property investor

Look Out For These Property Investor Risks

Property risk definition

Any novice property investor is prone to make rookie mistakes when investing in property– and being unaware of the basic pitfalls that investment property can present is chief among them. After all, investing in real estate is a time consuming, largely capital-intensive way of making money. In addition, even if you are choosing to own shares in real estate funds like Real Estate Investment Trusts (REITs), the basic underlying problems remain. Here are some of the key risks involved in any real estate investment – be they investing in houses, commercial real estate, foreign investments or time shares for that matter.

Some sage property investment advice

Novice investors should be wary of any real estate project that involves negative cash flows. Second homes and land speculation are prime examples, however even simple “fixer-uppers” can become disastrous for throwing off large sums of negative cash flow (also known as “negative gearing”). Unless you’ve had experience with land development, steer clear of this form of property investment. In general, be as conservative as possible when numbers crunching for fixer-uppers. Obtain several contractor estimates for the scope of work to be done prior to even making an offer on a rehab project. Without a doubt, investing in negative cash flow real estate should be attempted only by those with deep pockets, looking to shelter other forms of income from the tax man. The losses thrown off by negative cash flows will aid in reducing the bite of their overall tax bill. So, in effect, negative gearing makes sense for them…but not so for the novice investor actively looking for profits from the outset.

What is investment property?

Investment property is any real estate designed to earn a profit for the investor. And this means it can be located anywhere in the world. However, if you’re considering foreign property investment, think again. The novice property investor should be aware that buying foreign real estate is fraught with inherent risks. (Are you an expert in the politics of the country involved? Are they stable? How many trips abroad are you considering making to watch over your property? And what are the costs involved with those trips? Who do you call when a problem arises with the property in an emergency? Other major risks that can be found in in foreign real estate buys include fluctuating currencies, different real estate laws by country, as well as the singular lack of real estate protections afforded property here in the U.S. compared with other countries. These are all concerns – and inherent risks – only the well-experienced should address. In addition, I have always advocated buying close to home. You know your home area better than any other, and you won’t be considered an absentee owner. Too many tenants like to take advantage of the property and its landlord when they know the owner lives far away…

Owning property – sort of…the risks of time shares

Another important risky real estate area are time shares. They represent some of the highest levels of property investment risk. Time shares are very risky because it’s difficult to predict what, if any, value will accrue over time, the longer you hold onto them. They are very sensitive to market fluctuations, and can drop in value quite suddenly as well. In addition, time shares are very hard to predict with any degree of certainty their future positive cash flows based on prior years performance levels. Finally, these time shares can be difficult to sell when you need to, which can create an ugly financial situation for you when you are most exposed.

photos courtesy of kristinandcory.com, wilmothpropertyservices.com, sellworldmarktimeshares.com, foreclosure-support.com

Best Rental Property Investment Strategies: Landlording Now!

Investment opportunities abound

Indications are that this year is a great time to begin your real estate investing activities. Investment opportunities in rental property continue to abound. In addition, current home ownership levels as a percentage of overall U.S. population continue to dip. Even with the advent of the current economic rebound across the country, renting is still preferred over home ownership…even when home ownership affordability has continued to get better. According to recently released statistics from the National Association of Realtors, with home prices increasing slightly the last two years in a row nationwide, coupled with relatively historic lows in mortgage interest rates, it is now an excellent time to become a home owner.

Renter insecurity as a market force

As a percentage of average per capita gross income, monthly costs of home ownership (with mortgage debt) are running about 16 percent of gross income, compared with 21 percent a year ago. Clearly, most new home buyers want to stay on the sidelines, preferring to rent instead. This is most probably due to their feeling insecure about their job situation, or the stagnation in their gross incomes over the last few years. Regardless, investment property becomes much more attractive when renters continue to rent – and rents keep rising in the process.

