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Build Your Wealth in Real Estate#2

October 17th, 2006 at 04:44 pm

Continuation of Build Your Wealth in Real Estate.

This is the second chapter of the trilogy. It gets a little meatier and requires a lot more education. This is the section where you finally start earning some income off of real estate. Here’s the big question: Do you want to be in real estate for the short or long term? Because I am more of a long term planner, I will only go over one short term plan of making money.

Step five: Short term money maker. Buy. Fix. Flip.

This usually only works when you find a great deal on a house. The property needs to be undervalued/great deal or needs to get fixed up before it gets put on the market. Where do you find these diamonds in the rough? The best places to look are the foreclosure market, and real estate owned (REO) departments of mortgage companies and banks. There are a few differences between both markets and you can check them out at EverythingRE.com.

If you plan to buy a “fixer upper” here are a few rules to go by. The fixing up should only involve cosmetic issues, and never structural issues (cosmetic is cheap, structural is much too expensive). Cosmetic meaning: Painting walls, new carpets, landscaping, and cleaning. Structural meaning: fixing roof, support walls need to be repaired and other aspects that directly impact the overall composition of the house. After all the repairs you need to put it on the market as soon as possible. I highly recommend advertising before you even start doing the repairs so you can sell the house much quicker. You then have to determine the price of the house you want to flip. Take the current selling prices of other houses that compare to the home you just fixed. Best case scenario is when you sell the house in less than a month. You didn’t have to make one mortgage payment, and the only cost to you was the repairs.

Example:

* Price of distressed property: 100k

* Price you end up purchasing the property for: 90k

* Average selling price of properties in the subdivision: 130k

* Repair estimate: 10k

* You sell it for 130k and profit 30k

Step six: Buy smart. Rent smarter.

You can purchase a “fixer upper” or a traditional, well established home and rent it out to tenants. Find a great house in an area that shows true renting potential? Shop around at the closest apartment homes first in order to determine a competitive price to rent the house for. Make sure you are covering your monthly mortgage payment (unless you paid cash, and don’t have one) or at least the interest on the mortgage payment. You don’t have to make money immediately when you rent a house. Find good tenants that plan on renting for an extended period of time. Your mortgage payments stay the same (assuming you got a 15 or 30 year fixed mortgage), but your rent gets increased by around 3% per year. After the fifth year of renting is when you usually see the extra money flowing in. The fact that they are paying for your mortgage and you acquire the benefit of appreciation is by far the best part of renting your home. Eventually, when the mortgage payment is all paid off, the rental house becomes a cash cow. Not only did your real estate probably double in value, but you are receiving a constant stream of monthly income. I plan to use my rental property to pay for my kids’ college tuitions and expenses when I decide to start a family.

Step seven: Lease-to-own

You have another option instead of having to worry about some of the hassles of renting your home. The lease-to-purchase method is a mix between renting and flipping. This situation can usually only be profitable if you have built a huge amount of equity in the home either by the “fixer upper” or “great deal” approach. When you find someone that really wants to buy your house but is unable due to credit score or money issues, lease-purchase is the way to go. It can be a win-win situation if performed correctly.

Example:

* Your house’s fair market value (FMV) is 150k

* Your mortgage balance is 100k

* Your monthly mortgage payment is $615.00 (30 year fixed with a rate of 6.25%)

* Lease-purchase option money= 1% of FMV or $1,500. *Pure profit money*

1. Legally this gives the leaser/purchaser the “option to buy the property” while preventing the owner to sell to another party during the term of the agreement. This is also a weeding out tool because it “weeds” out the people that aren’t very serious about the whole thing.

* Settling home price155k and has the option to buy for three years(price that you and the lease agree to). Remember, you cannot change the set price, so think of a price that will create a win-win situation. (Even if there is a huge jump in appreciation you must sell it at the price you have in the contract).

* Rent is set at $1000.00 (A 155k 30 year mortgage at 6.5%. Assume an increase in mortgage rates).

* Apply 10% of the rent payment ($155.00) to applied rent. Applied rent will be used for the future down payment of the house. I highly recommend this, because it shows that you want them to purchase the home and it shows compassion towards their situation. *Applied rent can be taken away if they decide not to purchase the home when the “option to buy” period expires.

* At the end of “option to buy” period, they purchase the home for 155kmyou walk away with the settling money, and they now own the home. (~55k, and the $230.00 per month overage payment:

1. $1000 (rent) - $155(applied rent) - $615 (mortgage payment) = $230 monthly profit.

Step eight: To Be Continued…..

Books eFIPO recommends for Real Estate

Buy Low, Rent Smart, Sell High
The Automatic Millionaire Homeowner
The Beginner’s Guide to Real Estate Investing

Blogs eFIPO recommends for Real Estate

Zillow Blog
Nubricks
Searchlight Crusade

Technorati tags: eFIPO, Real Estate , Leasing & Renting .

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