Real Estate Investing - Making Money and Staying Out of Jail

If you're one of the four people in the world considering investing in real estate right now (five including me), you're probably looking to make the safest bet you can. While short term investment returns are pretty basic to predict, as the market won't shift much over the course of a few months, it's a different story if you're looking to sign a lease agreement and settle in for the long haul. What would a safe bet look like, over a long investment period?

This being an age of bu11$hit litigation and nervous legal disclaimers, let's start with this: there ARE NO bulletproof investments, in real estate or anywhere else. Your tenant could make up a reason to sue you and win, or your city could decide, in their infinite wisdom, that constructing housing projects right next to your rental property would be just peachy. There is risk in any investment, so wake up to that reality before pulling a dime out of your wallet.

That being said, there are certain long term trends that are pretty predictable, and can be identified. Let's take a look at a few of those, and see what we can dig up.

Population

This one is pretty basic: as population increases, so does demand, which of course increases value; just look at that ridiculous water park. Look for cities and neighborhoods that have high long-term population growth projected, and consider the most advantageous spots. Here's a hint: middle class white people don't breed well, because they want to protect their quality of life. Immigrant influx is the fastest vector for population growth, so consider buying in and signing a long term lease agreement here.

Urban Planning

Some cities are FAR more organized when it comes to urban planning, and will make efforts to combat sprawl and consolidate wealth in areas that are already developed. These make for far better long term investments, as sprawling suburban strip mall communities will just keep expanding outward, making supply infinite.

Water

People love water. They love boating on it, swimming in it, fishing in it, and having a view of it. Waterfront property is a fixed supply, while demand will always rise. Caveat: beware of flood plains and hurricane alleys, as these are already hard to insure, and you might end up like these poor schmucks with your car underwater.

Stable Institutions and Employment Providers

Some institutions aren't going anywhere, and provide a LOT of jobs. An example would be a local governments, universities, hospitals, etc. People want to be as close to their jobs as is practical, so find out where the employees like to live, research that institution's long term expansion/relocation/etc. plans, and consider these neighborhoods for a safe long term lease agreement.

This is a short list, but hopefully gives you some ideas in your area. Good luck, and here are a few good sites for a lease agreement (EZ Landlord Forms), rental listings (Hotpads), and credit checks (NTN Online).

It's an interesting time in the real estate business. Ok, "interesting" is something of a euphemism, but regardless, these are not normal times. The national real estate market has never fallen this far, this fast, in the history of America, which has lead many experienced and intelligent real estate professionals to flee the industry, while others have respecialized, while some crazed individuals are actually trying to LAUNCH a career in real estate.

Unsolicited Advice Point 1

If you're considering real estate as a career, the only area where it makes sense to enter right now is as a long term real estate investor or landlord. Prices are low, inventory is high, and interest rates are low, which makes it a great time to buy and hold for the long haul. It does NOT, however, make it a good time to become a realtor, as the market is crowded with good, experienced realtors who are struggling, and if THEY'RE struggling, you'll definitely have a hard time.

Unsolicited Advice Point 2

If you're considering going into the mortgage industry, similar advice applies. There is room, in the industry, for debt negotiators, who work with defaulting borrowers to renegotiate the terms of their note, but loan officers, processors, and underwriters are all scrambling to keep their jobs, at the moment. Unless you're a rock star salesman, it's probably not the right time to become a loan officer.

Unsolicited Advice Point 3

If you're thinking of moving, you've probably already considered the difficulty involved in selling at the moment. The solution is to lease your current home out, after buying your new home, and waiting a few years for the market (and economy) to recover from its current state of anemia. This is easier in some neighborhoods than others, but there's a good chance that your current home would make an excellent rental property. If you need it, here's a link for some free rental forms, to help get you started.

It's ugly out there right now, but it won't always be, so hang in there, and put yourself in a position to make a profit in a few years from now when there's a little more life in the market.

