Archive for General Topics
Real Estate Investment – One Simple Formula
The ads in the small-town newspaper were always the same: A house for sale with 5% down and payments of 1% of the purchase price. It might be a three bedroom home for $90,000, for example, with $4,500 down and $900 per month payments.
Finally it was explained to me that it was a way to get a great return on capital. It was the opposite of buying with no money down. You bought for cash.
A Real Estate Investment Formula
It is simple, really. When you buy for cash, you often get a much better price. A house that needs a little work might be worth $75,000, for example. By offering $65,000 cash, you negotiate your way to a $68,000 purchase price. If not, you walk away – there are always others.
Then you put few thousand into high-return repairs and improvements. Paint, carpet, and maybe asphalt for the dirt driveway. For our example, we’ll say you put $5,000 into it.
Now it’s worth $85,000 perhaps, but you target those buyers who can’t get financing easily, and you finance it yourself. By making it easy for the buyer, you can get $90,000 for the home – and do it without paying an agent’s commission. Whatever the sales price, you let the buyer put 5% down, and make monthly payments of 1% of the purchase price. Of course, you get higher than market interest too.
The buyer is thrilled that they are buying instead of renting, and you get a capital gain of perhaps $14,000 after expenses, plus good interest. Your total rate of return is somewhere over 25%!
You can save money by doing your own foreclosures if they become necessary. After foreclosing, raise the price a bit and sell it all over again, of course. By the way, if you can get an average return of 18% on your money, you’ll turn $75,000 into more than one million dollars in about fifteen years.
Real Estate Investing Business: Learn To Expand Your Business Network
People just getting started in real estate investing notice at the very outset that having a network of fellow investors and a network of buyers can make their investment business flourish. Having a network of people to rely on can help you locate better properties and also to find out which investors will usually want to buy real estate from you. In fact, it is not all that hard to build up your own business network provided you know how to go about it.
As far as real estate investing goes, it is common knowledge that you won’t buy every property that comes your way. But when you check out different properties you will come into contact with others who have similar interests — giving you the basis for your business network. After you have made a few real estate investing deals you will also have come into contact with REO agents who may be holding bank properties that are in post-foreclosure — another source of contacts for your business network.
One last source we’d like to recommend for business networking is to attend seminars and go to classes that deal with real estate investing
If you follow these simple tips, you will find that your business network will expand considerably.
Real Estate Ownership – Condominium or Fee Simple
Generally, apartment-style buildings are called condos, two-story row houses are known as town homes, and free-standing homes on small lots are referred to as garden homes. Unfortunately, this description creates some confusion about real estate ownership. Apartment, town home, and garden home describe the design or construction of certain homes. The word “condominium” does not refer to a the layout or style of a building. Condominium is a form of ownership of real estate. The form of ownership of real estate cannot be recognized by observing the building design.
Condominium Regime
The legal definition of condominium is: the absolute ownership of a unit based on a legal description of the airspace the unit actually occupies, plus an undivided interest in the ownership of the common elements, which are owned jointly with the other condominium unit owners. Each unit owner of a condominium has individual title to the space inside his unit. The space is sometimes described as beginning with “the paint on the walls.” In addition, each unit owner has an undivided interest in the physical components of the condominium buildings and land.
A popular type of condominium development is the multi-story apartment. In this case, there is no land under each unit. In these developments, the condo association usually handles maintenance of the building exterior and common grounds, while the unit owners maintain the interiors of their units. A condominium association is selected to make decisions about expenditures for repairs, and to handle administrative work related to the common areas. Fees are collected from the unit owners to pay for common maintenance. The association normally holds an insurance policy covering the jointly-owned areas, while individual owners carry insurance for the interior components of their units.
Condo projects may resemble duplexes, town homes, garden homes, or residences on regular lots. In general, the creation of a condo regime allows the developer to get more density approved than would be allowed if he had done single-ownership lots. This is often the reason why the condo regime is chosen instead of a development with single ownership lots. A condominium may be built as two units of a duplex. In this case, the two owners may jointly make decisions concerning maintenance of any common areas. By setting up the units of a duplex as two condos, the owner is able to sell them to two different owners.
