Simply Junior

There is no doubt that there are now many incredible opportunities for investors in the real estate market, but what are the best strategies looking ahead to 2011 and beyond?

The recent housing boom made many real estate investors over confident and sparked a fury of speculative buying. This lead to investors acquiring and gambling on all types of properties without giving much thought to the core principals of successful real estate investment – buying low and investing in long term rental properties. If these investors had only stayed true to these tried and tested means of building real wealth and income through real estate it wouldn’t have mattered what the market did and we wouldn’t be seeing the economy in such a state as it is now.

Fortunately for those of you looking to invest now and take advantage of the many great opportunities out there you will find many bargain priced homes. Combined with today’s record low interest rates you will also find that they hold the keys to incredible cash flow every month. Looking ahead through the end of 2010, 2011 and beyond investors will see the best returns by acquiring discounted properties and building portfolios of passive income producing rental properties. Those that choose this path will not only enjoy a healthy regular income but will be setting themselves up for a big windfall in equity when the market fully recovers.

One of the best ways for investors whether brand new or extremely experienced to harness this proven strategy for successful real estate investing is to invest in multifamily properties. Duplexes are of course the most common property type in this category that provide easy access and can double as a great first home that pays for itself. However areas like Hudson, Massachusetts also offer many great larger multifamily homes that offer even more cash flow. Investing in properties with a large number of bedrooms in the right areas can be rented out by the room. Hudson, MA has many 6 bedroom properties available at less than $100,000. Do the math. 6 rooms rented out at $100 per week each is $31,200 in annual income from just 1 property. Having four properties like this would mean achieving a healthy six figure income a year. Even if you had to finance your acquisitions today’s interest rates mean monthly mortgage payments of less than $400 a month, leaving plenty of cash flow on the table. You could even still afford to pay off the property within three years and then be sitting on a an incredible debt free, money making machine.

Investing in real estate can be very expensive. Investors are expected to put down a larger amount when purchasing a property than do people who purchase a home to live in it. If you purchase a $100,000 house, you may have to put down $20,000 to purchase the property AND this does not include closing costs, taxes or insurance. Then you may have to spend money on top of this in order to get a property ready to be rented out. Investing can be very expensive which is why many people cannot afford to enter the business. The smartest move you could make is to get a partner.

A partner will have many advantages if you are investing in real estate. A partner can pay for ½ of the down payment costs and the rehab costs. This allows both of you to purchase a property with ½ of the money that you would have needed if you purchased the property by yourself. If you are short on funds a partner can be a great way to help in getting started in investing in real estate.

A partner will give you an extra set of eyes and a level of experience that they bring to the table. They are able to give input on how repairs should be done or how to handle collections of rents. Your partner may have a better idea on how to handle an issue that you would have had by yourself. A partner provides a shoulder to lean on when times are difficult. 

A partner will also help in completing the workload. Sometimes you may need to be at the property at a designated time period in order to meet with contractors or other workers. If you are out of town for business or for vacation, then your partner could be available to meet with the contractor. You could swap off with your partner and have assigned weeks in which one of you is responsible for handling all repairs during the week. 

Having a partner can have many advantages. The biggest challenge is finding a partner that has the right temperament and has a compatible personality that you can work with. If you are not able to get along then your partnership will end in failure.

The bottom line about any real estate investment analysis is that it is a risk analysis. If risk was not an issue with investing, and all the results of any given investment were known with certainty, than creating an analysis for any type of real estate investment would simply be a matter of arithmetic. But the truth about real estate investing is that many factors come into play (i.e., the economy, tenant trends, etc.) that make it impossible to ever know with absolute certainty enough about a typical property to remove every element of the unknown.

Since the ability to accept varying levels of risk will differ from investor to investor, many simply avoid real estate altogether and opt to put their money only in relatively risk-free investments such as government Treasury bills. But the price for this lower level of insecurity, of course, is a lower rate of return. Why, because a relationship always exists between risk and rate of return. Therefore, when investors are attracted to the certainty, they in effect force down the rate of return they are willing to accept as a trade-off for their unwillingness to accept uncertainty.

Okay, so what about the risk takers? What can investors who prefer to collect the higher rates of return associated with real estate investment do to deal with (and perhaps minimize) the ambiguity? Investors must exploit tools that can potentially measure this risk. One method is by applying what is known as a “probability distribution” to prospective real estate investment opportunities.

For example, rather than using just one set of rents to ascertain potential cash flows and returns for a rental property, the investor should consider several rent scenarios that reflect an estimated probability of their occurrence.

In my real estate investment software, for instance, a form is provided that allows users to apply three different rent scenarios to a rental property. This way, rather than just having to accept whatever rents are presented by the seller, the investor can analyze the cash flows and returns based upon a range of rent probabilities (i.e., most likely, somewhat likely, and not likely but “wow, wouldn’t it be great”).

The logic is straightforward. Say, for example, that you’re doing an analysis on a ten-unit apartment complex made up of ten two-bedroom, one-bath units each reportedly with the potential of renting for $700 per month. My own experience warns me that “potential” rents may (or may not) be likely, so I always prefer to run my own rent scenarios. In this case, then, you would use our Rent Scenarios form and assign three rent probabilities based upon your own measurement of risk, and instantly you are the results so you can analyze what impact each rent might have on cash flows, rates of return, and profitability. The outcome if monthly rents are more likely at $650, for instance, could affect your willingness to chance buying the property.

This is only one of a variety of mathematical and statistical approaches to risk analysis that will help you address the uncertainties of real estate investment. But you get the idea. The best way to deal with uncertainty is to measure it. And the probability distribution we illustrated for rents is a good first step.

