Real Estate Investing For Dummies

[Pages:197]Real Estate Investing

FOR

DUMmIES

2ND EDITION

by Eric Tyson and Robert S. Griswold

Real Estate Investing For Dummies?, 2nd Edition Published by Wiley Publishing, Inc. 111 River St. Hoboken, NJ 07030-5774



Copyright ? 2009 Eric Tyson and Robert S. Griswold

Published by Wiley Publishing, Inc., Indianapolis, Indiana

Published simultaneously in Canada

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Library of Congress Control Number: 2009920906

ISBN: 978-0-470-28966-2

Manufactured in the United States of America

10 9 8 7 6 5 4 3 2 1

Contents at a Glance

Introduction ................................................................ 1

Part I: Stacking Real Estate Up Against Other Investments........................................................ 7

Chapter 1: Evaluating Real Estate as an Investment ..................................................... 9 Chapter 2: Covering Common Real Estate Investments ............................................. 25 Chapter 3: Considering Foreclosures, REOs, Probate Sales, and More.................... 43 Chapter 4: Taking the Passive Approach...................................................................... 61 Chapter 5: Fast Money: Small Down Payments and Property Flips .......................... 75 Chapter 6: Building Your Team...................................................................................... 83

Part II: How to Get the Money: Raising Capital and Financing................................................ 99

Chapter 7: Sources of Capital....................................................................................... 101 Chapter 8: Financing Your Property Purchases ........................................................ 113 Chapter 9: Securing the Best Mortgage Terms .......................................................... 129

Part III: Finding and Evaluating Properties ............... 137

Chapter 10: Location, Location, Value ........................................................................ 139 Chapter 11: Understanding Leases and Property Valuation.................................... 169 Chapter 12: Valuing Property through Number Crunching ..................................... 181 Chapter 13: Preparing and Making an Offer ............................................................... 205 Chapter 14: Due Diligence, Property Inspections, and Closing ............................... 223

Part IV: Operating the Property ................................ 259

Chapter 15: Landlording 101 ........................................................................................ 261 Chapter 16: Protecting Your Investment: Insurance and Risk Management.......... 293 Chapter 17: Recordkeeping and Accounting.............................................................. 303 Chapter 18: Tax Considerations and Exit Strategies ................................................. 315

Part V: The Part of Tens ........................................... 339

Chapter 19: Ten (Plus) Ways to Increase a Property's Return................................ 341 Chapter 20: Ten Steps to Real Estate Investing Success .......................................... 349

Appendix: Sample Purchase Agreement ..................... 359

Index ...................................................................... 367

Table of Contents

Introduction ................................................................. 1

How This Book Is Different............................................................................. 1 Foolish Assumptions....................................................................................... 3 How This Book Is Organized .......................................................................... 3

Part I: Stacking Real Estate Up Against Other Investments.............. 3 Part II: How to Get the Money: Raising Capital and Financing......... 4 Part III: Finding and Evaluating Properties ......................................... 4 Part IV: Operating the Property ........................................................... 4 Part V: The Part of Tens........................................................................ 5 Appendix................................................................................................. 5 Icons Used in This Book ................................................................................. 5 Where to Go from Here................................................................................... 6

Part I: Stacking Real Estate Up Against Other Investments ........................................................ 7

Chapter 1: Evaluating Real Estate as an Investment . . . . . . . . . . . . . . . .9

Understanding Real Estate's Income- and Wealth-Producing Potential...................................................................... 10

Recognizing the Caveats of Real-Estate Investing ..................................... 12 Comparing Real Estate to Other Investments............................................ 13

Returns.................................................................................................. 14 Risk ........................................................................................................ 15 Liquidity ................................................................................................ 15 Capital requirements........................................................................... 16 Diversification value............................................................................ 16 Opportunities to add value................................................................. 16 Tax advantages .................................................................................... 17 Determining Whether You Should Invest in Real Estate .......................... 18 Do you have sufficient time? .............................................................. 18 Can you deal with problems? ............................................................. 19 Does real estate interest you?............................................................ 19 Can you handle market downturns?.................................................. 19 Fitting Real Estate into Your Financial Plans ............................................. 20 Ensure your best personal financial health...................................... 20 Protect yourself with insurance......................................................... 20 Consider retirement account funding ............................................... 21 Think about asset allocation .............................................................. 21

xiv Real Estate Investing For Dummies, 2nd Edition

Chapter 2: Covering Common Real Estate Investments. . . . . . . . . . . . .25

The Various Ways to Invest in Residential Income Property .................. 25 Buying a place of your own ................................................................ 26 Converting your home to a rental ..................................................... 26 Investing and living in well-situated fixer-uppers ............................ 28 Purchasing a vacation home .............................................................. 29 Paying for condo hotels and timeshares .......................................... 30

