Real estate investing is not filled with the glitter and glamour of the stock market, yet it continues to be a haven for those with cash to invest.  The following is a comparison of the two investments.

If you had $20,000 to invest, would it be better to invest it on Wall Street or in real estate?  Over the past 30 years, real estate has yielded a 3% average growth rate over the long term.  This has been through good and bad cycles in the markets.  Most Wall Street fund managers are hoping to beat the S&P 500 to get an 8% to 12% return.  The S&P 500 is an index of stock that performs – in general – more consistently than individual stocks.  Based upon this past performance, let’s take a look at the differences in both investment types.

Investing $20,000 in the stock market (assuming a 10% return) yields an investor $22,000 at the end of the first year. Assuming the same rate of return, the second year would add $2,200 to that return…yielding $24,200.  In the third year, the yield would be $26,420.  Let’s see what the returns would be if we employ the power of leverage available to us in real estate.

Let’s use the $20,000 as a down payment to buy a $200,000 home. Assuming the home appreciates at 3%, this would create an increase in value to $206,000. The $206,000 grows the second year at another 3% and now is roughly a value of $213,000. The third year, the property would be worth $220,000. This is a gain of $20,000 on the initial investment of $20,000.  The money has doubled…that’s a 100% return on the initial investment.

What if the value of the real estate goes down? Then don’t sell it!  Especially true if the rental income pays for the costs of owning the property.  Attempting to “time the market” from one year to the next can be very dangerous.  “Buy and hold” has consistently proven to be a more successful formula for investing in real estate than for the stock market.  Real estate doesn’t fall in value as rapidly nor will it disappear.  If the property burns down, homeowners’ insurance covers any losses.  Stock has no such insurance.  Additionally, if you want to “cash-in” your gains from the stock market, you create a taxable event. With real estate, you can avoid a taxable event by refinancing it to access your equity.  You are then free to spend the money any way you choose…including further investment in real estate!

A common strategy used by homeowners to tap their equity is with a “cash-out” refinance.  They use this cash to purchase a rental property for investment or a new single family home to move into…leaving their first home behind as a rental property.  Known as an “equity multiplier” strategy…the opposite of holding a “dead equity” position.  “Dead equity” is when the property’s usable equity is left un-tapped.  Many people want to pay off their homes and be in this position.  Property owners can have the ability to earn still more returns by investing the proceeds of the cash-out refinance into other property, putting their equity to work with leverage.

Your level of involvement should be your guide when choosing to invest in real estate. You can be either a hands-on, do-it-yourself investor or you can work with a management company to handle the details.  In either case, your decision must be made based upon sound advice from professionals who can assist you as well as your plan of action based upon your objectives.

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Secrets Lenders Don’t Want You to Know! Read This 11 Point Report Before You Sign Anything!

The right or wrong decision when signing your mortgage papers can mean thousands of dollars difference in interest paid. There are very important considerations to evaluate before you commit to an adjustable mortgage or 30 year note. Obtaining financing for investment property whether it’s a single family home or 200 unit apartment building is a huge factor in what your cash flow and tax write offs are going to be. It’s not always about getting the lowest possible rate, it’s about getting the right loan for the situation, the closing fee’s, and experience of mortgage broker. Doesn’t it make to take the time to thoroughly investigate all of your options!

Unbelievably, many of us sign the first mortgage placed in front of us. Typically the excitement of the new investment purchase reduces the mortgage to not much more than an afterthought. What you read here could save you hundreds or even thousands of dollars. By aligning yourself with a professional agent you ensure that all the financial steps are taken care of properly and economically.

1. Utilize a Lender With Established Ties to an Agent- Lenders are much more flexible with the real estate agents who have done business with them previously. This relationship then establishes them as a team. The lender and agent work effectively together, referring each other business. That’s why a good agent can make substantial difference in setting up the most economical financing. And the right financing can, literally, save you tens of thousands of dollars over the life of your loan!

