Why invest in real estate? Because real estate, when properly acquired and managed, provides capital appreciation, equity build up, cash flows, tax benefits and a hedge against inflation. Real estate, both land and improved, has a broad-based marketplace with many and varied values, uses and users. Our country (including the real-estate-plentiful Valley) has a vast supply. The demand for real estate is there always, at some price or terms by users, investors or speculators.
Although real estate is not as liquid as a savings account, if you know your market place and a few techniques, real estate equities can quickly turn into cash or cash flows. Equities can be traded for other benefits. For me, real estate is the best investment opportunity around. Having owned land, apartment buildings, commercial properties and single family homes, my preference is the latter.
Of all the forms of real estate, the single family house seems to be the one with the most opportunities. It is the easiest to acquire and manage, and has the most liquidity. The small size of a single family transaction is well within the means of most investors. Unlike apartment buildings, a single family portfolio is not subject to a rent strike. There are ample opportunities for each of us who is willing to learn and to do. The key is "proper" acquisition.Invest in a Home
If you're new to single family investing, look at one hundred homes for sale before you write your first offer. Drive around clean, neat and reasonably priced neighborhoods in your area. Where would you would feel comfortable owning a rental house? Jot down the addresses and telephone numbers of FSB's (For Sale By Owner). Knock on doors and ask questions of the owners. By taking the time to talk with a hundred sellers, you will learn the values in your market place and come to recognize a good deal. You'll become comfortable asking important questions about the property, the owners and their problems. Find out what the sellers would charge for rent. What are other properties renting for in the neighborhood? Talk with brokers about current sales and rentals. Become the most knowledgeable person in your chosen investment area of town.
Stick to your local area. Buying houses in other states and all over the country may impress your friends, but wait until you have a problem a thousand miles away! It can be a very expensive lesson. Let's assume you have taken the time to learn your market place, talked with one hundred owners and have decided to begin investing in single family houses. Where do you begin? Since we are in the "profit" business, the place to start is distress ownership situations. That' s where the profit is. You make your profit when you buy, not when you sell. With some effort you can find distressed properties. Eventually, owners will contact you. Now, you must do the locating. You need a system for finding, tracking and cataloguing opportunities. Mine works well and it's simple. I use 3x5 cards. Everyday I cut out the FSBO ads from the real estate section of my local paper. I paste each to its own card. I copy the ad phone number in the upper left hand corner and the date in the upper right corner. The property address (when I get it) goes in the top center. My cards are filed by the first three digits of the telephone number. I arrange all my 3x5 ad cards in order by telephone number, marked by tabs indicating which set of numbers follow.
I know when owners change their ads. I know how long they have been marketing their property without success. Their ads may change, but their phone numbers don't. By reviewing my cards I can see who has stopped advertising. From this I know who sold their property, gave up, or can no longer afford the ads. All this is important information in the quest of a good deal.
Real estate rentals are another opportunity. Two types of owners place "for rent" ads: investors like you (a great source of information) and people hoping to rent properties they've failed to sell. (More about these ideas later). These ads get posted in my 3x5 box along with "For Sale" ads. Tack fliers on public bulletin boards and place "house buying" ads in your local newspaper. I have found that the "shopping-guide" newspapers,the free ones thrown in your yard,are good sources and the ad costs are cheaper. Hang g "I Buy Houses" ads on doors. Actively canvas subdivisions on foot, bicycle, or car to find FSBO signs. Talk with people you meet in the neighborhood. Always carry a business card or flyer bearing your phone number. It might read, "I Buy Houses." Get the word to as many people as possible that you are in the single family house buying business. Eventually your phone will not stop ringing!
More sources of single family home opportunities are: real estate brokers, foreclosure notices, and bank-owned properties (REOs).
Now that you have some sources and your 3x5 card system is in place, begin your phone campaign. The telephone qualifying process separates the lukewarm from the highly motivated. (We want only highly motivated sellers.)Make an Offer
Motivated sellers are selling because their situation is changing rapidly for the worse for any number of reasons. They are highly motivated to act now to solve their problem. Tactfully probe: why are they selling? What are their bottom-line needs? From your phone questions you should have a firm grasp of their situation and problem. Tailor your offer to meet just those needs,no more. Be absolutely certain you can perform on what you have offered. (You will hear all kinds of sad stories; this is the time for action; not charity.) Remember, always write at least one offer. You will be surprised how often they are accepted or reasonably countered.
There are as many ways to make an offer as there are sellers. Offers can be structured in numerous ways depending upon the seller's motivation and your abilities to perform. Let's talk about a few approaches to offers.Seller Financing
Today many transactions involve seller financing where the seller holds paper for part or all of the equity. As buyer, the trick here is to get the softest terms possible. One technique is interest only with the balance (balloon) due some time in the future. Be careful about having too many balloons on a number of different properties all coming due at the same time. You will find yourself in a real fire drill in a hurry. Try to structure an escape mechanism in the balloon, such as bubbles where you can extend the balance for an additional period of time by making a small payment at the due date of the balloon. This small payment will buy you time to get your ducks in a row and avert a liquidity crisis.
In a number cases you will be able to write your contract in such a manner as to create a principal only loan. For example, an absentee seller with a $50,000 free and clear house is motivated to sell. Offer $3000 down. You'll pay the balance ($47,000) with payment of $470.00 per month for 100 months. Now you have a principal-only loan.
Nigel Knox is an investment advisor based in Tarzana.
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