00FM.qxp 2/26/04 1:16PM Pageiii The BEGINNER’S Guide to REAL ESTATE I N V E S T I N G GARY W. ELDRED, Ph.D. John Wiley & Sons, Inc. 00FM.qxp 2/26/04 1:16PM Pagei The BEGINNER’S Guide to REAL ESTATE I N V E S T I N G 00FM.qxp 2/26/04 1:16PM Pageii 00FM.qxp 2/26/04 1:16PM Pageiii The BEGINNER’S Guide to REAL ESTATE I N V E S T I N G GARY W. ELDRED, Ph.D. John Wiley & Sons, Inc. 00FM.qxp 2/26/04 1:16PM Pageiv This book is printed on acid-free paper. Copyright © 2004 by Gary W. Eldred. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.Wiley.com. Library of Congress Cataloging-in-Publication Data: Eldred, Gary W. The beginner’s guide to real estate investing / Gary W. Eldred. p. cm. Includes index. ISBN 0–471–64711–X (paper) 1. Real estate investment. I.Title. HD1375.E353 2004 332.63�24—dc22 2004040730 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 00FM.qxp 2/26/04 1:16 PM Page v C O N T E N T S Why This Book? xi PART ONE: MINDSET + KNOWLEDGE = WEALTH 1 1. Get Started Now 3 Just Say No to Excuses 3 You Must Believe It to See It 7 Set Goals Now 12 2. Multiple Paths to Building Wealth 19 Appreciation in Market Values 19 Inflation 21 Cash Flows 23 Mortgage Payoff (Amortization) 24 Buy Below Market Value 25 Create Value with Property Improvements 25 Improve the Neighbors and Neighborhood 26 Convert the Use 27 Manage and Market Your Properties More Profitably 29 Protect Your Profits from the IRS (Tax Shelter) 29 Discounted Notes,Tax Liens,Tax Deeds, and Realty Stocks 32 PART TWO: HOW TO RAISE THE MONEY 35 3. Strengthen Your Credit Power 37 Consistency: Fast Track or Flake 37 Character Counts 38 Credit Scores Count Most 40 Summing Up 49 4. How to Invest Using Little (or None) of Your Own Cash 50 v 00FM.qxp 2/26/04 1:16PM Pagevi vi CONTENTS Why Low-Cash Deals Magnify Your Returns 50 Minimize Your Down Payment with Owner-Occupant Financing 54 Don’t Overlook FHA 57 Discover FHA’s Best Kept Secret: The 203(k) Program 59 Too Many Vets Pass Up VA Loans 62 Even Fannie and Freddie Accept Little- or Nothing-Down Loans 63 Summing Up 64 5. Forget the Banks, Seek Out Seller Financing 66 Sellers Can Nearly Always Beat the Banks at Their Own Game, But You Must Do More than Ask 67 Mortgage (Trust Deed) 70 Try a Contract-for-Deed 73 Assume a Low-Interest-Rate Mortgage 76 “Assume” a Nonassumable Mortgage 79 6. Five More Techniques to Finance Your Investments 83 Wraparounds Benefit Buyers and Sellers 83 Lease Options 84 The Lease-Option Sandwich 90 Lease-Purchase Agreements 91 Master-Lease an Apartment Building 93 7. How to Come Up with the Money to Close 96 Cash Out Some of Your Current Home’s Equity 96 Bring in Partners 97 Second Mortgages 99 Personal Savings 100 Sell Unnecessary Assets 100 Down-Payment Assistance 101 Easy Money—Hard Terms 101 Use Credit Cards 105 Personal Loans 106 Sweat Equity (Creating Value through Renovations) 106 Eliminate Your Down Payment with Pledged Collateral 106 00FM.qxp 2/26/04 1:16PM Pagevii Contents vii Student Loans 108 Use More Creative Finance 108 8. Here’s How to Qualify 110 Be Wary of Prequalifying (and Preapproval) 110 You Can Make Your Qualifying Ratios Look Better 112 The Application Itself Contains Many Clues to Your Integrity 122 No Rigid Borrowing Limits Apply to Commercial Properties 123 PART THREE: HOW TO INVEST FOR MAXIMUM GAIN 127 9. Twenty-Seven Ways to Find or Create Below-Market Deals 129 Why Properties Sell for Less (or More) than Their Market Value 129 Don’t Dilly-Dally with Due Diligence 135 How to Find Bargain Sellers 137 10. Make Money with Foreclosures and REOs 143 The Stages of Foreclosure 143 Approach Owners with Empathy: Step One 145 Some Investors Do Profit from the Foreclosure Auction: Step Two 148 The Benefits of Buying REOs: Step Three 151 11. More Sources of Bargains 156 Federal Government Auctions 156 Sheriff Sales 157 Buy from Foreclosure Speculators 157 Probate and Estate Sales 157 Private Auctions 159 Short Sale Bargains 162 12. Run Numbers Like a Pro 170 Follow the Construction Cycle 171 00FM.qxp 2/26/04 1:16PM Pageviii viii CONTENTS How to Profit from the Construction Cycle 171 Per-Unit Measures 174 Gross Rent Multipliers (GRMs) 176 Capitalized Value 177 Cash Flow Returns 182 Don’t Settle for Market Rates of Appreciation: Create Value 184 13. How You Can Greatly Increase the Value of Your Investment Property 185 Search for Competitive Advantage 186 First, Verify Actual Rent Collections, Not Merely Rental Rates 187 Talk with Tenants 188 Set Your Rents with Market Savvy 189 Your Apartment Checklist 190 Give the Interior a Martha Stewart Makeover 192 Safety, Security, and Convenience 194 Rightsize the Rooms 195 Create More Storage 196 Check Noise Levels 198 Overall Livability 199 14. Twenty-One More Ways to Boost the Value of Your Properties 200 Create Strikingly Attractive Curb Appeal 200 Collect More than Rent 203 Convert a Garage, Attic, or Basement 204 Create an Accessory Apartment 206 Create a Special Purpose Use 206 Change the Use of a Property 207 Cut Operating Expenses 209 Gentrification and Other Value Plays 211 PART FOUR: ONWARD AND UPWARD TO BUILDING WEALTH 219 15. Win What You Want through Negotiation 221 How to Define Win-Win 221