Now is the time – calling all landlords

According to an article posted on MainStreet.com, now is a great time to become a rental property owner. In the article (“For Passive Income, It’s a Good Time to Become a Landlord,” MainStreet, by Brian O’Connell, 2/3/15), Mr. O’Connell points out that “this is a good time to change your life and buy a rental property…a key part of wealth creation is creating passive income — money you earn while not actively working for it, and that’s where being a landlord can help. The idea is simple: Buy a property, rent it to reliable tenants and let them pay down the mortgage for you until the home is paid for. At that point, the entire value of the home is yours, along with any rent you earn after the mortgage is paid off.”

Do you have the right stuff?

Mr. O’Connell goes on to sum up what is primarily necessary to get into the real estate investing business: “It really does take the right stuff to be a great landlord. An entrepreneurial spirit, a hands-on, can-do approach and some good old-fashioned business savvy (along with time) are the ingredients in mastering the rental property game. And right now, it’s a game that’s paying off handsomely for the right players.” I think special attention needs to be heeded to his choice of words when he says “the right players.” This requires a fair amount of personal self-reflection in order to succeed.

And the right temperament?

In essence, this writer’s point is that it takes the right temperament and personality to be successful when real estate investing in rental property. Will you be the property manager for your investment property? if so, be prepared for those late-night emergency calls and some difficult tenant situations, not to mention the chore of screening tenants. Or, you can pay a property management company to do these activities for you. Just be prepared to spend between ten and fifteen percent of your gross monthly income (whether your installed tenants pay or not). It’s your choice – but be sure you run the numbers as to the feasibility of choosing the property management company route. Either way, you’ll want to maximize your investment opportunities now while, as Mr. O’Connell points out so very succinctly, “this is a good time to become a landlord.”

photos courtesy of houstonmortgagetexas.com, zillow.com, lawofficewalterjennings.com, tenantscreeningblog.com, anchorloans.com

Property Investing Basics – The Right Of First Refusal

One more useful tool of the trade…

The right of first refusal (or ROFR) is another excellent tool a property investor can use to manage risk and rewards. As a seller of investment property, the first right of refusal allows you to get something extra in return for providing a legal option for the potential buyer. As a buyer, this first refusal option allows you to lock down a property at some point in the future…sometimes at an agreed upon price, sometimes at a price to be negotiated later. In either case for a buyer, this right of first refusal real estate essentially creates a monopoly for one – you. All your competition gets eliminated in the process…a nifty arrangement for any buyer.

ROFR = financial benefit gained

In the case of a seller offering the right of refusal, some financial benefit usually accompanies the largesse of providing right of first refusal language in a formal agreement. Many times, it is a tenant who wants to take advantage of the prospect of a “rent-to-buy” scenario. I have done this on occasion with tenants for my single family houses. A fixed purchase price is arrived at between the parties, and incorporated into their lease as a first right of refusal real estate option. The tenant then has the right to purchase the property at the pre-negotiated price. They are usually given a set time window in which to exercise this ROFR option. At the end of that window, if they have not exercised their option, or if they have turned it down, then the seller has the right to place the property on the open market for sale.

Above market rents as option fee

In this scenario, the seller may be able to receive a higher rent from the tenant for their “buying” of the legal option. In addition, many times a portion of the increased (above market) rent can be applied towards the purchase price as part of their (already paid in) down payment on the property. Another point of negotiation between the parties may be the percentage of rent that will be applied to the down payment. If they choose not to exercise the option, the buyer effectively “loses” the amount they have been paying for rent that is greater than the “normal” market rent for the property.

Buying time to secure financing

If the property investor is the potential buyer of a piece of rental property, a right of first refusal gives them time to secure financing for the property, over and above a normal sixty to ninety days. Usually, a property investor buyer will need to pay some sort of ROFR option fee for this privilege. As mentioned above, this legal option effectively eliminates any competition for the property. Therefore, it has some value attached to it. And that option fee is a negotiated amount between buyer and seller.

