What Are Your Risk Return Objectives

Little- or nothing-down finance creates great opportunities for you to magnify your returns. Through smart borrowing, you can quickly pyramid your real estate wealth. But the more you borrow (all other things equal), the larger your risk. When you're highly leveraged, a slight fall in rents may push you into negative cash flows. A relatively small decline in a property's value may cause you to owe more than your property is worth. So steer clear of pie-in-the-sky optimism. Carefully work...

Net Operating Income

Investors define net operating income as annual gross potential rental income from a property less vacancy and collection losses, operating expenses, replacement reserves, property taxes, and property and liability insurance. Here's how a net income statement might look for an eight-unit apartment building where each unit rents for 725 a month Gross annual potential rents ( 725 x 8 x 12) Income from parking and storage areas 14. Property and liability insurance The following list explains each...

Subtract Depreciation

After you calculate the cost to construct the subject property at today's prices, subtract an amount for three types of depreciation (1) physical, (2) functional, and (3) external. As a building ages, it becomes less desirable than new construction because of physical depreciation (wear and tear). As a property is exposed to time, weather, use, and abuse, it deteriorates. Frayed carpets, faded paint, cracked plaster, rusty plumbing, and leaky roofs bring down a property's value when compared...

Whats Wrong with No Cash No Credit

To begin with, let me emphatically stress that various forms of creative financing can and should be used to finance some types of property acquisitions. I don't mean to reject creative finance. However, I've seen so many deals crash and burn that I must advise caution. Without a doubt, many promoters of creative finance have oversold its advantages and under played its potential perils. Before you imbibe such an intoxicating elixir, think through the following issues Do You Live below Your...

Tax Credits

In addition to deductible property expenses and capital improvements, you may also be entitled to tax credits. Whereas a tax deduction offsets income, tax credits offset your actual tax liability dollar for dollar. They're much more valuable than tax deductions. Say you subtract all tax-deductible expenses from your gross income and calculate your taxable income at 40,000. If you are in the 28 percent tax bracket, you would owe 11,200 (.28 x 40,000) in income taxes. But let's assume that you...

Contingency Clauses

Most investors hedge their purchase offers with a financing contingency and a variety of inspection contingencies. If the investor can't get financing on the terms specified, or if the condition of the property doesn't meet the investor's standards (as written into the purchase contract), the deal may be called off, and the investor would receive a return of his or her earnest money. Other Contingencies. In addition to financing and inspection contingencies, you can condition your purchase...

Maximize Your Leverage With Owneroccupancy Financing

Now that you've seen the pros and cons of high leverage (little or nothing down), it's time to consider one popular way that you can maximize your leverage (up to your own self-imposed limits) owner-occupied financing. By far the easiest, safest, surest, and lowest-cost way to borrow all (or nearly all) of the money you need to buy a property involves owner-occupied mortgage financing. Numerous high-LTV (loan-to-value) owner-occupied loan programs are readily available on single-family homes,...

The Interest Rate Kicker

Several years back, during the summer of 2002, when the cost of 30-year mortgage money hovered in the 6.0 to 6.5 percent range, journalists persistently oohed and aahed over the historically low interest rates. They claimed that rates couldn't stay at this rock-bottom level. By the end of the year, interest rates would surely move higher and thus puncture the housing bubble that these low rates had pumped up. But it didn't happen. Just as I then forecasted, mortgage interest rates stayed low....

Cold Call Owners

To learn successful cold calling, follow the techniques of Realtors. Most successful real estate agents develop listing farms. A listing farm represents a neighborhood or other geographic area that an agent consistently cultivates to find sellers who will list their properties for sale with that agent. Agent cold-call techniques typically include telephoning property owners with names gathered from a crisscross directory, walking the neighborhood, talking to residents, circulating flyers by...

Creative Beginning with Lease Options for Investors

To start building wealth fast without investing much money up front, try the lease option approach of Suzanne Brangham. Although Brangham stumbled fortuitously into her investment career, you can follow her path more purposefully. From her book Housewise (p. 39), here's her story 2 Also see, Peter Conti and David Finkle's book, Making Big Money Investing in Real Estate (Dearborn, 2003). While searching for the ideal career, I was also looking for a place to live. I located a lovely but...

Commercial Properties

When most people think of investing in real estate, they think residential. Everyone's familiar with houses, condos, and apartments. In contrast, many potential investors lack knowledge of commercial properties. Or they think such properties cost too much. But, individual investors now realize that in today's real estate market, many commercial properties offer lower prices and higher yields (i.e., higher cap rates, higher cash on cash returns) than houses, condominiums, and small apartment...

Property Taxes

If you think that your property taxes are too high, writes tax consultant Harry Koenig, you're probably right Research shows that nearly half of all properties may be assessed illegally or excessively (How to Lower Your Property Taxes, Simon & Schuster Fireside Books, 1991). While Koenig may overstate his point, no doubt, millions of property owners do pay more in property taxes than they need to. With just a little attention and planning, you can avoid falling into this trap by taking...

