Real Estate Profit Secrets

Real Estate Profits Secrets

Here we will cover the ideas, techniques, and/or methods that I have heard of or used to make a few extra dollars on a deal. For those of you who have been at real estate investing for a while, not much will be new! But, if one idea saves or makes you money, I will have succeeded.

If you have a bit of information that will save or make someone else money, add to this page. Keep in mind that with real estate investing your dollars can be leveraged three or four times. For every dollar you have to invest you can borrow three more dollars (at a minimum) to put to work. If you have $10,000 to invest? you can borrow thirty or forty thousand more.

The investment money you use to leverage a loan can be in the form of equity rather than in cash. As the value of the properties you buy improves, because you improved them /or because you improved the rental income, you can use that increased equity to borrow even more. That is the magic of real estate investing, a little money combined with leverage, time, good management, and experience equals wealth.

Ownership:

For most investors, holding property as individual ownership is the best method as the tax advantages and cash flow will then pass through to you. Holding title in your name does expose you to unlimited liability, so be sure to carry a high dollar, blanket type liability insurance policy. I carry a general million-dollar policy and a million dollars on each property I own. The cost is low.

Any real estate you use in your business should be owned by you personally, and leased back to your business. Buy holding title to business property in your name you will be able to take maximum advantages of the tax laws. The only exception I can think of is if the property has, or will, store hazardous chemicals.

Vacancy can be good

Check the rental market rates at least once a year. Even more often in good economic times. If you raise the rent by $25.00 per month, you increase the value of the building by $2,500. As a rule property values are about 100 times the net monthly rental income. There are thousands of properties out there that would have a better rate of return, and thus a higher resale value, if the rents were at the going market rates.

You can buy a building at its current economic value and raise the rent to make it more profitable, and thus more valuable. If you look at a building that is 100% occupied, chances are the rental rates are too low.

Similar apartment tenants

If you own an apartment building, think about renting your apartments to a certain type of tenant, e.g., over 55's, single adults, or students. It makes advertising easier, and people will pay a little bit more to live with a group they feel comfortable with. Each group has its advantages. For example, retired couples like to live with others in that "over 55" age group and there is less tenet turnover and they tend to be better credit risk with less wear and tear to the units.

Mortgage length

Check the difference in monthly payments on a 15, 20, or 30-year mortgage. The interest savings can be very substantial if you plan on holding the property until maturity.

For example:
A Mortgage of $80,000 at 7% for 30 years has a principal and interest payment of $532.24,
at 20 years the payment is $620.23,
at 15 years the payment is $719.06.

Carefully consider payment amount, and interest paid over time against your investment objectives. If you are managing for the monthly cash flow so that you can own as many houses as possible, then take the lowest payment. If building up equity is more important than cash flow, take the higher payment. The longer the term, the lower the payment amount and the bigger the interest tax deduction. Remember you can always pay more per month on the principal to reduce the number of years.

Best ways to find bargains?
(This section is duplicated at Getting Started)

You should consider having business cards printed that say, "I buy houses". Pass them out everywhere you go. Every now and then a deal will come your way. It really does work. Read the classified ads every day, looking for bargains. Put signs out that say you buy houses. The main point is that you are always looking and everyone you know, knows are looking. Do this long enough and you will find the deals.

Call the banks and savings and loan associations in your area; request a list of foreclosures that are for sale.

Check with your county court house for information on tax sales; be sure you understand the auction rules.

Check the Internet for U.S. Marshall Sales of seized properties
Drive the residential streets looking for the house on the block in the poorest condition. Look up the owner in the courthouse records, or on line (county records), and send them a letter asking if the home is for sale.

You can get a list of government property sales at http://www.pueblo.gsa.gov Federal information center: Go to Federal Programs - U.S. Real Estate - Property Sales List.

This web site lists government real estate properties that are sold by auction or sealed bid, and explains how to get more information.- 5 pp. (Bimonthly. GSA) 559L. Free. The web site also has contact list of other government seized property auction dealers.

I met a husband and wife team a few years back that found homes for sale at bargain prices by looking at homes for rent every Thursday when the paper came out. They were looking for landlords who were disgruntled and fed up with the problems of being a landlord. They would then offer to buy the house at a good price (good for them). They had to look at hundreds of homes to find a deal, but it worked, as they had seven when I met them. They knew the market, they offered a cash deal, they closed on the deal within days. After closing they took a mortgage out to replenish their funds. The plan was to offer $15,000 less than they thought the home was worth - (condition being a consideration)- and close the deal only if they could buy at $10,000 under market. They worked the blue-collar neighborhoods.

NAREI: Go to the national Association of Real estate investors web site to see if they have a local chapter in your area. www.narei.com....Join the local group and let the other members know you are a buyer. There will be people there who scout deals and turn the deals over to investors for a fee. Expect to pay from $500 to $1500 to the scout who brings you a deal. There will also be people who buy fixer-uppers and sell them to investors.

Assumable loans

When buying a house, assume any outstanding loans if they are at low interest rates. Before you agree to pay off an old loan, do the math to see if assuming the old loan and taking a second for the balance would be cheaper than a new mortgage. A lot of old assumable loans have no due-on-sale clauses and they might save you from having to pay points on a new loan. These are getting harder to find.