The importance of the written agreement

All right of first refusal language should be written by an experienced real estate attorney. Language must be very specific to cover many possible scenarios. The stronger the language, the less chance the transaction can end up in court somewhere down the road. There are many variations and conditions that an attorney will make sure are clarified prior to the parties signing the agreement. As an example, there will traditionally be a limited amount of time in which the transaction must close once an option is exercised. Also, the ROFR option may be transferrable to another party (known as assignment). Again, all conditions need to be negotiated prior to the agreement being fully executed. Overall for the real estate investor, right of first refusal makes for another useful tool in their property investing arsenal.

photos courtesy of landthink.com, thompsonburton.com, pittsburghlegalbacktalk.com, jayfalone.com, robertgsarmiento.org

Commercial Leases And The Estoppel Certificate

Why the need for an estoppel certificate?

Simply put, the estoppel certificate is an instrument of assurance. The assurance is that what a landlord says about his lessees is true. When a landlord puts his commercial building on the market for sale, part of the due diligence a buyer will require involves obtaining estoppel certificates from each and every tenant of the landlord for his particular building. While this is rarely done in residential real estate, getting a tenant estoppel form properly filled out and signed is imperative in commercial real estate..

Traditionally, a standard commercial lease will include the right of the investment property owner to obtain this signed landlord waiver from his tenants. These fully executed documents, known in estoppel real estate parlance as estoppel certificates, provide a potential buyer of the seller’s property with honest data about the leases they have in place with the current landlord.

Due diligence

The landlord waiver form is then used as part of the overall due diligence by the buyer. And many times, their lender will want to review these estoppel certificates prior to extending a mortgage to the buyer. They help the lender feel comfortable about the rental amounts and terms that are in place with the seller’s building. Usually, the lender’s underwriting department will perform the review of the documents to ensure accuracy before a loan will be granted. Unlike residential real estate, commercial property rental leases are usually for much longer periods of time. However, like in residential investment property sales, these lease assignments are critical to the new owner when a building is sold.

Provisions of the estoppel letter

The estoppel certificate (also known as the estoppel letter) is traditionally filled out upon the request of the landlord. In effect, the tenant certifies that their current rental agreement and its provisions are honest and truthful. Items usually found as part of the estoppel certificate include the veracity of the lease, when it began and when it ends, what security deposits are being held by the landlord, whether the tenant has assigned the lease to another party at the time of the estoppel letter, and whether the tenant has pre-paid any rent over and above his existing monthly rent.

Tenant Liability

The main purpose of the estoppel certificate is to protect the seller of the building. It basically places the onus on each tenant that their existing lease is correct. This makes the leases fully verifiable for purposes of the new owner, as well as their lender. Most estoppel forms create an out for a tenant’s liability here – many times they will say that the tenant is certifying the lease “to the best of tenant’s knowledge.” You can check out such verbiage by looking at the California Association of Realtors commercial lease agreement as just one example (http://www.car.org/legal/standard-forms/) . The tenant estoppel form is an important landlord waiver when it comes time to place his commercial investment property on the market for sale. Ultimately, it makes a sale much easier for the seller.

photos courtesy of campbellpropertymanagement.com, oc.hughesmarino.com, realogicinc.com, www.snipview.com

The Purpose of Title Insurance For Rental Property

Chain of title

The chain of title, or who actually owned a piece of real estate, is a construct from merry old England from the days of feudal lords. When real estate investing, title ensures an owner is the rightful owner of a rental property, and that there are no other claims, past or present, on it. And the purpose of title insurance is to protect anyone acquiring real estate (and if a mortgage is involved, their lender as well) from having a claim of title placed on the property. In actuality, anyone can make a claim as to ownership of a piece of property. However, title insurance companies relieve the purchaser of anyone investing in real estate from having to worry about settling any claims on it in the future. The title company, in essence says: “It’s our problem now, you go out and worry about only your investment opportunities.” Naturally, title companies run complete chain of title checks to make sure they protect themselves, prior to any closing, and insurance being taken out on a property.

The ordering of title

Title is traditionally ordered by the buyer’s attorney for his client. This occurs after a property investor has either agreed to a purchase price and terms for all cash, or if there is a mortgage involved, he has been approved and received a mortgage loan commitment from his bank. The title company then performs an intensive search of county records to determine an accurate chain of title to the property. This search is a comprehensive review of all the mortgages, deeds, easements and liens on a given property that have ever been recorded. Recorded is the key word here, because without a property sale being recorded, no one else can make a legal claim on it in the future. Without a sale being recorded, it’s as if the sale never occurred – legally, that is.