Tenant Selection

Marketing strategy tells you to target your rental units to defined market segments. However, federal law typically prohibits you from excluding applicants because of their race, religion, sex, ethnicity, national origin, disability, or family status (households with children). In addition, some state and local laws have lengthened this list to include other categories such as homosexuals, welfare recipients, and lawyers. (Yes, many property owners do not rent to lawyers because as a class,...

Will The Property Yield Good Cash Flows

Recall from Chapter 2, you compute BTCF (sometimes called cash throw-off) as follows Let's reprise the eight-unit apartment building example from Chapter 3, where we calculated NOI for that property at 47,121. Using an 8.5 percent cap rate, we then figured the property's value at 544,365 If you finance this property with a mortgage having a loan-to-value (LTV) ratio of 80 percent (20 percent down) at 7.5 percent interest, amortized over a term of 25 years, you figure your annual mortgage...

Undervalued Neighborhoods and Cities

At any time and in any area, no set forecast about neighborhood or community appreciation potential ever holds true. Sometimes lower-priced areas represent a great buy. At other times, higher-priced areas look best. Sometimes new developments beat established neighborhoods sometimes established beats new. Nor can anyone speak permanently about close-in versus far-out, well-kept versus run-down, or low-crime versus high-crime. Neither racial nor ethnic composition, nor household income level,...

Stageof Life Sellers

When shopping for bargains, you also can find good deals among stage-of-life sellers. These sellers are typically people whose lifestyle now conflicts with their property. They may no longer enjoy keeping up a big house or yard, collecting rent, or dealing with tenant complaints. They eagerly anticipate their move to that condo on the 14th green at the Bay-shore Country Club. Or perhaps they would rather not go through the trouble of updating and repairing their current property. Whatever their...

Creative Finance Revisited

Creative finance means thinking through multiple financing alternatives. As noted, the term gained popularity when property prices shot up and millions of hopeful buyers felt shut out of the market because they lacked sufficient cash, credit, or both. The central theme of my course, wrote Ed Beckley in No Down Payment Formula (Bantam, 1987), is to teach you how to acquire as much property as you can without using any of your own money. . . . Starting from scratch requires that you become...

The Birth Of Nothing Down

Enter Robert Allen, Carlton Sheets, Tyler Hicks, Al Lowry, Ed Beckly, Mark Haroldson, A. J. Kessler, and other promoters of nothing down. To sell their books, tapes, and seminars, these pundits promised the masses a solution to their dilemma. No cash, no credit, no problem. Just learn the tricks and techniques of creative finance and you too can become a real estate millionaire.1 Not surprisingly, the property boom of late has rein- 1 The term creative finance does not lend itself (no pun...

AsIs Condition

HUD does not warrant the condition of any of the homes it sells. Even when HUD FHA offers insured financing, HUD inspects the home for its own benefit only, not for the benefit of the home buyer. HUD Recommends Professional Inspections. Because HUD sells its homes as is, HUD encourages prospective bidders to obtain professional independent home inspections before they submit a bid. HUD does not accept 3 HUD frequently changes its policies and procedures. Depending on the local balance of...

Automated Underwriting AUS

Since the late 1990s, mortgage lenders have relied on automated underwriting. Using this system, a loan rep gathers pertinent underwriting facts and enters them into a software program. If your credit profile matches the acceptable profile in the software, that's great. It means a faster, less costly path to closing and a shorter stack of paperwork. On the other hand, if your personal situation needs outside-the-box attention, be sure to work with a savvy loan rep who can apply the skill and...

Leverage Pros and Cons

For naive investors, no cash, no credit sounds appealing. It lulls them into believing that they can join the ranks of real estate millionaires without first disciplining their ruinous habits of overspending and undersaving. Nevertheless, responsible real estate investors do at times rely on creative finance techniques to reap the wealth-building effects of leverage. Through leverage you can magnify your financial returns and build wealth much faster than if you paid 100 percent cash for your...

How Craig Wilson Used Market Information to Enhance the Profitability of His Property

Naturally, the methods you use to position your property will differ from the strategy that Craig Wilson or anyone else has adopted for his properties. Nevertheless, follow through the ways Craig chose tenants and designed his property features and operations to gain competitive advantage. You can similarly plan you own strategy. Tenant Segment. After weighing the complaints and comments of students against the typical rental property and owner manager, Craig decided to design his property...

Guests

As a way around listing roommates, some tenants won't officially bring in new or additional cotenants. When you show up and wonder who these new people are, you'll be told They're guests. Joe's just staying for a couple of weeks until he's called back to work at Ford. Two months later, Joe's still there, and now his girlfriend, Jill, has also taken up guest status. Whether you might get these kinds of tenants depends on the type of people your property attracts as well as your qualifying...