Archive for the 'Real Estate Investing' Category
Real estate investing makes people think of money. You will see a lot of good reasons for this. Real estate is something that is only available in limited quantities. After all, manufacturing more land is impossible. As a result, real estate is nearly universally thought to be a sound investment.
However, it must be acknowledged that conventional views on real estate are changing. This certainly has something to do with the economy. It is not uncommon to find people who are afraid of real estate investing. They think there is no money there anymore. They may also believe that they cannot succeed without investing large sums of their personal money. Both of these beliefs are dead wrong.
Don’t get me wrong. Cash flow is good (assuming it’s positive), but absolutely NO one has ever become rich from cash flow alone. Think about that for a minute.
Let’s look at a quick example. Let’s say you have a $100,000 property that generates $200 per month in positive cash flow. That’s $200 per month after all your expenses and debt service. That would give you $2,400 per year or $12,000 over five years in cash flow.
Assuming you follow our advice of maintaining a reserve account for each of your properties to cover future maintenance and repairs, you will have made $12,000 in net profit over those five years. This assumes that nothing unforeseen happens along the way such as a hot water tank or leaky roof requiring replacement, or a long-term vacancy.
If you’re going to put your investment capital, credit, and possibly your income at “risk” for $12,000, then you’ll need more than just cash flow to make it worthwhile. You need to be investing in markets that offer good appreciation potential. That is how you become rich!
The other day, I heard an insane story on NPR (Public Radio), about an investigation that was done by the Sarasota Herald-Tribune, where they looked at 19 Million Real Estate Transactions in Florida and found that, “…more than 50,000 Florida properties flipped under suspicious circumstances from 2000 through 2008″, and they commented that, “Those flips artificially drove up housing prices and tax bills and contributed to the crush of foreclosures”.
NPR took a closer look at this investigation and purchased a piece of the bonds that are backed by these “toxic assets”, and with the help of the Herald-Tribune (and reporter Michael Braga), they were able to see some of the people behind their toxic purchase (as part of those 50,000+ suspicious deals). This massive amount of suspicious deals included one attorney who defaulted on 5 loans totaling 3.6 Million dollars! Additionally, some of the other loans were tied into a group of investors who lied to banks to get loans. Overall, it was a frightening glimpse of what was going on under our noses.
Can this happen again?
By the time you read this, the new 2,300 page financial reform bill is likely to be making the headlines. The Senate has already approved the new bill and President Obama is expected to sign it into law this week – despite the fact that many of the provisions related to specific regulations have yet to even be written. If that sounds faintly disturbing, don’t worry, your concern is noted and shared by many experts throughout the nation. However, there are sweeping changes that are already apparent despite the lack of specific details.
Although broad in scope, home buyers and sellers are likely to be among the first impacted by the new provisions. They represent one of the most comprehensive – top to bottom changes to the finance, valuation, types of mortgage products offered and how lenders are compensated to take place in decades. In fact, there are even new rules for real estate investors that provide capital for the purchase of mortgages.
Though the current economic climate has left many people without homes and jobs, smart and determined real estate investors are finding great real estate deals in the Cleveland housing market. Our new Cleveland investment property is an excellent opportunity for those that want a great deal of cash-flow and long-term appreciation potential.
All properties are extensively rehabbed with up to $25,000 in work per property. All properties are tenant occupied and managed by professional management Properties range from 3 to 5 bedrooms, 1-3 baths, and up to 2 car garages.
Cleveland’s cost of living is 15.5% lower than the U.S. average. It has also been undergoing major revitalization in all sectors. The Economist has repeatedly voted Cleveland as one of the most livable cities, not only in the U.S., but in the world.
If you’re serious about beating the hard economy and making a great investment in cash-flow real estate then you should evaluate our latest offering of Cleveland investment property.
The land trust is a very powerful tool for the savvy real estate investor. A land trust is a revocable, living trust used specifically for holding title to real estate. Each property is titled in a separate trust, affording maximum privacy and protection.
Here are seven reasons to use land trusts:
1. Privacy. In today’s information age, anyone with an internet connection can look up your ownership of real estate. Privacy is extremely important to most people who don’t want others knowing what they own. For example, if you own several properties within a city that has strict code enforcement, you could end up being hauled into court for too many violations, even minor ones. Having your real estate investments titled in land trusts makes it difficult for city code enforcement to find who the owner is, since the trust agreement is not public record for everyone to see.
