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Real Estate 101

Date: 7/1/2017

Author: Real Estate Hotline

Investment involves risk. You may lose money or encounter some type of hardship or inconvenience. There are a lot of things you can do to reduce the risks but ultimately there are no iron clad guarantees. Typically, the higher the potential return – the higher your potential risk.

Investing and Speculating are not the same strategies. Buying a property today and basing your potential to profit on the hope that it will go up in value tomorrow is called ‘speculating’. This concept is a bigger gamble because you are betting the market will remain steady or rise substantially in a short time. Investing is a slower process, with small gains in the short-term adding up to big gains over the long-term. Just like when you pay into a retirement fund or savings account, you expect to keep the money invested and you may need to add money to nurture and grow it.

What is the best investment? A potential purchase doesn’t have to generate instant profits but it should show significant potential to create a profit within a reasonable period. Either you will rent it for instant monthly income or you will resell it for a lump sum profit. Ideally, we want to purchase properties that generate monthly income and have high appreciation potential but usually properties fall in one category or the other.

Income. If your goal is to generate monthly income you will need to focus on the properties that produce the highest positive cash flow. Theoretically, you will get the highest rental return in an area where most people are renters. But that also means you may not have as many buyers when it comes time to sell. In general, expect to hold income properties ten years or longer.

Flips. If you are looking primarily for a quick lump sum profit, you usually will find below market buys in distressed properties. Keep in mind, because rent increases usually lag years behind appreciation increases – properties that will go up in value quickly may have a neutral or very low cash flow. Two buying strategies that apply:

1. Distressed Sellers: Many times there are excellent properties sold at huge discounts only because the seller is in a bind and needs out fast. Look for properties in market ready condition in historically high appreciating areas at a minimum 15% discount.

2. Distressed Properties: Target properties with substantial unrealized potential or that need major repair. Then make the necessary changes to increase the value for resale purposes. Because of the increased risk – look for properties with a minimum 30% discount.

Don’t stress about short term value drops. If your goal is to hold and rent for ten years, stop worrying about what your property is worth right now. That’s like a farmer who plants a potato crop and then digs the plants up every few days to check the progress.

Don’t get your real estate advice from the media. Most reporters are not experienced real estate professionals or investment advisors. In fact, many don’t even own their own home. Make your investing decisions based on facts, historical statistics and financial records. Don’t shy away from a location just because the media gives it negative reviews. Keep in mind that the “hottest” areas will get the most media attention – good or bad. Locations where the real estate market is “the worst” may have some of the best bargains.

When money is cheap, get as much as you can for as long as you can. When financing a real estate purchase, always go with a longer term (preferably, 30-year) loan. While a shorter term loan will give you a slightly lower interest rate, it also locks you into higher monthly payments. On the other hand, most longer term loans give you the option (as your cash flow allows) of paying the lower monthly payment or adding extra payments to pay down the loan faster and save interest.

Buy the cheapest home in the best location you can afford or get as close to the best areas as possible. If you purchase the highest priced property in the neighborhood – cheaper properties could keep your value low. By buying the cheapest property – the higher priced ones automatically pull yours up. The closer you are to the higher valued areas, the better your chances of your property being included in the path of development as the area expands.

Buy average homes where average people with average incomes want to live. Middle income properties typically weather market fluctuations best and therefore carry lower risks. In an economic downturn, higher income bracket folks move down to economize, and in an economic upturn, lower income brackets will move up with these. Another plus to consider is that lower income bracket rent prices are around the same price as the middle-income, however middle income level homes will typically appreciate faster.

Where do I find properties?
The best sources are pretty simple:

1. Be observant. As you go about your day, be on watch for homes that appear to be abandoned or in distress. Take notice of flyers posted at local stores or handmade signs.

2. Networking. Tell everyone you know that you are looking for property to buy. In today’s age of social media, this should be easy.

Be flexible. Some people focus on bank owned properties. Others want only ‘for sale by owner’ offerings. Many will only buy single family homes, another goes for auction listings. It’s great to have a specialty but it’s important to keep an open mind to anything that has the potential for profit. It is important to check out the foreclosure auction in your county, tax deed sales, and Realtor.com or Zillow listings. But the best finds will probably come from just being in the right place at the right time.

Funding. In general, you will need at least one or a combination of the following:

- Cash
- Credit
- Time and effort

If you have a large amount of cash, you don’t need as much credit or time and effort. If you have an abundant source of credit, you will not need as much cash or time and effort. If you have very little cash and no credit – you will need a great deal of time and effort.

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