The Wholesaling Real Estate Option

When it comes to investing, an interesting question can be posed: is earning a 3% return on an investment worthwhile provided it is virtually guaranteed? For many people, such a return would not necessarily be worthwhile and they would prefer to take their chances with a riskier venture that comes with the higher rate of return. Hence, people invest in the stock market as opposed to dumping all their money in a checking account. Now, in real estate there is a unique method of low interest/high reward investing as it is known as “wholesaling”.

What wholesaling refers to is purchasing a block of property and then selling the properties at a low profit. This may seem like a less than worthwhile venture on the surface, but when one looks at it closely it is clearly a solid plan. The profits are then maximized in terms of the volume of the sale. For example, if one purchases 15 residential properties and then sells the properties at a $4,000 profit per property the profit will accumulate at $45,000. Certainly, that is far from a bad deal! In fact, it is one of the safer large scale investment plans available and can turn into a potentially lucrative investment.

Of course, this is hardly an investment strategy for one who is limited in terms of available capital. To purchase 5 or more residential properties simultaneously is hardly an option for one who can not afford them. But, for an aggressive individual with a lot of capital this could prove to be a wildly worthwhile investment.

Are There Ethical Dilemmas in Real Estate Investing?

It would be next to impossible to ignore the news reports of the current mortgage crisis. After all, the number of homes that are being foreclosed upon is now in the range of millions and that surely has gotten the publics attention. It has also widely opened the doors for real estate purchase and investment opportunities as a great deal of property can now be purchased at relatively lower market values. There are some individuals, however, who may feel certain qualms about purchasing homes during foreclosures as this may seem like taking advantage of a downtrodden person. Such an attitude it not necessarily correct.

A foreclosure simply means that a mortgage has been defaulted upon and the lender is attempting to recoup their money through seizure of the property. While there are definitely some heartbreaking tales associated with foreclosures the fact remains that a foreclosure – much like the initial home purchase – is a business transaction. Banks simply can not lend out money that is not going to be paid back. As such, the inclusion of a buyer of the foreclosed upon property is simply another link in the chain of these business transaction. If the person buying has not been involved in any unethical dealings associated with the foreclosure of the property then the buyer is not doing anything wrong. As a matter of fact, the buyer may even prove helpful as the influx of sales cash can be used to pay off a large part of the remaining mortgage. So, do not let public sentiment designed to sway emotions towards a federal bailout put you on a guilt trip.

Public and Private Equity REIT Investing

As previously mentioned REITS are a sort of managed mutual fund that center on managing, selling, renting properties or lending money to facilitate such ventures. What needs to be understood is that there are two types of REITS that one can invest in: public or private equity REIT funds. While it would seem that on the surface there is little difference between the two the differences that do exist are so radical that understanding the differences is critical before making an investment. The REITS are known as Public and Private REITs.

Public REITS – Public REITS refer to those investment trusts that are offered publicly on the stock exchange. These REITS can be purchased and sold at the will of the investor. They are generally not considered high risk investments although high risk versions surely exist. Also, most of the returns on such REITS are modest as will any low risk investment.

Private REITS – Private REITS are not offered as public stock and are essentially the equivalent of investing in a business. These REITS are generally aggressive with potential high risks, but the payoffs on a private REIT have the potential to be significant. Please note that when one purchases a private investment the stock can not be sold! Instead, the duration of the term of the REIT is specified (say 7 years) and then dividends are paid out (hopefully) over the course of those 7 years with the intention of recouping the initial investment and then exceeding it as a competitive interest rate. If the REIT turns out to be a lemon, however, there is no way out of it. So, please understand these complexities before getting involved.

Investing in a Real Estate Investment Trust

There is a common misconception when it comes to taking part in real estate investing and that misconception is that an individual must be a “big money player” in order to wheel and deal in property. This assessment is a rather inaccurate one as there are a great many opportunities available to those who only have a modest sum to invest. (And, no, this does not refer to those wild over the top opportunities that are available on late night infomercials!) If there was a solid way to invest in real estate with a limited amount of capital it would involve in investing in a REIT – a Real Estate Investment Trust.

