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Dodd-Frank Act Explained For Real Estate Investors

Some real estate investors and lenders have been sounding the alarm on the upcoming Dodd-Frank changes to seller financing, but most investors will have little to worry over.

As of January 10, 2014, the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as Dodd-Frank) went into full effect. The bill was actually signed into law by President Obama in 2010, and since then there has been plenty of buzz around investor circles about its impact and what the Dodd-Frank Act really means. Some real estate investors are worried about some of their seller financing practices and ultimately their assets.

The nearly nine-hundred page bill was drafted, in part, to try and address the many shortcomings of the financial industry, and relevant here is how it modifies mortgage lending practices (including seller-financiers) to try and protect borrowers in the wake of the last housing and financial collapse. Here’s what you will need to know to be in compliance, if you make any mortgage loans or do any seller-financing.

Dodd-Frank Act Explained For Real Estate Investors

Residential and Owner Occupied Only – First and foremost, the new law only applies to homebuyers who intend to occupy the home. If you sell strictly to other investors, the remainder of this article is purely informational and does not apply to you. Similarly, the new law does not apply to commercial deals.

Category 1 – Dodd-Frank distinguishes between individuals, trusts or estates who sell to only one owner-occupant buyer per 1 year and those who sell to more than one buyer per year. For purpose of this article, “Category 1” refers to circumstances where the seller (individual, trust, or estate only) finances one property per year to an owner-occupant. Category 1 does not apply to LLC’s, partnerships, corporations or other legal entities.

Under Category 1, the following applies:

  • Balloon payments are allowed
  • No proof of ability to pay is required
  • Note must be fixed for first (5) years, then may adjust no more than 2 points per year with a cap at no more than 6 points above the original rate (the original rate must be based on prime or an index such as T-bill or something similar).

Category 2 – This category references any individual, trust, or estate who sells to more than one owner-occupant buyer per year, but no more than three (3). It also refers to any LLC, corporation, partnership or other legal entity that sells to 1-3 owner-occupant buyers. To be clear, all legal entities are subject to the law in the same way as an individual seller who sells more than 1 property per year. Sellers in this category must abide by the following:

  • No balloon payments allowed
  • Must determine and show proof of buyer’s ability to pay
  • Allowed to do up to 3 transactions without becoming a MLO (mortgage loan originator) or hiring one (an MLO is the shiny new term for a licensed loan officer).
  • Note must be fixed for first (5) years, then may adjust no more than 2 points per year with a cap at no more than 6 points above the original rate (again, the original rate must be based on the prime rate or a an index like a T-bill or something similar).

Category 3 – For sellers who make more than three home loans (including seller-financed transactions) in one year, the new law requires MLO status or mandates that an MLO be hired to complete all transactions. Sellers in this category, whether individual or legal entities, follow all of the same rules as Category 2 sellers otherwise.

The law does not apply to commercial, multi-family properties with 5 or more units, or vacant lots/land, even if the buyer intends to occupy it as a residence.

Investors who take the time to understand the new changes know there is no need for panic and may, for the most part, continue to operate as they have been. The thing to keep in mind, which has always been the case for scrupulous investors, is professional and fair treatment at all times. Dodd-Frank is simply another approach to consumer protection. Investors can protect themselves and the consumer by simply knowing and following the new rules.

Position Realty
Office: 480-213-5251

What Is The Wrong Way To Invest In Real Estate?

“Real estate fever” . . . it’s hit the Country like a plague. Zillions of “newbies” are hitting the bandwagon, trying to make a profit where they lost in the stock market. I meet them all the time, and many are making big mistakes!

Mistake #1: Stock Market Mentality

You’d think after losing $7 trillion in the stock market people would have learned! Nope, they are making the same mistake, which is assuming what happened yesterday will happen tommorrow. Nine of ten new investors I meet say they are interested in real estate because they saw someone else make money from the rapid appreciation of the market over the last few years. But, buying real estate solely for short-term appreciation is often a big gamble! If you buy real estate to hold for 15 years or more, the chances are you will come out on top. If you buy a property and flip it in within a year, you probably are fine, too. And, despite the risk, many people can intelligently time the “boom” of a local market (or subdivision within a market) and make a profit. But, if you buy a rental property for full market price with break even or negative cash flow, you’d better have a backup plan if the market doesn’t keep going up. Investing is a lot like surfing… if you don’t know how to ride the wave, you will drown!