Surveying the Types of Residential Properties You Can Buy .................. 33 Single-family homes............................................................................. 34 Attached housing................................................................................. 35 Apartments ........................................................................................... 37

Considering Commercial Real Estate.......................................................... 38 Buying Undeveloped Land ........................................................................... 39

Chapter 3: Considering Foreclosures, REOs, Probate Sales, and More . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

Finding Foreclosures and REOs................................................................... 43 Foreclosures ......................................................................................... 45 Lender REO (Real Estate Owned) ...................................................... 51

Getting a Jump On Foreclosure and REO Competition with Short Sales................................................................... 52 Recognizing seller benefits ................................................................. 53 Comparing short sales to other properties...................................... 53 Finding short-sale opportunities........................................................ 54 Convincing a lender to agree to a short sale.................................... 55

Looking Into Lease Options.......................................................................... 57 Probing Probate Sales and Auctions........................................................... 58

Probate sales ........................................................................................ 58 Real estate auctions............................................................................. 59

Chapter 4: Taking the Passive Approach. . . . . . . . . . . . . . . . . . . . . . . . .61

Using Real Estate Investment Trusts .......................................................... 61 Distinguishing between public and private REITs........................... 62 Taking a look at performance............................................................. 63 Investing in REIT funds ....................................................................... 63

Tenants in Common ...................................................................................... 65 Paying for 1031 availability and "hassle free" management........... 66 Asking the right questions: Are TICs for you?.................................. 67

Triple Net Properties .................................................................................... 69 Thinking ahead about landlord/tenant division of duties.............. 69 Minimizing the risks of triple net investments................................. 71

Notes and Trust Deeds ................................................................................. 71 Tax Lien Certificate Sales ............................................................................. 72 Limited Partnerships..................................................................................... 73

xv Table of Contents

Chapter 5: Fast Money: Small Down Payments and Property Flips. . . . 75

Purchasing with No Money Down ............................................................... 75 Understanding why we recommend skipping these investments ............................................................ 76 Finding no-money-down opportunities (if you insist)..................... 77

Buying, Fixing, and Flipping or Refinancing ............................................... 78 The buy-and-flip strategy.................................................................... 79 The buy, fix, and refinance strategy .................................................. 81

Chapter 6: Building Your Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83

Knowing When to Establish Your Team ..................................................... 84 Adding a Tax Advisor.................................................................................... 85 Finding a Financial Advisor .......................................................................... 85 Lining Up a Lender or Mortgage Broker ..................................................... 87

Protecting yourself by understanding lending nuances................. 87 Building relationships with lenders .................................................. 89 Working with Real Estate Brokers and Agents .......................................... 89 Seeing the value of working with an agent ....................................... 90 Understanding the implications of agency:

Who the agent is working for.......................................................... 91 Getting a feel for compensation......................................................... 92 Finding a good broker or agent.......................................................... 94 Making the most of your agent .......................................................... 96 Considering an Appraiser............................................................................. 96 Finding an Attorney....................................................................................... 97

Part II: How to Get the Money: Raising Capital and Financing ................................................ 99

Chapter 7: Sources of Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101

Calculating the Costs of Admission........................................................... 101 Forgetting the myth of no money down.......................................... 102 Determining what you need to get started..................................... 103

Rounding Up the Required Cash by Saving.............................................. 103 Overcoming Down Payment Limitations .................................................. 105

Changing your approach .................................................................. 105 Tapping into other common cash sources..................................... 106 Capitalizing on advanced funding strategies ................................. 108

Chapter 8: Financing Your Property Purchases . . . . . . . . . . . . . . . . . .113

Taking a Look at Mortgage Options .......................................................... 113 Fixed-rate mortgages......................................................................... 114 Adjustable-rate mortgages (ARMs) ................................................. 115

xvi Real Estate Investing For Dummies, 2nd Edition

Reviewing Other Common Fees................................................................. 119 Making Some Mortgage Decisions............................................................. 121

