Six Steps to Real Estate Success by Marinda Hemmert
Step One: What's Right for You The first step in Real Estate investing is determining your investment strategy, and thereby, which type of property will suit you best. There are many options in real estate property. Before you even consider properties, you must first take a personal inventory of your success skills to be sure that Real Estate Investing is right for you. You may refer to Robert Allen‟s Nothing Down for the 2000s, chapter 5, starting on page 34, for an extensive discussion on Personal Inventory. It details some of the “key traits associated with success in real estate investing: courage, imagination, critical thinking, people skills, communication, negotiating ability, generosity and a sense of humor” (pg. 37). Be sure that you have these traits and are ready to take the next step toward Real Estate Investing. If you feel ready, the next step is to take stock of where you are financially. Sit down and prepare a realistic financial statement. An example is available on page 38 of Nothing Down for the 2000s. Once you have that completed, you can make a game plan for your investment activities and start assessing property types. To determine which property type is best for you, you can refer to Nothing Down for the 2000s, outlined briefly here: “While financial opportunities exist for every type of real estate, the best choices are different for the beginning, intermediate and advanced investors. Therefore, in considering a real estate investment, you need to understand the pluses and minuses of the following four major categories of land. (pg. 17) Undeveloped Land—located far away from metropolitan centers, this type of property has no immediate potential for development. Recreational Land—such as forests or mountains. This type of land has legal restrictions that prevent it from being developed or being used for anything other than recreation or conservation purposes. Unless you are a seasoned investor, stay away from recreational property. Agricultural Land—unless you‟re planning to become a farmer, this type of land is usually less than an ideal investment. Many farms have restrictions that require the land to be used to agricultural purposes rather than for commercial development. Urban/suburban Land—virtually all real estate investors focus on some type of urban or suburban property. This land is valuable because it is located in a town or city with a significant number of people. Those people need homes, stores, offices, warehouses and apartments. This is the kind of property you should consider for your Nothing Down investment strategy. With this kind of land the factors of supply and demand will almost always be working in your favor. For the beginning investor, the safest investment is a property that produces some type of income, especially if you‟re making an investment with little or nothing down. Income-producing properties come in all shapes and sizes, including rental homes,
apartment buildings, vacation condominiums, office buildings, shopping centers, hotels, motels, rest homes, warehouses, and industrial park (pg. 18). Of these types of properties, rental homes and apartment buildings typically offer the least risk and require the least amount of expertise. There are three important advantages to income-producing residential properties that make them highly desirable to an investor like you. First, there is usually a fairly sizable pool of homes and apartments in most urban and suburban settings. That gives you more properties to consider as possible purchases. Second, the volume of sales of residential properties is much higher than for commercial properties. That makes it easier to determine the market value of the property. Third, it‟s easier to obtain a mortgage loan or get other financing when purchasing a residential property. Lenders see the risk as being lower” (pg. 19). Within the residential investment arena, you may be able to make a great deal of money through fixing up older or poorly maintained homes or apartments and selling them for a profit. This requires an investor with dedication and some know-how. You should also consider whether or not this is a long-term investment or a quick turn-around, whether you want to rent it out, whether a positive cash-flow is important or if a break-even will do. Once you decide what kind of property interests you, then you are ready for the next step, the search for the right property to suit your needs. Next week‟s article will go into depth on that topic. Make sure you are taking advantage of the EMI Real Estate courses that offer unparalleled teachings on these topics. Please be sure to attend those and the accompanying Real Estate Help Session taught by Karen Nelson Bell and Duncan Guertin. Also attend various other Real