So, should you refrain from investing if you think the market has peaked? Absolutely not! You can find bargain-priced properties in every real estate market, even the hottest. You can find low-interest rate financing that will increase your cash flow so if values drop, you still are covered. You can plan short-term (six to 12 months), because real estate markets rise and fall slowly. And, if you keep a cash reserve for your business, you won’t sweat when the market tanks, because you know that in the long run, real estate markets virtually always come back.

Mistake #2: Investing Blind

You’d think after losing $7 trillion in the stock market people would have learned! Nope, they are making the same mistake, which is blindly buying real estate based on bogus advice or complete lack of education. Real estate is one of the few investments in which risk is directly proportional to knowledge. True, it has a higher learning curve than investing in the stock market, but there’s no proof that having knowledge of the stock market reduces risk (just ask your mutual fund manager).

I read a comment on a real estate discussion group on the Internet. In response to an inquiry as to whether a particular seminar or training program was worth the money, someone answered, “Why waste your money on that stuff? Just use your money as a down payment and learn as you go.” This is probably the worst advice you could ever give a beginner. Money for real estate deals is easy to find if you can find good deals. But, you won’t know what a good deal is without having first invested in your education!

The more knowledge of real estate investing techniques, financing, acquisition, negotiating and, of course, your local marketplace, the less risky your investments will be. A bargain real estate purchase will generally always be a safe investment; a bargain stock purchase isn’t – after all, who says the company you bought into will be in business next year?.

Mistake #3: No Cash Reserves

Ask anyone in real estate long term (or any other business, for that matter) and they will tell you the two most important words for survival are: “cash flow.” Heck, even K-Mart failed to learn that valuable lesson!

In order to stay in real estate long term, you need cash reserves. Buying real estate nothing down is easy; handling negative cash flow, repairs and other expenses in the meantime is the trick. In fact, if you can handle the bad times, real estate will always make you come out on top. Lack of cash reserves puts unnecessary pressure on you to do substandard repairs, accept less than qualified tenants and give into tenants’ demands for fear of vacancy.

When you have a sufficient cash reserve, you act rationally. You hold out for a higher sales price. You hold out for a qualified tenant. You leave properties vacant rather than rent to low-lifes. You call a tenant’s bluff when they threaten to leave. You take care of necessary repairs and improvements on your properties. It’s a whole different ballgame than operating from a lack of cash. Like I said, buying properties with no money down isn’t hard; it’s handling the cash flow. In other words, you can buy real estate without money, you just can’t survive in business without cash reserves. Thus, consider accumulating cash reserves before investing in rental properties.

Mistake #4: Being Greedy

Many investors get started flipping properties to other investors, which is a good idea to generate cash reserves. However, you must be realistic about how much profit is in a deal. If there is a potential for a $20,000 profit in a rehab project, you can’t expect to make $10,000 flipping that property to a rehabber. A rehabber has a huge risk in embarking in such a project and wants a large enough profit to justify the risk.

For example, if a house needs $10,000 in repairs, the rehabber investor wants to make at least a $20,000 profit. If you find a deal with $20,000 in profit potential, how could you expect to get $10,000 for flipping the property if the rehab investor you flip it to is only going to make $10,000? You should be happy making $2,500 and moving on to the next deal. If you want to make more than $2,500 on such a deal, then you must find and negotiate a better bargain that has more profit potential.

Mistake #5: Treating Real Estate as Anything Other Than a Business

People are lured to real estate because of the quick buck that it promises. Don’t hold your breath, you won’t get rich quick. An “overnight sensation” usually takes about five years. More than ninety percent of the people who take a real estate seminar quit after three months.

Why the high fallout rate? Lack of action and unrealistic expectations. Real estate investing should be treated with the seriousness of a career. It takes months, even years for a business to cultivate customers and have a life of its own. You need to treat real estate like any other business. Give yourself at least six months to see if real estate works for you. It may even take a year before you buy your first property. Maybe in the second year you will buy three or four properties. If you work hard at it and keep your eyes and ears open, you may even find your first deal in 30 days. Certainly, you will not make money by talking or thinking about it; you must go out and take action.

Position Realty
Office: 480-213-5251

How To Begin Investing In Rental Properties ~ Buy and Hold

In my judgment, investing in real estate to hold is the best method yet discovered for a person of modest means to become wealthy. Unfortunately, that doesn’t make it easy. Buying and holding real estate successfully requires accomplishing a lot of very different tasks simultaneously or it won’t work. To boil it down, there are five major components:

1 – Acquisition

2- Financing

3- Rehab

4 – Management

5 – Maintenance

In my experience, these five components of buy and hold real estate investing are the basis for building wealth in real estate investing. I will explain each in detail below.