2. Protection from Liens. Real estate titled in a trust name is not subject to liens against the beneficiary of the trust. For example, if you are dealing with a seller in foreclosure, a judgment holder or the IRS can file a claim against the property in the name of the seller. If the property is titled into a trust, the personal judgments or liens of the seller will not attach to the property. This effectively separates the owner or seller from the property.
You might have missed this little item in the nightly news report; government home mortgage giants Freddie Mac and Fannie Mae are delisting from the New York Stock Exchange. Despite $145 billion in taxpayer funds spent to shore up the pair, shares have dropped so significantly they no longer qualify for inclusion on the exchange but will continue to be traded via the infamous bulletin board instead.
In order to participate in the traditional exchange, shares must trade above $1…Fannie has been below that level for well over a month making delisting a legal necessity. Freddie has continued to struggle at just over the $1 level but will also be delisted given the eventual prospects. Given the difficulty of becoming profitable…much less an actual attempt to repay the government aid, it’s unlikely any serious effort to revive the failing entities will be forthcoming.
Novice short sale and other real estate investors are often confused by the entire process; it’s not your fault! Foreclosure has never been simple but with the current backlog and other pressures, it’s become worse than ever.
Here to help is an easy to read foreclosure process timeline. It will help novice investors understand the different methods used to purchase short sale, pre-foreclosures and foreclosed properties.
- First month missed payment. This counts as day one for the bank but notice, the homeowner had 30 days just like normal to come up with a payment. They will always remain 30 days ahead of the bank schedule.
- Second missed mortgage payment…day 30 for the bank.
- Third missed mortgage payment…day 60 for the bank. The loan is now seriously delinquent.
- Read more »
Buying bank notes for non-performing loans is one of the easiest ways to make money in real estate today. Sure, it’s not absolutely fool-proof (nothing is) but it comes pretty close. So, why does it seem there are so many people making a mess of buying bank notes?
Like most things in life there are always a few people that give something a bad name but that doesn’t mean it should stop you from adding bank notes to your personal investment portfolio.
Find out for yourself what the most common bank note blunders are (and how to avoid them) with this quick checklist:
- Failure to verify the outstanding balance due and the actual repayment terms of the note. Yes, it sounds obvious enough but you might be surprised at the number of people that don’t really understand what they are buying. Take time to inform yourself about the original conditions of the note and terms before finalizing the transaction. A little information and education can go a long way.
I know of some people who have become totally caught up in the euphoria of newfound knowledge and just couldn’t stop buying audio programs and attending very expensive seminars and bootcamps. This seminar junkie must have spent at least $50,000 within a 12 month period and still hadn’t bought their first investment property. They were just bouncing around from one great idea to the next.
I don’t know whether, in their case, it was because they were just caught up in the excitement of that environment, whether it was their way of convincing themselves they were active when they may have been too scared to get started, or they were honestly trying to find the best strategy for them. I’m guessing it was a mix of these things.
I also know of an investor who took quite the opposite approach. He stumbled across a pretty good investing strategy and didn’t check out any other alternatives but went ahead and spent over $10,000 getting a good education in that one area. He went on to build a decent portfolio over a few years but then realized there were some even better strategies out there.
This second story isn’t so bad because he built some success and he could afford the further education he now sought. However, he told me once that it was a little disheartening because if he wanted to pursue a different strategy he had to start the learning process all over again and it felt very much like he had his “ladder to success” leaning against the wrong wall. And even though he could now afford the education more easily it was still another $5,000 – $10,000 that he could have avoided spending. If only he’d done his homework first.
Looking for big profits in short sales? An internet search for the phrase “investing in short sales” brings up tens of thousands of hits, many of which offer strategies and tricks to make a killing on the rising number of short sales in the U.S. These properties are sometimes viewed as easy money because the seller is in distress. But this is not necessarily the case.
The concept behind a short sale is this: a homeowner is unable to continue making mortgage payments; however, the outstanding mortgage on the property is higher than the market value of the house (i.e. “upside-down”). The homeowner makes a deal with the lender to sell the property at market value, and the lender eats the loss.
But are short sales really the money-making scheme that many believe them to be?
Not that it’s impossible to get good deals – many investors manage to buy short sales at a discount – but investors should be aware that negotiating a short sale is no walk in the park.
