sometimes-exorbitant taxes through technical means that are best explained by a tax professional.

The third step is to actually create your corporation.  Once you have defined which strategies you are going to use and the tax implications of those strategies, the type of corporation best for you will be clear.  By determining a corporate structure in a three-step approach, you are ensuring that you are maximizing your profit and eliminating waste on superfluous legal fees.  Creating your own real estate investment business is a challenging endeavor, but the rewards it brings are worth the preparation and effort.

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

Marketing is the single most important facet of a real estate investment business, as in practically any other business.  Marketing is not only the way your business acquires, interacts with, and maintains customers, but it is also the primary method by which you establish an image or reputation within the community.  It can be very expensive, and extremely time consuming, but consistent and varied marketing is at the root of every real estate success story.  It’s the simplest of logical conclusions that if no one knows who you are, then no one will do business with you.  Every experienced investor has had a moment where he realized that his primary job is as a marketer; the sooner an investor gains this insight, the better off his career will be.

Probably the most common form of real estate marketing is indirect marketing.  In indirect marketing, an investor may reach out to no one in particular, but rather an entire neighborhood or community.  The message is broad, but clear: I am here, and I am ready to do business with you.  It doesn’t have to pertain to a specific market or property type, you are simply casting a wide net over the community, hoping to catch as many leads as possible.

By contrast, direct response marketing is done by selecting a specific portion of the community, and targeting them (and only them) as directly as possible.  Rather than casting a net to catch your fish, here you are using a line and bait, looking for just one specific fish.  Your bait is your services (“We Buy Homes As Is”, for example), any service needed by your target market.  Direct response marketing has its advantages and drawbacks when compared to indirect: due to the relatively small scale of the target market, direct response marketing tends to be much less expensive; however, for the same reasons, this approach tends to produce far fewer leads than an indirect campaign (it could be argued, though, that these leads are more likely to be in line with your business plan).

Neither of these approaches is right or wrong, and in fact they are most effective when used together in a “consistently varied” approach.  If your business has the cash reserves to do it, there should be a massive indirect response campaign, supplemented by several, highly-specific direct response marketing campaigns to various target communities.  The choice (or balance) between the two will be entirely up to you or your business, and it will depend on which direction you want to go.

When it comes to the media of marketing presentation, the key is to be as varied as possible (an indication of today’s high-paced, short-attention-span, multi-media-using society).  Try to get your name everywhere—flyers, business cards, signs, billboards, TV, radio, internet.  Whatever you can reasonably afford. If you give your potential customers one opportunity to learn your name, they probably won’t remember it; three opportunities—maybe; give them 100 chances to see your name, and they’ll never think of anyone else when it comes time for a real estate transaction.  Just like the old adage, “all publicity is good publicity”, there is no such thing as too much marketing.

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It doesn’t require a vast knowledge of economics to understand that markets fluctuate; and it doesn’t require an expert in real estate markets to see that the world of property transactions has reflected the general economic turmoil over the past few years.  But getting back to those most fundamental economic tenants: Buy low, sell high (that explains the fluctuations!).  Logic then dictates that that the lower the price, the better the buy; and the higher the price, the better the sale.  So in these unprecedented economic times, when experts are reporting historically low prices and high foreclosures—indicators perhaps of crisis—the wisest of real estate investors is busy buying low.  Really low.  When those investors sell high a few years down the road and make a fortune, they will be looking back on these years as the greatest investment opportunity of their lifetime.  And wouldn’t you like to be sharing those sentiments?

Arguably the best way to capitalize on this unique investment opportunity is to look into REOs, short sales, and other property options resulting from financial or economic stress.  Banks and government administrations all have enormous incentive to unload their property burden (their dead weight inventory), and when combined with the market conditions themselves—which already heavily favor the investor—you have a recipe for a profitable investment enterprise.

In recovering markets like the Midwest, and particularly in growing real estate communities like Indiana, there is no better time than now to invest a little money creatively, and watch it grow and grow in the years of recovery to come.  REOs and short sales are some of the most reliable avenues of investment in this type of market, due to the vast surplus of inventory owned by major lenders.  Following the recent and ongoing foreclosure crisis, there is no shortage of properties from which investors can select.  Search for the best deal among the great deals, fight hard to hit your negotiating points, and have a thorough plan to see you through to profit.  Ten years from now, you will either look back at 2011 as the year that launched your investment career to new heights, or you will look back on it with terrible regret as your colleagues enjoy the fruits of their opportunism.  It is entirely in your hands.

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

Certainly there are many types of investments to make in real estate, but some are better suited to specific needs than others. If you are new to real estate and want to explore your options, the best way to get started is to evaluate your own goals. Goals should be classified into long term and short term, labor intensive or side projects, and they should be based on your level of experience in the field. Pick realistic goals, for example, as a new real estate investor, you should not plan to make a 300% profit on a foreclosed property. Assessing your expectations and basing them in reality is the first step in starting your real estate venture.