Acquisition

You make your money when you buy. And that is just as true for buy and hold as it is for flipping. Some buy and hold investors can get a little lazy. Whereas flipping creates discipline by quickly showing whether the deal was a good one or not given how much money was made or lost on the sale, buy and hold has no sale. So it’s easier to justify (consciously or subconsciously) lower quality deals. Don’t make this mistake!

Poor deals on the acquisition side will hurt buy and hold investors in the long run just like flippers. More money will be thrown away, cash flow will be lower and refinances won’t pull money out or will force investors to keep high interest private loans. Buy and hold investors should use the same aggressive marketing and negotiating tactics as flippers and not settle for anything less.

Financing

Financing is generally the hardest part for buy and hold investing. Fortunately, there is an assortment of ways to finance properties to hold, but all of them require thriftiness. The first is to save money from a job and use that money to buy investment properties. For this model, FHA loans can be great here because you can buy any property up to a fourplex, live in one side and rent out the rest.

In addition, flipping and holding are by no means mutually exclusive. Why not hold every third or fourth property while flipping the rest? Or better yet, use creative financing (like subject to’s or seller financing) to buy a property for no money down. Or get a ma’ or pa’ private lender to lend you the full down payment. Or partner with someone who has money. Then they can bring the money and you can do the work. It’s not easy, but there are plenty of financing solutions available.

Rehab

The Sydney Opera House was budgeted to cost $7 million and take six years to complete. It ended up costing $102 million and taking 16 years! In other words, it always costs more and takes longer than you think. Contractors and employees are notorious for overcharging, procrastinating or providing poor quality work. So be careful when hiring and be quick to fire if needed.

The best contractors and employees generally come from referrals. Ask for them from people you trust whenever you can. Often local REIA groups will have a list of referred vendors and contractors. And when you are vetting such vendors, ask for references and check them thoroughly. And do not pay them up front!

It’s also important to work hard at accurate budgeting. Make sure to add in a contingency of 15-20% for the things that will inevitably pop up. And always double check your budget against your results. This is important to make sure 1) your buying criteria is right and 2) that you are not under-financing these properties.

Management

The big question is whether to hire a management company or do it yourself. The advantage to hiring a management company is that it frees up more time to look for properties. The disadvantage is that they cost money and that some are incompetent or even criminal. If you do hire a management company, just as with contractors, vet them thoroughly. You should ask for referrals from people you trust and then from the management companies’ themselves. And do not be afraid to fire them. A management company can make or break you and the bad ones will break you quicker than you think.

If you decide to do it yourself, it has to be a primary focus. Property management is the nuts and bolts of real estate, and without it, everything falls apart. Learn the law and consult with an attorney to make sure you are in compliance. In addition, you must have a thick skin and be able to tell a tenant “no” or some of them will walk all over you. Furthermore, know that you will eventually need to hire someone for leasing, maintenance and/or bookkeeping. In the meantime, you will need to be able to do basic bookkeeping yourself in order to properly do your taxes, assess your situation and obtain bank financing.

Maintenance

If you decide to manage yourself you should at least find a roving handyman you can call for maintenance issues (unless, that is, you are very handy). When you have enough units, you can hire someone full time. You will also need to have plumbers, electricians, HVAC technicians and the like on call for such issues.

If you use a property management company, the maintenance and turnover is the most important thing to watch as overcharges will usually go there. If maintenance expenses are out of hand, demand an explanation. If the explanation is unacceptable or the situation doesn’t change, switch companies. The same goes for prolonged vacancies.

These are, of course, just the broad strokes. For more information, read ,The Millionaire Real Estate Investor by Gary Keller and How I Turned $1000 into a Five Million in My Spare Time, by William Nickerson or view the many articles and books on this site.

Position Realty
Office: 480-213-5251

How to Use Your Retirement Funds for Real Estate

In this articles, we will examine how one can use the tax-deferred money in their retirement plans to take advantage of real estate investing opportunities. This article explains how you can use your 401(k) funds to diversify your portfolio mix into real property.

The 401(k) Plan

First, it is important to understand some basic features of a 401(k) program. The 401(k) is a subsection of the Profit Sharing Plan section of the Internal Revenue Code. It allows for employee deferrals on a pre-tax basis. Employers may make this type of plan available to their employees by adopting an acceptable format forsuch a plan. There are limits of how much an employee can contribute. Adoption of such a plan also permits the employer to match employee contributions and to make profit sharing contributions (at the employer’s discretion).

