Real Estate Investing 101: Six Golden Keys to Help
You Find the Right Properties—at the Right Price
Take heart, novice real estate investors. Scott Frank and Andy Heller, co-authors of Buy Even Lower, offer Six Golden Keys that will make getting started a lot easier.
Chicago, IL (September 2006)—Investing in real estate can be a tricky business. If you’re just getting started, you have lots of questions: How much of a discount should an investor get? What are the best ways to find good deals? Is it better to buy a fixer-upper or a pristine, perfectly cared for property? You’re wise to be cautious. There are plenty of success stories about investors flipping properties for huge profits, but there are also horror stories about people paying too much and losing money on their real estate investments…and you don’t want to be one of the latter. “A lot of people get into real estate these days because of the instability in the corporate world, or else they’ve seen others get wealthy and they want a piece of the action,” observes Scott Frank, who along with Andy Heller wrote the new book Buy Even Lower: The Regular People’s Guide to Real Estate Riches (Kaplan Publishing, September 2006, ISBN: 1-4195-3574-9, $18.95).
“To such newcomers I would say there is
great money to be made in real estate investing, but it’s critical to do your homework before you jump in.” “It’s for these people—regular people—that we wrote our book,” adds Heller. “In Buy Even Lower
, we provide information about two important factors that we have never seen in any other real estate book. First, we teach you how to choose the best real estate investment strategy for you based on how much time and money you are willing to spend and based on how much risk you are willing to take. Second, regardless of the strategy you choose, we teach you how to always make a profit. We believe this is vital information for any property investor just starting out.” Combined, Frank and Heller have about forty years of experience investing in real estate. And in that time they’ve discovered that the easiest way to be successful is to follow their proven formula. A lot of people have helped them through the years. That’s why they’re so excited to share their Six Golden Keys that will help first time investors buy the right properties at the right price. Below is an outline of the Six Golden Keys. Take a look and learn how to apply them so that you can become a winner in the real estate game:
• Golden Key 1: Determine Your Minimum Investor Discount.The Minimum Investor Discount is one of the most important aspects of real estate investing. However, it is also one that is often overlooked, especially by novice investors. Buying a property at Minimum Investor Discount assumes that it is in mint condition and has no problems. In other words, whether it is a house, office building, or a piece of vacant land, the Minimum Investor Discount assumes that the investor will have no repair or improvement costs, no negative features, and so on. If any additional costs will be incurred, they need to be considered for additional purchase price discounting. When you are ready to get in the real estate game, apply the appropriate Minimum Investor Discount while using the right investment strategy. There are three strategies from which to choose: the Buy and Hold strategy, the Buy and Lease/Purchase strategy, and the Buy and Flip strategy. The Buy and Hold Strategy: This strategy is generally about finding properties with good rental or appreciation potential. Most investors who use this model buy houses, condominiums, multifamily properties (duplexes, triplexes, quadplexes, apartment buildings), or commercial real estate (office buildings, strip centers). Many Buy and Hold investors rely on investor discounts as small as 5 to 10 percent.The Buy and Lease/Purchase Strategy: The authors prefer this strategy because it encompasses the best qualities of the Buy and Flip and the Buy and Hold strategies, while minimizing many of their negative attributes. With this strategy, investors can tap into the six different profit sources: they can gain access to the profits from buying at an MID%, as well as collect monthly rents, realize property appreciation, obtain tax write-offs from being a landlord, pay down the loan with the lease/purchaser’s money, and obtain option money, which is the fee the lease/purchaser pays to enter into a lease/purchaser agreement. The rule of thumb to typically use for the MID% is 10 to 20 percent.The Buy and Flip Strategy:This strategy is about making the quick buck. You buy a property at a discount, get it ready for marketing, and sell it for short-term gain. This strategy almost always requires buying very low—with Minimum Investor Discounts of 20 to 30 percent, or more. “Once you have determined the best investment strategy and Minimum Investment Discount range for you, the next step is deciding how wide a net you want to cast for your target properties,” says Frank. “Here’s what all first-timers should keep in mind: the higher the Minimum Investor Discount you require, the fewer properties you will probably be able to purchase, and the harder you will have to work to find them.”