Smart investors can earn a living in ANY real estate market, and being a smart investor is not as difficult as it might seem. Here are a few practices for bringing home the bacon as a real estate investor, even if your real estate buddies shout that the sky is falling.

 

Practice 1: Foreclosure Auctions

You know why the media yells and screams about foreclosures? Because they sell for less than their MLS-listed counterparts, so when there are too many they can drag down the market. But they’ll ALWAYS sell for less, because there are so fewer buyers. See the entry below about buying real estate at foreclosure auction, and find a good discounted property.

 

Practice 2: Renovation

You don’t have to be a veteran contractor to renovate shells (though it will still save you money if you are). Fixer-uppers sell at a discount, because so few people are willing to take on the headache, which means you create equity by buying dilapidated real estate and improving it. You’ll need a bank or hard money lender who offer rehab loans, a solid contractor, and the patience & funding to wait a few months for your pay check. You might even consider buying a shell at a foreclosure auction and then renovating it, effectively creating a double discount.

 

Practice 3: Find Your Inner Landlord

Let’s be honest: being a landlord is not for everybody. It requires capital, patience, and comfort with a non-liquid, term investment. That being said, there’s no better way to thrive in a cold market than to acquire while it’s cold and unload a few years down the line when the market’s hot. And let’s face it: being a landlord is not without its perks, particularly cash flow spilling into your checking account each month (see below for maximizing cash flow through rental properties).

 

Make sure you have an airtight rental agreement, and (here’s where the business plan really gets strong) consider the following model: buy a shell at foreclosure, renovate it, and then keep it as a rental property.

 

You don’t need me to tell you that slow markets are the time to buy, and while you can still make money selling (see above), you stand to earn a lot more if you have the patience to wait. Play your cards right, and this slow real estate market could be the best thing that ever happened to you.

A lot of people talk about buying real estate for a steal at foreclosure auctions, and most of them have never actually done it. From someone who actually has, here are a few tips.

 

Tip Number 1: observe a few auctions before bidding. On the most basic level, you’ll need to understand the procedures; showing proof of funds for deposit, understanding what they're talking about in the legal description, etc. Beyond all that, though, there’s a rhythm to auctions, and you need to get a feel for it.

 

Tip Number 2: Be prepared. Would you go bid on a Baroque period armoire without knowing when the Baroque period was (or worse, what the hell an armoire is)? Likewise, do some research on the house and the neighborhood. When was the home built? How many square feet does it have? How many beds and baths? Has it been renovated recently? What kind of work does it need? What are the local comps selling for? And the list goes on, but the bottom line is: what is the thing worth right now?

If you know what it's worth, you can decide what you’re willing to pay for it. Which brings us to...

 

Tip Number 3: Always know beforehand what you’re willing to bid, and stick to it. It sounds easy, but you'll be tempted to bid more when you're actually there, and it'll cost you money.

 

Tip Number 4: Have your loan lined up beforehand. Whether it's a hard money lender or a local bank, establish a close relationship and earn their trust. Make sure they can move QUICKLY, because you'll have to settle within a short window of time.

 

Tip Number 5: Keep your competition close. There aren't a lot of people who are serious about picking up real estate at auction,which means you’ll see the same faces again and again, so play nice with the other kids in the sandbox. Have a pizza with them, buy them a beer, get to know them. Find out who they borrow from, who their realtors are, what neighborhoods they’re investing in, etc.

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Some real estate investors are interested, not in a one time payout (now or in ten years), but in earning a consistent, monthly income from their properties. Who hasn’t daydreamed about living solely off of their investments, off of passive income? It’s a tantalizing dream, and one I intend to make a reality.  

So where does one start, on this journey from working for a lousy wage to earning income while tanning on a beach?  

Start from the following concept: maximizing cash flow, specifically maximizing the cash flow from each specific property. Because, as we’ve seen, landlords are targets for litigation (see How to Protect Your Rental Property Investments - Landlord Legal Guide), and every single property you own is a legal liability.  

