Monday, March 2, 2009

Real Estate Investing Fundamentals

Real Estate Investing Fundamentals (ShowMeHow Videos)

This movie repeats a lot of concepts and quotes from Rich Dad, Poor Dad.

Pay Yourself First
Location Location Location

Jobs, different industries, view, growing colleges, Low Unemployment...

Looking for a deal:
Make Aggressive Offers = whatever is left to pay on the mortgage. This way the previous owner gets back his equity, the bank gets its money. A realtor could find this number.
Look for a house for sale where the owner already moved out (pays 2 rents).

Flip Houses
=> Look for old houses unsold for 6 months or 1 year...
Buy for less than 65% of the value once rehabed
Make them new. re-sell them 15-20% higher (should be at least 30K as it is complex)
(kitchen, bathroom, windows, heating, conditionner, roof....)

Some Lenders tends to ask for higher down payment or higher interest rates for investors.

Your First buy will have the best rate. A Loan could be called back... don't screw up a loan ?

Select a realtor with experience, He should be specialized in investment property and he will help you find the houses. He should also own investment properties himself.

Ask the Real Estate agent do evaluate the price of the property, work with many real estate agent. You will deal with whoever finds you a good deal.

find a good tax accountant to explain the advantages of investment property, holding time, repairing the house, buying, selling, closing cost, expense.

1031 tax exchange programs, re-invest your profits into another investment property (defer capital gain taxes)
=> Take a course
=> special qualified intermediary required for the exchange (service fee paid at the close at the sale, so agreement with the intermediary should be set after you found a buyer)

The sales and purchase contract should state that you intend to complete a 1031 tax deferred exchange, the buyer will cooperate at no cost or liability

Don't buy a house that has
- been modified (2nd floor added, add-on room... probably bad job)
- deferred structural maintenance
Make a house lead-free is an easy way to increase the value of your asset

Create a LLC even for only one house. Carry large Insurance policies. check the cost before buying, it is substantial.
Create one LLC per house, use the address ad LLC Name, LLc loans are more expensive, but protection is worth it. (example someone gets hurt on the property and sue you, worst case scenario you can only lose one house)

Get only a structure insurance,
tenant should get insurance with 300K liability insurance required (in case someone gets hurt in their house)

FSBO - For Sale By Owners
=> Use compliant contract, often this is pretty much illegal, buyer and seller don't know what they're doing.
=> get an attorney or know what you are doing.

Buy a first house in a newly built section, very good, buy early.
=> make sure the builder is strong
=> make sure market is strong, growing, good area. keep for few years and resell.

Multi Units properties have better cash flow. (2-8 units)
can only be sold to investors, low appreciation.
Split utilities if no individual meters, more complaints in between tenants.

When you start investing, it's better to buy single family house, they tend appreciate and build wealth, Multi-units, give better cash flow.

Loan harder to get, interest rate higher, higher down required.

Get a lender approval before shopping for houses, ask them details / good faith estimate of the fees before shopping.
Pre-qualification vs / Pre-Approval
Pre-qualification => conversation + credit history
Pre-Approval => + Evidence of income, assets, check the loan approval

There are interests only loan (you pay 100% of cost of loan before paying the principal)
Once you have equity in a house, pull it out on a loan and use it as a down for another.

Sometimes there are very high fees to get the best loan rates.
Application fee, + appraisal, credit report fees + flood appraisal fee, tax service fee, processing fee. underwritting fee
(sometimes loan origination fee, or loan discount fee to get lower %)

if you don't have 20% down, you need to pay mortgage insurance upfront + monthly
=> also very often you would be pushed to ARM or interest only loans.

sometimes you can ask the seller to finance (easier, faster, you could get better rates, he could get a safe an easy investment at 8% or so)

On FHA loan, the seller can not pay closing cost

VA & conditionnal Loans, you can get the seller to pay the closing cost (6-7% of sale price)

Debt to income ratio = total monthly debt / gross monthly income (if you get rent only 75% of it is included)
Debt to income ratio should be <>
TNT = Tenants and Toilets
Keep the house clean, you will get better tenants.
bad Tenants = unhappy => listen to their complaint.

Put in the lease that you will do an annual inspection (watter damage, molds, leaks, it's cheaper to do preventive maintenance before they complain)
It's a business, don't be too nice to tenants.
Credit report, verify income with employer, references from previous landlord (did they take care of property, pay on time, would they rent to them again)
Send them a Christman card, make your tenant like you.

Find tenants => put ad in local newspaper

=> work with rental agencies, ask them to send you their Overflow tenants (offer them a referral fee)
tenants that are ready to go to rental agencies are better, more chances they had no problems. tenants who had problem stay oway from these rental agencies as they know for sure that there will be a full background check.
(as opposed to ad)
ask 2 months deposit=>serious tenants

you need to warn your tenants about lead base paints (before 1978) => if there was a claim on CLUE report, it will be hard or expensive to insure the house

CLUE report show history of property, insurance claims, floods, molds, water problems....
=> ask home inspector
Watchout for safety issue, electric, people falling, tripping, smoke detectors, have tenants sign that smoke detectors are not wired together.
To set the rental price, go to MLS system look for economic rent, price yourself just a bit lower => allow you to select the tenants.
Do like an 1hour open house, and take application, select the best one.

Always have a signed lease. with tons of addendums and all...bankrupcy protection...
define scope of their responsability/maintenance (real estate agent provides comprehensive lease that you can use)
make sure the tenant understand the lease.

Shorter than 6 months lease might have additional taxes.

Don't rent to smokers, don't take pets unless the unit is about to be renovated. (small pets only, check references for pets, barking, additional deposit)

Even a fish tank can damage your apartment. Pets will ruin the carpet => increase rent, have them pick up poo around the house.

Vacation rental is harder, more maintenance needed, more furniture, more management fees (15%)
Fair housing, non-discrimination contracts

Section 8 housing, lot of paperwork, bad tenants, but rent is insured?

If all your properties are close together you get discount from vendors (plumbers...)
It's easier if propertie is close to you, so you can look over it, or you should get a manager. (8%)

Pre-foreclosures are easier to find than foreclosure and everybody is happy to avoid it.

Foreclosures are not offered to investors for the first (30-60 days)

REO, Real Esteate Owned property, bank owned

Network in banks foreclosures departments, court, auctions, attoerneys, lawyers (inherits), doctors (medical emergency needing cash).... tell everybody you are an investors and ready to buy fast.
Express Auction,...
Rosenbert Associates => attorneys website, see foreclosures date, contact ppl before to help them resolve before they foreclose.
for example search for contrywide Owned Properties.... tell the bank to tell the guy to contact you to avoid foreclosure => government sites like VA, Hud, ...
If people can't pay the property taxes =>
Tax Sales, you buy the house... probably the owner will buy it back from you... and give you a 10% or higher interest on your money
=> go to courthouse and ask

Find a good experienced REALTOR
put contigencies in the contract depending on results from home inspector, termite inspection, financing... Seller should pay to fix
Pay an appraiser to evaluate the house.
have contractors come to evaluate the cost of repairing and be ready to fix the property ASAP to rent it.

if there is competition, to be a better buying candidate provide pre-approval loan, and remove the contingencies

sale tyipcally settle in 30 to 60 days, put in the contract that you are allowed to show the house to prospective tenants during that period.

Concrete structure needs less maintenance.

Suggested Readings

Cash Flow
Thomas Stanley & William Danko - The Millionaire Next Door

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