For those not familiar with what a REIT entails, probably the best description of it would be sort of mutual fund that invests in properties. That is, the REIT will involve a multitude of properties and interest will be paid on the success of these ventures. The way in which money is earned on a REIT involves the purchase and sale and/or management of property, and rental income (equity REIT); the lending of money for real estate purposes (mortgage REIT); or a combination (hybrid REIT). So, instead of venturing out into these investment options on your own you can invest in a collected managed portfolio of these ventures in the form of a REIT. Again, this is no different than a mutual find and comes with relatively low risk and low initial capital investment. Of course, you could also invest big as well as seek aggressive and volatile REITs as the choice is up to the investor.

Flipping Property as a Real Estate Investment

There are a number of different methods an individual can employ in order to turn a profit in real estate investing and one of the most common is what is known as flipping a property. For those not familiar with what this term refers it means that one purchases a property at a low price and then quickly sells the property at a higher price. Usually, this is done by way of repairing or adding to the property so as to increase its value. For example, if one purchases a home that has a roof in disrepair and then fixes the roof the equity of the home might modestly (or dramatically) increase. The property is quickly sold – aka flipped – and the increased equity is collected as profit. Does this sound easy? Well, in a way it is but it is definitely not a process that comes without risk.

Case in point, if a the property deemed to be “flipped” turns out to require more repair work than what was previously expected or if there are other issues to contend with such as declining real estate value then the property might even turn out to be a money loser for the investor. Granted, tax write offs may make the venture salvageable but this was not the original intention. If there was any advice that could be offered here it would be approach flipping a property conservatively and not try and make a “killing” by attempting to flip a large volume of property. Start slow, take it easy and then let business develop from there.

What is the Subprime Mortgage Crisis

There is much in the news these days about the subprime mortgage crisis and how it has led to foreclosures in the real estate world. Unfortunately, many news reports chronicle the expansion of the subprime mortgage crisis, but they often do not define. This is due to the erroneous assumption that the audience generally understands what this crisis refers to. Granted, there are those familiar with this crisis, but for those who lack a coherent understanding of what it refers to a more detailed explanation is provided.

In short, there was a five year period that ran from 2000 – 2005 where mortgages were made available to borrowers who were having a difficult time being approved for loans by “mainstream” lending institutions. So, these borrowers sought alternate means of acquiring a mortgage and found their “supplier” in the form of subprime lending institutions. Essentially, the terms and conditions offered by a subprime lender were stricter than a standard bank and, additionally, the interest rates were much higher. This was not done in order to be predatory; it was done because the borrower was essentially a high risk candidate.

Unfortunately, as many of the traditional lending institutions predicted, these high risk borrowers ended up in default of their loans. This has led to foreclosures and in an attempt to avoid foreclosure many of the borrowers opted to dump their property and recoup their losses. With so many houses put up for sale market values plummeted and, as a result, the subprime mortgage crisis of massive foreclosures and devalued real estate has occurred. This has created a crisis and it will be quite a while before this massive real estate crisis eventually stabilizes.

Qualifying Property Prior to a Purchase

Let’s say that you are driving your car down a stretch of road and you see a beautiful home. Lo and behold, it would appear that this gorgeous home has a for sale sign on its property. It would seem that the gods have smiled upon you as purchasing the home is all you can think of. There is the problem: all you are thinking of is purchasing a home based on its personal appeal to you. Now, it goes without saying that one should purchase a home that is appealing, but there are also practical and pragmatic issues that need to be taken into consideration before making such a purchase. This should include performing a solid and reliable method of qualifying the home first.

On the surface, some may assume that qualifying the home is a complicated procedure. While it is definitely not a cursory venture, it is also not one that is overly complicated either. Basically, what qualifying the property entails is ascertaining the various financial aspects associated with it. For example, what is the market value of the home and what have similar homes in the same area been selling for? If this is a home that is in foreclosure, how much of the remaining mortgage balance does the property owner owe? What is the condition of the home? Is repair work required and what would the costs be? As you can see, answering these questions add additional spheres to an individual’s ability to make a decision as to whether or not the property is worth purchasing.

The Straight Lease vs. the Graduated Lease

When it comes to real estate investments many people opt to purchase property with the desire to rent the property out and draw rental income. This has long since been proven a solid means of recouping one’s financial expenditure. It has also provided the means of making a profit from the initial investment. Of course, in order to make such a process workable it is necessary to have a lease put in place so as to secure income. The alternative option would be to simply allow the person to rent month to month, but the ability to draw an income when there may be extended periods of time when the property is unoccupied because the renter moved out is a foolish option. Again, a lease should be put in place so as to secure the rental income. There are a number of different types of lease options one could utilize, but the two most common are the straight lease and the graduated lease.

