Types of Real Estate Investors II

Methods To The Madness What makes real estate investing exciting is that there are so many ways to make a profit. There are properties available in price ranges for every person's pocket book and investment style. I will provide a general description of some of the methods that people are using to conduct their real estate investments. Often several of the methods get combined in one deal especially over time as your needs or opportunities change. There are no schools where the details of these methods are taught. We all learn as we go along. I hope to stimulate your thinking and inspire you to learn more.

Buy, Improve and Sell (dealer) If you buy property for a quick re-sell you would be a considered a dealer. Your goal is to buy low and sell high on a short-term basis. You are looking for bargains because you make your money when you buy the property. As your goal is to sell the property quickly, the lower the price you pay, with the least amount down, the more profit and flexibility you have when it is time to sell. You have to find houses that are selling for less than the fair market price, and properties that would increase in value if they were spruced up a little. In order to succeed as a dealer you need to study all you can about single family home buying and selling. Read all the books you can. Gain a lot of knowledge about creative deal making. Knowledge will be invaluable to your success. Ideally, you want to buy at 20% below the market price for a home needing cosmetic repairs and touch ups. Try to buy homes financed by the seller with little down and no "due on sale" clause. You want to sell it yourself, with a larger down payment than you gave, and carry the note at a higher interest rate than you are paying.

For example; you buy an owner financed home for $40,000 with $2,000 down at 7% interest for twenty years, with the first payment not due for ninety days. You spruce the home up and sell it for $50,000 with $3,000 down, owner financing at 10% interest or thirty years. You end up with your down payment back, and a positive cash flow on the equity difference between the two loan balances, and you will gain a small amount of equity spread each month as your loan used to buy the house is for a shorter term than the mortgage given to you by your buyer when you sold the house. There are tens of thousands of deals out there that can be done this way.

Buy - Rent - Hold - Long Term (landlord) This is the most common method of real estate investing. Here you are looking for homes that will rent for more than your payments on the home. You goals should be to create a positive cash flow, to buy with the smallest possible down payment, and to pay the lowest possible interest rate. Your profits will come from the positive monthly cash flow, from increases in the rents over the years, from the tax advantages because of the depreciation of the building, from tax deductions on interest paid, from the equity build up as the mortgage is paid down, and from the increase in value of the home due to inflation. You could also gain from interest and tax advantages by selling the home years later and carrying the mortgage yourself. I have a home that I purchased 19 years ago for $32,000 on a 20 year note at $299 per month. I collected rent on it for 17 years (the renters paid for it) and then I sold the house for $40,000 at $365 per month on a 20 year note. My note will be paid off next year and the buyer I sold the house to will be paying me for many more years.

 We Buy Houses for "CASH" (distressed dealer) We have all seen these signs. There is even a franchise available called Homevestors. Here again you are a dealer in homes rather than an investor. Quick turnover is where the money is. These dealers are looking for anyone wanting to sell a home quickly so they can get the house for a very low purchase price. Some of the reasons people are willing to sell homes at distressed prices are: The homes are in need of repair, back taxes are due, divorce, death, fire damage, and relocation. And some are just tired of being a landlord. The dealer then corrects the deficiencies and quickly resells the home. In order to do this you need to line up sources of quick cash. You find lenders such as doctors, lawyers, business people, etc. who will let you have purchase money. Expect to pay very high interest rates up to 24% and/or a percent of the deal, or a flat dollar amount in addition to the interest. The reason for this is that you may only need the money for 30 to 90 days and even the high interest rates may not be enough of a profit to entice people to lend you this short term risk money. You then fix the home and put it back on the market with owner financing. You will have to have another group of investors to buy the mortgage notes from you, or you can sell the notes on the secondary note market at a discount, or you can borrow against the note. Most of the lenders willing to buy notes on this type of property, will want 20% to 25% annual returns. Your cost for funds will be high, and therefore you must buy the homes cheap to cover all the cost and still turn a profit. This is a business rather than an investment and there is a lot you must learn to be successful at it. When done right, the profits can be very good.

