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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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Ready to place your home on the market? Do you understand the process and details of selling a home or commercial property? Before you list with an broker, educate yourself on all the factors that will affect your profit. Be as informed as possible so you can make the absolute best business decisions. After all, the sale of your home is a business decision!

Most of us are not tuned into the trends and fluctuations of the real estate market. Likewise, we are not aware of the necessary steps to maximize profits on the sale of our investment. Typically we rely heavily upon an agent to lead us down the most profitable path. When considering the sale of any investment property it is usually the most valuable asset we own, doesn’t it make sense to list with someone who will maximize our profits? But how do we find that agent?

Start by doing some research. Find out who are the most active agents in your market. Look at advertising to see how professional it is. Do they specialize in the buying and selling of investment property not just home sales? Do they understand ROI and ROE?

1. The Phone Interview
Place a call to each of the agents on your list. Document how quickly they returned your call. Remember: they will be returning calls to your prospective home buyers. Do an initial ‘feel out’ interview over the phone so when you meet you will both be prepared.

2. Request a Complete Plan
From title to escrow; request a complete plan as to the services they can provide for you.

3. Evaluate Their Team
Top producers will have established relationships with lenders, title reps, inspectors… everything. They are there for your benefit and if they are ill-prepared to handle all the steps, you are being short changed.

4. Detailed Report of your Investment Property
Request a complete report of your property with ideas for improvements, cosmetic changes, structural repairs or anything that could add value to your property. Remember a small investment up front will pay higher dividends at the time of sale.

5. Alternative Report
Request a complete report of alternatives to the sale. What would current market leases generate? Rentals? Responsibilities attached with leasing? Have your agent educate you as to all your options.

6. Insist on Pre-qualification
Don’t waste valuable time negotiating or showing your property to unqualified prospects. Insist your agent prequalifies candidates to screen out all unwanted prospects.

7. A Net Sheet
Request a complete net sheet, minus commissions and fees, showing your exact proceeds at the time of sale.

8. A Marketing Plan
Insist on a step-by-step marketing plan of how your property is going to be sold and marketed. Look for innovative ways to attract home buyers. Demand 24-hour advertising, lead accountability and tracking services. These services exist and you should insist upon them.

9. Telemarketing Efforts
Investigate the agent’s telemarketing team. Do they just cold call or do they have a mechanism to create proactive leads and call on those prospects?

10. Direct Mail
Investigate the agent’s capacity to send direct mail. How often do prospects receive mail? Is it professional? Does the mail piece motivate prospects to respond?

11. Advertising
Is it well written and professional? How many ad mediums do they utilize? Newspaper advertising is not as effective as it used to be. The internet is where 87% of people search for a property. What is the brokers web strategy? Remember: the quality of the advertising will directly influence how well your home will be perceived.

12. Negotiation Strategy
Have a written, well conceived, negotiation strategy. The old adage, “You don’t get what you deserve, you get what you negotiate” rings true in real estate. Insist on a sound negotiation strategy before you entertain buyers.

13. Closing Checklist

Be sure to get a written closing checklist. You need to know in detail how you will conclude the sale of your investment. This should provide a step-by-step procedure that will be easy to understand and follow.

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.

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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.

Understanding the premise of private money

Private money lenders, also known as “hard money” lenders, provide loans to borrowers with tarnished credit who may not otherwise qualify for traditional commercial mortgages.  Money is also provided for properties that, due to distress or needed repair, may be considered too risky and not be touched by a traditional money lender.

Primarily, private money lenders depend on the commercial property as the collateral for the loan.  In order to protect their interest and to reward them for the extra risk, private money lenders will usually only lend up to 65% of the value of the property, and charge a much higher interest rate to the borrower.

Ideal situations for private money funding

Due to the steeper terms of private money funds, these loans are typically short term, usually only up to one year, but sometimes up to three or even 15 years.  Private money funds can be a good source of funding for an investor who finds a distressed property and needs capital to purchase and renovate the property with the intention of selling or refinancing within a short time.  Or perhaps an investor needs quick funds to close a deal.  Private money lenders can usually close and fund more quickly than traditional mortgages and can provide a temporary financing option, or bridge, until a traditional commercial mortgage with reasonable interest can be obtained.

How to negotiate an optimal private money loan

When negotiating for a short term private money loan, an investor should always ask for the option to prepay the full balance of the loan before the due date without penalty.  Some private money lenders will tack on huge charges for paying in full early.  But if private money funds are meant to be a short term or bridge loan, then an investor will want to option to pay in full early.

Sometimes more time is needed to complete a refinance or obtain traditional funding.  Private money lenders will often add a provision for extra fees and additional interest if the balloon payment is not met on time.  A good investor should anticipate how long it will take to secure other financing and request to waive extra fees if more time is needed.

A usual option for repayment of private money funds is monthly interest only payments, with a balloon payment of the principal balance due at maturity.  With short term loans of up to a year, the interest only payment option is a good deal to keep monthly payments lower.

Private money is ideal for certain investment situations

Private money or hard money lenders are in great demand and offer a beneficial service in providing funds to finance commercial and even residential property.  Though it is easier to obtain private money for an investment, an investor must remember the limitations of private money funds, and the potential extra costs.  But with the right plan and property, private money may be the answer to get a deal going and reap the financial rewards for a great commercial property investment.

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.