The Flip Side of Flipping

real-estate-tips

Many investors were burned this year and last by the falling real estate market. Playing the previously profitable flip game that started in about 2002 (where they would buy at a moderate price, then quickly resell for a profit at a higher price), these flippers suddenly discovered they were in trouble. Real estate they had bought (often multiple properties) was now going down in price, not up. The flippers suddenly, and disasterously, found themselves unable to resell, refinance, or make the payments. As a result, many were forced into foreclosure and some lost their entire investments.

The plight of the flippers has been well documented and noticed, and has had an undermining effect on other would-be property investors. Today, much of the “smart” money is staying out of real estate, playing it safe, so to speak.

That’s unfortunate, because as the market falls in most areas, profit opportunities are arising. (The real estate market is not falling everywhere – in places such as Charlotte, NC, for example, prices are growing at close to 3 percent annually.)

However, the opportunities of today are not those of yesterday. Flipping is out. The flip-side or “holding” is in. Here’s the play:

As foreclosures increase (due largely to ARMs resetting at a higher payment than the borrower can afford, forcing them out, but also in part due to investors walking away from would-be flipped properties) and lenders take over homes, increasing numbers of properties are kept vacant. (Lenders hold the properties vacant so they can resell them, something few are accomplishing.) The latest statistics I’ve seen indicate that something close to 3 percent of the housing stock in the country is now vacant (a multi-decade high), mostly as a result of the foreclosures. Since we never have had a real surplus of housing, that means that there are lots of people out there looking for places to live. And that means the demand from tenants for rentals is strong and getting stronger.

As a result, in many areas vacancy rates are falling and rental rates are steadily increasing. In some parts of Los Angeles, for example, residential rental rates are increasing above 7 percent annually.

The combination of falling prices, low interest rates, and rising rental rates provides a strong opportunity for investors. For the first time in nearly a decade it’s becoming possible to buy “break-even” properties, even properties with some positive cash flow. Today, in many markets, it’s possible with a standard down payment of 20 percent, to buy a property whose cash flow will handle your PITI (principle, interest, taxes and insurance) as well as much of the maintenance and repair costs. To make a profit, all that you have to do is buy and hold until the market eventually turns around. Then just ride the wave to higher values.

Therein, however, lies the rub for some investors: will the market turn around?

I certainly believe it will. The history of American real estate is that it has always gone higher. Historically, in fact, the real estate cycle has averaged around 14 years – 7 up years followed by 7 down years followed by 7 up and so on. If you’ll grant that the current down market is about 2 years old, if history repeats itself, it should be about 5 years before things turn around. Of course, markets that fall quickly, as has real estate, tend to rebound quickly, too. So it could be much sooner.

An interesting sidelight here is that buying to hold doesn’t require that you wait for the market to bottom out. All you need to wait for is a break-even property. Once you have that, you can comfortably hold it indefinitely and ride out price declines. Barring a deep recession or a depression, which would undermine even the rental market, buying to hold is probably a good strategy, as noted, as long as the property generates sufficient income to cover expenses.

Opportunities seem to be particularly strong in single family homes (not necessarily condos) as well as multi-family housing. Apartment buildings, in particular, seem to be faring well with prices falling as cap rates went up. The advantage seems particularly strong in up to 4 unit buildings where Fannie Mae and Freddie Mac secondary financing may still be available. (For larger units, lenders are requiring more “skin” – equity investments of 25 percent or more.)

Buying to hold is not a new idea. It’s been the long-term road to riches for millions of Americans since the Great Depression. Yes, it’s slower than flipping. But, it’s also steadier

 

Buy Investment Property Without Seeing It

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Why would you buy investment property without seeing it? It’s a numbers game. Whether or not you see the property before you make an offer isn’t nearly as important as making sure the numbers make sense.

My partner and I invest in Real Estate. He makes offers on a hundreds of properties at a time, offering 25-50% less than the asking price on each one. Occasionally a few sellers will accept these offers. He never has to look at the homes beforehand. Including an “inspection and approval” clause in the offer means he can always back out of the deal later when he sees the house. Meanwhile, he efficiently found the truly motivated sellers.

