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Real Estate Investing For Dummies PDF

411 Pages·2015·10.07 MB·English
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Eric and Robert’s Principles for Success by Eric Tyson and Robert S. Griswald ✓ Real estate is a proven wealth-building vehicle. Investing in rental properties can generate current income and significant tax benefits as well as build equity from appreciation over the years and decades. ✓ Although many people can succeed investing in real estate, rental property investing isn’t for everyone. Consider your investment prefer- ences and personal temperament before buying property. Do you have the time to devote to real estate investing? Are you comfortable trouble- shooting problems or hiring a property manager? ✓ Make sure you’re financially fit before investing in rental properties. Pay particular attention to your monthly budget and make sure that you have adequate insurance coverage. Most successful real estate investors build their real estate investment portfolio through saving money and then gradually buying properties over the years. ✓ Don’t underestimate the importance of establishing good credit. The best returns on real estate rely upon the use of credit to obtain the leverage of using OPM (other people’s money). ✓ Your first (and often one of the best) real estate investment is buying a home to live in. Real estate is the only investment that we know of that you can live in or rent to produce income. You can also derive large tax- free profits when you sell your principal residence at a higher price than you paid for it. ✓ Focus on residential properties in the beginning. Residential property is an attractive investment and is easier to understand, purchase, and manage than most other types of property. If you’re a homeowner, you already have experience locating, purchasing, and maintaining residen- tial property. ✓ Among residential property options, our top recommendations are small apartment buildings and single-family homes. Attached housing makes more sense for investors who don’t want to deal with building maintenance and security issues. Attached-housing prices tend to per- form best in developed urban environments. ✓ Have your real estate team in place before you begin your serious property searching. Line up a real estate agent, loan officer, tax advi- sor, lawyer, and so on early because the real estate investor with the best resources can identify the properties to ignore and those worthy of careful consideration. Move quickly — the speed at which you can close a transaction is an advantage in any type of market. ✓ Look for properties in the path of progress. Areas where new develop- ment or redevelopment is heading are where you want to be. The best real estate investment properties are ones that are well located and physi- cally sound but cosmetically challenged and poorly managed. ✓ You don’t get rich trying to find no-money-down real estate investment deals. Don’t believe infomercials hucksters. Don’t expect to buy top-notch rental properties that way. ✓ Making at least a 20 to 25 percent down payment provides access to the best financing terms. You can make smaller down payments — even as low as 10  percent or less — but you often pay a much higher interest rate, loan fees, and private mortgage insurance. Leverage, or the use of the lenders’ money to cover the majority of your acquisition costs, can boost your rates of return. But too much leverage can be dangerous if the rental market turns and your debt expenses are high. ✓ As the size and complexity of the deal increases, financing options become less attractive. The financing options for larger apartment buildings (five or more units), commercial, retail, industrial, and raw land generally require more money down and/or higher interest rates and loan fees. But more advanced real estate investors can enjoy higher overall returns plus the benefits of easier management and stability from long-term tenants. ✓ For low entry costs, consider real estate investment trusts (REITs) and lease options. You can buy these exchange–traded securities (which can also be bought through REIT focused mutual funds) for a thousand dollars or less. With lease options, you begin by renting a property you may be interested in purchasing later, and a portion of your monthly rent goes towards the future purchase. If you can find a seller willing to provide financing, you can keep your down payment to a minimum. ✓ We prefer the adage of “Location, location, value.” It clearly empha- sizes location but also the importance of finding good value for your investment dollar. Owning real estate in up and coming areas with new development or renovated properties enhances finding and keeping good tenants and leads to greater returns. Properties in great locations with extensive deferred maintenance, especially aesthetic issues that can be inexpensively addressed are another great opportunity. ✓ Make real estate investments close by. Buy property within two hours away by your favorite mode of transportation. Venture further only when you really know another real estate market and regularly find yourself there for other reasons or you’ve found an excellent property manager. ✓ Any decision about where to invest starts with an evaluation of the overall region’s economic trends. If the area isn’t economically sound, then the likelihood for successful real estate investments are diminished. ✓ You’re purchasing a future