Real Estate Investing Business: Getting The Most Out Of SEO
Being in the real estate business used to mean advertising properties over the radio, on the TV, and even in newspapers. With the Internet properties can be listed online, allowing clients to view houses and land before contacting you. But what if they’re using a search engine to find the real estate for them and your site doesn’t show up? That’s where real estate SEO (Search Engine Optimization) services come in, offering the ability to boost your real estate site to a higher position in the search results.
Keyword placement is one of the important factors in getting a search engine to find and return your site as one of their top listings. Linking in from other sites is another great way to get people to see your real estate site. The more people on outside sites who click links that lead to your site, the higher your site will go up in the search results. The content on your site is also very important as once people arrive at your site, your content will be what gets them stay.
There are wrong ways to use keywords and link building. More importantly, if done improperly, it can actually get your real estate site banned from search engines such as Google. Overuse of keywords (keyword spamming) can clutter the content of your site and even defeat the purpose of your site by creating a search engine friendly text that has nothing to do with your business. Linking to your site from others can also be useless if the site your link is on isn’t related to the real estate in some way.
As with any business transaction, if you’re going to pay money you should be sure to see references or examples of SEO service company’s work. If this can’t be provided to you, move on. Since you’re hiring the company to help increase your site’s popularity, they should be able to tell you some of the proper keywords and phrases you’ll need. If they’re asking you what you want to use, they’re not fulfilling the duties of their job.
A good SEO service company will want to know about your company so they know what route would be best for you and your real estate business. They’ll also have a writer to assist with the search engine optimization, since keyword placement works best when the text is written with keywords rather than throwing keywords into text later on. When you’re satisfied that the real estate SEO services you’re looking into are legit, the sooner you hire them the sooner you’ll see more traffic at your business site.
Real Estate Investor Question – Fix and Flip vs Buy and Hold
Here’s another awesome question I received from my discussion board. The question; Why bother keeping property after it’s rehabbed? Why not sell it after the rehab and GET PAID!
Of course, the first questions that you must answer is how emergent is your need for quick cash? You can likely generate the most SHORT TERM cash by selling a freshly rehabbed house. But, you will give much of it away in taxes come next April.
If you keep it, you stand to make more! You will also enjoy some great benefits while you own it such as cash flow, a tax break, and MORE cash with the future appreciation. You can still pull some nice cash a few months after buying it when you refinance (post rehab) the property from your hard money (at 70% loan to value) to long term financing (at 85% or 90% loan to value).
The short answer is an investor is going to make considerably more money by hanging onto a property after it’s rehabbed. There is a downside to it. You have to be a landlord, and you have to decide if you want to do that. I don’t think it’s too bad as long the landlording is done correctly.
Let me illustrate the difference in overall money between rehab and sell, and rehab and rent investing with this example;
Let’s say appreciation rates are 5% in your town and the average price of a freshly rehabbed property in the neighborhoods investors buy in is $100,000. Let’s also say there is Bill and Fred.
Bill sells his properties after rehabbing and makes $15-18,000 per house. Good boy Bill!
Fred keeps his rehab projects and cash-out refinances, pulling out around $10,000 per house within 3-6 months of ownership. (Fred trades his 70% loan-to-value (LTV) ratio hard money for long term, 30-year mortgages at a lower interest rate with an 85-90% loan to value ratio. He pockets the difference between what it costs to pay off the hard money and the new mortgage less closing costs. This works out to about $10,000 per property.)
Bill (rehab and sell) makes a great living. Ten houses per year is $150,000-$180,000 per year…nice jingle! The downside is that Bill has to keep rehabbing to keep making that living year-after-year and pays taxes on all that money as regular income (ouch!). So his $150,000 per year is in reality somewhat less.
Fred (the rehabber) also makes a great living. Ten houses per year makes him $100,000 or so in tax free, spendable cash. But, Fred controls a million dollars in real estate and it’s going up in value year after year. Also, Fred pays no taxes on that money he gets from the cash-out refinances. It’s part of a mortgage, so must be paid back, therefore is not income! I love that part!
Let’s look at what Fred’s doing more closely.