An individual employee may contribute up to about 20% of annual compensation, to a maximum of $9,500 per year. Employers may make matching contributions (such as 25 cents on the dollar) up to 8% of total compensation for each employee. Sometimes profit sharing contributions may also be made and, under certain circumstances, one may have a combined package of 401(k), match and profit sharing/money purchase up to $30,000 in a given year. All of this is variable, and one rule does not apply for all cases.

If you are an employer, you can design the features of the plan and provide the investment alternatives for yourself and your employees. If you are an employee (not defined as an employer), you are permitted to operate your deferrals and investments as established by your employer. If some of the features we discuss here are not available to you as an employee, you may wish to discuss them with your employer to determine whether they can be adopted by your 401(k) plan. If your present plan does not permit the flexibility we are about to discuss, remember any plan may be amended and restated to make such capabilities available.

How to Use the 401(k) for Real Estate and Notes

After all this, how can the funds in your 401(k) plan be used for real estate transactions? Once you have found out that your 401(k) plan funds can be used for real self direction, and the trustee of the plan also permits such transactions, the rules are simple:

You can purchase assets into your plan which are not prohibited. Real estate is not prohibited. You may not deal with yourself or members of your family (other than siblings).

All Transactions Must Be Arm’s Length

This means that you can purchase mortgages with your plan assets. This means you may purchase real property in your plan for income purposes. While debt-financed properties may be subject to unrelated business income taxes, in almost all investment cases we are aware of this has not applied.

How It Works

How does it work? First, you find the property or note. These are self-directed plans, and no one is going to give you a list of real property to chose from. It’s all up to you. Remember, you take all of the risks and receive all the benefits. Neither the employer or the plan trustee has any obligation to you in a properly designed plan. Second, you request that the administrator of the plan ask the trustee of the plan to purchase the asset you have selected for your benefit in your plan. All this is performed through written documents. Third, the security interest in the asset you have asked to be purchased is perfected for the benefit of your plan account. Income and expenses are allocated to your account.

How Often Can You Do This?

As often as you like. Some people like to buy distressed properties, fix them up, and then sell them. Others buy discounted notes. Some purchase income streams. There are as many options as one can think of, provided you follow the rules.

Typically, employers will use the completely self-directed option for compliance with 404(c) of the code for self trusteeship safe harbor. Some combine the complete self direction along with a number of mutual fund choices, making complete self direction available on a non-discriminatory basis to all employees. There is a cost associated with this.

As can be imagined, the process of purchasing notes and real property is a labor intensive process; the process of purchasing mutual funds in a daily valuation environment is almost fully automated. Your 401(k) administrator can provide you with the costs. If your administrator doesn’t handle complete self direction, there are some that will. It’s up to you, as an employer or employee to ask. You may be surprised at the answer.

Position Realty
Office: 480-213-5251

Top 10 Buying Rules & Mobile Applications For Commercial Investing

These 10 rules might seem elementary at first glance, but you’d be surprised at how many of the 10 rules are REGULARLY broken by real estate investors every day. With the, so called, gurus around the country preaching “more”, “bigger” and “quicker”, new real estate investors have gotten themselves into trouble by not following sound business principles outlined in this tip.

Top 10 Rules to Buying a Great Commercial Deal

1. Find a property to which you can add or create value that solves a problem

2. Don’t fall in love with the property

3. Research everything about the market and property

4. Crunch the numbers using a realistic financial model

5. Plan for unexpected happenings

6. Create a business plan with investment goals

7. Purchase with 20% or more equity to keep debt load down (Raise equity from investors)

8. Have more than adequate capital reserves

9. Have a good team in place

10. Be flexible to change

Commercial Mobile Apps For Investors

With commercial real estate professionals always on the go, the advancement in mobile apps has helped many professionals meet more people and close more deals. While new mobile apps have been slow to reach the commercial real estate industry, it has really taken off in the last year or so.

As Smart phones and computer tablets have grown in popularity, mobile apps have been a huge driving force for busy and active commercial real estate professionals. These mobile apps helped commercial real estate professionals in many areas of their business such as:

—->Contact Management —->Document Management

—->Financial —->Listing Search

—->Mapping —->Marketing

—->Photography —->Research

—->Surveys —->Virtual Assistant

Recently, I came across a website, run by top commercial real estate professionals, that has reviews on the most popular commercial real estate mobile apps. The name of the site is CRE Apps. You can check out their website by going to cre-apps.com.

CRE Apps is a great place to learn about all the new CRE apps that are helping people like you and me to make their business easier and more convenient. Here’s where you can find out the most popular CRE Apps: www.cre-apps.com/2012/04/most-used-cre-apps/.