income stream or cash flow when you buy an investment property. What you pay for a property and the cash flow it generates makes a significant difference in the success of your invest- ment. The key is identifying which properties sellers have under-priced. ✓ Don’t rely on the seller’s numbers when evaluating a property’s potential. Speak directly with the seller to determine the history of the property and their motivation for selling. But, don’t rely on historic operating results offered by the seller or broker. Develop your own num- bers through evaluating the property with a team of qualified profes- sionals who are specialists in the physical and fiscal management of real estate. ✓ The buy-and-flip real estate investment strategy can work, but it also has a downside. Buying and flipping can be a way to make quick money in real estate if you time your investments correctly in a rapidly rising real estate market. However, flipping can cause your profits to be taxed as ordinary income and you could lose during a market downturn. ✓ Bottom line: Real estate professionals, and you, should value a prop- erty based on the projected Net Operating Income (NOI). Project the NOI preferably for next few years. Projecting the NOI is time consuming and requires a lot of experience, especially if you plan property changes to increase income and/or reduce expenses. Real Estate Investing 3rd Edition by Eric Tyson, MBA, and Robert S. Griswold, MSBA Real Estate Investing For Dummies®, 3rd Edition Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com Copyright © 2015 by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without the prior w ritten permission of the Publisher. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Trademarks: Wiley, For Dummies, the Dummies Man logo, Dummies.com, Making Everything Easier, and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc., and may not be used without written permission. All other trademarks are the property of their respective owners. John Wiley & Sons, Inc., is not associated with any product or vendor mentioned in this book. LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY: WHILE THE PUBLISHER AND AUTHOR HAVE USED THEIR BEST EFFORTS IN PREPARING THIS BOOK, THEY MAKE NO REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE ACCURACY OR COMPLETENESS OF THE CONTENTS OF THIS BOOK AND SPECIFICALLY DISCLAIM ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NO WARRANTY MAY BE CREATED OR EXTENDED BY SALES REPRESENTATIVES OR WRITTEN SALES MATERIALS. THE ADVISE AND STRATEGIES CONTAINED HEREIN MAY NOT BE SUITABLE FOR YOUR SITUATION. YOU SHOULD CONSULT WITH A PROFESSIONAL WHERE APPROPRIATE. NEITHER THE PUBLISHER NOR THE AUTHOR SHALL BE LIABLE FOR DAMAGES ARISING HEREFROM. For general information on our other products and services, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-3993, or fax 317-572-4002. For technical support, please visit www.wiley.com/techsupport. Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com. Library of Congress Control Number: 2014951023 ISBN 978-1-118-94821-7 (pbk); ISBN 978-1-118-94822-4 (ebk); ISBN 978-1-118-94823-1 (ebk) 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: Getting Started with Real Estate Investing ����������� 5 Chapter 1: Evaluating Real Estate as an Investment ������������������������������������������������������7 Chapter 2: Covering Common Real Estate Investments ����������������������������������������������23 Chapter 3: Considering Foreclosures, REOs, Probate Sales, and More ���������������������41 Chapter 4: Taking the Passive Approach �����������������������������������������������������������������������59 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: Identifying Sources of Capital ��������������������������������������������������������������������101 Chapter 8: Financing Your Property Purchases ���������������������������������������������������������113 Chapter 9: Securing the Best Mortgage Terms �����������������������������������������������������������131 Part III: Finding and Evaluating Properties ����������������� 139 Chapter 10: Location, Location, Value �������������������������������������������������������������������������141 Chapter 11: Understanding Leases and Property Valuation �������������������������������������171 Chapter 12: Valuing Property through Number Crunching ��������������������������������������185 Chapter 13: Preparing and Making an Offer ����������������������������������������������������������������211 Chapter 14: Due Diligence, Property Inspections, and Closing ��������������������������������229 Part IV: Operating the Property ��������������������������������� 265 Chapter 15: Landlording 101 �����������������������������������������������������������������������������������������267 Chapter 16: Protecting Your Investment: Insurance and Risk Management�����������301 Chapter 17: Recordkeeping and Accounting ���������������������������������������������������������������311 Chapter 18: Looking at Tax Considerations and Exit Strategies �������������������������������325 Part V: The Part of Tens �������������������������������������������� 349 Chapter 19: Ten Ways to Increase a Property’s Value �����������������������������������������������351 Chapter 20: Ten Steps to Real Estate Investing Success �������������������������������������������359 Index ����������������������������������������������������������������������� 369

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