Let’s say Fred bought 10 houses valued at $100,000 each, owes $90,000 on each one (after the 90% cash out refinance), so he controls $1,000,000 in property. If he keeps them 5 years (assuming a low appreciation rate…which is pretty conservative):
Purchase year – 10 houses x $100,000 = $1,000,000
Year 1 – Same 10 houses X $105,000 = $1,050,000
Year 2 – Same 10 houses X $110,250 = $1,102,500
Year 3 – Same 10 houses X $115,762 = $1,157,620
Year 4 – Same 10 houses X $121,550 = $1,215,500
Year 5 – Same 10 houses X $127,627 = $1,276,270
Essentially, Fred makes an extra $50,000 per year for keeping 10 properties. After owning them 5 years, if he sells, he puts $276,000 in his pocket.
Remember
- Some parts of the country will appreciate much faster than 5%. Heck some places properties will double in value in 5 years.
- No tax benefits of keeping the property is included here. That equates to thousands of dollars in real income.
- This is ONE ten-house year. Let’s say you want to “top out” at owning 30 houses. Well, in just a couple of years your buying will slow down to a trickle and you’ll start selling and cashing out of properties. I mean, how many ten-house years to you need to string together before you are set for life?
- What if you hold these houses 10 years? The numbers get pretty exciting.
If you’re like me and you don’t want to do this for too many years, then holding properties for a few years makes a lot of sense, especially if you don’t have much personal money invested in them.
So what of poor old Bill? Chances are, Bill will satisfy his need for short term cash, then start holding property. What do you think?
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.
Appraisal: The Ups and Downs Of How Much A House Is Worth.
Determining Fair Market Value (FMV) is an eternal struggle and major balancing act. That’s because buyers want a house to appraise on the low side—to keep the purchase price down. While sellers want the same house to appraise on the high side—to make the sale price higher. And then you’ve got the owners of the house—who also want the appraisal to be on the low side, in order to keep the property taxes down.
So with all these different agendas and points of view, how is the fair market value of a real estate property actually determined?
Once a year, your county puts a dollar value on your property. Property taxes are based on those dollar values, and your property tax notices are generate. But before those notices are prepared, a long, detailed process has taken place.
First, the land is valued as if it’s vacant — an empty lot, in other words. Then any improvements are described and measured. Improvements consist of the house and any other structures, pools, sheds, garages, and so forth
Next, most counties check the Marshall Valuation Service Cost Guide. It’s a standardized nationwide guide for determining the value of the cost per square foot to build a building that fits the description of the improved property
Then, if the house isn’t brand new, the replacement cost is considered, as well as depreciation; the year the house was constructed and the condition of the property are factors here. Appraisers then must take the critical step of comparing the value of the house with recent selling prices of similar homes in the neighborhood. At this point, the appraisal might stand as is — or it might be adjusted upward or downward.
Market Value is a theory, in other words, not an unchanging fact.
In a perfect world, you have to have willing buyer and a willing seller. Neither is under duress. Both are in a position to maximize gain and are trying to do this. But in the real world, things are rarely that simple and equally balanced. Which is why people feel differently about the appraisal value of a house. It really depends how strong their position is as a buyer or seller.
Does the local economy come into it at all?
You bet it does.
Ask a successful Realtor about that! He or she will tell you they’ve noticed that a certain area’s fast-growing economy is attracting people from other areas who consider real estate here a bargain. That helps fuel increases in property values.
Now that you know where that appraisal value comes from, you’re armed with the information you need to make a better house-buying decision. For instance, you can understand how two virtually identical houses that are in two different neighborhoods could be very far apart in price and appraised value. And why your choice of the ‘right’ house in the right neighborhood could be worth a not-so-small fortune to you right now AND years down the road.
Real Estate Specialists: The Buyer’s Agent
Never before has the role of specialists in real estate been more important. With buyers and sellers requiring more services, the industry has seen an explosion of agents who specialize in either the representation of sellers or buyers. These specialist agents can provide a wealth of services and maintain a complete impartiality during the sales process as there is only one client to concern them.
Historically the sales transaction and the concerns of the buyer were the purview of a single realtor. However as the industry has progressed, so have the needs of each party and so the specialist arose. Buyers have some very particular needs, and specifically the need to feel that their best interests are seen to. Listing agents are representatives of the home’s owner and in that role they have a primary responsibility to that owner.
So what is it that a buyer’s agent does?