Avoid ARM's

Adjustable rate mortgages (ARM), those that start out with a low interest rate and increase if interest rates increase can increase your monthly payments. Should you consider adjustable rate mortgages? Here is the rule of thumb, if you are planning on selling the property, or plan to refinance it within five years, go for the lower rate ARM. If you are planning on holding the property for six or more years, take a fixed rate loan.

The reason has to do with the way interest rates increase and the math. Interest rates go up and down slowly, generally over about a two or three year period. If a low variable interest rate holds for two years and then starts up and increases slowly for two or more years, you will be dollars ahead, or at worst break even, for the first five years with the ARM. After five years of increasing interest rates the fixed rates will began to save you money.

Real Estate sales commissions are negotiable

Real estate sales commissions are negotiable. Ask for a lower commission rate if the agent is asking you to lower your selling price or they are asking you to pay points to a bank on behalf of the buyer. Just keep in mind that all parties to a real estate deal are making money, or hope to. Everything is negotiable Including the sales commission.

Some agents will take a note for their commission, or part of it. They do not like it, but once in a while it can help close a money gap and save a deal. This works best with independent agents who are both the listing and selling broker.

If a property's sales price is over $300,000 you should pay less than the so called "standard" 6% commission. 4% to 4.5% is plenty. On deals over a million dollars 2% or 3% is fair most of the time. If you are in a sellers market and you want to get top dollar for your home, try a commission plan designed to give the agents an incentive to sell at a higher price.

Lets say your agent wants to list your home for $350,000 and they think it will bring between $320,000 and $350,000. Consider setting the commission at 4% of the first $300,000 and 15% of any amount over the $300,000. If the home sells for $320,000 you pay commission of $15,000 if it sells for $350,000 you pay commission of $19,500. The difference is that you would net more from the sale, and the agent has an Incentive to get the higher price.

Do not pay any extra fees to the agency listing your property for sale. The sales commission is more than adequate. Keep your listings to three months at a time. Six months is entirely much to long for residential properties, and long listings encourage real estate agents to procrastinate.

If the agencies insist on the longer listing, you need to insist on a month by month marketing plan specific to your property. Most listing contracts have a clause that states you must pay a commission to the agent if a buyer the agent brings around buys the home after a listing expires. Be very certain that you insert a clause that state that this pay later clause, does not apply if you have the home listed for sale with any other agency. You do not need to find out later you owe two commissions.

Rent can offset your down payment cash.

On a multi-tenant building, if you close the deal just after the first of the month, the rent credit and deposit credits that you get will offset part of your down payment and your closing cost. Set your closing date for the third day of the month, just after the rents are collected, to maximize the current cash received. When buying a property I set my closing for the fifth day of the month, that way I get max cash form the existing rentals with a whole month before my payment is due.

Trade properties to postpone taxes.

The down payment need not be cash, consider trading services or equity in other property for the down payment. If you are planning to sell one property to buy another, a trade will postpone (see real estate taxes) any income tax due. Check with your accountant to be sure the deal is structured correctly to meet the IRS's like kind exchange rules, thus postponing the capital gains tax you would pay on a sale.

Component depreciation

When building new, or replacing any major items on rental property, where you can not write it off as repairs, get a letter from the supplier stating the useful life expectancy of the items being installed.

The letter becomes your proof of length of time for deprecation for tax purposes. For example; Say you are replacing all the refrigerators in a ten unit apartment building. The appliance dealer says the useful life is ten years. You divide your installed cost by ten and take that amount of deprecation each year.

On new construction you can do this with the whole project, roofs, driveways, appliances, etc. You have to document the installed cost very carefully, but the supreme court of the United States said component depreciation is allowable.

Owner financing magic

When buying a property I will pay more for owner financing (more interest, or a higher price) if I have to as long as I can write the contract. You want to buy and finance the deal without a due-on-sale clause, and you want to get an assumable Mortgage. This gives you greater flexibility when you sell the house, and the possibility of getting a discount when you do offer to pay of the mortgage in the future.

For example, you buy a house with an owner carried note, a few years later you decide to sell the house and your buyer is getting a new VA loan, thus paying your loan off. You call up your note holder and offer to pay them off in the next 30 to 60 days if they will discount the note. Ask for a $1,000 discount or 2% of the balance. You will be surprised how many times they will say yes. When they say yes type up a letter to that effect, get it signed right away, and take it to the title company. The letter will become part of the closing instructions.

When your existing loan is at a low interest rate and the rates have increased even banks will say yes to a discounted early payoff as they can re-loan the money at a higher rate.

Or, if your mortgage note does not have a due-on-sale clause, you can sell the house on a wrap around Mortgage where your buyer pays you and you continue to pay your old note that is at a lower interest rate for a shorter time period. You get to pocket the difference each month. You can only do the wrap around mortgage if you do not have a due-on-sale clause in your original mortgage.

Escrow payments

I do not keep escrow accounts. If you have the discipline to save the money so that you will have the money when the taxes and insurance payments come due, then why tie up your money (interest free) in escrow accounts when you could put that money to work.