Sources of Real Estate Investing Education:
Books, blogs, mentors, podcasts
*Cash Flow = Income - Expenses
*Return on Investment = (V1 - V0) / (V0) where V1 = end balance
Six Steps to Help You Overcome Fear
Get off your duff - Develop a plan and work that plan every day.
Commit - Without commitment, no course, class, or trainer will get you closer to your goal.
Start participating - Ask questions, connect with others, and build relationships.
Learn the lingo - Know what you are talking about.
Learn the concepts - Fear comes from being unclear.
Watch others - Surround yourself with those doing this.
Real Estate Niches
Raw land
Single family houses
Multi-family houses (Duplex, triplex, quad)
Small apartments (5-50 units)
Large apartments
Real estate investment trust
Large group of individuals pool funds to purchase large investments.
Commercial
Mobile homes
Tax liens
Investing in notes
Investing Strategies
Buy and Hold
Rent property & collect monthly cashflow -> Mortgage paid down = increasing equity.
Hold property until it can be sold for a future gain.
Flipping Real Estate
Buy at discounted price, improving in some way, then selling for profit.
"Buy low, sell high"
70% Rule = Purchase home for 70% of its current value (less rehab costs)
ex. $100,000 x 70% - $20,000 (Repairs) = $50,000 purchase price.
Wholesaling Real Estate
Find great real estate deal, write a contract to acquire deal, & sell the contract to another buyer.
Sell the contract for an 'Assignment Fee' between $500 - $5,000
The Real Estate Market Cycle
The Peak
Prices at all-time high, inventory is down, multiple offers are common, even above asking price.
Tipping Point
Prices begin to fall, compensating for over-building & high prices. Foreclosures begin rising, as homeowners can't sell due to owing more than home is worth.
Decline
Prices continue to fall; foreclosures flood the market. People are fearful of buying, causing even more inventory & driving prices down.
The Bottom
Prices bottom out, causing investors to start purchasing much of the excess inventory. Deals are plentiful and cashflow is at an all-time high.
The Climb
Confidence among home buyers improves, leading to more sales, decreasing inventory, and higher prices.
The Peak...
Real Estate Business Plan
Mission Statement: Clearly define your purpose and include the benefits of your business.
Goals: What do you want real estate to help you achieve? Define short- & long-term goals.
Strategy: Choose one strategy & become a master at it.
Timeline: What is your desired timeline to reach your goals?
Market: What kind of properties will you look for? Low-income, high-income, commercial, etc.
Criteria: Define your loan to value, cash-flow requirements, max purchase price, max rehab budget, and max timeline.
Flexibility: Flexibility within your criteria is one of the most important concepts to understand and clearly define.
Marketing Plan: How are you going to create a marketing system that brings in motivated sellers? How will you find the best deals that are listed?
Financing Deals: Are you using conventional loans, hard money, private money, equity partners, seller financing, lease options, or some other creative method?
How you do your deals: How are you going to turn a property purchase into a profit? Clearly define the steps.
Teams & Systems: Clearly define your team and the systems you will use to delegate and automate tasks.
Exit Strategies & Backup Plans: How are you going to get out of the deal?
Illustrate Example Deals: Illustrate purchases, cash-flow, appreciation, sales, trades, 1031 exchanges, cash-on-cash return, and more, in order to define what your path forward may look like.
Financials: Document your personal financial situation and update it whenever it changes.
Assembling Your Team
Mentor: By training under the watchful eye of someone smarter or more experienced, you get smarter.
Mortgage Broker / Loan Officer: The person responsible for getting you loans.
Real Estate Attorney: Someone who can go through contracts and knows the legalities of your moves.
Escrow Officer or Title Rep: The person responsible for closing the deal.
Accountant: As you acquire properties, doing your own taxes and bookkeeping will become increasingly difficult.
Preferably a CPA with real estate knowledge / experience.
Insurance Agent: Be sure to shop around for both the best rates and the best services.