Tax Sales: Most counties hold tax sales of real estate on the doorsteps of the county court house. Property owners who have failed to pay the property taxes can have their property auctioned off to the highest bidder. Notices are posted in the local commercial newspaper and on the bulletin board at the courthouse. Special deeds are issued, and the property owners have reclaiming rights (in my state that time is two years). Check with your county offices for information on tax sales. Be sure to inspect the property, and have a plan of what you will do with the property once the holding period for reclaiming by the original property owner has expired. When you see a house boarded up, chances are it was purchased at a tax sale and is being held in inventory, waiting for the time for reclaiming to pass.

Mobile Homes (Landlord) If maximum monthly cash flow is your goal, then renting mobile homes is better than renting houses. Buying mobile homes cost less than buying so called normal houses, and mobile homes can be put on smaller lots, thus you can own more rental units for the dollars invested. Every dwelling unit has a certain amount of shelter value regardless of whether it is a home, a mobile home, or an apartment. Because this is true, the less you have to invest to provide that dwelling unit, the more profit you can make. One of my friends has accumulated 20 mobile home rental units over the years and is installing six more this year. Here are the highlights of how he operates. All the units are outside of the city limits near a school. All the units are older units purchased for under $5000. He fixes them up just good enough to get them rented. He buys a piece of land where he can put three or more on the same property. He lets everyone know that he will buy a mobile home, or land for cash if the price is right. This year I watched him buy a 12' x 48' home for $1,500 and six lots for $12,000. By the time he gets the six lots set up with mobile homes and puts the septic tanks in, he will have invested about $100,000 for six rental units. At a low rental rate of $500 per month, times 6 units, that is $3000 per month times twelve months, equals $36,000 per year income. That is a payback of less than 3 years. The disadvantages are that the homes do not appreciate in value, and financing is hard to come by.

Buildings for rent - without land (No land cost) Here are two ways to do this. First you buy mobile homes as cheap as possible, and put them in mobile home parks to rent out. Because you do not own the land, your monthly profits will be decreased by the rent you pay for the lots. But this method does allow you to get started with less cash. Be sure the mobile home park owner is aware of your plans, and that the parks lot lease allows for what you are doing. Another method is to lease office buildings or storage units set up on the renters land. Examples; office trailers for long-term construction projects, school classroom buildings, church classrooms, guardhouses and back yard storage units, etc. This business requires cash to buy the units, and financing is very hard to come by. The only effective way I have found to find the people needing to rent the buildings is to have a yellow page ad running stating that you lease office buildings. You will need lots of cash to buy the buildings, and you will need to cut deals with portable building and or office trailer manufactures to buy at wholesale prices. I have four small portable office buildings on lease at a total of $775 a month. They have been leased to the same company for five years. The units cost me a total of $25,000 giving me a 32-month payback and I still own them. Even if I sell them at the end of the lease for 20% of my cost I am way ahead on this one. Update; Jan 2004 the buildings I had on rent where sold to the renter for $10,200.00 we collected a total of $61,350 on a $25,000 investment. A 145% return over five years, divided by five years and you get a 29% return per year. (Note; the time frame was actually 66 months)

 Undeveloped Land (Speculation) Leave this one to the experts. The carrying cost of raw land is very difficult to overcome. If you can find a way to make the land produce income, then you can make a lot of money from raw land speculation. I own one piece of raw land and have it leased out as a mobile home sales lot. The property has been a very good investment for me. I did carry it for several years at a large negative cash flow. I will cover this deal in detail in another article, as there are some lessons to be learned from it.