Primarily the buyer’s agent will begin with the location of suitable properties for their clients. This is usually based on a list of requirements and desires that the client has communicated to the agent. They will then arrange viewings and recap their findings with their clients and assist in deciding upon a good candidate for an offer. This will be based on the wealth of community information that a buyer’s agent commands
As specialists, buyer’s agents are experts on their given area. Once a property is selected, the buyer’s agent role evolves into an overseer-negotiator role. They will typically coordinate the inspections and conduct the negotiations with the listing agent. This includes the execution of and closing of the actual contract.
There is an art to representing a buyer. It is a role that has become ever more crucial in an industry where customer service is the single most important thing that an agent can offer. If you are in the market for a home then the buyer’s agent is the friend that you need in order to make sure that you are given the service that you deserve.
The Key to Real Estate Investing Success: Goal Setting
Goal setting is a primary attribute of successful entrepreneurs, while lack of proper planning is the number one reason for failure.
Proper goal setting involves setting a business plan in place for your life. To many, this doesn’t sound easy or it sounds tedious. In practice though, goal setters have more free time, more money, and more success in all areas of their lives than those who don’t set goals, and it’s no different with real estate investors.
Real Estate Investing must be treated as a business. It requires planning that anyone can do. Much like an airplane pilot who goes through a pre-flight checklist, the real estate investor must go through many steps for every real estate deal. You must find the deal, do your research on the property to establish a value, prepare your contracts, present your offer, schedule the closing, get the title work done, prepare the financing, get property insurance, etc.
Set your plan up into baby steps that you can review and knock out every single day. Your daily plan must include marketing to get motivated sellers to contact you. Regardless of the deals you have in the works, if your marketing stops, you will go through long dry spells. Even with consistent marketing you will have periods with few leads and periods where you are swamped with sellers offering you great deals.
Constant daily review of your goals is critical. This is why so many suggest taping your goals to your bathroom mirror so you see it them when you wake up and again before you go to bed. You can even buy giant poster sized post it notes to write your goals on and stick them to your wall. Reviewing your goals before going to sleep at night causes your brain to program your goals into your subconscious. So put those goals down on paper and start putting your real estate investing success plan into action!
Real Estate Investing Business: Your ‘Go-To’ Team
If you tend to be a “lone wolf,” trying to do too much yourself, listen up! In real estate investing, you need a team of people you can trust and rely on. Here are some possible team members, and what they should bring to the team.
1. A mortgage broker or banker. A broker can offer many options, but a banker can make the loan decision. They each have their advantages, and you could use both on your team. In either case it’s important they understand what you want (fast closings, lower interest, corporate loans, etc)
2. An accountant or bookkeeper. Keeping proper books for real estate investments is getting more complicated with all the tax-law changes. Find someone who understands the law, and understands what you want.
3. A real estate attorney. Find someone familiar with the laws and legal customs of your area, and who has experience with the type of deals you intend to do (If you are buying rentals, they should be familiar with doing evictions, for example.)
4. A good real estate agent. An agent with experience in the area of town you invest in and access to the MLS (Multiple Listing Service), can be a great help. If this is a seller’s agent, they can still ethically bring the best deals to you once they know you’re a serious buyer.
5. An appraiser. A good appraiser can give you an accurate valuation of a property, but they can also suggest ways in which you can most efficiently raise the value of a property. Find someone that will talk to you.
6. An inspector. Some states make it too easy to become an inspector with little experience. You may want to find one that is or used to be a contractor or an engineer, so he can find the problems AND give you some idea of the cost of repairs.
7. An insurance agent. Good ones will understand what you want, and find ways to save you money. As far as possible, insure all your properties with one agent, and you’re likely to have discounts available, as well as better service.
8. An escrow officer. They’ll usually be with a closing company. Find someone that’s efficient, and can explain things clearly to both sides. If this person is confused by a creative real estate contract, they should be easy to educate or easy to replace.
9. A cleaning person or crew. When you have a trusted person or crew ready, it means a fast turn-around when you buy a rental or rehab project.
10. Rental property manager. Be certain that the company you hire has experience, is responsive, and will have time when you call. Good property managers can tell you what you should get for rent in a given area BEFORE you buy.
Start building that team. Investing in real estate is less stressful and more profitable with a strong team.
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.
Terminology for the Real Estate Investor – Appraisals to Comps
When you’re selling your home or other real property on your own, you don’t have to know everything about the process. But does help to have a practical knowledge of the terms that come up during the process.