2. Don’t Attempt Paperwork Alone- All the paperwork required to complete the purchase of an investment can be quite intimidating and frustrating for a buyer. Make sure you have your lenders help you with all the paperwork. Get help from your team, your lender and agent. Their expertise will help alleviate the stress and it will prove to be invaluable before you sign your mortgage.

3. Look at All Your Options- Make sure you see at least 5 loan programs for your mortgage. Lenders have at least 10 programs and should work with you and your agent on deciding what is best for your circumstances. Evaluate all your options. After all it’s your money you’re spending – not theirs!

4. Demand Service- There is little difference between a bank, savings and loan, or a mortgage broker when it comes to the competitiveness of their loan rates. The difference is in the service they provide. It is their job to serve you! You want to get the loan approved and move into your new home as quickly as possible, but don’t overlook the fact that you are the one spending the money and they are the ones who should cater to your needs. Don’t let the process become so intimidating that you lose that understanding.

5. Stay in Complete Touch- You should receive a written report from your lender about every step. This will ensure that no details are overlooked and there will be no surprises.

6. Negotiate a Flexible Loan- Don’t just accept the terms they lay down in front of you. Lenders are in the business of loaning money and they want your business. Make sure you examine every option available to you. If you negotiate a variable rate loan, many lenders have the ability to move you into a fixed loan if rates start going up. Make sure that you understand whether or not that is an option in the package you are looking at.

7. Don’t Give Up on the First No- Initial decisions are not always final decisions. Going to a higher authority can sometimes get you the loan, but do so with the assistance and compliance of your lender and agent. Many times special circumstances when explained properly to the person in charge, will win you the loan.

8 Don’t Wait for the Bottom of the Market- The odds of you hitting the bottom of your market are about like the odds of you hitting your state lotto! You will almost never hit the bottom of a market. And trying to time it exactly right is often costly. It usually causes a person or family to miss out on the opportunity to purchase a very nice property. You’re better off simply negotiating the best rate and terms you can at the time you find a property. If interest rates go down, you can refinance. This is a much better approach because you won’t miss out on the property you’ve spent so much time locating.

9. Be Honest With Your Lender- Your lender wants to help you with your loan. The only time they get paid is when you get approved. The more information (good or bad) you provide your lender, the easier it will be for them to get an approval. It helps them present the loan in the best light. This in turn helps the loan get the highest approval rating.

10. Become Completely Educated- Pick your lender’s brain. Lenders will teach you all about your various options, even if you haven’t found the right property yet. They will be very patient with you while you are looking, especially if you have aligned yourself with the right agent. They understand all the up-front work will pay off in future business. Your agent will then continue to refer people to the courteous and service-minded lender on down the line.

11. Get Prequalified- Lenders will provide you with a certificate of pre-qualification. By getting prequalified you know exactly what financial parameters to stay within. Your agent and lender will consult with you and help you get qualified for the loan that best fits your needs. Many times they are able to get you a larger loan than you may have thought possible.

Getting approved for a loan is often times much easier than you might have previously thought.

I just came across this story of an elderly women who lived a very modest life.  You are not going to believe this story..

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I read all the time and have a huge library full of books.  Most of them are books about real estate, selling, marketing and finance.  I was never the novel or fiction type.  I always felt like I was wasting time by reading those books.  If I was going to read something I wanted it to have some value to making me a better business person or better person in general.  With all these books I always go back to the same two that I find the most valuable for everyday life and business.  They are Think and Grow Rich by Napolean Hill and The Science Of Getting rich by Wallace Wattles.  These are two classics no business man or investor should do without.  If I don’t do it know I will never get around to it.  So I just pulled them off the shelf and made copies for you.  I can email them to you right now,  just fill out your info in the boxes below.

With a never ending stream of babble from the news media about low 4% interest rates for everyone in America, the one thing we can tell you for certain is that the government is not going to pay for it. If there is anything in this “mysterious” stimulus package to lower mortgage rates, it will only be some kind of assistance to help sell housing inventories; not to help lower the rates further for those making regular payments, trying to refinance.