This true story demonstrates that with a good clause or two in the contract, you don’t have to worry about making an offer before you see a property. It’s true when you buy investment property or your next home. When it isn’t everything the seller says it is, you can reject the deal with little or no loss. So why wouldn’t you want to look at the property?

The main reason you might skip looking at a property before making an offer is time. This is certainly true if the property is far away. If you don’t get a price that makes sense, why spend your time traveling to look at real estate investments? A price and terms that make sense – this is what is important. Of course you’ll probably want to look at the actual property eventually, but looking at the numbers is how you invest.

Investors value income property according to current cash flow (or should if they want safe and viable investments), so start by verifying income. Get the actual income figures for the past 12 months. Always consider the potential income if rents are raised, vending machines are added, etc., but base your offer on the current income.

Verify all expenses with investment properties. If any expenses listed by the seller seem unusually low, they most likely are. Just substitute your own best guess in place of any suspicious numbers.

After you determine the net operating income, apply the appropriate capitalization rate to arrive at the value. If you’re not sure how to do this, get help. However, you really should understand the principle of how to figure a cap rate. This is a numbers game you’re playing.
Calculate loan payments (talk to your banker), and see how much cash flow you’ll have. Then you can figure your cash-on-cash return based on how much of your own money you put into the deal. Just divide the cash flow by your investment.

When the numbers work, you can safely make an offer. Inspections will tell you if there are problems that will affect the cash flow. You can always renegotiate if there are such problems (assuming you made your approval of all inspections a contingency of the offer). Of course, you can even go take a look now that you are truly ready to buy that investment property.

 

Types of Creative Financing for Real Estate

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Financing the purchase of a home can be confusing. There are many different financing options. Searching the internet or talking to a bank, you may not always find the most honest or accurate advice. When you are not sure how you are going to pay for a new home or you want to save as much money as possible, it may help to look at creative financing. If you are having difficulty choosing how you want to finance the purchase of a home, then look at these top 4 types of creative financing.

1 – Subject to Transactions

The first creative financing to look at is referred to as “subject to transaction”. This is a type of financing where the buyer takes on the current mortgage on the property. Potential buyers should always be cautious when considering this type of financing. You are taking the mortgage that the previous owner setup with a lender.If the lender does not feel that you are qualified for this mortgage, then the lender may end up asking that the entire loan be repaid instantly. If this occurs, then you will be forced to seek a mortgage through another lender in order to pay off the existing mortgage. The advantage of this type of financing is that you may not have to go through the financing process at all, if everything works out correctly.

2 – Short Sales

The next type of financing to consider is a short sale. This is a type of transaction where a home is about to go into foreclosure. The owner of the home may ask the lender of they could sell the property for an amount that is less than what is currently owed on the property. The buyer can then place an offer on the house that is less than the actual property value. The bank will receive less than what the property is worth, but they will not have to go through the foreclosure process and will be able to start receiving payments from the new owner. A short sale can greatly reduce the cost of buying a new home, if you are able to find a situation where this type of financing is suitable.

3 – Option Purchases

An option purchase is essentially like holding a property until you can get the financing you need to purchase the home. You are putting money down on the property and reserving the right to purchase the property at a later date. This is a type of purchase that the owner must agree to. When making an option to purchase, you will need to have enough of your own money available to put down on the property – this money cannot be taken from a loan.The seller of the property will agree on an option price with the buyer. The primary reason for considering this type of transaction is if you find a home that you want but cannot yet seek financing from a lender. Instead of having the seller list the property, you are agreeing to have him wait until you can get a loan.

4 – Seller Financing

The final type of creative financing to look at is seller financing. Instead of seeking a loan from a bank or other financial institution, you will make payments to the previous owner. This type of financing is often only available if the seller does not currently have a mortgage on the home. A down payment is typically required. Consider using one of these types of financing if you are having difficulty obtaining traditional financing for a new home. The reason these are referred to as creative financing is because they are not as common and require special circumstances. Thanks for reading, please leave any comments you may have.