Here’s just a small sample of the types of mobile apps you can use in your commercial real estate investing business:

Loopnet: www.loopnet.com/mobile

Yardi: www.yardi.com/product/MobileApps.aspx

Costar: www.costargo.com

Argus: www.angus-systems.com/?q=products/mobile

REOptimizer: www.reoptimizer.com/solutions/web-app
These real estate investing mobile apps are great in helping you find and close profitable commercial real estate deals. I’ve created a Top 10 list to use as a guide when researching properties on these mobile apps.

The Commercial End Game

Real estate investing is a long term game. Make good business decisions using these 10 rules as a guideline so that you can have long term success with your investment business. Focus on buying GREAT deals not big deals.With time, big deals will come.

Whether you are a real estate investor, broker, manager, lender, consultant or contractor, you should spend some time learning about new technology that can help grow your business, and, make life a little bit easier. I hope this tip serves you. I look forward to it helping you reach finding and buying great commercial deals.

Position Realty
Office: 480-213-5251

How to Get Your Renters to Think Like Home Buyers

Most rental residents treat their dwellings like renters, not home buyers. That’s because rental residents “think” like they are renters, in almost all cases. However, I’ve found it is to the landlord’s advantage if tenants think like “future home buyers.”

Residents who think like home buyers act in the following manner:
Take better care of property than average tenants.

  • Pay rent on time and fulfill other obligations.
  • Handle minor repairs and needed maintenance.
  • Add upgrades/improvements to the property.

Therefore, from the very first month a rental resident moves in, one of you major management objectives is to change their mindset from renter to future home buyer. In fact, your opening letter of introduction, or cover letter, to announce your rental policies starts off: “Welcome Future Home Buyer”.

The process to change a resident’s mindset from renter to future home buyer is not instantaneous, but can be gradual yet continual and very effective. Here’s how I suggest you start the transformation.

WELCOME “FUTURE HOME BUYER”

In the first month, welcome the resident as a “future home buyer” and use that term in both oral and written communication.

Give on-time thank you vouchers.

At the start of the second month, after the resident pays the rent on time, send your resident an On-Time Thank You Voucher – valued at either $25 or $50 good toward the purchase of the home they are living in (or toward any one of your homes if that is an option you would consider).

The first time your residents receive this voucher, they will probably not call you up in immediate urgency to buy your home. But this strategy will start their minds thinking a little about the possibility of buying.

Oh, I almost forgot to mention, one small but significant point about how the on-time thank you vouchers system works. If a resident is ever late, any vouchers received up to that point are considered null and void. This point is spelled out on each voucher as a reminder to residents.

This is significant because when residents first start receiving the vouchers, it effects them. Even though they may not be sure if they will ever buy something; most people don’t want to lose out on something of high perceived value that they can receive. Residents will keep paying you on time so they can keep getting the $25 or $50 vouchers.

The vouchers begin to add up to significant amounts after several months, up to $600 in a year. Residents don’t want to simply throw that much money away or lose it. Some owners offer a one-time only, or once a year only, late payment without complete loss of accrued voucher total. With a late payment, owners deduct a penalty of 25% or 50% off accrued total instead of penalizing the full amount. Whatever method you utilize, the penalty should be significant to be effective.

Your residents will do everything within their power to be able to keep paying the rent on time each month, to keep from losing the possibility of using the vouchers. Don’t be surprised if the residents begin paying a week to ten days early to insure they don’t come close to missing out.

HOLD HOME-BUYING DISCUSSIONS

By the middle of their first rental year, you will want to ask the resident if you can have a home-buying discussion with them.

Hold home-buying discussions twice a year. They are an important part of the transformation process. During home-buying discussions, you share with your resident the buying possibilities, outright purchase, lease option, land contract, etc. As the owner, you should also mention your criteria for choosing whom you would sell the home to under favorable terms. Home buyer criteria should include someone with good payment history and good maintenance and upkeep history.

As the transformation from renter to future home buyer continues because of your home-buying discussions, your resident will take excellent care of your property.

It’s important that you understand that the objective of changing the resident’s mindset is to get residents to “start” to think of themselves as future home buyers, but it is not necessary that they actually buy a home. In fact, please note that you do not allow residents to cash in on their vouchers until an actual closing to buy the house takes place. Even though you are starting to change the resident’s mindset, in most cases you will not see the final transformation from renter to future home buyer to actual home buyer.

However, just getting residents to think differently of themselves, as future home buyers, during their stay in your rental, will cause them to perform differently. Even if they end up not buying one of your homes, and rents or buys elsewhere, the steps I’ve suggested you follow to start the transformation from renter to buyer, will greatly benefit you the rental owner. You will get rents on time, residents will take care of all minor repairs and maintenance headaches for you, because you are not dealing with a renter, you are working with a future home buyer, whose performance is determining whether he or she will be able to buy.