Mortgage rates are derived from bonds which are traded on the “free market”. Mortgage rates are now trading in a range between the upper 4% and low 5% range.  This range is lower then it has been in the 37 years Freddie Mac has been keeping records.

Trillions of dollar shave been pulled out of the stock market and investors are sitting on the sidelines waiting for the market to stabilize and it will happen!  When the money starts pouring back in, fixed rate mortgages will shoot up, 1%, 11/2% or more. Who knows?  But they will go up and maybe overnight.

When considering mortgage refinancing, do not expect to get the same rate as your neighbor, friend or relative, unless your financial profile, credit score, loan to value, property type, property usage etc., are identical.

If you’re shopping rates, know that any published rate is obsolete before the ink dries; any quoted rates without a rate lock are probably meaningless.  The bond market is in constant motion, just like stocks.

Those of us that have been in the mortgage industry a while have lists of customers that tried waiting out an extra 1/8% to ¼% and completely missing the market lows.  We see it every time rates dip.

Strategy #1:  Choose your investment wisely

In the case of investment properties, it is difficult to make lemons into lemonade.  Therefore, it is important that you choose a wise investment property to begin with, as this will make your profitable exit strategy much easier to execute.

The first thing an investor should do before purchasing an investment property is to fully consider the risk of the purchase, as well as the potential financial return.  Do you as an investor want to purchase and manage commercial real estate?  If so, what type?  Are you more suited to owning retail, office, apartments, warehouse, etc?  Or do you prefer single or multiple family dwellings and rent to residential tenants?  Are you suited to be a landlord and accept all the responsibilities that come with it?  And most important, what is your strategy for profit in these investments?  Owning and renting?  Renovating and selling?  Developing land?

Once an investor has a firm grasp of the type of property and responsibilities he or she wants to own, then deciding the strategy for profit is easier.  When the plan for purchasing, owning, renovating and/or renting has been properly executed and the time for selling is ripe, there are many considerations for maximizing the profit on the sale of a commercial or residential property.

Strategy #2: Execute the sale with tax considerations

Avoid Capital Gains – If you purchase residential property and sell it within 24 months, you will have a hefty capital gains tax liability of 5% to more than 25% when combined with state and federal tax rates.  However, if you make the home your primary residence for at least two years and then sell, then you will owe no capital gains tax, ensuring you can keep more profit.

1031 Exchange – A 1031 tax-free exchange allows owners to sell an investment residential or commercial property and acquire another replacement property with equal or greater value and defer owing taxes.  The tax burden is deferred until the sale of the next property, or another 1031 exchange can be performed to further defer tax liability.  However, timelines are strict for a 1031 exchange and new properties must be purchased within 45 days after the closing of your current investment sale.

Strategy #3: Carry the mortgage

If you are in a position where you do not need a lump sum amount of cash at closing for your investment property, consider carrying a first or second mortgage for the new owner.  You will hold a promissory note for the full value of your equity and receive monthly payments, including a good interest rate for your investment.  Oftentimes, sellers who carry a mortgage can earn a return of 10% or more on interest.

Strategy #4: Build equity in your properties

Distressed properties – If you purchase a distressed commercial or residential property, you can take advantage of building equity starting with the sale price.  Distressed properties are often sold below market value because of the deferred maintenance issues clouding the property.  An investor who can negotiate a purchase price well below market value and fund renovations to improve the distressed property can reap huge profit potential when selling.

Added value to investment properties – An owner of commercial or residential property should always consider adding value to the property that will increase the selling price.  For instance, a residential home with a renovated kitchen and outside landscaping has a much higher potential for an above-market selling price.  An apartment complex with minor improvements to each unit, which can command higher rent rates, will show a greater valuation at the time of a sale.

Real estate investors can make great profits from the sale of commercial or residential property.  A sound strategy for adding value and deferring taxes on a sale will help maximize the final selling value, and with the end in mind before purchasing a property, an investor will enjoy the rewards of maximum profit.

Investing in commercial real estate is quite lucrative if you are an intelligent investor, who has a property purchase plan from the beginning.  Before you ever make a move to begin the purchase process, it is wise to take a look at the property to project the potential value of your investment.