Contractor: Find someone who gets things done on time and under budget. Be sure that your contractor is licensed, bonded, and insured in order to protect yourself.
Realtor: Working with an agent who is punctual, eager, and a go-getter is essential.
Property Manager: If you don't want to actively manage your properties, a good property manager is important.
Handyman: You need someone to take care of the little things that come up on a daily basis.
Should I use a partner or go it alone?
PROS
Team brainstorming
Pooling resources
Assistance with analysis
Complimentary qualities
Task division
Expanded networking
Accountability
Confidence & motivation
Split risk
CONS
Four tips for a successful real estate partnership:
Don't be a jerk
Learn to compromise
Talk daily
Plan ahead
Creating Your Selection Criteria:
Town
Neighborhood
Property size (sq. ft)
Lot size
Property condition
Number of units
Cap rate
Cash flow
Appreciation potential
2% Rule:
Monthly rent should be approximately 2% of the purchase price.
$100,000 home should rent for $2,000 per month
50% Rule:
50% of your income will be spent on expenses - not including the mortgage payment.
Expenses = repairs, vacancies, utilities, taxes, insurance, management, and turnover costs.
70% Rule:
You should only pay 70% of what the after-repair value is, less the repair costs.
$200,000 ARV with $35,000 in repairs. ($200,000 x .7) - $35,000 = $105,000 purchase
Where to find investments?
Multiple listing service
Newspaper
Word of mouth
Craigslist
Outbound marketing
LoopNet
The Process of Buying Property
Step 1: Decide on your investment strategy / niche.
Step 2: Define your selection criteria.
Step 3: Decide on a financing method. Make a clear plan of how you will purchase the property.
Step 4: Begin searching for properties for sale. Connect with a real estate agent.
Step 5: Run each property through your criteria filters and rules to screen out the duds.
Step 6: Make an offer on the property or properties you want to pursue.
Step 7: Negotiate the deal with the seller and come to agreement on price and terms.
Step 8: Perform your due diligence, which includes inspections of the property. Property details are handed over to a title or escrow company or local attorney. Submit paperwork for your financing, begin lining up contractors, check validity of property's disclosed financials, and prepare for closing.
Step 9: You sign papers at the title or escrow company's office.
Financing
All Cash: Easiest form of financing, as there are typically no complications. The return from a cash deal will not be the same as when leveraged.
$100,000 in one house vs $20,000 in 5 houses.
Conventional Mortgage: Require 20% down payment. Lowest interest rates.
Portfolio Lenders: Some bank and credit unions have the ability to lend entirely from their own funds. They can provide more flexible loan terms & qualifying standards.
FHA Loans: Downpayment as low as 3.5%, but you must live in the property. Can use FHA to buy duplex, triplex, and quads. Need to pay Private Mortgage Insurance.
203K Loans: A subset of the FHA loan; allows you to build the cost of rehab work into the loan itself, while still having a 3.5% down payment.
Owner Financing: If the property owner has the home free and clear, they can actually fund the purchase, and you would make payments to the seller rather than a bank.
Hard Money: Financing that is available from private businesses or individuals for the purpose of investing in real estate.
Characteristics:
Loan is primarily based on the value of the property
Shorter term lengths (6-36 months)
Higher than normal interest (8-15%)
High loan points (fees to get the loan)
Many lenders don't require income verification or credit references
Doesn't show on personal credit report
Can fund a deal in just days
Private Money: Similar to hard money but there is a relationship between the lender and the borrower. Private lenders will lend you cash to buy a property in exchange for a specific interest rate. Their investment will be secured by a promissory note or mortgage on the property. * If you are trying to build relationships for private capital, you must develop credibility and maximize your visibility.
Home Equity Loans and Lines of Credit: Banks or other lending institutions will allow you to tap into the equity you already have in your primary home to help finance the purchase of investment properties. Banks will lend up to a certain percentage of your home's value in total.
ex. Your house is worth $100,000 and you owe $50,000 on your mortgage. You can borrow a total of $40,000 to ensure the total loans don't exceed $90,000 -> 90% of Property Value
Partnerships: An equity partner is someone you bring into a transaction in order to help finance the property.