• Golden Key 2: Know What Good Properties Look Like. In real estate investing, success begins and ends with the properties you choose to buy. Choose the wrong property and you could end up being stuck with real estate that no one wants or you could be forced to sell at an undesirable price. After all, you have literally millions of properties to choose from, so you should have a certain type of property in mind before you go looking. You can waste a lot of money, time, and energy if you don’t.An important point too is that a good property for one investor may be viewed as a bad property by another investor due to different real estate investing strategies and Minimum Investor Discounts. “A property is a good property only if it is the right one for you,” notes Heller. “A residential investor will view a well-priced deal on a strip mall as a bad property for his or her investment strategy, while a commercial investor may view this same property as the deal of a lifetime. It all comes down to following your investment strategy…which should be based on the amount of time, energy, money, and experience you have. Golden Key 2 helps you sort through the multitude of property types. By doing so, you can focus on those that best fit your personal situation and have the potential to deliver the profits you desire.”
• Golden Key 3: Find Good Properties. There are many ways to find good properties to buy. Most models differ on key variables such as amount of available cash required, level of inherent risk, degree of contact with distressed sellers, and the amount of time required by the investor. Ten common methods include preforeclosures, foreclosure sales, postforeclosures, purchasing from distressed sellers, real estate auctions, tax liens and deeds, pounding the pavement, corporate relocations, estate sales, and bulk institutional buying. If you don’t want to deal with emotional homeowners who are reluctantly selling their property, you should avoid preforeclosure and distressed seller properties. Keep in mind, however, these sales can be some of the most profitable because the homeowners are trying to get rid of their properties quickly. If you have a lot of time to invest in looking for a property, pounding the pavement (making offers on many properties in your community) may be the best option for you. If you make enough low ball offers, from time to time you may find great bargains, though you may feel like you’re looking for a needle in a haystack. The key is selecting the methods that best fit your time, money, and personality. “Of these choices, we prefer postforeclosures,” says Frank. “Not only do they offer a large pool of properties, but as an investor, you’ll deal with financial institutions rather than owner-occupants who are emotionally attached to their homes. Additionally, the postforeclosure purchase process provides enough time to thoroughly examine properties and usually takes less time than other methods.”
• Golden Key 4: Calculate Maximum Purchase Prices. When you master this key, you learn to systematically calculate the maximum price you should pay for a property to make it a good investment. It’s the top price after any and all negotiations have been completed, and it’s often referred to as the ceiling price. The Maximum Purchase Price provides an objective amount that guides you through negotiations and auction bids to purchase properties that will give you a healthy profit. Use the formula below with every property you consider purchasing: Maximum Purchase Price (MPP) = Fair Market Value (FMV) – Repair & Improvement (R&I) – Other Costs (OC) – Total Investor Discount (TID)Other Costs (OC) = Legal Costs (LEG) + Finance Costs (FIN) + Taxes and Insurance Costs (T&I) + Mortgage Payment Costs (MORT) + Utility Costs (UC) + Marketing Costs (MARK) + Real Estate Agent Costs (REA) + Miscellaneous Costs (MISC)Total Investor Discount (TID) = Total Investor Discount Percentage (TID%) X Fair Market Value (FMV) Total Investor Discount Percentage (TID%) = Minimum Investor Discount Percentage (MID%) + Repairs and Improvement Hassle Percentage (RIH%) + Negative Property Attributes Percentage (NPA%) + Length of Time on the Market Percentage (LTM) “The formulas may seem complicated now,” says Frank. “But as you become a more experienced real estate investor, you’ll know them like the back of your hand. Truthfully, finding your maximum purchase price is the easy part. The hard part is having the self-control not to pay more than your max when you are negotiating or bidding on a property with great potential.”