The title search

Any title company property search will be sure to include all records the local municipality has on file for the investment property. This will include any outstanding water or tax bills, special assessments, tax liens and any other item that could conceivably affect the title. Traditionally, building department records are also checked to ascertain any outstanding building permits (opened, but never closed as completed), or similar code violations. Once title is completed, a title report is prepared by the title insurance company. It is sent to all the attorneys in the property transaction for their review.

If there are any current problems (for example, an unaddressed easement that was never disclosed), the attorneys need to hash out a solution prior to a closing. Similarly, if a building code violation comes up in the title report, or, as another example, the title picks up an existing, illegally built shed (that was built without a building permit), the seller will need to obtain a building permit (or tear down the shed), prior to the closing. Once the buyer’s attorney is satisfied that all outstanding violations have been removed, and that his client, the buyer, will be able to purchase the property with no encumbrances on it, the title is deemed to be “clear.” And a closing can finally be set.

At the closing

At closing, the buyer who has purchased title insurance is given his policy. This ensures that his title rights are fully protected, subject only to any conditions set forth in the insurance policy. An example of a condition could be any kind of pre-existing easement on the property (for example, a right of way for a trail path, or utilities right of way). And the bank holding the buyer’s mortgage is also named as an insured member on the policy. The cost of the title policy is a small sum to pay amongst all other closing costs, especially given the protection it affords the buyer (and his lender).

photos courtesy of business-law-pa.com, askgreganddanielle.com, welchgroup.net, massrealestatelawblog.com

Investment Mortgage Loan Costs

A tighter lending market

Property investors know that a rental mortgage is harder to obtain financing for, as well as costs more, than residential home mortgages. Why? The answer is simple:

lender risk. The greater the risk, the greater the financing costs for the bank. And likewise, the lower the risk, the lesser the cost structure. Lenders always look at their worst case scenario: that is, a property going into foreclosure if the monthly mortgage is not paid in a timely fashion. It is for this exact reason that lenders assign greater risk to investment mortgage loans.

Home purchases are highly emotional to borrowers. There is a natural human affinity to stay in one’s home – one’s own personal sanctuary. And a borrower will do all he can to keep his home, even when beset with personal financial difficulties. A homeowner is thus much more likely to attempt to hold onto his home and make payments on his mortgage in a timely manner than an investor would on a rental property. Investors look at balance sheets and income statements to determine if a property is worth sinking more money into and making mortgage payments in a timely manner. It is the concept of emotionalism and ties to a home that makes home buyers a safer risk than property investors.

The extra costs with an investment property mortgage

While there are daily fluctuations in rates globally, all real estate is local – and rates will differ from region to region. However, on average, rental home mortgage rates have

traditionally cost about half a point higher in mortgage financing costs relative to the residential home mortgage marketplace. Again, this is due to the increased inherent risk associated with non-owner occupied rental properties.

There are some discreet factors that ultimately affect the rate any investor will be able to obtain on their rental property. Some of the factors include the type of rental property – ie., a single family versus a multifamily, the loan-to-value ratio (the lower the LTV, the lower the mortgage rate, and vice-versa), the borrowers credit score, and of course, the current occupancy and rental cash flow of the property. The higher the occupancy rate, the lower the costs associated with the loan. Also, know that extra points can be shaved down by accepting a slightly higher interest rate on a rental mortgage.

The basics of rental property mortgage financing

While credit markets are much tighter for investment property, some generalities hold true when choosing from different rental property investment strategies. Occupancy rates help lower overall mortgage costs for rental property. Traditionally, 75% of current rent roll on a property can be used as an income qualifier for any given rental property. Loan-to-value ratios tend to start at 70% for investment property (while it’s 80% for home loans). Lower LTV’s (eg., down to 60% or 50% even) can substantially lower overall costs of the loan, including points and interest rate). In addition, when real estate investing, an excellent credit score (above 740) will also aid in reducing overall rental property financing costs. This can greatly expand what you can borrow, helping paint a brighter financial picture for your investment opportunities.