Each condominium has rules that are specific to the development, so no assumptions should be made about their requirements. It is important to read the condominium documents carefully before purchasing a condo. The documents specify the maintenance that is covered by the common budget. In one project, the association may handle exterior components, decks, pools, sidewalks and driveways. In another, the individual owners may be responsible for more maintenance of their units, including foundations, roofs, and exterior walls.
If you have questions about the division of labor between the common budget and the individual owners of a condominium, you can present your question to the condo board itself. The board can give you an interpretation of the rules and clarify how the issue has been handled in the past. Another possibility is to ask a real estate attorney to review the documents for you. Realtors, other unit owners, or maintenance workers are not appropriate or reliable sources for the interpretation of condo documents.
The Texas real estate contract for condominiums contains a provision requiring that the buyer be given a copy of the condo documents, with a period of time to review them. During the document-review period, the buyer may terminate the contract without penalty. In addition, a resale certificate is must be provided by the association president or manager. This document provides information on the current budgets, insurance coverage, special assessments, lawsuits and other matters that affect the association.
Fee Simple Ownership
In contrast to the condominium regime, you may own real estate by fee simple. “Fee”, which comes from the word, “fiefdom”, refers to legal rights in land, and “simple” means unconstrained. Fee simple is the most common type of ownership. It is the absolute legal title to real property, including both buildings and land.
In fee simple, there are several different possibilities with regard to your obligations of ownership:
(a) Your property may not be in a subdivision at all. In this case, your deed will not include any subdivision restrictions that control your use of the property. Be aware that there could be some deed restrictions put in place by previous owners. In addition to deed restrictions, you may be governed by city or county ordinances or zoning laws that limit your use of the property.
(b) Your property may be in a subdivision with very few restrictions, no common areas, no architectural control committee, and no mandatory dues. Usually these are older subdivisions.
(c) Your property may be in a subdivision of homes on large lots, or in a town home or garden-home community in which there is a legally created homeowners association. In this case, every homeowner is required to be a member of the association. The association may charge mandatory dues and enforce subdivision rules. A certain level of maintenance may be required of each property owner. For example, you may need association approval of exterior paint colors, fences, or additions to your home.
Like the condominium form of ownership, fee simple ownership does not prescribe how maintenance is handled or how developments are governed. For example, the owners of a town house, with fee simple ownership, may be required to fully maintain their units. Or, the owners’ association may cover painting, roofing and yard work for the owners. In subdivisions where there are single family homes on large lots, it is more common for the homeowners association to manage the common grounds, pools and parks, while the individual lot owners fully maintain their own properties.
Understand your ownership rights and obligations
Before buying into a condominium regime or purchasing a fee simple property, you should have a clear understanding of the type of ownership you will have in your property. If you are buying a condominium, it would be wise to read the condo documents carefully and understand how maintenance is divided between the individual owners and the condominium association.
If your ownership is fee simple, with individual ownership of the land, you should review the deed restrictions (if there are any) and understand the restrictions and obligations that apply to your property. In the fee simple form of ownership, there may be mandatory dues to pay for common area maintenance, or, in some cases, the dues may be used for partial maintenance of the individual properties.
If you have a question about your type of ownership or about your obligations as a homeowner, it would be wise to review the title documents with a real estate attorney before proceeding with your purchase. Ask plenty of questions! A clear understanding of your type of ownership, and of your obligations as a homeowner will result in a more satisfying real estate purchase.
Asset Protection for Real Estate Investors
Many real estate investors started out running their investing business as a sole proprietor because they really didn’t know any better. Most survived with only minimal damages, but quickly realized they needed to take the time to assess the best legal structure to use for real estate investing.
If you ask 10 experts you are likely to get 10 different opinions. With that in mind, here’s our opinion. Please don’t let our advice interfere with common sense and sensible business practice — ie, consult with your attorney or accountant (or the website of your state’s secretary of state) when choosing a business structure.
