The Real Estate Investor's Guide to Financing

Insider Advice for Making the Most Money on Every Deal

The Real Estate Investor's Guide to Financing

Author: David Reed
Pub Date: March 2008
Print Edition: $17.95
Print ISBN: 9780814480618
Page Count: 240
Format: Paper or Softback
e-Book ISBN: 9780814410448

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Excerpt

C H A P T E R 1

Basic Finance for the Investor

While there are certainly plenty of real estate books on the market that

specialize in real estate investment, those same books fall short when

it comes to one of the most important aspects of real estate investing:

financing.

Buying real estate as an investment can bring great rewards. Holding

real estate and watching its value rise over the long term is a nice way to

retirement for many people.

One of the advantages of real estate can also be a disadvantage, however.

It’s not a liquid asset. You can’t get your money out of it as easily as

you can get money out of an ATM. If it’s a stinker, you have to sell it, and

that takes time and it takes money.

You can’t just change your mind because of a heavy dose of buyer’s

remorse, take your receipt for your investment condo back to the store,

and get your money back after saying something like, ‘‘Well, it was the

wrong size, and my aunt gave me one for Christmas.’’

Real estate investment needs commitment. You need to decide that

it’s right for you before you get involved.

There are two different types of investors: those who buy and hold,

and those who buy and sell quickly, a process that is often called flipping.

Flippers attempt to find bargains, fix them up, then sell them for a profit.

And these two types of investors are not exclusive; you can both be a

flipper and hold for the long term.

Flipping brings a whole new element to real estate investing compared

to simply holding onto property for a long period of time, then

either selling it when you think you’ve made enough money or keeping

it and passing it down to your grateful heirs.

Flipping requires more than just buying; it requires you to know how

to make repairs on a home and evaluate how much of a return in the

form of increased value those repairs would generate. Or maybe the issue

isn’t just increased value but simply making the place livable.

Flipping requires different financing strategies from those used for

long-term investments. Any real estate investment book you read concentrates

more on either finding, fixing, and flipping real estate or finding

and keeping real estate while paying little attention to the financial

aspect—perhaps one of the most critical pieces of the real estate investment

puzzle.

Getting the wrong financial package can wipe out your profits, hold

you back from selling because of lack of equity, or perhaps require you

to sell for more than the market will bear because of the bad loan you got

when you bought the property in the first place.

If you’re a flipper, financing is critical. If you’re long term, financing

is also critical, but at least in long-term deals you can always refinance

the property down the road if you made a bad loan choice in the beginning.

We’ll discuss refinancing investment properties in detail in Chapter

4.

But then again, because you’re reading this book, you won’t be making

those mistakes, now will you?

One advantage that a long-term investor has is the ability to buy in

other markets.

Let’s say, for instance, that your local real estate market is humming

right along. You know that you can find a property, fix it up, and sell it

for a profit. Or maybe your market is really moving and you can find a

piece of property that takes absolutely no work (or very little), and

because of the real estate demand in your area, you know you can make

another 10 percent on your investment.

You know you can do this because you know your market. You know

the neighborhoods. You know the contractors who work on your properties,

or if you do most of the rehab yourself, you can drive to the job site

every day.

That’s not true if you’re buying in Texas and you live in California.

Yes, you can fly in and look at properties, but if you want to fix and flip,

you’ve got a brand-new problem. How do you find someone you trust to

be the contractor while you’re a couple of time zones away? How do you

monitor the contractor’s progress?

How do you pay the workers, and how do you make sure they’re not

sitting around drinking beer all day long while you’re frantically trying to

get your contractor to return your voicemails?

The truth is, you can’t. If you’re a flipper, then a long-distance rehab

project may not be for you. In fact, if you were planning on making

$20,000 on a nice little flip, then all the labor, plane fare, and headaches

won’t be worth it at the end.

Yes, you can be a long-distance flipper if the properties you’re buying

don’t need any work and you think you can sell them quickly and for a

profit. Yet, you’re not local. You’re not the only real estate investor, and

there will be local professional investors who can sniff out a flip a lot

more quickly than you can simply by being where the property is. By the

time you’ve found a potential investment, gotten on the plane, and rented

a car to look at your potential investment, if it was such a good deal, it’s

probably been snatched up while you were checking your bags.

I will note that sometimes faraway investors can have the upper hand

when they’re in a part of the country that is doing better economically

than the locale they want to invest in.

For instance, a town may have experienced some huge layoffs as a

result of downsizing, creating a significant economic hit. If you are living

in an area that is not depressed, you may have more disposable income

and be able to buy a house for less than market value.

But even then, as a flipper, if you invest in a depressed area, who are

you going to sell to—another flipper? If the local economy you’re buying

into is in the middle of some major economic upheaval, then home buyers

aren’t exactly going to be lining up along the street waiting to bite on

that ‘‘bargain’’ house you found. Many of the people in the town where

you found your bargain have, unfortunately, been laid off.

Being a long-distance flipper, then, is a challenge. You don’t know

the area as well as the locals do, you can’t monitor your project efficiently,

and it’s hard to find buyers in a depressed market.

On the other hand, such opportunities bode well for long-term investors.

If you see that a certain area outside where you live is going through

some difficult times, you can find a bargain house and hold onto it, waiting

to sell until the economy recovers.

I own a home in Austin, Texas, that I bought in the late 1990s. The

seller was an investor from California who had bought the house some

10 years earlier—right in the middle of the S&L debacle. Combine that

crisis with an oil and gas industry that was suffering through perhaps

one of its most trying times, and you can see why real estate in Texas

was depressed.

The investor bought in 1988 during an economic downturn in Texas

and sold 10 years later, doubling his money, after the economy recovered.

He was long term.

Not just that, but the property I bought was listed as a ‘‘fixer-upper’’

that needed some ‘‘tender loving care,’’ meaning that it had its challenges.

In fact, the California owner had never lived in the property but

had rented it to various people for the entire decade.

When I bought the house, it needed some work. The carpet was old,

the tile in the kitchen area was coming up, and the entire house needed

some significant updating—Significant with a capital S.

My wife and I had been looking in that particular part of Austin for

nearly a year, trying to find the perfect deal.We had seen so many similar

houses that we knew immediately that the property was a steal. The property

had been listed, and within 24 hours of its original listing, it had had

three offers—all from locals.

We not only offered the asking price but also bumped it up by a few

thousand dollars (because we knew we had found a bargain) and won

the bid. We bought the home, completely remodeled it, and turned it into

a very nice piece of property. We still own the home today, and the property

has appreciated nearly fourfold since we bought it. And I doubt that

we will ever sell it. Okay, we will, but not for a long, long time. I know

the area, and it’s a keeper.

Sometimes people get into real estate investments by accident. For

instance, you find a house you really, really want to move into, but your

current property isn’t selling for what you’d like to sell it for, so you keep

it and rent it out.

Or perhaps you inherited a property from a relative and decide to

keep it long term and not sell right away.

Occasionally life simply causes you to get into real estate when you

had no initial motivation to do so. You’d never thought of it, and now

you’re in it. And you find out you like it!

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