Estate classes with instructors Mark Hornberger, Fred Tingley, and Joe Varnadore. Get the details at www.EMITraining.com. Step Two: Find It! Once you determine which type of property will best suit your needs, then you may set out on the quest to find just the right one. To start, make a list of which criteria are most important to you and those “must haves” required to fulfill your needs. For example, if you plan to rent single rooms to college students, then proximity to your local college and the number of rooms will be most important—secondary to size of bedrooms or other features. Or, if you plan to rent to a single family, finding a house in a safe neighborhood might top the list. If you plan to fix it up and sell quickly however, then finding the absolute lowest price property, with problems you know how to fix, will be most important. Robert G. Allen‟s Nothing Down for the 2000s goes into great detail about each step in the Real Estate process: “If you‟re looking to buy a property on your own price and terms, search the Internet, the classified ads, and the for-sale-by-owner listings for the „don‟t-wanter.‟ This is the seller who will do almost anything to get rid of his property. He might take a personal note from you secured only by your signature. He might take your SUV or pickup truck in exhange. He probably will give you a
price that‟s well below the market average because he needs to sell now. He wants out! Even in extremely tight sellers‟ markets there are still plenty of don‟t-wanters. Perhaps 5 percent of all sellers are willing to be flexible enough to be called don‟twanters. A word of caution: Sometimes a don‟t-wanter is a don‟t wanter for a very legitimate reason. Sometimes the problems that go with a property aren‟t easily solved. If you are not careful in analyzing what has made the seller a don‟t-wanter, you could buy the property and end up being a don‟t-wanter for the very same reasons” (Nothing Down, pgs. 61-62). Once you find a property you like, it‟s time to assess it with a complete Property Inspection and thorough Market Analysis. “The condition of the property is extremely important to making sound investment decisions. As you inspect a property, you should focus on potential structural problems—the most difficult and costly items to repair. You can hire an inspection company to come in and check each of these areas for you and give you an estimate of cost to repair any deficiencies. I highly recommend such an inspection. It‟s cheap insurance. You should be less concerned with cosmetic problems. These things include landscaping, painting, draperies, small appliances, carpets, and minor repairs. The cost of these items is small in comparison to the increase in value resulting from a minor fix-up” (Nothing Down, pgs. 96-97). You can also complete a thorough inspection on your own, using forms provided as part of your Protégé tuition. These are available on www.emitraining.com under “Protégé Resources,” “Forms.” “As a savvy investor, your second major step is to conduct a market analysis” (Nothing Down, pg. 57). Page 98 of Nothing Down for the 2000s, by Robert G. Allen, has a sample form you can use or you can print it off www.emitraining.com. “When you are seeking to buy income-producing homes, condominiums, duplexes, or apartment buildings, you must know the „going price‟ in your ideal location. The best source for up-to-date market information is a local real estate agent. Pay close attention to the real estate section in your local newspaper. If you want to know the market values of homes in a specific neighborhood stop and ask a property owner. Determining if a property will actually produce income for you is a two-step process. First, you need to have a clear picture of exactly what you can expect to pay each year on your purchase. Next, check the annual property taxes assessed on the building. This is a public record and should be available online or at the courthouse. Once you calculate your total expenses for the year, just divide by twelve to determine how much your property will cost each month” (Nothing Down, pgs. 5759). Then, divide the monthly expenses by the number of units available to rent to determine the price per unit you will need to collect each month. When you have found the right property, it‟s time to negotiate the price of the property. For details on this process, please reads Nothing Down for the 2000s, chapters 13 and 14, by Robert G. Allen, which include his Negotiation Checklist with eleven critical points to consider. Once the property is negotiated to the right price for both parties, it‟s time to make an offer. You can draft an offer using the EMI Purchase Agreement Form on www.emitraining.com. Please consult a Real Estate Attorney to be sure this contract is applicable in your respective state.