• Golden Key 5: Make Solid Offers. If you will be negotiating to buy a property, then your initial offer should play a pivotal role in your ability to become a successful real estate investor. Don’t make the common mistake of jumping into negotiations without making a solid offer. Your initial offer price should be below your Maximum Purchase Price to create some “wiggle room” for negotiation. However, if your offer is too low, the seller may reject it and come away with a negative, skeptical view of you. This can cause serious problems if you make another offer. Also, if the seller has multiple properties or is an institutional seller, the damage created by a lowball offer could impair a great future source of discount properties. Presenting a solid offer to the seller gets negotiations off to a good start and best positions you to purchase the property at or below your Maximum Purchase Price. Most real estate investment purchases take more than one round of negotiations. Negotiations can center on the price or on other key components of the real estate purchase contract, such as requested repairs prior to closing, repair contributions, contributions to closing costs, or financing. Therefore, before you make an initial offer, do your best to understand the key terms of the purchase and how all the components work together to affect the entire deal. Also, make sure it passes the “red face test” and include a cover letter to walk the seller through your rationale for the offer, which is almost always less than they’re asking for.“Up until this stage in your investment process, your time and energy are essentially focused on research or preparatory work,” says Heller. “But once you make an offer, you’re no longer simply assessing and theoretically considering investing in the property. You’re now putting your money on the line.”
• Golden Key 6: Negotiate Like a Chess Master. Negotiating to buy real estate at a discount is a lot like playing chess. Both are intellectual challenges that require strategy and focus. Both require you to anticipate the other side’s next move before you make yours, and then adapt appropriately when they make theirs. If you’re successful, you win the rights to purchase a property at a good discount. However, unlike chess, you should make each move with the intention of completing the purchasing process with the seller and agent feeling like winners, too. First, this is simply good business. Second, these people may be sources of future discount properties, such as banks selling postforeclosures and real estate agents who maintain a large portfolio of bank foreclosures.One great way to negotiate your way to a successful purchase is to find the “bone” for each property. The bone is any information a seller or agent can appropriately share to help you negotiate to a successful conclusion (that is, the purchase of the property). If a bank employee tells you they must reduce their foreclosure portfolio by 25 percent by the end of the month, then you have found your bone. You may be able to use the information to negotiate a better purchase price at the end of the month. “There are thousands of rules of successful negotiation,” says Frank. “But we’ve found if you follow one rule in particular you will be a great negotiator. That rule is the Golden Rule: treat others the way you would like to be treated. Do this and not only will you be able to negotiate great real estate deals, but you’ll build relationships that could benefit you on future deals and you’ll feel good about building your wealth along the way.
”When done properly, real estate is one of the best ways to generate sustainable wealth. The key is systematically and strategically buying the right properties at the right price on a consistent basis. “The best way to set yourself up for success is to let the Six Golden Keys drive everything you do,” says Heller. “Keep them on a metaphorical golden key chain and carry them with you every time you are thinking of purchasing a new property. If one of your keys doesn’t fit in the door, then you know it isn’t the right property for you. All the keys need to fit. Embrace this philosophy and you’ll be well on your way to real estate investment success.”
About the Authors:
Scott Frank is an executive in a Fortune 100 company and has been buying, renting, and selling residential real estate on a part-time basis for more than twenty years. Scott is married with four children and resides in Atlanta, Georgia. Andy Heller is an executive in an international transportation firm and has been buying, renting, and selling residential real estate on a part-time basis for more than fifteen years. Andy is married with one child and resides in Atlanta. Together, Scott and Andy have bought, rented, and sold approximately one hundred properties valued at over $10 million. In 2003, they wrote the Fortune magazine-recommended book entitled Buy Low, Rent Smart, Sell High
About the Book:
Buy Even Lower:The Regular People’s Guide to Real Estate Riches(Kaplan Publishing, September 2006, ISBN: 1-4195-3574-9, $18.95) is available at bookstores nationwide, major online booksellers, and in our online store (click on shop).
Excerpt of book as pdf
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