Not all valuation methods are created equal

Before discussing the actual valuation of commercial property, it is prudent to know the different methods of real estate valuation.  The first is the market valuation, or sales comparison method.  Residential homes are usually valued using the sales comparison method since the value of a home is directly related to the price a buyer is willing to pay compared to the sales price of similar homes.

Another method is the Cost Valuation Method, which is simply land value plus an estimate of what a building or other improvements would cost to reproduce in today’s dollars.

And the last method, which is used most widely in commercial and investment real estate valuation, is the income capitalization method, or cap rate method.  Using this method, commercial property is valued by determining the rate of return on an investment, or capitalization rate, divided by the average net operating income (NOI) for the property.  NOI is the gross income for the property less expenses, but not including debt service or mortgage payments.

For instance, you as an investor find a nice retail strip center for sale.  The current owner provides details of the previous 12 months net operating income, and you find that the average yearly NOI is $75,000.  The capitalization rate for the area you are looking is about 10%.  Therefore, by dividing $75,000 by 10%, you can figure that $750,000 is a good estimation of the value of the property.

Enlisting professional sidekicks for your commercial portfolio

Remember that this type of quick estimate is a ball park figure only.  A true and accurate valuation can be performed by a licensed commercial real estate appraiser.  Also, if you use a commercial mortgage broker to help finance an investment, the broker can provide a clearer estimated cap rate valuation because he has access to databases that provide critical information, such as accurate cap rates in the area of your potential investment, typical vacancy rates, and average rent per square foot for an area.

Keep in mind that the seller may provide financial statements and data that are overstated or exaggerated.  For instance, he may indicate no vacancy contingency in his expenses.  Or gross rents may be higher than the average for the area.  It is wise to carefully analyze the income statement and use the experience and knowledge of a broker or appraiser to figure accurate numbers when calculating the potential NOI for a property.

Befriending the PPU for valuation

Another type of commercial real estate valuation is the price per unit or PPU.  The PPU may be used on commercial property, such as apartment buildings, where excessive vacancies may skew the financial data and the final NOI cap rate.  By using the sales comparable method mentioned above, a commercial real estate appraiser can more accurately determine the value of an apartment building by comparing the recent sales of similar apartments, and determining an average price per unit.  Simply multiplying the PPU by the number of units in a potential investment can provide an accurate valuation.

It is helpful for an investor of commercial real estate to know the methods of valuation for a property.  By knowing the methods and working with a team of experts, an investor can intelligently determine whether a commercial property will be a profitable investment.

The daily newscasters and “talking heads” feature regular stories of the tragedy of foreclosures in America.  Indeed, the rate of foreclosures is continuing to increase, partially driven by the financially illogical variable rate mortgages.  With that said, if you are a financially savvy investor with solid financials, this is a great time to capitalize upon these intriguing opportunities, especially in the form of REO properties.

Banks are in the business of lending money, not owning, managing, or selling real estate.  However, oftentimes a bank is forced to foreclose on an investment, and a property reverts from an investment to Real Estate Owned, or REO.

Real estate investors can purchase REO properties from banks for less than the full market value of the property, but in most cases, REO properties are sold by lenders at or just below market value.  A smart investor will have a strong strategic plan for bidding on and financing a bank-owned property to get the best value.

Bidding on REO property

Even though banks do not want to hold and manage real estate properties, there is a wide misconception that banks want to ‘dump’ REO properties at far below the market value simply to get if off the books.  Closer to the truth is the fact that a REO property is not considered a liability, and banks will want to get full or near market value for their asset.

If an investor makes an offer on a REO property lower than the bank’s calculated full market value, the bank will probably make a counter-offer closer to the market value at which they want to sell.  An important thing for investors to remember is that banks do want to sell their REO properties as quickly as possible, so patience and persistent bidding is the key for a potential investor to get a good deal.  But also remember that a bank is looking after their own best interests – not yours.

