In 2004, I had a couple of credit cards and no income; when I began dealing in real estate. I found one thing standing between me and greatness: Money! So though there are numerous
strategies available to maximize your investment dollar you first need to create short and long-term investing goals. With that in mind designing an exit strategy maybe more important, then the actual purchase, of your first home. In this article I'll outline some strategies that could potentially increase or decrease your return when investing in real estate.
As in any profession Real Estate Investing offers a host of very specific areas of expertise. I've found due to the high level of competition in real estate that the
beginner investor should try and stick to the basics to insure success.
Real Estate Investment Strategy One: Purchase on paper, and Close for Cash.
Buying to cash out is the most easily understood form of real estate investment. Despite its simplicity, there are some useful hints for increasing your return:
Begin advertising and showing the foreclosure home the day the contract is ratified, and be advised you can't sell something you don't own but, if you're smart you'll have two or three possible clients interested in a lease option to buy. It's important to strategize the way in which you want to present your offer to the buyer regarding closing costs and mortgage amount on the foreclosure property you're
buying. Understanding Hart, Ameridream and other no-money-down foundations and how they can relate to your foreclosure home could determine your break-even point, and you can build that into your profit margin.
Real Estate Investment Strategy Two: Consider a Buy and Rent Option
The difference between rent options and conventional rentals is that with rent options the contract is contingent upon a sales contract which is conversely contingent upon the rental contract. The sales contract has the purchase price and closing date preset to allow the tenant enough time to repair their credit, and if necessary to accumulate enough cash to satisfy the lender.
- The attributes that distinguish a rent option from a non-rent option are:
- A predetermined price with a built-in appreciation of four percent per year.
- A non-refundable deposit in an amount that you feel secures your real estate investment.
- Five percent of the sales price is a common starting figure.
- A rental contract and sales contract are endorsed simultaneously.
The transfer of real estate can be accomplished in several different ways. Renting out the home with the option to purchase is a strategy that allows the owner to maintain ownership of the foreclosure home while simultaneously creating a cash flow. The average property owner that rents the home out with the option to purchase realizes a
20% higher return over a conventional rental situation.
In addition to the reasons already listed, rent options can also be advantageous because:
- The tenant’s perception is one of ownership may translate into the home that could have been better cared for.
- The tenant's willingness to pay more, feeling a greater sense of ownership and control over the home.
- The tenant is willing to put an above-average deposit down on the home, generally five percent or greater depending on their credit and cash on hand.
- The tenant is more likely to stay in the home for over three years because there is perceived ownership.
- If the tenant reneges on the contract there is no need for you to absorb the expense of foreclosing on your tenant.
Despite the advantages listed above, the maintenance of the foreclosed home remains solely the responsibility of the homeowner until the foreclosure home is purchased, which can be a disadvantage. Further, tenants can be over-extended when attempting to pay both rental and option payments.
Real Estate Investment Strategy Three: LIC to Sell
A Land Installment Contract (LIC), also known as a Land Trust, is a method for transferring a home from one party to another without creating a new mortgage. This tool allows a real estate investor to transfer the
ownership of a foreclosed home to a buyer without that buyer necessarily having credit worthy of a mortgage.
This opens the same doors as a Rent Option with one small difference; it requires the seller to perform a foreclosure in place of an eviction. The foreclosure process can cost between $5,000 and $100,000, while an eviction should cost little more than $500.
An LIC can be favorable because it makes it more difficult for the buyer to be evicted and in some circumstances the buyer is willing to pay a greater amount in order to initiate the transaction over a rent option.
Real Estate Investment Strategy Four: LIC to Rent
An LIC to Rent is also possible and has been done for many years by land installing the property from the seller and rent optioning the property to the buyer. This option requires that you read all “For Sale By Owner” periodical and call the seller directly.
- Once contact it made by the seller, ask the following questions:
- Do you need to cash out?
- Are you willing to hold a mortgage?
- How much are you willing to carry?
- If the answer to first question is not yes! Skip the remaining steps and move on to the next seller.
LIC to LIC
The mistake that many investors make is not fully understanding the options that they have available. A great way to make a profit in real estate is to buy and retain the property. Rent optioning the property is far more advantageous than Land Installment Contracts for the seller while land installments offer the buyer more control over the property than is required; giving them a sense of ownership and responsibility.
In either case, while owning the property for an extended period of time may increase your potential profit margins! I've found that depending on clients whose income to debt ratio exceeds 70% may cost you a ton of money and a
bushel time in the long run, while having a qualified buyer to begin with gives the investor the best of both worlds. Their ability to afford the down as well as the monthly payments for six months, will guarantee no money out of your pocket, and secure sale agreed to in the lease option contract stating the sales price is
comparable to other like properties selling at the time of the sale.
So, in my opinion doing your homework and finding qualified buyers will save you
gobs of time and insure you of making good money on your investment, and save you save you the headaches of getting involved in a bad deal.
Well I wish you good luck! And one other piece of advise! Don't ever depend on luck when it comes to investing in real estate.
By Randall Schantin