Commercial Warehouses (Landlord) These can be very good as a long-term investment. You find a piece of land where the access is good, but the location is slightly off the beaten track. You erect a 4000 to 6000 square foot metal building with the minimum of office and restroom facilities. These types of buildings are popular with small businesses. One of my businesses leases a warehouse of 4000 sq. ft. for $1600 per month, on a three-year lease. The landlady has so many of this type of property that her monthly gross income is $75,000 per month. That is just shy of a million dollars a year. Her family has been doing this for over thirty years and most of the warehouses are paid for. I was so impressed with her operation that I have added this type of real estate investment to my future "To do list".

Commercial (Speculation) This is another type of raw land dealer. They own or buy a piece of land where they think a need will exist in the future, they then put up a sign that says build to suit. Another method is to cut a deal with the landowner to put up the sign on the condition that you will buy the land if you find a tenant. Here is a simplified description of the process. Once you find a user that is a very good credit, risk you get a letter of commitment from them that they will lease the building on a long term lease if you build it for them. You get an option to buy from the property seller. You then go to the lending institution to get the loan. When you get the loan letter of commitment from the lender, you get the lease finalized. Experienced investors normally do this type of deal.

Office Buildings (Landlord) Office buildings can be great investments if you have a little more money to work with, and if you have the staying power should vacancy rates run high during a business downturn. The location and condition of the building will dictate the type of clientele you can attract. Office space leases for about the same as apartments per square foot without having to have all those kitchens and bathrooms. They also are not normally occupied 24 hours a day, thus less maintenance is required. The disadvantages are that they tend to be vacant longer, and it takes longer to resell the property. You can also expect down payments approaching 30%. If you are buying the office building to run your business out of, you can get an SBA guaranteed loan with 10% down, and lease up to 49% of the space to other users.

Land Developer Land developers buy large tracts of land and develop the land into industrial parks, mobile home lots, or subdivisions, in all their various forms. This is definitely an area where experience is important, and large amounts of investment capital are needed. Most of these developments take years to get approved, and the projects can last for many years.

Buying Paper (lender) If you have a lot of cash to invest, and seek high returns, buying mortgages may be for you. There is a very large market dealing in first and second mortgage notes. There are brokers who can find mortgages for you to purchase, and even manage the whole process. You can find notes to buy by searching the county records for mortgage liens filed, and offer to buy the notes from the holders. And you can call those signs that say "We buy houses"some of them need note buyers and there may be a real estate investors club in your city that you can contact for leads. It is possible to get better than a 20% return by buying notes at a discount. For example; you find a note where the home seller carried back a first lien on his/her home for $40,000 at 8% interest for twenty years. You offer them 90% of the balance owed in cash. The note holder gets $36,000 now and you get the payments with interest on the full $40,000 greatly increasing your return on the $36,000 you actually paid out. That would give you an annual return of over 14% on your $36,000. You will find mortgage brokers in the phone book, and then there are those signs "we buy houses" - someone has to finance the deals.

Highest & Best Use This type of investor looks for property that would be worth more if the use of the property were changed. Here are a few examples. You are only limited by your imagination, and the local market place. 1. A house has one side facing a busy street, and the front facing a side street. You buy the house, convert the zoning to commercial and rent it as office space. 2. An office building rents month to month and has attracted a certain type of tenant because of that. You spruce it up, add security, and switch to two to five year leases thus attracting a better class of tenants at higher rates. 3. You buy a warehouse with adjacent land, lease the building, fence off the land, and rent it to companies looking for outdoor storage such as companies that rent barricades that need a place to store them, or as a construction equipment storage yard. 4. You buy a mobile home park based on the space rental income and convert it to a mobile home park where you own the homes, thus getting more rent per space available. Others Real Estate investments. Other types of real estate deals would include, parking lots, buying large acreage and dividing it into small building lots that are sold on contract for deed, RV parks, outdoor storage yards, or flea markets to name a few.

You can also invest in real estate through real estate investment trust (see your stock broker) or with real estate limited partnerships. Always check with your tax adviser first.

"In the process of getting rich you can't help but create jobs for others" Jim Glasgow