The second step is then matching up the kinds of investments that suit your goals. Wholesaling is ideal for people that are new to the business, want to generate immediate income, have a low credit score and prefer a side project rather than a full-time job. Wholesaling allows investors to flex their skills in finding undervalued properties and in networking to build up a buyer list. Of course, it is also possible to build a business around wholesaling for those investors who want to generate more income and are willing to make wholesaling a full-time job. Retail-flips are also good for investors looking to generate income quickly, but if the house requires any renovations, then expect the construction to be done anywhere from 4 to 6 months after the purchase date. The investor may need to have good credit for a retail flip, since it is more likely that his name will be on the deed and he may have to get loans for the purchase and/or construction. Long-term rental properties, on the other hand, are great for generating sustainable wealth. Every month you can expect a cash flow which provides the desired security to those investors who are retired or have no other source of income. If being a landlord and the responsibilities that come along with that are not appealing, it is always possible to hire a property management company that deals specifically with properties, offering your tenants 24 hour support. Owning rental properties can also be a side project, especially if you hand off the responsibility of maintenance to someone else.

Your real estate portfolio can consist of any combination of wholesale deals, retail flips and rental properties and the exact percentage of each is up to the individual’s preferences. If you’re looking to create a business, wholesaling is a great way to get started to generate some capital, and then investing in rental properties will give you the sustainable wealth that a business needs to survive. There are many different combinations of real estate investments that are possible and the key is to assess your own goals to find the best combination that suits your needs.

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In the yesteryears before 2008, cash-out refi had a different set of rules. A real estate investor could take a loan of up to 90% of the after-repair value of a renovated house, pay back the private money lender, and then use the rest as income or to put towards the next real estate deal. These days, the climate has changed and no sane bank will allow a 90% refinance loan. The highest you can find is probably a 70% to 75% cash-out loan, and there are restrictions on how many of these loans you can get. So, is refinancing the same as it used to be? Can it still help an investor to get a good cash flow on multiple properties?

The key is to make sure that the refinance is for a long-term rental property. The best way to refinance is to take a fixed rate loan and opt out of the option arms or fancy ad-ons. You want to know exactly how much your overhead will be per month, so you can calculate the cash flow and adjust your rents accordingly. Keep in mind that if you take out a loan with less than 20% equity, you will have to pay mortgage insurance, adding to your total monthly expenses. The goal of refinancing is to get a greater cash flow per month since the monthly payments will be less than they were for the mortgage or private lender loan. If you have four or five long-term rental properties, then refinancing may work for all of your properties. Additional properties can be refinanced using private lenders acting in the place of a bank.

Refinancing is not appropriate for short-term goals, i.e. anything other than a rental property. Refinancing will have you paying a lower monthly premium, but for a longer period of time. You don’t want to get stuck with a 30-year monthly premium for that $20,000 you wanted last year, even if it may be tempting at the time. Additionally, beware of the overleveraging trap for the inexperienced investor. If you’re refinancing too many properties or you are at too high of a loan to value ratio, you may not be able to raise the rents enough to cover the payment. This could easily result in no cash flow or negative cash flow, which obviously is not sustainable. Be conservative in refinancing and only take a cash-out loan if you can guarantee that you will have a positive cash flow from the rent.

Even though banks prefer conservative lending practices, you can still make cash-out refinancing work to your advantage in this environment. If you structure the refinanced loan to fit with a long term goal and calculate a positive cash flow, refinancing may be a good idea

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

Refinancing can be a great financial move.  With interest rates at record lows, it is a good idea to shop around and see what kind of bank loan you can get.  Some lenders allow you to refinance up to 75% of the value of the property as long as your equity is 25% or greater, regardless of the amount of time you’ve owned the property.  If you find yourself in need of some extra money or want to take advantage of lower interest rates, refinancing can help.

For the real estate investor using private money, refinancing could save hundreds of thousands of dollars. For example, say you’ve purchased a $100,000 rental property with $70,000 from one private lender.  According to the bank, you have $100,000 of equity in the home, even though you borrowed from a private lender.  You could refinance for $75,000 with a 6% interest rate, 30-year period resulting in a premium of $449.66 and pay back the private lender plus any additional bonuses negotiated in the original contract, and now pay off the refinanced loan for a much lower interest rate.  This works very well with rental properties because you will have greater positive cash flow than if you continued paying the higher interest rates to your private lender.  A reasonable rent of $1,000 a month will equal your initial down payment plus the interest at 2.5 years, and then after that you will be making a profit of $550.34 per month.  If you stayed with the private lender, perhaps agreeing upon an 8% interest for 10 years resulting in a monthly premium of $849.29, it would take 16years before you broke even.  If you relied solely on private money, you wouldn’t do the deal, but refinancing can make it worth your while.  These numbers only get larger with a property of higher value and higher loans.