The simplest (not to be confused with easiest) way to do this is to buy rental properties with cash, and only owe taxes and insurance on them. As that’s hardly practical for most of us, we’ll simply leave it that it is a wise investor who carries no debt.  

Beyond that, here’s what you need to look for: neighborhoods with a gap between market rents and market sales prices. Look to spend 60-70 times market rent on a property, but no more, if possible. This is easier said than done, of course, because neighborhoods with greater rents than pricing tend to self-adjust by market forces, but here are a few signs to look for:

-College towns/neighborhoods (side note: they usually pay rent on time, but they’ll trash your house, and yes that includes the girls too)

-Immigrant strongholds (statistically speaking, the population will grow faster here)

-Gentrifying neighborhoods (just make sure you’re in early and not late).  

Additionally, take a long, careful look at multi-unit buildings, because they tend to offer the best cash flow. However, there are some catches. First of all, be extremely careful about zoning, and never assume you can change it. Here’s a hint: look for the number of utility meters in the basement. Second, they’ll cost more money up front, which you may or may not have.  

To maximize your cash flow you may want to amortize your mortgage for thirty years to minimize your monthly payment, which is fine, but consider paying extra principal every month to pay it off early. If you can pay off your rental properties in full within five or ten years, then you’ll be sitting pretty on a beach somewhere sipping pina coladas long before the rest of us.  

Finally, this is perhaps the most important point of all: stay capitalized. Never, ever, EVER let yourself slip into a situation where you don’t have the capital to maintain your mortgages and your investment properties, because it will leave you with nothing but ugly options: selling the real estate or borrowing more money. Sometimes the phone will ring at two in the morning, and you’ll find out that the roof just collapsed on one of your properties, and it will cost $3,000 to repair. Sometimes you’ll have vacant rental properties, and you’ll have to carry the mortgages out of pocket. Sometimes tenants will threaten (and if you’re unlucky, more than threaten) to sue, and when all of these things happen you’ll need cash, and lots of it.  

It’s a beautiful dream, and it’s possible for every real estate investor. As a final note, I recommend every landlord hire a property manager, if for no other reason than to reduce stress, though of course there are many other reasons (experience and knowledge of landlord-tenant laws being high on the list). For a particularly colorful example of why you should use a property manager, check out Junior Brian's hilarious Diary of a Slumlord blog. 

For further reading and resources for landlords, I recommend the following database of landlord articles and real estate forms, and there are certainly a lot of fantastic information right here on Active Rain. Good luck, real estate can be a fun industry, and I wish you the best in it.  

Real Estate Investment Strategies - Part I - Short Term Investment

Real Estate Investment Strategies - Part II - Long Term Investment

In some ways, long term real estate investment is easier than short term investment, because landlords remain somewhat immune to periodic spikes and dips in the real estate market. They also have a longer period to recover costs and allow the property to appreciate, if their expenses goes over budget.

 

That all being said, there are certainly plenty of pitfalls for landlords and other kinds of long term investors. Lawsuits are constant threat, since the ownership exposure is so much longer, and tenants love to sue landlords (see here for Landlord Legal - How to Protect Your Real Estate Assets). Maintaining cash flow is another concern, though one we’ll discuss more thoroughly in the third and final installment of this series. Finally, speculation on real estate market trends is a double-edged sword, and there are certainly plenty of smart investors who have been burned by highways being erected and urban decay.

 

So, how does one begin looking for a good long term investment?

 

First of all, determine your risk tolerance. Investors who favor low risk and low returns are well advised to invest in stable, middle class neighborhoods that are well established. Those who are not averse to risk might favor lower end neighborhoods that have a higher potential to shoot upward quickly, but also breed crime and may only worsen (for a light, humorous look at slum landlording, see Diary of A Slumlord: Landlord Tips, Tricks, Rants, and Rage).