The straight lease is the most common leasing option available and it simply involves affixing a specific price over a specific period of time. For example, if one opts to rent out a home the lease may set the terms at $1,000 a month for a period of 12 months. The individual, of course, is then obligated into 12 month agreement without breaking the lease. A graduated lease is similar to the straight lease, but the property owner reserves the right to increase or decrease the amount of the lease either at will or within certain agreed upon conditions. Generally, graduated leases are rare, but they have been employed by landlords who discover their tenants may be problematic or are causing property damage or simply because of rising taxes or real estate value.

What the Seller has to Gain by Dumping a Foreclosed Property

Some individuals can be very hardheaded and when they have their minds set on something the ability to change their minds can be quite a complex task – even when changing one’s mind or course of action would be far more beneficial than following the same course. Case in point, when an individual falls into financial hardship and is facing foreclosure on their home they may resist offers to sell their home. This, while noble, can turn out to be a thoroughly disastrous venture. As such, it is critical to point out to the homeowner that selling the property may very well be in his or her best interests.

If there was one basic, simple psychological appeal that could be made to the homeowner it would be that foreclosure positively, must be avoided at all costs. The reason for this is that with foreclosure proceedings there come a number of catastrophic hassles that may cause irreparable harm to the homeowner. For example, if a home is foreclosed upon the credit rating of the homeowner will be devastated for a full decade. Of course, one could also seek protection against the creditors by filing bankruptcy, but bankruptcy has become significantly more difficult to qualify for as laws centering on the requirements for filing bankruptcy have become much stricter. Additionally, the damage done to a person’s credit rating due to a bankruptcy would make borrowing money next to impossible. As such, it is significantly better to sell the property outright on your own terms than it is to suffer the disaster of having property foreclosed upon.

Why Bailouts Will Never Be Used to Save a Foreclosure

Real estate and the free market will always experience cycles. There will be boom periods and then there will be periods of depreciation. In some instances, the negative trends will be treated with much media fervor because the media will generally draw an audience if the reporting strikes the right emotional cord. In some instances, pulling these emotional cords is sometimes used to affect policy and law. One such policy that pundits are attempting to influence involves drawing the government into an agreement to bail out those who are suffering from the current foreclosure crisis. While some would hope and pray for a bailout this is most definitely a next to impossible scenario to occur.

First, the number of homes that are currently in foreclosure in the United States has supposedly topped two million. There is simply no way the government could afford a complete bailout (or even a partial sliding scale bailout) to this many number of homeowners. The administration costs associated with such a bailout much less the bailout itself would cost in the billions. This would simply be a totally unfeasible process to undertake.

There is also a very dangerous message that would be sent in the advent of a massive federal bailout. That message would be that people are not required to be fiscally responsible for their actions. In other words, it doesn’t matter what you borrow or how you default because the government will be there to pay off your mistakes. Such an attitude would be a disaster for any nation’s economy.

The Home Needs A Lot of Work? GOOD! What an Opportunity!

If there ever was one thing that dissuades people from purchasing a home it would be the necessity to perform a multitude of repairs. After all, who wants to purchase a home and then invest tons of money into repairing the property as well as making the requisite time commitment that such repair work would entail? Now, while this situation may sound dreadful on the surface it is actually a great opportunity for an industrious person.

If you think this is an idealized description of the situation, then look at it this way: say the average market value of a similar home in the area is $250,000. The home you are considering purchasing is valued at $190,000 due to extensive repair work that is required. So, before making a decision as to whether or not this home is a viable investment purchase it may be wise to examine what the cost of the repairs will be. If the repair work will cost $30,000 then this is not a negative…it is a huge positive! If you do not believe so then simply do the math: $190k plus $30k equals $220K. Remember, the value of the home after repairs will be in the neighborhood of $250K. So, even with $30k in repair work you will end up with acquiring the home at a $30k discount! This is to say nothing of the equity appreciation the home will eventually accrue.

Of course, no one wants to purchase a home that is falling apart, but if the required repairs can be overcome by the equity one can acquire then this is far from a bad real estate investment venture.