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Tax Advantages Of Rental Property

End of year tax planning

It’s always a good idea to start planning for April 15th now, close to the end of the year, to determine how best to maximize your investment property tax deductions. November/December is a great time to make an appointment with your accountant before they are consumed with work come January through April. Maybe they will have some new suggestions about how best to maximize your day to day expenses to help offset your cash flow income, realizing a smaller tax bite on your rental property come tax time. Whether you have a typical investment rental property or even some vacation home rentals, now is the time to start your tax planning.

Recordkeeping 101

Remember to keep excellent records throughout the year on each of your rental properties. In addition, keep records even if you don’t purchase a particular property in any given year. You can add those expenses in when you eventually do acquire a property, as part of your cost “basis” (more on cost basis as part of capital improvements below).

You should also know that all expense items are deductible from revenue, thereby lessening your overall profit (and therefore, tax bite) on any given rental property in a calendar year. Maintenance costs, such as plumbing or electrical repair work, landscaping, snow removal, etc. are all examples of ongoing yearly expense items. In addition, auto expenses incurred while looking for properties can be considered part of your overall expense deductions in any given tax year. Also, all office costs, such as your computer, printer, phone, phone bill, internet bill, office furnishings, etc. are also expense items. And don’t forget that any property management fees are expenses that are deductible in the given tax year you are reporting as well, whether in standard residential home rentals or in vacation rental homes.

Expenses versus capital improvements

However, keep in mind that your renovation/rehab costs are not expensed as yearly items – they are lumped in with your other property acquisition costs, and are known as capital improvements. They comprise the cost basis of the rental property. When it comes time to sell your building, all of your basis costs over the years you owned your rental property will be taken together and subtracted from the amount you sell your rental property for – thus yielding a capital gain. Capital gains are taxed at lower levels than personal income, so any item you can add to the cost basis needs to be carefully itemized, tracked and recorded. In this way, you’ll have a completely accurate amount for the cost basis of any given rental property you acquire.

Assuming you did manage a profit when you sold your rental property and you held the property for at least a year, you’ll pay only the capital gains tax. In 2014, this tax rate is 15% (or 20% if your taxable income as a single taxpayer is above $400,000, or $450,000 if married and filing jointly). In addition, you’ll have a surtax added to pay for Medicare – an added 3.8% of your profit if your taxable income is over $200,000, or $250,000 if married.

Depreciation counts

This is where things get fun for the property investor. Depreciation, or the amount ascribed to “wear and tear” on your rental property each year, is strictly a paper number. You did not actually fork out any money, yet you derive the benefit of deducting an amount for depreciation on each of your buildings each year. This paper deduction results in a lower positive cash flow, and concomitantly, a lower tax bill. Be sure to check with your tax advisor/accountant to help determine the actual depreciation on each of your investment properties. Commercial buildings will have different depreciation schedules than residential rental properties. In addition, different types of residential properties may have inherently longer life spans, and may call for a unique depreciation schedule for each one. (Of course, eventually you “pay” for the depreciation deduction. When it comes time to sell your property, the total amount you’ve deducted in depreciation over the years gets subtracted from your cost basis, an accounting maneuver known as “recapture.”)

Converting to a primary residence

If you lived in your former rental property for at least two years, you can claim a part of the standard home $250,000 exclusion for your primary residence (or $500,000 if married and filing jointly) when it comes time to sell it. This exclusion will be prorated based on the length of time you lived in it versus how long you actually owned the property. So if you owned it for 10 years, but lived in the home rental property for 5 years, you’d be able to claim 50% of the exclusion. Again, it is smart to check with your tax advisor for further advice on how to save from overpaying the IRS on your rental properties.