Stay in control and make the most of your assets.

Why Seller Financing Is A Win / Win For Both Buyers and Sellers

There are many benefits for doing an owner-carry installment sale as opposed to conventional financing for both the buyer and seller. Sometimes the advantages inure to the benefit of one or the other, but in most cases the transaction is “Win/Win” for both parties.

Benefits for the Seller

Most sellers of real property insist on the highest price and all cash. Sellers want a fast closing with little hassle. Sellers also want to pay as little taxes as possible on the gains incurred. In many cases, the seller can have most of his needs satisfied by an installment sale rather than a traditional cash sale. Let’s look at these needs one by one.

Highest Price

There is no doubt that a seller can insist on and receive the highest price when offering flexible owner-finance terms. In many cases, the seller can receive more than the fair market value of the property by offering these “soft” terms. People are always willing to pay a premium for non-qualifying financing.

Cash

Nearly ever seller says he wants all cash, but few need it. What the typical seller wants is the most net cash from the deal. Often, the seller has to pay closing costs, title insurance, broker fees and the balance of the existing financing. In addition, there may be capital gains tax due to Uncle Sam. In many cases, the sale of a property by an installment sale (particularly a “wraparound”) will net the seller more future yield than any source from which the cash proceeds were reinvested.

Fast Closing

Nothing holds up a sale more than new lender financing. In some areas of the country, it can take months for a buyer to qualify and close a new loan to purchase your property. Since most standard real estate contracts contain a financing contingency, you may end up back at square one if your buyer does not qualify. Furthermore, if your house is not particularly nice or unique, it may take you some time to even find an interested buyer. Since you are competing with all of the other houses for sale, you may need to spend thousands of dollars in paint, new carpet and landscaping just getting the house ready for the market. There are very few “assumable” loans and few sellers are offering “soft terms.” Thus, an owner-carry sale makes your house unique. Furthermore, an owner-carry transaction can be consummated in a matter of days, since there is no appraisal, underwriting, survey or other nonsense involved. In many cases, you will be able to sell the property yourself, saving thousands in real estate broker’s fees.

Tax Savings

On an installment sale, so you only pay gains to the extent you receive payments each year. This can be particularly advantageous if you have owned the property for several years. Furthermore, you can combine the installment sale with an I.R.C. §1031 Tax-Deferred Exchange for further savings. As you can see, the installment sale provides many advantages to the seller of real property. Let us now turn to the advantages for the buyer.

Advantages for the Buyer

Easy Qualification

The buyer, in many cases, prefers an installment sale to conventional financing because it does not require traditional bank income and credit approval. The buyer may have poor credit because of a divorce or recent bankruptcy. He may be self-employed and cannot prove income. He may be new to his job and cannot meet strict lender guidelines. Even if he could qualify for a loan, the rate will be astronomical if he has poor credit. Furthermore, few conventional lenders offer fixed interest rate loans to people with a poor credit rating. As you can see, there are dozens of reasons why a buyer cannot (or will not) qualify for a conventional bank loan. The installment sale becomes the perfect solution for him.

Credit Rating

An installment sale may give the buyer a chance to improve his credit rating by owning a home and making payments timely.

No Loan Costs

One of the biggest benefits for the buyer is not having to pay the costs associated with conventional loans. Points, origination fees, underwriting charges, appraisal, credit reports, title insurance and the plethora of other “junk” fees charged by conventional lenders can amount to thousands of dollars at closing. The buyer is free from these with an owner-carry installment sale.

Fast Closing

A buyer can close and move into a property within days, since there is no third party lender holding up the transaction. Despite the elevated purchase price and interest rate, there are many benefits to a buyer who engages in an installment sale transaction.

Position Realty
Office: 480-213-5251

Rental House Investments Beats Investing In Stocks

After seeing the stock market and real estate market decline so significantly the past few years, many investors are wondering whether now is a better time to buy stocks or invest in real estate and which would be a better investment?

Real Estate Investing vs. Stock Market Investing

Consider the following facts about a recent rental house purchase which was purchased a few weeks ago. The house in question was purchased in Port St Lucie, Florida and was a bank owned REO property which was purchased directly from the bank.