“Our biggest challenge [with short sales] is getting the banks to recognize that the property is not worth what they think it is. When we submit offers, and we think it’s a fair offer, and we fight with the banks on behalf of…the buyer, it’s very difficult to get them to meet us halfway at times,” says Mia Lutz, president of Say No To The Bank, a community counseling organization that works with foreclosure buyers and sellers.
Time frame can also be a major impediment for real estate investors looking to purchase short sale properties. Short sales can take anywhere from 30 days to six months from contract to closing, and the deal can fall apart at any time.
The two large questions on the minds of real estate investors are: when will the economy recover? and when is a good time to reinvest in the housing market? We think the economy has reached the point where aggressive investors can find good opportunities in selected housing markets. Although the national economy will just be creeping along for another couple of years and home prices will be weak, some local markets have enough long-term potential to warrant taking investment chances.
The latest bad news for the housing market is that the fall in home prices in the last four quarters was worse than expected, showing weak demand for housing and competition for real estate rentals from vacant properties. Overall, home prices fell almost 7 percent, whereas the fall for the four quarters of 2009 was 5 percent. Although the biggest drops were in Florida, California and other markets out West, the effect was felt across the country. The good news is that rental vacancy rates seem to have stabilized most everywhere, and are falling in large markets like Atlanta, Chicago and Miami. On balance, we seem to be looking at a housing situation where the downside in some local markets has become quite small.
Even though the economy grew at a 3 percent rate in the first quarter, the job situation has not improved very much, indicating a much longer recovery period. Over a million jobs were lost in the last 12 months, many in construction and manufacturing. We expect job gains during the next year, but in lower-paying areas such as retail trade and health care. And the number of temporary workers will continue to grow.
Using self-directed IRA funds to purchase income-generating real estate is a profitable strategy an ever-growing number of investors are employing. These accounts (a.k.a. real estate IRAs) can buy rental property as an investment, just as they would buy stock market securities. This means real estate IRA holders can use their retirement funds to purchase real estate without incurring early distribution taxes or penalties and they can realize the rental payments as tax-deferred income within their IRA.
The challenge, however, is this: How do you purchase real estate that costs more than the money you’ve accumulated in your retirement account? Because the Internal Revenue Code prohibits account holders from extending credit (a personal guarantee) to their own accounts, personal loans can’t be mixed with IRA funds. So unless you have an IRA flush with funds, it would seem that your purchase options are slim to none.
Leveraging borrowed funds
There is a way out of this dilemma. Real estate IRA accounts can make use of borrowed money as long as the credit history, income and/or assets of the account holder are not used to acquire or guarantee repayment of the loan.
There is only one leverage option that meets these criteria: non-recourse loans.
For those of you wondering, a Series LLC is a regular LLC with a twist – it can have an unlimited number of subsidiaries (called Cells), and each subsidiary is treated as a separate structure where liability is concerned – if you set the structure up and run it properly. So far eight states have Series LLC legislation on the books (Delaware, Illinois, Iowa, Oklahoma, Nevada, Tennessee, Texas and Utah). But even if you don’t live or own property in one of those states, you can still use a Series LLC by qualifying it to do business in the state(s) where you want to operate.
I think this is perhaps the ideal structure for real estate investors (and anyone else) who wants to keep their assets safe without spending all the profit on legal structures.
Here are my 3 favorite reasons to use a Series LLC with real estate:
If you or someone you know dumped some "bad" real estate, then there might be a ticking tax bomb coming your way. It’s a Form 1099-C and it means you have a "cancellation of debt", and cancellation of debt is taxable.
So if the lender forecloses and takes your property from you, or you do a short sale, chances are the current value is less than your loan. That means the lender has to forgive part of the debt or may pursue you for the difference.
If they forgive the debt, you have a cancellation of debt. And if you have a cancellation of debt, you have a taxable event. The amount of debt that is cancelled is taxable income to you. You report it on your Form 1040 just like any other type of ordinary income. In other words, you never got a check, but you have to pay tax on it.
So, let’s go with the foreclosure or short sale scenario and assume that your lender has forgiven the debt. Just as a note though, don’t assume that the lender is forgiving all the debt. In most states, they can pursue you if you’ve refinanced the first loan or for a second mortgage. And depending on your particular state laws, they could wait years to come after you for the amount. Yikes!