Refinancing does not make sense, however, with properties that are for the short term. To continue the above example, your total payment for the refinanced loan after 30 years would be $162,000.  If you had sold the property for $120,000, this would leave you with a profit of around $20,000, disregarding the terms of the contract you had with the private investor and the refinancing costs.  Overall, paying $162,000 later for $20,000 now is not a good deal.

Generally, if you can find interest rates 2 percentage points lower than the rates you would be paying otherwise, it could be advantageous to refinance.  Anything less than 2% is not worth your while, because there is a cost to refinancing.  It can cost you a few thousand to cover all the closing fees, origination fees, appraisal fees and possible points .   If you decide to refinance, you should opt for a fixed rate loan so you can calculate exactly what your overhead will be each month.  Also watch out for a clause that prevents you from pre-paying your loan.  Search around and try to find the lenders that don’t prevent you from pre-paying, which can also save you thousands of dollars.

Refinancing can be a good choice when investors have long-term rental properties and the refinanced interest rates are at least 2% lower than what the investors would be paying.  Otherwise, stay away from refinancing because it will only end up costing you more in the long run.

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As a real estate investor, you have three basic options of where your money comes from: yourself, the bank, or other people. There are advantages and drawbacks of each, and different methods of financing may be more appropriate depending on the strategy. Generally, if you use private money, finding lenders through networking or angel investors online, the main advantage is that you can secure a loan more quickly than at the bank.

In real estate, it is important to be able to close deals quickly. Other investors are competing in your area and when you spot a good deal, it is only a matter of time before another investor notices it as well. With a private lender, it is possible to close a deal within 24 hours. This allows you to move quickly on the best deals and complete many deals within a short period of time. If you are using your own money, then time is not an issue; however, there is a much higher risk to your personal funds. Bank loans take much longer to secure, especially now as they do not give credit easily. The red tape and strict scrutiny makes it difficult, if not impossible, to get a loan on a property that you want to flip. Bank loans, however, may be more applicable to long-term properties, because they have lower interest rates.

Although private money loans do have higher interest rates, you secure the loan by the property itself helping to reduce the risk to the investor. Private lenders are generally less risk averse than banks, allowing for more flexible terms. Even though private lenders are more willing to accept risk, as the investor, you should still do everything you can to protect their principle. The rule of thumb is 70% loan to value per property; that is, for each property, only finance it up to 70% with private lender money. If you are analyzing your deals correctly, you should have the purchase price and rehabbing costs covered within this percentage. This leaves at least a 30% margin that protects the private lender in case something goes wrong with the deal.

Overall, private money is a great way to invest because it allows you flexibility and saves valuable time. You can make more profit using private lenders because you are not restricted to a set number of loans, but you must remember to structure your deals to protect your private lenders and satisfy them so they will want to invest again.

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

The idea of getting stuck with a property can be daunting, especially since the costs of getting rid of that property can be high. Every time you purchase a property you run the risk of not being able to sell it, but there are ways to reduce those risks. The best way to ensure not to be in that situation is to invest wisely and maintain multiple exit strategies for each property. These plans will help you move a property or at least earn income from rent. Exit strategies will also help guide you on which properties to invest in, because a property should be able to fit the criteria of your exit strategies.

Generally, it is advisable to have three exit strategies. The first one is your intention for the property and the subsequent two are the backup plans. For example, if you are considering buying a property to rehab and then sell it as quick as possible, you may want a lease option and a long-term rental option as your next two exit strategies. In the event that you are unable to sell the property, these two options will provide a different means of earning a profit. Good backup exit strategies employ a variety of time lines, safeguarding a property in a slow market. In your local market, if the average price of a house has dropped since the time you bought your property, you can employ either of the two strategies to earn a monthly income that hopefully covers the mortgage, until the market bounces back and you want to sell. This may be a period of months or years, so be prepared to be patient if you’re unwilling to sell a property for a lower price.

Additionally, lowering the price of a property is not always a guarantee of moving it more quickly. There are other ways to incentivize if you find yourself stuck with a property. Find out which realtors are selling the most properties in your area and incentivize them to visit your property. There are many ways of doing this, such as holding an open house and making a deal with them if they sell your property. You may want to reevaluate your marketing strategies as well. If you’ve tried a variety of ways to sell your property and it is still not selling, then you have your alternate exit strategies.