Purchase Price _________________$47,500
Monthly Rental _________________$800

Annual Rental Income____________$9,600
Less Annual Insurance___________$1,045
Less Property Taxes_____________$1,300
Less Vacancies_________________$800
Less Repairs __________________$800

Net Annual Income (NOI)_______$5,655

Cash on Cash Return__________$11.9%

If we assume that the property is vacant 1 month out of every twelve and that we spend another 1 months rent on repairs, we would still net a very healthy 11.9% return. Where else can you get almost 12% on your money with very little risk? This house previously sold for almost $200,000 and buying it at less than 1/4 of that price has obviously significantly reduced the downside risk.

The Real Value of Your Rental Property

The current market value of this property is around $77,000. So while this investment yields a current yield of 11.9% I have the added luxury of knowing that there is around $30,000 worth of equity in this property. And considering that historically most rental property in Florida sells at around 140 times rent (this number changes based on market conditions), the fair market value for this property could be somewhere around $112,000. That is how much I would sell this property for if I were to sell it to a Rent to Own Buyer with an FHA mortgage.

Zillow estimates the value of the property at $124,000. The insurance company has the property estimated at $125 per square foot replacement cost. Since the property is 1,176 square feet that puts the valuation at $147,000. I think the property is worth around $77,000. The fact that properties are selling at such a discount to replacement cost should be a huge red flag. That is the builder’s way of letting you know that you should be buying real estate now.

The real replacement cost is around $75 per square foot which would put the properties value at $88,200 which is probably fairly accurate. However this is the value if the house was constructed new and without the land. The lot is worth $25,000 so the house built new would cost around $113,200 to build. Existing homes need to be depreciated since obviously they are worth less than new homes so the $77,000 to $88,000 is probably a healthy range for what the house is really worth. If we are conservative and assume $77,000 that is still a definite $30,000 in equity.

Return on Investment For Rentals

At a purchase price of $47,000 that represents 63.82% return on my money when I purchase ($30,000/$47,000). In addition to this $30,000 in instant equity I also receive almost 12% annually as mentioned previously. And this is all without utilizing any leverage whatsoever.

Imagine what the return would be if I borrowed 90% of the purchase price ($42,750) at 7% on a 30 year fixed mortgage. My monthly payment would then be $281.09 for both principal and interest which adds up to a total of $3,373.08 for the year.

If I deduct this $3,373.08 from the $5,655 net operating income above then I would be left with a net annual income of $2,281.92. Consider that if you put down 10% ($4,750) that would work out to be a “cash on cash” return of 48%. Where else can you get this kind of return?

Less Risk Investing In Rentals

There is no other investment that can do this with any certainty. Keep in mind that in these calculations I am still factoring in all the expenses of owning property including vacancies, maintenance, taxes, insurance and repairs. I have not factored in the “headache” factor which is basically the headache that comes along with being a landlord.

The “headache” factor is without a doubt the biggest downside to being a landlord. Being a landlord is a lot more hands on that looking at your monthly mutual fund statement. In my opinion that is the biggest issue that a potential landlord should consider before investing in rental properties.

Going back to the example of the $47,000 house, investing this same $47,000 into stocks would be a much less secure way to invest your retirement money. I should know. I spent fifteen years as a stockbroker and money manager before becoming a distressed real estate investor. And I am here to tell you what many other real estate investors and landlords like me already know. The best place to invest your money is in single family rental properties.

Why Investing In Rental Properties Beats Stocks?

Any landlord will tell you that being a landlord can be a headache too. Chasing after dead beat tenants, lost rent, damage to properties, maintenance and repairs are all part of being a landlord so you need to make sure that you have the time, desire, inclination and patience to become a landlord. But if you do and you hold for the long term you will be rewarded very well.

Unless your name ends in Buffet or Soros you are probably much better off investing in single family rental properties than you are investing in the stock market. Investing is about getting as much cash flow or yield as possible, without risking your nest egg and doing so in the most secure way.

Anything else is not investing. It is speculating. And speculating is anyone’s guess. If you are looking for a sure thing then you should go out and find a single family rental house that is way below current market value and you should buy it, fix it up and rent it out. If you hold that house until the mortgage is paid off you will have a good investment.

Position Realty
Office: 480-213-5251

Strategies To Increase Apartment Investing Cash Flow

Want to increase your real estate investing properties cash flow? Have any apartment buildings you would like to improve? I’m going to show you how to increase your monthly cash without spending a dime and start putting more money into your bank account each and every month.

You can do this by uncovering hidden marketing assets within your properties. Once you learn where to find these assets and how to use them, you will be able to increase your sales and cash flow by 10%, 20%, 30% or more.

