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.

An IRA certainly has greater flexibility than a 401(k) and other plans for one’s retirement. It can be used for virtually any type of investment one chooses, from stocks and bonds to mutual funds to real estate. One might consider whether or not making an IRA real estate investment is a wise move. Many people are under the misconception that doing it at all is illegal. It isn’t illegal, nor, however, is it simple.

Continuing frustration about the phenomenon of low interest rates, coupled with recent memories of the bear market, have caused some investors to seek answers beyond mutual funds, stocks and bonds to plan for a secure retirement savings, and an increasing number of them are beginning to use their IRA funds to purchase real estate. In recent history, they have been quietly picking up everything from single-family homes to tracts of land to commercial apartment buildings with their IRA real estate investment transactions.

While IRA real estate investment is a real possibility, experts are warning that investors exercise caution. The stakes are high and the rules are quite complex. A single mistake can disqualify the tax-deferred status of an IRA in a split second. This forces the investor to shell out the cash for taxes on the full value and penalties.

Property ownership inside of an IRA means forfeiting the better-known tax advantages inherent in investing in real estate. With IRA real estate investments, one is not allowed to deduct mortgage interest nor property taxes. Furthermore, depreciation funds cannot be used. When the property is sold, what would have been a traditional IRA transforms profit into standard income instead of capital gains. Additionally, the IRA has to have enough spare funds to pay all of the expenses related to the property such as taxes, maintenance costs and management frees since the total amount of income has to flow into the IRA and resulting expenses have to be paid out of it.

Research! Research! Research!

If an investor does the research and adheres strictly to common sense policies, he or she can be one of the success stories that are beginning to result from IRA real estate investment strategies. However, if this is the plan, the investor should prepare for a lot of work.

The first step involves finding the right property. The IRA may not be used to purchase one’s own residence or vacation land or home. Next, one has to find a custodian for any IRA that will allow real estate investments. One should not look to one’s own mutual fund company or one’s own local bank for assistance. There are very few IRA custodians who are willing to do this. They can be found by doing a search for “self-directed IRA” or “real estate IRA” on the Web.

There are restrictions involved in selling the property as well. Buying or selling property to oneself, one’s family members or to and from individuals and/or firms that provide services to one’s IRA are, in most cases, also unfortunately, disqualified.

Preparing for your retirement by creating a real estate IRA trust is one of the best ways of ensuring that you have made provision for the future. Facing retirement can be a daunting process especially if you are not sure if the investment that you have in your existing IRA will be able to cover the plans that you have. No one wants to carry on having to work when they could be retired, but the fact is that many people find themselves in this position, which could have been avoided with good financial planning and professional advice from a financial adviser.

Real Estate IRA investment is a way of putting the money in your IRA to work for you before you reach the age of retirement. There are a number of ways of accessing the money and using it to benefit you and your family during your retirement. Real Estate IRA investments are one of the most secure and risk free investments that a person can make. Even in an economy that is struggling to perform, real estate is still one of the sectors of the economy where people can make a lot of money.

Ways of investing in a Real Estate IRA for your future

1. Invest a portion of the funds in your IRA into a real estate IRA Investment Trust. This form of investing allows you to buy the shares and stock in any real estate investment fund in the same way that you would invest in mutual funds or an Exchange Trade Fund (EFT). There is very little risk, and although the shares do trade up and down depending on the prices and the state of the stock market, they are a remarkably safe way of letting your money work for you.

2. Invest in a Real Estate IRA self directed account. This type of investment allows you to set up a self directed IRA fund and to transfer an amount of money from your IRA account directly for use from the self directed IRA account. The freeing up of this money allows you to make a direct investment in a property that can be used to create a residual income that must be paid into the IRA. This method of investing requires some thought, but there are many professional independent lending companies who will be able to find you an investment that will fit your risk profile.

3. Hard Money lending. This form of investing works like a loan. You loan the money in yourself directed IRA to individuals or businesses for a short period of time, with an extremely high return on investment. The return is somewhere in the region of 12 – 15% and it does mean that the rewards are great. The risks however are equal, as you are investing in the potential and the promise of a return that is not guaranteed. It is always wise to consult with a private money lending company who will advise you on the best investment for your IRA funds.

Whichever method you choose, you will be satisfied to know that you and creating a Real Estate IRA that will give your retirement funding a healthy injection of money, so that you are able to enjoy retirement.

For cash buyers in today’s real estate market, the power to offer cash funding and a quick close can translate into a better purchase price. Motivated sellers can include banks that have many properties to sell, individuals who need to move and have been unsuccessful in selling for some time, and homeowners in financial distress. While it always feels great to know you got a good price for your home or investment, in today’s market the smart cash buyer will also have an exit strategy before tying up his cash.

Two common real estate investment strategies are: 1. Flip and 2. Buy and Hold.

“Flipping” a property refers to purchasing a property below market value, repairing and renovating it appropriately, and then selling as quickly as possible. An investor’s ability to flip a property depends on timing and keeping costs down, including original purchase price. Some people make good incomes flipping property. However, it is possible that one or more properties purchased to “flip” will not sell, or will not sell in a timely manner. The best way to minimize risk in this scenario is to purchase investment properties only when a realistic market rent will cover your costs, as well as cover a mortgage should you be forced into a long hold. This way, you can recover 60 – 90% of your cash by taking a mortgage on the property, and let rents will cover expenses until the market recovers and you can more easily sell.

Historically, the California market has lofty peaks and deep valleys with an approximately 12 -18 year cycle from one peak to the next. The peak in 1989 was followed by a low around 1994. The next upward climb started gaining momentum around 1998 – 2000, but did not peak until 2006, 18 years from the previous. If the peak was in 2006 and we are close to the bottom in real estate now, there is a long, slow climb ahead before prices heat up once more.

To “Buy and Hold” may be the most common real estate investment strategy. Values go up over time, sometimes with a dip in between peaks. A common error many real estate buyers made during the early 2000′s was buying for appreciation instead of cash flow. When a market is appreciating quickly, it is hard to match the cash on cash return for doing nothing but holding title on a property. However, without an ability to rent that property for at least break even cash flow, the buyer has made a bet on appreciation with a huge risk of carrying heavy costs if the market or events do not go as planned.

Whether in 2011 we are at the bottom of the real estate price fall for this cycle or close to it, real estate purchases made well in the next 2 – 5 years will set investors up for exciting returns over the following decade. If you buy for cash flow when the market is down and people are eager to sell, your investments will serve you well.

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.