Hot Tips For Real Estate Investors - Part 5 20.
When you buy your next property instead of giving the seller
the note as down payment, give him a note secured by that note.
Structure the payments to exactly match the payments you are
receiving. Now you don’t have any income from the note to pay
taxes on, but you do have a new property that is producing rental
income.
25. One Liners
1) If a borrower becomes a member of the military after signing his
trust deed he will be protected from foreclosure by federal law. Don’t buy
any existing TD where the borrower is a member of the military if he
borrowed the money while a civilian.
2) Farmers have the unique opportunity of entering bankruptcy and
remaining sheltered by the bankruptcy court for years longer than other
debtors. Avoid TDs secured by farm property.
3) A subordination clause may be reason for rejecting a TD for
purchase, unless you can negotiate with the mortgagor and have the clause
cancelled.
4) Variable interest rate TDs should be avoided when secured by
property containing four or fewer residential units. Statutory restrictions on
this type of loan are so complex that the cost of complying with the law is
prohibitive.
5) When buying junior liens and the first is not held by an
institutional lender, the first is apt to contain peculiarities in its terms which
make the junior risky. Check it carefully!
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6) Cal Vet loans are really a “contract-of-sale”. The State owns the
property, so do not buy anything junior to a Cal Vet loan.
7) “Divorce TDs” are customarily written with no interest, or at
interest rates well below existing rates. They often do not require payments.
8) California’s “one-action” rule effectively insulates a TD
borrower’s other assets from collection efforts.
9) A judgment lien recorded ahead of your TD is senior to your TD.
It can be foreclosed upon.
10) Judgment liens are never superior to a purchase money TD, no
matter when the judgment was recorded.
11) A secured guarantee backed by separately pledged property is a
reliable shield against the effects of bankruptcy. You can have several TDs,
each signed by a different property owner, all securing a single loan on
which only one of them is the borrower. In case of default you have
recourse on each pledge property.
12) A borrower can protect his property via bankruptcy, no matter
how often he has filed in the past, by selling a fraction interest in the
property to another person who then goes into bankruptcy himself.
13) The right to prepay any mortgage loan must appear in the note.
Its absence can effect the market value of the security, because it makes sale
or financing of the property more difficult.
14) Be a “don’t-wanter”. Anytime you fall in love with a property
you may make a bad decision in order to get it.
15) Be wary of “big deals”. Never place yourself in a position where
one mistake can wipe you out.
16) IRS is your business partner. Always consider that when
investing.
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17) When buying property always try for a “stutter note”. You retain
the right to miss one payment each year.
26. Selling Smart
The author was selling a rental house to move the money into
another investment. It was necessary to replace the carpet in the
entire 1,500 square foot home. After doing some shopping we
found that we could buy nice looking carpet at Home Depot for
less than two dollars per square foot. That price included pad and
installation.
This good deal got even better. It seems Home Depot gives
buyers 60 days to pay for carpet. That meant that the carpet could
be paid at the closing out of escrow, so there would be no money
out of pocket before the sale. And finally, while shopping for the
carpet, we noticed a sign that said if you signed up for a Home
Depot credit card you could get 10% off your first purchase. That
chopped another 10% off the carpet expense.
With new carpet and some yard clean up the home sold in
one day. We had listed it with a discount broker who agreed to sell
the home for a 3-½% commission. When you want a quick sale it
pays to list with a broker so the home will appear in the multiple
listing. That’s where other agents look for homes to sell buyers.
Shop for the broker who is willing to list your property for the least
amount of commission. There are many discount real estate
brokers these days.
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The buyer hired a home inspector to look over the property.
From the inspector’s report the buyer asked us to do some roof
repair. We offered to credit the buyer with $300 in escrow. The
buyer countered with a request for $500. We agreed and the deal
closed with no problem.
Before we agreed to the $500 we had a roofing contract give
us an estimate for the repairs needed. His figure was $1,500. Of
course, we did not tell anyone, including our broker, about the
contractor’s quote.
The repairs are minor and the buyer could make them himself
for far less than $500, but there are two things to learn here. First,
always offer credit in escrow for minor repairs.
If you agree to have work done before the close you run the
risk that other problems may be discovered during the repairs.
The second thing to learn from this deal is if your are a buyer
always get a contractor’s cost estimate on anything that your home
inspector reports.
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27. Always Have A Plan
Always have a plan for any home before you buy it. You
have four primary choices:
a. Quickly sell (flip) the property for profit.
b. Hold and rent for monthly cash flow.
c. Refinance to get profit out and then rent or sell.
d. Trade for other property.
28. VA Homes
You can find lists of VA resale homes online at
www.vahomes.org. You must bid on these homes through a real
estate broker or agent. Find one who is experienced with VA resales.
At the time this was written investors could buy these
homes for just 5% down. That figure will fluctuate with the VA’s
inventory. Owner occupants pay even less down. Could you buy
one to occupy with a small down payment, live in it for a year and
then turn it into a rental property?
29. Price-to-Rent Ratio
Here is a ratio that will allow you identify the most you can
afford to pay for a rental house.
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The ratio specifies that the monthly income form rents must not be
less than 1% of the total purchase price. In other words, you must
never pay more for a house than 100 times what the monthly rent
will be if you expect it to be a profitable investment.
Purchase Price divided by Monthly Rent = Ratio
The ratio should always be less than 100, that is your break-
even point. The farther under 100 the better. Going over 100
means you will probably have negative cash flow and have to feed
the alligator out of your pocket.
Here is a house being offered for $110,000. You determine
it would rent for $1,000 per month. What’s the ratio?
$110,000 divided by $1,000 = 110
Oops, you’ve broken 100 on the ratio meter. You could not
pay more than $100,000 on this house to have break-even cash
flow.
This ratio can also help you size up the investment potential
of a neighborhood. If the average rent in the area is $1,000
monthly you immediately know that the most you would pay for a
house there would be $100,000 and even less to get positive cash
flow.
The price-to-rent ratio is only a rule of thumb and should
only be used as a starting point in evaluating a property. If there
were a high vacancy factor in the area you would pay much less to
account for having your property vacant more than average periods
of time. If the house needed fix up you would chop that cost off of
your purchase offer. And so forth!
Success is built on a mountain of details. This document and accompanying materials are designed to provide authoritative information in regard to the subject matter covered in it. It is for illustration purposes only and presented with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional opinions. If legal advice or other expert assistance is required, the services of a competent professional should be sought. |