Step back and look at all the possibilities your property offers its residents and marketplace. These strategies will help you optimize and leverage your marketing assets so that you have a stronger operating property. Here are few areas for you to find hidden assets:

Get Inside Your Property

That’s easier then you think. Take an hour and contemplate on the following:

•Uncover hidden assets
•Reveal over-looked opportunities
•Find under-valued relationships
•Expose under-performing activities

What did you come up with? Most investors, does not matter the size of the property will be able to think of a least one example for each.

Areas To Optimize & Leverage Hidden Assets

Now that we’ve identified a hidden asset of your apartment building or cash flow investing property, the following examples are great ways to put the asset in play:

•Past residents
•Current residents
•Under-promoted property competitive advantage
•Unique service or amenity
•Sub-par leasing performance
•Relationships with other business
•Big property strengths
•Current sales & marketing process
•Up-selling additional services
•Lifestyle promotion
•Resident retention
•Community relationships

4 Strategies to Optimize and Leverage Your Assets

1. Differentiate Your Property: What makes your property unique? Find your properties uniqueness by conducting a property and market assessment. There’s a great book out that you should read. It’s called “Differentiate or Die” by Jack Trout.

That’s exactly what landlords need to do with their properties to be successful. We have to differentiate your property so that you stand out among your competition.

2. Optimize Your Current Marketing: Optimize your current marketing by integrating the competitive advantage that makes your property different into all of your marketing.

3. Optimize Your Current Customer Base: Build a solid customer relationship marketing program. This program will be centered on building a consistent resident referral system. If you are successful at implementing the first two steps, building a solid and consistent resident referral program will be the very bedrock of your financial success and generating more cash flow.

4. Building Marketing Alliances: There are many ways for your property to partner-up with local businesses. Think about it. People that live, work, shop and play in your local market stay within that market. Building alliances within that market will help you get referrals. And guess what? Referrals are as good as gold because there’s very little selling when they come to your property to rent.

Start optimizing and leveraging you properties hidden marketing assets so that you can increase your occupancy, reduce unit turnover, and reduce concessions. These four strategies will help you drive more cash flow to your bottom line.

I hope this tip serves you. I look forward to helping you reach for the stars!

Position Realty
Office: (480) 213-5251

7 Steps For A Successful 1031 Tax Deferred Exchange

A 1031 exchange is a tax-deferred exchange which allows an owner of business or investment property to exchange that property for new property without incurring income tax on the gain.

The 1031 Exchange Process

Prior to closing on the sale of the sold property:

Step 1: Consult with your tax advisor for a 1031 tax exchange

Step 2: The Agreement
Contact an 1031 exchange intermediary to reserve an account number to use on all the exchange documents. The owner of the property (“the Owner”) should complete both an Exchange Agreement and a Qualified Exchange Trust Agreement.

Step 3: Assigning the Sold Property Contract
The Owner assigns rights but not obligations under the Sale Contract to a Qualified Intermediary and provides notice of the assignment to the Buyer. At the closing, title for the sold property is transferred directly from the Owner to the Buyer (known as direct deeding). A copy of the completed Assignment of sold property Contract and a copy of the Sale Contract should be sent to your intermediary.

Step 4: Net Proceeds
Net proceeds from the sale must be payable to the Qualified Intermediary. Payment may be in the form of a check payable to them or a wire transfer. It is important that the Owner never have actual or constructive receipt of the funds from the sale. Once proceeds are received by them, they are invested for the benefit of the Owner.

Within 45 days following the sale and transfer of the sold property:

Step 5: Identifying Replacement Property
The Owner completes the Identification of Replacement Property form. Replacement property must be specifically and unambiguously identified. For real estate, this could be a valid street address or a legal description. Identification requirements for personal property may vary depending on the item, but make, model and year are usually sufficient. Delivery of the Notice to the intermediary may be by hand, fax, mail, or over-night courier and must be postmarked by or received by 11:59 p.m. on the 45th day. Prior to midnight on the 45th day, the Identification may be amended or revoked, but after the 45th day, no changes in the Identification will be accepted.

Within 180 days following the sale and transfer of the sold property:

Step 6: Assigning the Replacement Property Contract
The Owner assigns rights but not obligations under the Purchase Contract to the Qualified Intermediary and provides notice of the assignment to the Seller. A copy of the completed Assignment of Replacement Property Contract and a copy of the Purchase Contract should be sent to the intermediary.

Step 7: Disbursements
Owner sends a Direction to Disburse Funds from the Exchange Account. Funds are made payable to the Seller of the Replacement Property or to the Seller’s agent. At the closing, title to the replacement property is transferred directly from the Seller to the Owner (direct deeding).

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