The process will likely include counter-offers, so be prepared for those steps. Once you have an accepted offer, then you are ready to move on to the next step in the Real Estate Process, “Funding It,” where you will acquire the funds to actually buy the property. During the steps in this process, be sure to utilize your Protégé tools and especially the forms on www.emitraining.com, such as the Property Profile, Inspection Checklist, Comparative Analysis and Purchase Agreement forms. If you are ready to start the process, be sure to sign up on the Millionaire Hall of Fame (www.millionairehalloffame.com) and begin the 101 Day Real Estate Challenge so you can track your progress and learn from other students‟ Real Estate Transactions. Step Three: Fund It! Find the Right Financing for You The first step to Real Estate Success is determining the best investment strategy for you, including what kind of property will suit it. Then comes the quest for the perfect property to fit those constraints. Once you‟ve found it, made an offer, and had it accepted, you have to get into the nuts and bolts of financing it to complete the deal. There are many options available to consider and this article will provide an overview of each to ponder. For those new to investing and perhaps lacking in credit or down payment, there are many options available. “That ever-elusive creature called a mortgage, however, can be yours even if your income is low and your credit rating isn‟t quite up to snuff. There are plenty of federal, state, and local programs designed to help the first-time homebuyer” (Nothing Down 126). “You should also be aware of special loan programs available to first-time homebuyers and would-be buyers with limited income. Fannie Mae, a private company that buys mortgages on the „secondary market‟ from other lenders, offers a wide array of programs in partnership with local lenders” (Nothing Down 129). “Another good source for loans in the Federal Housing Authority (FHA), a division of the U.S. Department of Housing and Urban Development (HUD) that guarantees loans for people who don‟t have large down payments. Under FHA loans, which can be obtained through most banks and mortgage companies, you could obtain a loan with virtually no down payment” (Nothing Down 129). The U.S. Veterans Administration (VA) also sponsors a program for veterans; if you‟ve served in the armed forces, you can buy a home with no down payment. You will have to be prepared to pay closing costs, however (Nothing Down 129). Many state and local governments have become involved in helping renters become homeowners. One common approach is to offer tax-free bonds to generate funds for low-interest-rate loans to low- and middle-income residents”(Nothing Down 129). For those who are able and interested in pursuing hard-money lenders for your loan needs, here is an overview of those available options. “In general, hard-money lenders offer you hard terms: a loan with a relatively high interest rate, a short payback period, and higher monthly payments than you might expect.
Commercial Banks: Most commercial banks generate significant profits by making loans to small, mid-size, and large businesses, including commercial real estate builders and developers. Most banks operate real estate lending subsidiaries that are a major source of mortgage funds. If you‟re a real estate investor with a solid proposal, they will want to talk to you. Mortgage Companies: Mortgage companies focus entirely on the real estate finance industry, making both residential and commercial loans. If you‟re interested in real estate deals, you should get to know a mortgage company in your area. Mortgage Brokers: Brokers make their living by connecting potential borrowers with lending institutions, private investors and other sources of funds for real estate transactions and should be able to contact several different lending institutions to find you the best rate and terms on a mortgage. Finance Companies: Finance Companies specialize in loans for cars, boats, trailers, and other consumer items. They usually charge high rates for their loans and require a monthly repayment plan. In general, they should be avoided. If you do use a finance company, ask for the terms that will give you the most flexibility. Credit Unions: If you belong to a credit union, you have a very good chance of obtaining a loan at highly competitive rates. That‟s because credit unions are owned by their members, unlike a bank, whose shareholders are focused on making a profit. Online Lenders: The rise of the Internet has spawned a host of online lending companies, as well as scam artists seeking only to separate you from your hardearned dollars. A legitimate lender may be able to offer you a better rate or terms than your local bank or mortgage company, because they don‟t have the „bricks and mortar‟ investment in local offices or staffers. If you opt for the online company, be sure to check references to make sure it‟s a legitimate operation and that any transfer of funds is done in a highly secure way. And never, never, never send a „loan application fee‟ or your credit card or social security number to someone who contacts you via email” (Nothing Down pages 131-134). When considering your funding options, be sure to consider the „pros and cons‟ of each and also consult with more experienced investors, whose opinions you trust. This article is a short review of the options available to new home buyers. For detailed information, please refer to Chapters 15 and 16 of Nothing Down for the 2000s by Robert G. Allen. Step Four: Home Sweet Home--Property Management, Now That It's Yours The first article in this series, What‟s Right for You?, discussed in detail how to decide which types of properties would be suit your needs. Robert Allen recommends that any long-term property be an income-producing property to reduce personal risk and create multiple streams of income (see his best-seller Multiple Streams of Income for more details). So, in this article, we‟ll discuss some of the caveats of maintaining and managing your new property.