1031 swaps

A good way to avoid capital gains on the sale of your property is to buy more investment property through swapping like property. In section 1031 of the IRS code, one is allowed to carry the cost basis forward from a newly–sold property to a newly-bought property without having to pay taxes on the sale. There are however, many IRS rules regarding how the monies are held between the sale and purchase, as well as strict time lines for this to be acceptable. Make sure you check with your tax advisor regarding the exact way to accomplish this tax deferment.

photos courtesy of statenislandlifestyle.com, buyersutopia.com, amillionlives.net, ehow.com, denversrealestate.com

The Republican Sweep And Rental Property Investment Strategies

The mid-term elections recap: little change for real estate investing

The mid-term elections have come and gone on Tuesday this week, only just two days ago. And because both houses will be controlled by Republicans starting in January, it doesn’t necessarily mean that the party of big business will take existing banking laws and revamp them en masse, along with their protections to the American people. Current banking loan standards will most assuredly stay in place, and the concomitant tight credit atmosphere that comprises today’s investment property mortgage market shall unfortunately remain unfettered.

On the downside for property investors

The investment property mortgage marketplace will remain as is, with very tight credit available. There’s simply too much downside for Republicans if an easing of current banking reforms (created since the banking crisis of 2008) were to be repealed, and a new banking crisis were to develop anew. Of course, President Obama would never allow any stripping of current banking mortgage protections, would the Republican majority try to proffer any revisions to current law. Obama would simply use his veto power to stop any changes in their tracks.

Minimum wage laws – some good news for property investors

Even with the Republican’s sweeping into a Senate majority, thereby controlling both houses of Congress in two months, don’t expect any major change in effects for property investment opportunities. Republicans will be quite averse to legislating anything that could hurt big business (and, to a major extent, small business as well). Before the election, there was at least a hint of a Democratic push for a major hike in the federal minimum wage. That will be tossed to the junk heap now. In addition, the wave of Republicans winning major state governorships on Tuesday, will mean that, even on a state by state level, minimum wage hikes will most probably remain at or near inflationary levels only. Even with the mass of protests by fast food workers this past year, expect the prospect of a $15 per hour minimum wage to be a pipe dream for at least several more years.

Keeping costs down

How does this affect the average property investor investing in real estate? Simple. If you don’t already do the menial maintenance work around each of your rental properties yourself, then you probably hire others to clear the walkways of snow, rake the leaves, empty the gutters, etc. As you keep adding on investment properties to your empire, these seemingly small costs become quite large when taken together. Whether you hired the labor yourself – or had your property manager do so – you still end up paying for this maintenance on each rental property you own. The prospect of a hike in the minimum wage would have definitely put a dent in your rental property cash flow. So with the Republicans being victorious on a national scale, expect to keep your maintenance costs at or near current levels. And that’s some good news that property investors can cheer about as a result of Tuesday’s elections.

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The Changing Nature Of The Investment Property Market

Current effects of the millennial generation

If you haven’t noticed, the entire landscape of the residential property investing marketplace has been going through a seismic shift over the last several years. Coinciding with the financial crisis that begain in 2008, demand for single family homes has plummeted. At the same time, rental prices have skyrocketed, making residential rental properties hot commodities of late.

Millennial characteristics

One of the main reasons for this is the millennial generation. They have come of age, and are taking their place in rapidly increasing numbers into the workforce. However, unlike their predecessors in the Baby Boomer and Gen X demographic models, millennials stay at home with their parents much longer, don’t feel this is a major social negative in doing so, are not fiancially prepared to obtain mortgages for their first home, and are quite scared of losing their jobs. Hence, these reasons effectively keep large numbers of them on the first-time home buying sidelines.

An increasing trend

However, statistics are now showing an increasing trend for millennials to start purchasing investment property to live in as their first home. Buying two to four family homes, and living in one of the units, allows them to offset the normal investment property expenses, pay their mortgage each month, and even create a small positive cash flow in the process. In addition, they are treated to the loophole of being able to utilize FHA and VA style mortgages, since they will be owner-occupants. This makes obtaining a rental mortgage much easier.