Many say that if you are a beginning investor, it’s probably best to not worry about asset protection until you actually have a few assets to protect. On this point we disagree. Our opinion is that you carefully consider the method(s) you will be acquiring and disposing of your real estate assets. Then huddle with your team/advisors and set up a business structure that will provide the best asset protection for the way you plan to run YOUR business. Why do we suggest getting the asset protection part done up front? Because you can turn around an investment deal faster than you can set up a business. Better to have your asset protection plan in place when you do the deal, than to try to go back and get everything re-done in the name of the business. Our recommendation is to never take title to investment property in your own name.
So, now that you’re going to structure that business, what structure should you take?
Assuming you want to set up an entity for handling your investment properties, the most popular are an LLC (Limited Liability Corporation) or a C Corporation. There is a lot of debate about which one is better. Many investors prefer the C Corporation because a certain amount off the top is taxed at 15percent and you can have a kick-butt employee (you) benefit plan to write off expenses. Others prefer the LLC, even though the income is passed through like a sole proprietor. The LLC is easy and inexpensive to establish, and just as easy to dissolve. In fact, we know investors who set up an LLC for each property they hold.
There are other ways to structure your business and shield your assets, but don’t even get us started on S Corps, or on the more complicated structures whereby you establish one entity which owns the others. Just trust us that you’ll want to talk it all over with a trained professional or a mentor.
Why is the tax issue such a big deal?
Here’s a simplified example using the C Corp. If you make $100K as a sole proprietor you are taxed on the full amount (35 percent) and have $65,000 left. Anything you buy for yourself comes from after-tax dollars. However, with a C Corporation if you could make the same $100K on paper, but have $50K in allowable expenses that you can write off. So you get taxed on that $50K at 15 percent and only have to pay $7,500 in taxes compared to $35,000 if it was your personal income being taxed. You still can buy the same stuff, but you are taxed less if you structure things correctly.
A very wealthy man once said It’s very hard for a C Corporation to make any money! What he meant was that C Corporations can expense almost everything until there is little or no profit.
Think about it… and then call a professional.
3 Pitfalls to Avoid When Playing the Real Estate Investing Game
So you’ve seen your one-thousandth infomercial and the guy in the neatly pressed button-upped white shirt is tantalizing you with his rock-solid no-money-down rags-to-riches real estate investor course for 3 easy payments of a gazillion dollars (but only if you call now). It’s the middle of the night and now you are thinking, “this really looks like a great deal, I better get it fast before the special offer expires.”
(Have you noticed that there’s always a special offer?)
Anyway, we aren’t saying this guy isn’t telling the truth, but regardless of which course or school of thought you buy into there are several key pitfalls that one must avoid when engaging in any real estate investing transaction.
Pitfall Number 1: Paying too much!
The whole point in real estate investing is to find properties that are undervalued. How does one find out what is undervalued versus overvalued? Without getting into technical details, the bottom line is that you need experience. Real estate is essentially one of the highest ticket items in the shopping center of life. Know your limit before you shop, and don’t pay more than you absolutely must.
Pitfall Number 2: Not Knowing the Market
Yes, learning about the market you want to focus on means you are going to have to do some work! This part is common sense, but executing it is where the payoff comes in. How do you make money in real estate? Many investors phrase the answer to that question as “You make your money when you buy.” What it boils down to is this, you study your market and you know it well enough that you know how much money you can expect to sell the house for when the time comes. Knowing that, you structure your purchase so that your profit is already there.
Pitfall Number 3: Buying Houses Instead of Selling Solutions
Real estate investing is not about buying homes from other people. It’s about selling a solution to people who want or need to sell their house. If you keep this in mind, you’ll become more creative about the structuring of your deals. And you’ll close those deals more quickly and with better profit margins because you’ll be working with motivated sellers.
To sum it all up, these are three things that no late night infomercial real estate investing course can teach you. This knowledge is gained through experience. Work on gaining that knowledge and stay out of the money pit.