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The Wise Women Survival Guide to Alternative Investing Today, Tomorrow and into 2009 By: Lisa Moren Bromma How do you buy real estate? 1. Pay cash. 2. Loan from a bank or a private lender. 3. Get the seller to take monthly payments as the terms of the sale. 4. When there's an existing loan, take over the payments. 5. Lease options. Where to find the deal! 1. Walk the streets. 2. Short sales. 3. REO’s listings of reo’s direct. 4. Look for properties on the market longer than 6 months. 5. Estate sales. 6. Condemned property. 7. Seller financed mortgages. Web sites to assist your research •www.zillow.com recent sales • www.nahb.org affordability index in your location • www.realtor.org/research/research/metroprice median price in your area • www.realtor.org/directories housing supply information • www.money.com/pricetorent price-to-rent ratio • www.money.com/homeforecast housing forecast in your market Tips for sellers who consider lease options 1. Put it in writing. 2. Use a separate lease agreement and a separate option agreement. 3. Keep the term short. 4. Take a security deposit. 5. Pay like an owner - do not let the tenant pay the taxes and insurance. 6. Little or no rent credit. Tips for buyers negotiating a lease options 1. Fix the sales price. 2. The longer the term the better. 3. Ask for a rent credit each month that is applied to the down payment. 4. Read the documents before you sign and, if necessary, consult an attorney. Tips for rehabbing 1. This is not a get rich quick investment. 2. Make sure you know what the cost of the rehab will be before you buy. 3. Pay an expert to fix up the property, if you are not in this business. 4. Make sure you understand your exit strategy and timeline for the resale of the property. 5. Watch your cash flow so you don’t get burned! 6. You make your profit when you buy! #1 factor to consider when buying a short sale or foreclosure: You are buying the property AS IS. An inspection is necessary! Landlording 1. Screen your tenants carefully. 2. Have a lease you control. 3. Always have an inspection of the property with the new tenant present. 4. If possible, manage the property yourself. 5. Have your leases expire at the same time. 6. Use the discount rent model. If you must use a property manager: 1. Check with your state to ensure they are licensed. 2. Avoid realtors unless they have actively managed property and are properly licensed. 3. Check references. 4. Make them use your lease. 5. Have your own contractors - don’t depend on theirs. Cash flow industry • Trends (private syndications buying pools of notes). • Protecting yourself in this market. • Don’t buy a note unless you count on owning the property. • Partials. • Lending. Using your IRA 1. Entrust IRA card/IRA checking account. 2. Great investments with an IRA. a. Options b. Notes c. Cars, cows, mobiles and more! 17 steps for succeeding in real estate 1. Know why you need to invest in real estate. a. Establish in your own mind the reasons why you need to invest in real estate in order to stay ahead of taxes and inflation. b. Never forget the intent of your purchase: appreciation, cash flow, income, or immediate profits--whichever way you choose. 17 steps cont’d 2. Establish your investment goals. a. Prepare a current financial statement estimating major expenditures. b. Determine how much money you think you will need to maintain your present standard of living after you retire. c. Allow for inflation. Remember, in a real estate investment, inflation works for you instead of against you. 17 steps cont’d 3. Locate sources of investment capital. a. Consider such sources of start-up capital as savings accounts, cash value life insurance, borrowing against stock and refinancing of other real estate. b. Consider the possibility of borrowing from people you know who would like to earn a higher interest than on their present investment and still have security. c. Don’t over-leverage. You do not want to be in a position where you feed your investment to keep it running unless you are prepared to take that risk. 17 steps cont’d 3. Locate sources of investment capital cont’d. d. A property can be optioned, if you have enough investment capital available to you in a short period of time to exercise the option and purchase the building. e. An owner who is very motivated to sell may be willing to consider a lease/option or lease/purchase or seller financing. f. Purchasing a distressed property can be very profitable to you if you are willing to work at it and get it turned around into a profitable investment. g. Enlarge your investment holdings as your capital increases. 17 steps cont’d 4. Determine how involved you will be in managing your property. 5. Select the investment right for you. 6. Determine the form of ownership. 7. Locate your investment property. 17 steps cont’d 8. Analyze your prospective investment. a. Income. Can the rents be increased soon after you purchase the property? b. Expenses. Are there any excessive expenses that you can lower? c. Financing. What alternative financing strategies are available on this property? d. Your overall benefits of owning this particular real estate. 17 steps cont’d 9. Use the financing technique that gives you the best result. 10. Consider the tax consequences. 11. Negotiate the purchase. a. “Lock up the property” by making sure both parties have fully executed the contract including initialing any changes that are made after the fact. 17 steps cont’d 12. Take necessary steps before and after the closing. a. Prepare an estimate closing statement so you will know how much cash you need to close. b. Employ a title company or an attorney to do the closing for you. c. Make a list of the items you expect to receive from the seller at closing. This includes keys; garage door openers; original leases; any service contracts related to the property, etc. 17 steps cont’d 12. Take necessary steps before and after the closing cont’d. d. Have the utilities changed over to your name. e. Do a final walk through before closing and visit the property right after the closing. Meet any tenants that may still live in the property. 17 steps cont’d 13. Set up a good record keeping system. 14. Develop a lease that serves your purpose and is fair for the tenant. 15. Monitor your investment with return in mind. a. Don’t fall in love with your investment. 17 steps cont’d 16. Structure the sale to suit your needs. a. Establish a reasonable selling price for your property based on actual market value. b. Look at the pros and cons of listing your property with a realtor. c. If you decide to sell the property yourself, develop attractive ads for the property. 17 steps cont’d 16. Structure the sale to suit your needs cont’d. d. When structuring the sale, remember that taking back secondary financing reduces your cash available for reinvestment. e. Consider tax consequences and tax exchanging where you get the opportunity to defer any capital gains. 17 steps cont’d 17. Secure your financial future. a. Plan on building your real estate investment portfolio to build your estate. b. Do not go into real estate investing expecting to become a millionaire in 12 months. c. Remember any property that is leveraged 100% will probably be at a negative cash flow. It is important to realize that one vacancy will no doubt take money out of your pocket to keep that investment going. 17 steps cont’d Talk to real estate players. As a beginning investor, you should talk to everyone you meet - brokers, appraisers, tenants, other landlords - to get a feel for your individual marketplace. Real estate is a competitive business, but I have found many of the players are more than happy to talk about their deals once they are completed. Attend and become a part of your local real estate investment club. Questions? At Wise Women Investor, you can: •Check out my blog every Monday, Wednesday and Friday • Sign up for the quarterly Wise Women Investor Newsletter Contact: www.wisewomeninvestor.com [email protected] •Link to my weekly radio show or listen to show archives