Some busy investors opt to hire a professional property management company and pay them a monthly service fee. However, if you live nearby and have the time available, you can retain more of the profits by managing the property yourself. Many property owners also prefer this because they are able to retain first-hand knowledge of all aspects of their investment property and make critical decisions quickly. Also, this gives you the opportunity to research and use repair service technicians and shops that you trust and with whom you can maintain a good working relationship. Before any maintenance problems arise, take the time to research local repairmen and their services so that if a problem does arise, you are already prepared with the name of a good, fair repairman you trust. Have a list of these service providers, including their phone numbers and their hours of operation, handy: Carpet cleaners, Electrician, Plumber, Appliance repairman, Painter, Carpet company and Landscaper. Be sure to have two companies for each category so that you can get a quick response time if you need it. You may choose to hire a Landscaper for weekly yard maintenance, especially initially, while you have other aspects of the property to concentrate on. For the long-term, focus on making the yard as low-maintenance as possible. Ideally, in time, you will be able to easily maintain it with just a few minutes‟ work per week. Now: How to recruit and choose suitable tenants? There are many places to advertise for property rentals. If you are renting single rooms, placing ads on college bulletin boards is free, easy and gives you a large pool of potential viewers. Whether you are renting single rooms or whole properties, newspaper ads prove to be a great resource for soliciting the most potential tenants. It‟s more expensive than some other options, but when time is money (meaning, vacancies are lost money), it may be worth getting an ad in the local Sunday paper. Regardless of these activities, a sign in the yard or front window and strong word of mouth are always helpful. Be sure to put those into action as soon as your tenant gives you notice of their departure. Once you have a pool of potential applicants, the next step is to filter out everyone but the best tenants. One way to get a good picture of a tenant is to have them fill out a thorough rental application and review that carefully. A downloadable form is available at www.emitraining.com, under “Forms.” You may also choose to run a credit check, with their permission, to get a complete credit history. Before agreeing to rent the property to a prospective tenant, ask to meet each person who will be living there so you can get a full picture of their family. Once you decide to rent to a tenant, you should have their first months rent and their deposit paid in full. Many property managers also like to have the last months‟ rent, but that‟s up to your discretion. Important Note: Under the Civil Rights Act of 1968, it is illegal to discriminate based on Race, Color, Religion, Sex, National Origin, Family status and Physical or menial disabilities. To protect yourself and respect others‟ rights, do not discuss these topics with or about any current or potential tenants. Before they move in, do a walk-through of the house with them and take detailed notes or a video tape of the property and any damages that may already exist. If
they are notes, the in-coming tenant should sign the form, acknowledging its accuracy and thoroughness. Then, when they are ready to terminate their lease with you, you complete the same walk-through and have detailed proof of any damages they have caused during their occupancy. Basic Rules of Landlording: This is your property. You have rights as the owner. Maintaining and protecting your property as your means of living is your first priority. However, your tenants also have rights that you must respect. You are always entitled to perform an inspection of the property if you suspect a problem or just on a routine basis. But, you must give the tenants formal notice so they can prepare for your visit. They must be allowed to maintain their privacy. As the landlord, it is your obligation to maintain a habitable property. This includes maintaining heating and cooling fixtures for the home, providing and maintaining functioning plumbing, all appliances provided by you must be maintained in good working order, the premises should be free of waste and debris, trash receptacle should be provided and all stairs, walkways and other potentially dangerous areas of the property are kept up to safety codes. The landlord should respond promptly to any incidences reported. By the same token, tenants are responsible to immediately notify the property manager of any deficiencies or maintenance issues, to maintain a sanitary residence, to live in accordance with their contract, not to misuse, destroy or deface any of the provided facilities or appliances or to change the residence in any way, without express permission of the landlord. Additionally, the tenant is responsible to pay their rents on time and may be responsible for their respective utilities, or potentially pay a late fee, depending on the contract terms you negotiate. Any harm to the residence, beyond normal wear and tear, can be deducted from their security deposit. Any harm beyond that may have to be settled in a small claims court. Any breach of their contract is grounds for immediate eviction notice. Such infractions would include moving in additional people or unapproved pets, conducting illegal activities on the premises and destruction of the property. If you rent rooms individually or have multiple units, you can expect to be judge and jury of any disputes that arise. Maintaining good relationships with tenants is critical to retaining them, so hear both sides and act fairly. When a tenant is ready to leave, you should complete the same walk-through with them that you did before their move-in, documenting any damages, and have them sign or acknowledge on film their presence. Most tenants will have a good idea of what part of their security deposit they are fairly entitled to, but in cases of dispute, this documentation will be critical. Many tenants will want a check cut before they leave, but for your security, it should be mailed to their forwarding address once you are satisfied that they have vacated permanently. If they deserve their full deposit, then a simple check for the amount with suffice. If not, a check for the remainder, with an explanation of deductions, is the best course of action. Remember to set your rent rates high enough to cover your costs, including inflation and rising utility prices, but low enough to be competitive enough not to experience vacancies.