Friends with benefits

Many in the millennial generation also are purchasing multifamily homes with friends to offset their costs. The millennial generation (born between 1977 and 1998) share some rather unique characteristics that make then especially suited to do this style of investment property acquisition. Generation Y characteristics include a celebration of diversity, with an overriding sense of optimism about the future. They tend to be rather inventive. And while they may be used to individualism, they consider their friends quite dear – so much so that they may equate their friends as family.

Creating their own rules

In addition they are used to creating new rules, and they are certainly well-versed in the internet and the concommitant communication style that entails, including an easy acceptance of all new technological advances. They’re excellent at multitasking, and are used to feeling nurtured. All of these characteristics make them better suited for the ability to trade off the traditional first time home buying process for the non-traditional role of first time owner-occupant-landlord.

Priced out of the current first-time home buyer market

When coupling these characteristics with the fact that, in today’s real estate market, rental prices are very high, first time home prices are also quite high, and most first time buyers are unable to afford to buy a home in an area that they would like to live in, these millennials are basically priced out of the home real estate market. But not so with the owner-occupant multi-family rental property market.

The entree into the real estate market

The average first time investment property buying millennial has never bought a home before, and sees the rental property as his entree into the home buying world, while at the same time creating an inflationary hedge in real estate. They effectively get in on the ground floor, utilizing their rental units in the process. Again, many millennials may jointly purchase an investment property spreading the costs, while also renting out other units for cash flow. Remember, they hold their friends in high esteem – and aren’t afraid to live with them in the next unit over as co-owners. This is one of the many characteristics that give generation y the ability to make these bold, new, trend-setting investment property moves.

photos courtesy of loyalogy.com, immersiveyouthmarketing.com, screenmediadaily.com

Real Estate Investment Fundamentals

One valuable lesson to learn

One of the fundamentals of real estate investing is quite straightforward and simple – don’t ever sell any of your investment properties. Once you sell, you’ll have to pay capital gains tax, and you’ll lose the cash flow from the investment (assuming it is positive), as well as losing the ability to leverage your equity in the properties for future investment acquisitions. This third feature is probably the most important and financially productive for your ongoing success as a real estate investor. It truly comprises one of the most basic of property investment fundamentals – namely, using other people’s money to grow your real estate investments.

Positive cash flows

Never selling any of your rental properties also means you’ll pay stricter attention to detail – like ensuring you always run at a positive cash flow for each property you acquire. I once purchased a four-family house with generous owner financing. I paid slightly over market value for the property because of several reasons. First, I knew I’d be holding the property for the long-term. Second, in return for “giving in” to the seller’s price demands, I secured an incredible below-market rate of interest with excellent terms from him directly. I didnt have to apply with a bank, or pay bank fees associated with closing one of their investment property loans.

But wait, there’s more…

In addition, the owner-financing was for a first mortgage with no balloon payment in a short period of time. And because of the term and interest rate the monthly payments were ridiculously low. I knew I had a cash cow from day one on this rental property. I was using other people’s money (in this case, the seller), and I had added another rental mortgage to my stable without incurring any hit to my credit rating for taking on more debt. (Private mortgages do not show up on credit reports). So I left my credit rating intact, and could still use this new property for future leveraging of my equity in it when needed for other rental property acquisitions.

Overpaying for a property as a positive move

So even though I knew I was overpaying in the short run, I knew I was adding a great positve cash flow to my stable of investment properties for the long term. And by holding onto it, I was deriving the benfits of the excellent cash flow it was throwing off, the ability to leverage my equity in it at will, and I did not have to pay capital gains taxes on it as long as I held it. It was truly a triple winning rental property combination. So be sure to analyze the cash flow aspects of any rental property deal when encountering a “stubborn” seller who “must” get his price. You never know when that stubborn seller may turn a dog of a rental property into a cash flow bonanza for you. Always ask for owner financing to obtain your investment mortgage loan, and see what they say. You could end up with a marvelous real estate investment acquisition in the process.

photos courtesy of houstonmortgagetexas.com, anchorloans.com, zillow.com