The Real Estate Investor's Guide to Financing: Insider Advice for Making the Most Money on Every Deal - Softcover

Über die Autorin bzw. den Autor

David Reed (Austin, TX) is a veteran mortgage banker who has closed more than 1,000 mortgages. He is a columnist for Realty Times and Mortgage Originator Magazine and is a member of the Mortgage Speakers Bureau. He is the author of Mortgages 101 (0-8144-7245-1), Who Says You Can't Buy a Home (0-8144-7340-7), and Mortgage Confidential (0-8144-7369-5).

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C H A P T E R 1

Basic Finance for the Investor

While there are certainly plenty of real estate books on the market that

specialize in real estate investment, those same books fall short when

it comes to one of the most important aspects of real estate investing:

financing.

Buying real estate as an investment can bring great rewards. Holding

real estate and watching its value rise over the long term is a nice way to

retirement for many people.

One of the advantages of real estate can also be a disadvantage, however.

It’s not a liquid asset. You can’t get your money out of it as easily as

you can get money out of an ATM. If it’s a stinker, you have to sell it, and

that takes time and it takes money.

You can’t just change your mind because of a heavy dose of buyer’s

remorse, take your receipt for your investment condo back to the store,

and get your money back after saying something like, ‘‘Well, it was the

wrong size, and my aunt gave me one for Christmas.’’

Real estate investment needs commitment. You need to decide that

it’s right for you before you get involved.

There are two different types of investors: those who buy and hold,

and those who buy and sell quickly, a process that is often called flipping.

Flippers attempt to find bargains, fix them up, then sell them for a profit.

And these two types of investors are not exclusive; you can both be a

flipper and hold for the long term.

Flipping brings a whole new element to real estate investing compared

to simply holding onto property for a long period of time, then

either selling it when you think you’ve made enough money or keeping

it and passing it down to your grateful heirs.

Flipping requires more than just buying; it requires you to know how

to make repairs on a home and evaluate how much of a return in the

form of increased value those repairs would generate. Or maybe the issue

isn’t just increased value but simply making the place livable.

Flipping requires different financing strategies from those used for

long-term investments. Any real estate investment book you read concentrates

more on either finding, fixing, and flipping real estate or finding

and keeping real estate while paying little attention to the financial

aspect—perhaps one of the most critical pieces of the real estate investment

puzzle.

Getting the wrong financial package can wipe out your profits, hold

you back from selling because of lack of equity, or perhaps require you

to sell for more than the market will bear because of the bad loan you got

when you bought the property in the first place.

If you’re a flipper, financing is critical. If you’re long term, financing

is also critical, but at least in long-term deals you can always refinance

the property down the road if you made a bad loan choice in the beginning.

We’ll discuss refinancing investment properties in detail in Chapter

4.

But then again, because you’re reading this book, you won’t be making

those mistakes, now will you?

One advantage that a long-term investor has is the ability to buy in

other markets.

Let’s say, for instance, that your local real estate market is humming

right along. You know that you can find a property, fix it up, and sell it

for a profit. Or maybe your market is really moving and you can find a

piece of property that takes absolutely no work (or very little), and

because of the real estate demand in your area, you know you can make

another 10 percent on your investment.

You know you can do this because you know your market. You know

the neighborhoods. You know the contractors who work on your properties,

or if you do most of the rehab yourself, you can drive to the job site

every day.

That’s not true if you’re buying in Texas and you live in California.

Yes, you can fly in and look at properties, but if you want to fix and flip,

you’ve got a brand-new problem. How do you find someone you trust to

be the contractor while you’re a couple of time zones away? How do you

monitor the contractor’s progress?

How do you pay the workers, and how do you make sure they’re not

sitting around drinking beer all day long while you’re frantically trying to

get your contractor to return your voicemails?

The truth is, you can’t. If you’re a flipper, then a long-distance rehab

project may not be for you. In fact, if you were planning on making

$20,000 on a nice little flip, then all the labor, plane fare, and headaches

won’t be worth it at the end.

Yes, you can be a long-distance flipper if the properties you’re buying

don’t need any work and you think you can sell them quickly and for a

profit. Yet, you’re not local. You’re not the only real estate investor, and

there will be local professional investors who can sniff out a flip a lot

more quickly than you can simply by being where the property is. By the

time you’ve found a potential investment, gotten on the plane, and rented

a car to look at your potential investment, if it was such a good deal, it’s

probably been snatched up while you were checking your bags.

I will note that sometimes faraway investors can have the upper hand

when they’re in a part of the country that is doing better economically

than the locale they want to invest in.

For instance, a town may have experienced some huge layoffs as a

result of downsizing, creating a significant economic hit. If you are living

in an area that is not depressed, you may have more disposable income

and be able to buy a house for less than market value.

But even then, as a flipper, if you invest in a depressed area, who are

you going to sell to—another flipper? If the local economy you’re buying

into is in the middle of some major economic upheaval, then home buyers

aren’t exactly going to be lining up along the street waiting to bite on

that ‘‘bargain’’ house you found. Many of the people in the town where

you found your bargain have, unfortunately, been laid off.

Being a long-distance flipper, then, is a challenge. You don’t know

the area as well as the locals do, you can’t monitor your project efficiently,

and it’s hard to find buyers in a depressed market.

On the other hand, such opportunities bode well for long-term investors.

If you see that a certain area outside where you live is going through

some difficult times, you can find a bargain house and hold onto it, waiting

to sell until the economy recovers.

I own a home in Austin, Texas, that I bought in the late 1990s. The

seller was an investor from California who had bought the house some

10 years earlier—right in the middle of the S&L debacle....