If you would like additional information regarding property management, many resources are available at your local public library. Also, the Real Estate Help Session teleconference, taught by Karen Nelson Bell and Duncan Guertin, is a great resource for specific Real Estate questions. Step Five: Farm It When it comes time to sell your investment property, there are a few helpful hints that we‟ve discovered. First and foremost, decide whether you want to sell the home on your own or enlist the services of a Real Estate Agent. There are pluses and minuses to both options. With an agent, you relinquish some of your profits by paying them a percentage commission on the sale of the house. However, “a ForSale-By-Owner advertise and market the property, attend all the showings, follow up with the buyers or buyers‟ brokers, and thoroughly check out any buyer who makes an offer to purchase the home” (100 Questions). So, if the amount of commission saved is worth putting more effort into the sale, then by all means. The first step in any sale is to thoroughly clean and tidy your property, inside and out. Properties sell best when lived in but appear tidy. Pick up clutter and turn on lights. Fix any minor repairs that can be done quickly. Have the carpets cleaned if necessary. Next, have an accurate, up-to-date appraisal completed on the property. This will help you with your next step, which is determining your selling price. Once you determine what the property is worth and how much you need, depending on your circumstances, you are ready to either list the property with an agent or begin the process of selling it yourself. If you decide to use an agent, then the best advice from then on is to vacate the property whenever a prospective buyer is coming to view it. If a buyer is alone with your agent, they will feel more comfortable to speak freely. If you are going to sell it as a For Sale By Owner, then there are a few more tips we can offer: Now that you have decided on your selling price, write a thorough and accurate advertisement to represent the property. This should include the price, your name and contact information, details and perks of the property, your flexibility if there is any and, ideally, a picture or two of the property. Now that you have this information in a concrete format, you are ready to start marketing the property. First and foremost, use word of mouth to notify everyone you know that you have a property on the market. Next, make a large version sign of your advertisement to post in the yard of the property. Be sure to mark “For Sale By Owner” clearly on the sign. For some buyers, this is considered an advantage, since they will be saving commission costs too. Next, you can post your ads on Internet Boards, local newspaper classified ads, in For Sale By Owner listings. You can also put up signs or cards on college or community message boards. And, many Real Estate Agents will charge you a small fee (usually a couple of hundred dollars) to list your house on the MLS (Multiple Listings Service) with your contact information. This is a great resource and a nice middle ground for using an agent, if you‟re hoping to keep your costs to a minimum.
Once you have interested parties, schedule walk-throughs with individuals or couples, but don‟t try to save time by showing it to a number of people at once. If you want to do this, then you may host an Open House, but to double-book individual appointments could make the potential buyers feel manipulated. Before potential buyers arrive at the house, get there early and turn on every light in the house. Bring a can of aerosol air freshener and give it a little spray when you arrive, if it needs it. Be sure it‟s not too strong or they may think you‟re trying to cover something unpleasant. Fresh flowers and other nice accents help make it feel homey also. Turn your cell phone to vibrate before they get there and once they arrive, answer all their questions honestly, but don‟t volunteer so much that is feels like a hard sell. Let them lead the way through the house if they want and you bring up the rear and answer their questions. If they want to be guided, you lead the way but make sure to pause long enough in each room that they can take it all in and don‟t launch into a pitch at each room. Once you have an offer in your hands from an interested party, it‟s up to you to either accept it or counter-offer. You can talk with an attorney or a Real Estate Agent if the contract is confusing in any way. Once you agree on terms, then you are done with your chore of being the agent and onto the role of moving man! Please be sure to read the final article next week of Six Steps to Real Estate Success: Tax Tips. You may also refer to 100 Questions Every Home Seller Should Ask by Ilyce R. Glink for more information and other tips on selling your home