 

If you’re taking the safer route, take a close look at the school systems of the neighborhoods you’re considering, as they tend to be a good indicator of the health of the community. Also consider the stability of the job market in that area, along with the age demography (look for a high percentage of families). Most parents will sooner put their children in a good school than be fifteen minutes closer to work, and families are far more stable than young professionals or the elderly.

 

If you’re looking to speculate on low end neighborhoods that will be the next to take off, it’s a little harder. When urban neighborhoods do turn the corner, the first wave to move in is composed of young professionals who are less concerned about crime than families. They like nightlife like bars and restaurants, they like artistic institutions like galleries and museums, they like water (bays, rivers, harbors, etc.), they like sports stadiums, and they like subways and metro stations. Speculators are wise to pay close attention to municipal plans to add any of these attractions to a given neighborhood, but beware: there are thousands of others monitoring just as closely, so sometimes it pays to wait until after the initial excitement dies.

 

One final word for speculators: don’t over-improve. That neighborhood you’re watching may well take off in five years, but between now and then, you still have to rent to low income people. They can’t and won’t pay extra for a hot tub on the rooftop deck, so wait until the yuppies move in before shelling out extra cash.

 

There is much to be said about the art and curse of being a landlord, and it would fill several large tomes. For starters, nascent landlords would be well advised to take a look at some of the following: How to Screen Tenants - A Landlord's Guide, and Landlord Articles for First Time Investing.

 

The good news for long term real estate investors is that real estate does tend to appreciate over time, and if you have the patience (and the capital) to wait it out, you can earn an excellent return.

 

Real Estate Investing Strategies

 

People who invest in anything, whether it’s real estate, commodities, futures, etc., all have different financial goals. Some investors look for long-term profits, others look for short-term gains, still others try to create cash flow. Here’s a brief look at the investing strategies associated with each, in several installments, starting with short term real estate investing.

 

Short Term Real Estate Investments: Contract Flipping or Renovation Resales 

So, you want to invest in real estate and get paid within, say, six months. There are really two avenues available to you: flipping real estate purchase contracts and renovating properties to resell. Each requires a different skill set, but both require you to be able to purchase real estate investment properties at below-market prices, so we’ll start there.

 

First, you’ll need a realtor, to give you listings of what’s available properties, but more importantly to give you a second opinion on neighborhood values, so find someone who really understands the specific market you’re looking to buy into.

 

Second, you’ll want to talk to wholesalers. They’ll all try to sell you on their properties, so be wary, but sometimes there are good deals to be found here. To find some good wholesalers, talk to a few local hard money lenders, as they’ll know a lot of the wholesalers in the local real estate market.

 

If you’re looking to flip contracts, then learn as much from the wholesalers as you can, because that’s what they do. They find deals at 60 cents on the dollar, and sell them to you for 85 cents on the dollar (or 100; be wary of these).

 

Also, keep in mind that any contract you sign as a buyer, you may not be able to flip, so you’d have to renovate and sell. The next leap of logic is that you may have a hard time selling even after renovation, so be prepared to put a tenant inside and keep it as a rental property, if need be. This all underscores the main point: buy under market value, because it will keep more options open to you.

 

Ok, you found a property to put under contract. Awesome. What next? If you’re going to flip it, you’ll need a buyer, and fast. Start with your realtor, and ask if she has any investors looking to pick something up in that neighborhood. Then call up some loan officers who specialize in renovation loans, as they’ll each have a network of investors. Try Craigslist, if only because it’s free. You might also try those hard money lenders, as they usually know plenty of hungry investors.

 

As a final note on contract flipping, ONLY flip to professional real estate investors, as the homeowner buyers will be using conventional bank financing, which doesn’t allow flipped contracts.

 

If you’re going to renovate it, then make sure you have a good contractor lined up. If you don’t, then ask some of those same contacts who they recommend. Hard money lenders have contractors, realtors know contractors, rehab loan officers know contractors. Make sure you get several prices on each job, just to be sure. For substantial jobs, always use a licensed contractor, and always have them pull work permits for the jobs (this is critical, because your municipality will shut down your job otherwise).