Understand that REO is “as is” property

Banks will usually sell their REO properties in “as is” condition, meaning if there are any renovations or repairs needed in order to qualify for traditional financing, a bank will not perform the repairs.  They may, however, offer a credit on the sale price for the deferred maintenance of a property.

Investors should analyze a property carefully and have thorough inspections performed by licensed inspection firms.  A proper inspection will reveal items that an investor will need to consider improving before the property can be achieve full resale or rentable value.

If a property with numerous defects does not qualify for a traditional mortgage from a bank or other lender, a real estate investor will need an alternate plan to finance the property.  The investor should form a plan for repairs and renovations and could work with partners to invest money in the fix up project.  Hard money lenders may also be a source of short-term financing.

Enjoy favorable terms

An investor will often reap favorable sale terms from a bank REO property.  The properties are usually clear of any prior liens.  Additionally, a bank may offer financing to an investor will favorable terms, such as low down payment or low interest rate.

Swift closings can also be a great benefit since the title will be owned free and clear by the bank.

Benefits of buying REO

As previously mentioned, a REO home is generally free of all liens from prior lenders and contractors.  Having a home for sale free and clear offers a safe investment and quicker closing times.

A REO property will also be vacant and ready for an investor to occupy or begin renovations immediately after the sale.  Any owners or tenants will already have been evicted prior to the final foreclosure.

REO properties can be a great investment – as long as an investor is savvy about purchase strategies.  Knowing the condition of the property and bank REO selling procedures is an asset to the investor.  With a little experience, a real estate investor can reap many financial rewards with a niche in REO properties.

Did you know the IRS allows you to direct how your IRS funds are invested?  And in fact, you can direct your IRA monies to purchase investment real estate.  With the help of Uncle Sam, your IRA funds can work for you under your direction and bring great tax-deferred financial returns.

Designating the right IRA account

Most IRAs are set up through a custodian or financial firm who manages the assets through stocks, bonds, and primarily mutual funds.  With a little research, you can find a custodian who allows you to transfer all or part of your IRA funds into a traditional IRA, a Roth IRA, or a Simplified Employee Pension Fund (SEP-IRA), which allows you to direct the custodian in the real estate investments you wish to make.  These types of IRAs are called “Real Estate IRAs” or “Self-Directed IRAs.”  You would be wise to select an IRA custodian who is knowledgeable in the real estate investments you wish to make.

If you are knowledgeable and educated about real estate investments, or know someone who is and you want to invest with them, then this type of IRA may be for you.  Once you have funds set up in a self directed IRA, you may then direct the custodian how the assets are to be invested.  The IRS allows IRA funds to purchase raw land, residential houses, commercial property, or even mortgage notes or Real Estate Investment Trusts (REIT).  Remember, you must research and direct how the funds will be invested.  The custodian does not conduct the research nor make recommendations for you.

Profitable example of IRA-funded real estate investments

Here’s an example of how a self-directed IRA could work for you.  Say you transfer $100,000 into a real estate IRA.  You find a distressed single family home and pay $75,000 to purchase the home, knowing the full market value after repairs will be around $125,000.  You may spend an additional $20,000 for renovation and repair costs, which come directly from your real estate IRA account.  You manage to sell the home for $120,000 and put the $25,000 profit back into your real estate IRA fund, leaving your profits tax-deferred.

Downsides to purchasing real estate investment property with IRA funds

Unfortunately, the IRS has strict rules that govern your ability to make use of any property purchased with IRA funds.  You may not use a residential property for your own private dwelling or vacation home.  Nor can you use a commercial building space as an office for your business.  However, once you reach the age of distribution, usually 59-1/2 years old, you may then use IRA real estate as a primary or secondary home.

All real estate assets must be held in the IRA custodian’s name.  The purchase of residential or commercial real estate property also allows no tax deduction benefit from mortgage interest or property taxes.  Depreciation is also not allowed as an expense.

When purchasing investment real estate, you must also have extra funds set aside for the payment of property taxes and other maintenance costs.

Real estate may be the best way for you to grow your retirement funds.  If you know how to successfully manage real estate property, you can make it interesting and profitable by using your IRA.