Choosing between fixed and adjustable ......................................... 121 Selecting short-term or long-term.................................................... 123 Borrowing Against Home Equity ............................................................... 123 Getting a Seller-Financed Loan .................................................................. 124 Mortgages That Should Make You Think Twice...................................... 126 Balloon loans ...................................................................................... 126 Interest-only loans ............................................................................. 127 Recourse financing ............................................................................ 127

Chapter 9: Securing the Best Mortgage Terms. . . . . . . . . . . . . . . . . . .129

Shopping for Mortgages.............................................................................. 129 Relying on referrals ........................................................................... 130 Mulling over mortgage brokers........................................................ 130 Web surfing for mortgages ............................................................... 132

Solving Potential Loan Predicaments ....................................................... 134 Polishing your credit report............................................................. 135 Conquering insufficient income ....................................................... 136 Dealing with low property appraisals ............................................. 136

Part III: Finding and Evaluating Properties ................ 137

Chapter 10: Location, Location, Value . . . . . . . . . . . . . . . . . . . . . . . . . .139

Deciding Where to Invest ........................................................................... 140 Understanding the Goal: Finding Properties

Where You Can Add Value...................................................................... 142 Evaluating a Region: The Big Picture ........................................................ 143

Population growth ............................................................................. 144 Job growth and income levels.......................................................... 145 Investigating Your Local Real Estate Market ........................................... 147 Supply and demand ........................................................................... 148 Path of progress................................................................................. 153 Considering barriers to entry........................................................... 154 Government's effect on real estate.................................................. 159 Comparing Neighborhoods ........................................................................ 160 Schools ................................................................................................ 161 Crime rates ......................................................................................... 161 Pride of ownership ............................................................................ 162 Role play: What attracts you to the property?............................... 163 Mastering Seller's Markets and Buyer's Markets .................................... 165 Understanding real estate cycles..................................................... 166 Timing the real estate market .......................................................... 167

xvii Table of Contents

Chapter 11: Understanding Leases and Property Valuation. . . . . . . .169

The Importance of Evaluating a Lease...................................................... 169 Reviewing a Lease: What to Look For ....................................................... 171

Comprehending a residential lease ................................................. 171 Making sense of a commercial lease ............................................... 172 Understanding the Economic Principles of Property Valuation ........... 173 Determining highest and best use ................................................... 175 Comparing fair market value and investment value ..................... 175 Reviewing the Sources of Property-Valuing Information ....................... 176 Establishing Value Benchmarks ................................................................ 177 Gross rent/income multiplier........................................................... 178 Price per unit and square foot ......................................................... 179 Replacement cost .............................................................................. 180

Chapter 12: Valuing Property through Number Crunching . . . . . . . . .181

Understanding the Importance of Return on Investment ...................... 182 Figuring Net Operating Income.................................................................. 183

Evaluating income: Moving from fiction to useful figures ............ 184 Tallying operating expenses............................................................. 187 Calculating Cash Flow ................................................................................. 189 Servicing debt..................................................................................... 190 Making capital improvements.......................................................... 190 Surveying Lease Options that Affect Your Cost ...................................... 192 Comparing some of the options....................................................... 192 Accounting for common area maintenance

charges for commercial buildings ............................................... 193 Visiting the Three Basic Approaches to Value ........................................ 194

Market data (sales comparison) approach .................................... 194 Cost approach .................................................................................... 197 Income capitalization approach ...................................................... 198 Reconciling the Three Results to Arrive at a Single Value ..................... 201 Putting It All Together: Deciding How Much to Pay................................ 203 Examining the seller's rental rate and expense claims................. 203 Deciding which set of numbers to use............................................ 204

Chapter 13: Preparing and Making an Offer . . . . . . . . . . . . . . . . . . . . .205

Negotiating 101 ............................................................................................ 205 Starting with the right approach ..................................................... 205 Building a solid foundation of knowledge ...................................... 206 Assembling attractive and realistic offers...................................... 210

Preparing to Make Your Offer: Understanding Contract Basics............ 211 Bilateral versus unilateral contracts ............................................... 212 Elements of a contract ...................................................................... 212

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