 

You may want to use a hard money lender for the renovation, or you may want to save money and use a local bank, depending on your time urgency, credit, and income. Regardless, make sure you have enough money to finish the renovation, because otherwise it will take twice as long and end up costing you twice as much as you pay for carrying costs, have to get contractors in there many different times, etc.

 

A few small things that make big difference when renovating real estate:

1. Jacuzzi tub: they’re not much more expensive, and people love them.

2. Off-white paint: beige, tan, blues, whatever, make it tasteful but different.

3. Central Air Conditioning: if possible.

 

As I mentioned above, there’s always the chance that you can’t sell the property, so always be prepared to lease it out as an investment property if necessary. Here are some free property management forms and resources, though a more thorough discussion of long term investment strategies will be covered in Part II of this series. 

Good luck, and remember there are plenty of other real estate investors willing to talk and share ideas and knowledge with you.

Friend me on Facebook, and join my group, the Landlords & Real Estate Investors Union. It's a place where fellow investors share resources, tips, comments, and advice, and it's pretty friendly!

Introduction

The market is soft, so you might be thinking now’s the right time to buy a rental property and hold it. And you’d be right, it IS a good time to buy and hold, but there are a few things you should know before writing any big checks and diving in headfirst. Here are few ways to protect yourself from litigation and other legal issues related to real estate and being a landlord.

Legal Protection Strategy 1: Real Estate Ownership Type

All too many smart people make an easy mistake when they first start buying real estate as an investment: they buy it in their own name. This has some serious legal implications, as it will immediately show up as an asset if someone decides to sue you. Furthermore, if the tenant of that property sues you, they can legally go after all of your OTHER assets, which is clearly a problem.

Solution: Create a legal entity (e.g. an LLC) to purchase property under, and make sure someone else (a spouse, for example) owns it with you. This will make it harder, though not impossible, for someone to take your hard-earned assets from you in litigation. As a final note, restrict how many properties each of your LLCs owns, as anything owned by that LLC is vulnerable if the LLC is sued.

Legal Protection Strategy 2: Use An Airtight Lease Agreement

If anything goes wrong with the tenant or property, EVER, then the first piece of paper produced in court is the lease agreement. What makes a good lease agreement? Well, that’s the subject of an entire article in itself, but first and foremost it must conform with state and local laws. Try here for a good database of state-specific lease agreements , that can be customized to contain the legal language you want to include.

Legal Protection Strategy 3: Issue Proper Real Estate Legal Disclosures to Your Tenants

This cannot be understated: if you don’t issue to your tenants the legally required real estate disclosures, THEY CAN SUCCESSFULLY SUE YOU LATER. The most common example is lead-based paint disclosures, which legally must be given to tenants (typically along with a lead-based paint inspection certificate) when they sign the lease agreement. However, each state has different laws regarding what must be disclosed and when, so use the State Assist in the site above to check local real estate and landlord laws, and if need be contact a local real estate attorney, specializing in landlord – tenant law.

Here are some landlord - tenant legal disclosures that may be useful in your state.

Legal Protection Strategy 4: Screening Tenants and Good Property Management

How to Screen Tenants is an art that needs more attention than I’ll give it here, so read the linked tutorial.

Property management is also a nuanced and tricky beast, but to be brief, an attentive landlord who responds to his tenants when they call will be drastically less likely to be sued. When your tenants call about a problem, call them back. When there’s a problem with your real estate investment property, fix it. Establish a personal, first-name relationship with your tenant. They’ll appreciate it, and be less likely to sue you for your legal assets if there’s a problem.

Conclusion

No one likes to be sued, so do everything you can to avoid it by finding good tenants and keeping them happy. And, of course, prepare for the worst by being protected in your legal ownership of your real estate investment property. Good luck, and hopefully, you’ll never experience the nightmare of a real estate landlord lawsuit.