Commercial Loans: Since multifamily properties with more than 4 units are seen as commercial property in terms of lending, you may need to look at commercial loans for larger residential properties.
EIULS, Life Insurance, Roth IRAs, & Other Sources: There are a multitude of other investment and savings products available for investing in real estate.
Marketing
Online Networking
BiggerPockets
Your website
Social media
Blogging
Marketing Funnel
Designed to grab the attention of people who have no prior knowledge of your company and encourage them to engage in a business relationship with you.
Direct Mail Marketing
Sending information to targeted individuals through the mail, in hopes that a small percentage will respond.
How does direct mail work?
Direct mail campaigns are designed to build awareness of your product or service over time.
How do I build a list to send to?
You can build your list by using public records provided by your local county assessor, or you can hire a company like ListSource.
Update you list every 6 months or so to keep it updated.
What do I send?
Postcards or Yellow Letters
Yellow letters have higher response rate due to the personal nature of the letter.
Who should I send direct mail to?
Absentee Owners - For those looking to get a great deal, absentee owners are great targets - particularly those who live out of town.
Abandoned Property - Contacting owners of properties that appear dilapidated or abandoned may lead to fantastic opportunities.
Probates - Probates are properties that are in the process of being distributed, along with the assets of a deceased person, to their heirs.
Pre-Foreclosures and Foreclosures - People struggling with losing their home are often highly motivated to sell.
Apartment Owners - If you are looking to get into apartment buying, mailing to apartment owners can be a great way to stay on their radar.
Expired Listings - Your real estate agent will have access to all the properties on the MLS that did not sell when listed with an agent.
Online Advertising
Facebook / Google Ads
Facebook allows you to target who sees your ad based on interests, location, demographics and Facebook connections.
Google allows you to target who sees your ad based on searches, web history, and location.
Pay Per Click Advertising!
Tips for Creating Online Ads:
Where will your ad send people? Make sure the destination is part of your marketing funnel.
Create a title that pops
Intrigue them with your ad's content
Use an eye catching photo
Determine your price
Split test
Exit Strategies
Traditional Selling with a Real Estate Agent
Sign listing agreement with the agent, giving them the right to earn the commission if they sell.
Discuss important features of the property & list on the MLS.
Negotiations about price and terms begin once an offer is received.
Paperwork for sale will be done by local title company, escrow company, or an attorney.
For Sale by Owner
Negotiation, setting up title and escrow, and managing the closing in seller's hands.
Commission still paid to buyer's agent, usually around 3% out of pocket.
Selling Using Seller Financing - "Carrying the Contract"
The seller is the bank, so the buyer provides a down payment directly to the seller and makes monthly payments to the seller.
Why Use Seller Financing?
Typically for buyers who don't qualify for a normal mortgage because they may not be able to document all of their income, they may be self-employed, or may have some blemishes on their credit report.
Many investors use seller financing to receive monthly income that doesn't require maintenance, tenants, or rentals.
How to Use Seller Financing?
Seller should require a large non-refundable down payment to protect their interest and to prevent the likelihood that the buyer will stop making payments.
Lease Options
The tenant moves into the home and makes monthly rent payments (lease)
The option is a legal agreement that allows the tenant to buy the home at a predetermined price in a predetermined length of time.
In exchange for the tenant's sole "option" to buy the property, the tenant will pay an upfront non-refundable option fee that will typically be applied toward the purchase.
Advantages of Lease-Options:
A great short-term exit strategy for a slow market
Lease option tenants usually take better care of your property
No real estate commission required
Disadvantage of Lease-Options:
The dreaded due-on-sale danger
You can't sell the property to anyone else
You could be sued
1031 Exchanges
Use the money you would have paid towards capital gains tax and put it towards your next property.