Several real estate investing strategies exist, but not all generate profits, nor are they suited for every investor. To succeed in this market, investors should engage in thorough research to understand the pros and cons of each available strategy.

The most popular real estate investing strategies include residential homes, commercial real estate, and probate properties. Each type of property can be used in various ways. How investors generate a return on investment will depend on how much time they want to spend maintaining the property.

Residential homes can be used as vacation rentals, long term rentals, or combined with owner will carry financing. Vacation properties require more hands-on care than residential rentals. Investors will need to fully furnish vacation homes, maintain utilities, and thoroughly clean after each use.

Long term rentals don’t require as much maintenance, but property owners can incur expensive legal fees if tenants default on their lease or cause property damage. Nearly every landlord has experienced bad tenants and endured the time-consuming and costly process of eviction. On the other hand, conducting proper due diligence can minimize risks. At minimum, investors should obtain a current credit report, background check, and list of referrals.

One investment niche that is beginning to explode is that of offering seller-financing. Thousands of people have lost their home to foreclosure and cannot qualify for bank financing. Those who can qualify for a mortgage loan aren’t willing to pay full market value because the market is saturated with discount-priced foreclosure and bank owned homes.

Offering seller-financing can be beneficial to all parties involved. Sellers can obtain fair market value for their home by selling under a lease purchase option agreement or seller carry back trust deed. During the contract period, buyers tend to better care of the property because they are working towards purchasing it.

Owner will carry contracts usually extend for 1 to 3 years while buyers restore credit ratings. When the contract expires, buyers obtain a bank loan to purchase the property. If buyers cannot qualify for financing, sellers can extend contract terms or lease the home to other tenants. When buyers default on owner-financed contracts, sellers retain all funds contributed toward the purchase.

Several real estate investing strategies exist with commercial properties. This type of real estate is generally more expensive to buy and maintain than residential homes. Investors usually partner with other investors to offset costs and maintenance duties.

Some of the more popular commercial investments include apartment and condominium buildings, retail shops, and office buildings. Investors will need to carefully calculate the true cost of commercial real estate. Most require a dedicated staff to maintain the premises, collect rent, and attract new tenants.

Investors who do not want to manage commercial properties may want to consider investing in real estate investment trusts. Commercial REIT stock offers the potential for long-term capital gains and can be a good tool for portfolio diversification.

Lesser known, but potentially profitable real estate investing strategies are those involving probate properties. This type of real estate is held in probated estates. When estates are incapable of paying decedents’ outstanding debts or mortgage payments secured by the property, the real estate can be sold to eliminate financial burdens.

This investment niche requires investors to have a good understanding of state probate laws and the ability to scout out potential properties by searching public records. One of the easiest ways to learn how to buy probate homes is to network with other investors who specialize in this niche.

Although the real estate market is still downturned, there are plenty of opportunities for investors to generate profits. Calculating the pros and cons of each type of investment can help investors decide which real estate investing strategies to incorporate into their long-term plan.

Lots of folks think it can’t be done.

How in the world can you buy a piece of real estate property without cash or credit? How is it possible to buy a $50,000 house or a $1 million dollar house if I don’t have an abundance of cash or an excellent credit rating?

Nothing stops a would-be investor cold in his tracks like “no cash or credit.” The prevailing perception is that “I can’t start real estate investing” because (1) I sure don’t have any money and (2) my credit is horrible!

The typical way real estate investing is accomplished is with an earnest money deposit to accompany the Purchase Contract and a down payment at closing. Many real estate investing tycoons, in wanting an offer accepted, make large earnest money deposits so the property seller will recognize the buyer as a serious investor. And because many real estate investing tycoons use real estate agents as their purchasing liaison, they provide sizable down payments out of which the sales commission will be paid.

Well, when I started my real estate investing career, I had neither cash nor credit. I had a serious business failure prior to my start in real estate investing, so I had to conjure up a way to succeed outside the traditional norm.

While I was well aware of the accepted procedures of earnest money deposits and down payments in real estate investing, I was forced by my situation to find alternatives. I did not realize at the time that commercial property is often purchased without any cash outlay at closing or even a credit check of the buyer.

So without any pocket change or a savings account, I began offering a $10 bill as my earnest money deposit! And I began offering no down payment at closing. My Purchase Contract offered simply the assumption of an existing loan! (In the 1980s when I started my real estate investing career, wrap mortgages were common, whereas today other legal instruments accomplish the same purpose.)

I don’t have to tell you that real estate agents were not exactly fond of me. In fact, in my highest week of tendering offers, I submitted 235 offers on MLS houses, and got 235 rejections. I mean, the realtors and brokers were infuriated at my non-traditional offers! Most went to great pains in writing “REJECTED” across the entire length (even both sides) of the legal-size Purchase Agreement I had laboriously filled out for submission. The young man “running” my offers (and his broker) were verbally blasted out of the saddle! I got NO acceptances from my 235 offers. Yet, I still managed to buy two properties from the 100% (humiliating) rejection. Two property owners approached me later and said, “I can’t accept your offer on that property I had listed with my real estate agent, but I have another house you can have on the same terms!”

That break-through began my trek into the Nothing-Down Wilderness that made me a multi-millionaire in three years. Once I realized it was persistence with a thimble-full of know-how, I forged on to discover motivated sellers who accepted my offers. I bought $1 million in properties that first year, another $1 million the second year, and $10 million by the 4th year.

It’s a shame that even some real estate investing tycoons don’t know how to buy with no cash and no credit. But the bottom line is that know-how still makes possible the impossible.

Buying property of any price is still achievable with no cash and no credit. It’s done every day in residential and commercial property. And because it is achievable, anyone can enter the real estate investing arena, regardless of the size of his or her wallet.