Keep in mind, these aren’t intended as “be all, end all, penultimate” definitions. They’re working definitions for pragmatic folks. Let’s go…
Acceptance - A legal term referring to the acceptance of a buyer’s offer by the seller. Acceptance is often preceded by a number of counter offers between the parties.
Appraisal - a professional opinion of the value of real property. Most jurisdictions have careful rules defining who may call themselves an appraiser, and most lenders have a “stable” of approved appraisers whom they use regularly. Typically, the lender making the new mortgage loan will require that the property appraise for at least as much as the purchase price. Occasionally, a buyer will require the same thing in an all cash transaction.
Bridge Loan – Short term loans used to “bridge” any time gap between the sale of a home and purchase of the next one. These loans can be valuable when escrow is delayed on the sale of a home and the seller has committed to the purchase of another home. Bridge loans are also known as “panic loans”, but can be a life saver.
Coinciding Settlements – when a buyer needs the funds from the sale of his prior home (which is under contract to be sold) in order to purchase his next home, he may well make settlement under his sale a contingency for settling on the home he is purchasing. In reality, the sales don’t usually coincide. They usually take place back to back. Funds from the first are often wire transferred to the second.
Closing - Depending upon the state you live in, Closing can have different meanings. Generally, the closing of a real estate transaction refers to the exchange of necessary documents, execution of the same and transfer of money.
Comps - This term refers to the sales prices of similar properties in the area of a house in question. Comps are used to help determine the fair market value of a property.
Conditions – any conditions which must be met before the sale can be consummated. Some typical conditions include things like the property’s appraising for the purchase price or more, the property’s being in good condition when a home inspection is done, the buyer’s loan being approved.
As you can image, there are many real estate terms for which you have a general understanding. In our next article, we continue with the terms starting with “Condominium.”
Real Estate Investor Math – Do You Know These Simple Formulas?
The Real Estate Math You Don’t Need
The gross rent multiplier is one formula you don’t need. It’s mentioned here because some people are still using it, and there are better ways to estimate value. A gross rent multiplier is a crude way to put a value on a property. You decide that properties are worth 10 times annual rent or less, for example, and simply multiply the gross annual rent that a building collects by ten in order to get your value.
There are obvious problems with this formula. It must change constantly to reflect interest rates, because a property might be profitable at 12 times rent when interest rates are low, but a money loser at eight times rent if the financing is expensive. Also, there are just plain different expenses for different properties, especially when some include utilities in the rent, for example. Gross rent doesn’t say much about the factor that makes a property valuable: the net income.
Real Estate Math You DO Need
Rental properties are bought for the income they produce, so this is what your real estate valuation should be based on. That is why your real estate math education needs to start with the how to use a capitalization rate, or “cap rate” to determine value. A cap rate is the rate of return expected by investors in a given area, or the rate of return on a property at a given price.
An example might make this clear. Take the gross income of a property and subtract all expenses, but not the loan payments. If the gross income is $76,000 per year, and the expenses are $32,000, you have net income before debt-service of $44,000. Now, to arrive at an estimate of value, you simply apply the capitalization rate to this figure.
If the normal capitalization rate is .10 (ask a real estate professional what is normal in your area), meaning investors expect a 10% return on the value of their investment, you would divide the net income of $44,000 by .10. You get $440,000 – the estimated value of the building. If the common rate is .08, meaning investors in the area expect only an 8% return, the value would be $550,000.
Simple Real Estate Math
Estimated value equals net income before debt-service divided by cap rate – this really is simple real estate math, but the tough part is getting accurate income figures. Is the seller is showing you ALL the normal expenses, and not exaggerating income? If he stopped repairing things for a year, and is showing “projected” rents, instead of actual rents collected, the income figure could be $15,000 too high. That would mean you would estimate the value at $187,000 more (.08 cap rate).
Besides verifying the figures, smart investors sometimes separate out income from vending machines and laundry machines. Suppose these sources provide $6,000 of the income. That would add $75,000 to the appraised value (.08 cap rate). Instead, you can do the appraisal without this income included, then add back the replacement cost of the machines (probably much less than $75,000).
No real estate formula is perfect, and all are only as good as the figures you plug into them. Used carefully, though, real estate appraisal using capitalization rates is the most accurate method for estimating the value of income properties. For putting a value on a single family home, you need another approach. Yes this means more real estate math to learn, but we’ll save that for another time.