For those who are new to real estate investing (REI), a logical question to ask is: how to get started? After all, there are many different opportunities available in the RE industry. However, financial resources (or the lack thereof) are certainly a major consideration when getting into this business. As the old saying goes, it takes money to make money. So, if you have little or no money at the outset to invest, how to proceed as an investor?
The good news is that there are ways to make a good living in this industry with little or no money. One method is to break in as a real estate agent. This offers at least two advantages: 1) No investment capital required. 2) you can learn while you earn about how the real estate biz works. Other low or no cost routes to explore for REI success include: start off as a property scout (bird dog). Once you get good at being a property scout you might want to matriculate up to being a wholesale property flipper; next, after saving up some money, you may want to move up the food chain and become a fix/flipper (buy/rehab/sell); then become a buy & hold real estate investor and finally a (RE) note holder/trader.
A. Property Scouts employ the following lead-generating methodologies: 1) Dialing for dollars: Review daily Craigslist and newspaper ads. Look for key “distress” wording such as: FSBO (For Sale By Owner), fixer upper, must sell, etc. Reach out to them. 2) Driving for Dollars: Drive different neighborhoods, on a consistent basis, looking for vacant or rundown houses, FSBO signs. Look for changes such as peeling paint, newspapers piling up, mail not taken in, lawn not mowed, boarded up or empty property. These are clues of a distressed property. Approach the owner, see if you can be of help.
B. Wholesaler suggested sequence of events: 1) Identify a property you think will be a good buy, i.e. 60% LTV/FMV or better. 2) Eblast specs to your cash buyer list. 3) Secure verbal commitment from a qualified cash buyer (CB). 4) Secure a LOI (Letter of Intent), signed by the seller, that is a precursor to, and lays the groundwork for, an eventual signed (purchase) contract. 5) Secure a LOI, signed by the CB that is a precursor to, and lays the groundwork for, an eventual signed contract. 6) Secure a signed purchase contract with the seller, based on the previous LOI. 7) Provide the address to the CB so they can check it out. Assuming it meets with their approval: 8) Secure a signed contract with the CB, based on the previous LOI. 9) Open two separate escrows. 10) Close both escrows. 11) Get paid.
C. Fix/Flip (Buy/Rehab/Sell). This is a major step up in the REI world as it requires that you possess the knowledge of a contractor, combined with cash in the bank as well as real estate marketing skills. It is easy to lose money with fix/flips, especially for amateurs. Here are some common mistakes to avoid: 1) Overpaying for the property; you need to buy it at a deep discount to market price (i.e. 60% LTV/FMV). 2) Underestimating rehab costs. 3) Counting on appreciation alone to earn a profit: You need to think about two separate profit centers: the equity you gain when you acquire the property AND the value you add by rehabbing it. 4) Underestimating carrying costs (for the hard money loan you may need to take out to finance the deal), as well as selling costs when you go to sell the property. 5) Victim of bad timing. Since it usually takes 6-24 months to fix/flip a property, if the market turns south (like it did in 2008), you may lose money on the deal since the equity value can drop so much or you can’t find a buyer to pay what you need to charge to earn a profit.
D. Buy and hold: hopefully provides net income (annual difference between rent receipts on the one hand and all your costs on the other hand, less taxes). However, if you overpay for the property, getting from negative to positive cash flow can be problematic. Also, after a few years. many landlords wind up suffering from “owner fatigue” associated with the “4 T’s” of rental property management: trash, tenants, taxes and termites.
E. Owner financing note investing. For example, say you have had a rental property long enough that you own it free and clear. In order to lower your tax burden (if you sold for all cash), one consideration is to sell the property via owner financing. You get a good-sized down payment with monthly payments spread over several years. You are essentially acting as the bank. You receive a first position note/deed; the buyer receives a grant deed to the property. Obviously before undertaking such a sale, it is strongly recommended that you enlist support and advice from professionals who can help you get the best deal possible for yourself: a realtor who is very familiar with non-owner-occupied investment properties; a real-estate savvy CPA; maybe a real estate attorney.
Advantages of taking back a note, via owner financing, include: 1) Limit your tax liability (by undertaking to do an installment sale vs. all cash sale. 2) Maintain needed cash flow via the monthly payments from the buyer of the property. 3) The down payment (DP) you receive may in fact be “tax free” to you as the result of the ATB (Adjusted Tax Basis). This can be accomplished by carefully adjusting the amount of DP money received to roughly equal how much money you have ever put into the property. 4) Potentially higher selling price. By making it easier for buyers to purchase a property, via owner financing, this can serve to increase the pool of available buyers, which in turn can result in more overall money in the pocket of the seller.
by Tod Snodgrass
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