Before you buy the property, work out the numbers on the backup exit strategies as carefully and as thoroughly as if they were your primary intention. If you have an acceptable cash flow for all three exit strategies, then the property may be a good investment.

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If you are a real estate investor using private money, then you understand that having private lenders are critical to your success. They are the cornerstone of your business and should be treated like royalty. Without them, you don’t have capital to invest, and finding a few good private lenders could be the difference between success and failure. So, once you have a private lender, how do you ensure that he/she will continue to invest? The answer is not finding the best real estate deals and making the most profit, although surely that will help, but rather it is structuring real estate investments to fit the expectations of the private lender.

The first step is to have an in-depth discussion with your private lender to understand their expectations and reasons for investing. Is he new and inexperienced, unfamiliar with real estate? If so, you may want to invest short-term with his money, either on retail flips or rental properties, so he doesn’t get scared and back out. During this discussion, it is necessary to explain all the options and types of investing that you do and suggest the best choice for them. Is your private lender very experienced in real estate? In this case, the lender is more likely to want to assess the deals carefully and this may become more of a partnership than an average lender. You may want to structure the deal to split the profits instead of paying a fixed interest rate. This gets your lender more involved in the process and he may be willing to take bigger risks resulting in more profit, both for him and for you. Once you have a private lender, make sure to have a discussion about their expectations and reasons for investing immediately. It will make them feel more secure and reduce the chance that they are unhappy with the results.

The second step is to explain the risks to your lenders. Some factors are out of your control, and they should have a clear understanding of your goals and expectations. Obviously, you will not be able to predict 100% of the time what the market will do or how quickly a house will sell. As long as you keep them clued into your process, i.e. the logic behind your conclusions, they will be patient if the unexpected happens. After all, investment carries risk, and they should be prepared to accept that.

The third step is to create an emergency fund of your own, and of course, let the investors know it exists. This fund should cover any losses that the investor incurs or at least help to ameliorate the loss. If necessary, it is better to incur some personal loss than to lose part of the private lender’s principle. The private lender will more than likely be willing to invest again and you can try to recover your losses on the next few deals.

Understanding the private lender’s expectations, thoroughly explaining the risks, and creating an emergency fund will help to ensure that your lenders will be happy with your performance and will agree to invest again.

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

1. Make sure to have your mortgage originator review your tenant’s application to verify how soon they can qualify for a bank loan and what items need to be cleaned up.  By doing this, you place the odds in your favor that your tenant will succeed. This will increase your local reputation as well as encourage other candidates in the future. This is especially true when you secure personal testimonies from clients who have exercised their option and have their own financing in place.   Success breeds success.
2. Have your real estate attorney review your option and lease agreement to make sure they are compliant with local, state and federal laws. Also understand at what percentage of purchase price “equitable interest” becomes an issue.   Some states mandate that if the option fee is greater than a certain percentage of the purchase price of the home, foreclosure procedures must be followed if the tenant is not able to exercise their option.  If the option fee is too high of a percentage, courts may view this as a contract for sale rather than a lease option forcing you to follow foreclosure procedures which become more expensive and time consuming.
3. Price the house at a fair marketable price that is supported by recently sold comparables. If the market is on the upswing, you can price the home reasonably over the current market value based on the current appreciation rate for the length of the option period.  This means that as a seller, you may want to price the house 2% to 5% above market value per year, taking into consideration the current appreciation rate.   However, be conservative here.  There is nothing worse than the tenant qualifying for the loan and then the home not appraising for the price you have agreed upon.  You are better off leaving a little money on the table for the buyer in equity than over pricing the home.   If the appreciation is greater than you anticipated, the accumulated equity may actually help your tenant secure the loan.  Better to lose $1-2K in equity appreciation than lose $20-30K or more in overall profit if the property doesn’t appraise for the purchase price.  The bottom line-Don’t be greedy!  Be profitable!
4. Charge slightly above average rent on the property and credit a portion to the purchase price of the home.   If the tenant is not able to exercise their option, this is an extra profit center for you.
5. However, don’t charge so much rent that the tenants are not able to keep up the maintenance on the home.  No one wins in this situation.  You have to invest money to fix the home and you have a disgruntled client.
6. Provide full disclosure to the tenants and the potential risks involved to them if they do not follow through and to you as well.  Most people want to succeed.  Do your best to help them succeed.
7. Encourage the tenants to invest in the property, especially if it is a fixer-upper. The bank will consider their improvements as equity, and it will assist them in securing a loan.
8. Provide an ongoing education program to help your tenant learn about credit scores, budgeting and how to take care of a home.  Make participation in these education courses mandatory.  If your tenants are serious about owning their home, they will appreciate this.  If they are not willing to participate, they are not appropriate candidates. Being as hands-on as possible will help the tenants secure the loan and result in a win-win situation.

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