Lining Up Your Real Estate Financing: Cash vs. Loans

The biggest barrier to entry in real estate investment is usually the money.

Buying property requires a large chunk of bills. If you have the cash on hand, you can buy property outright. If you don’t, you must obtain a loan.

Both paths take you down the road to investment property ownership, but there are definite pros and cons to each purchasing decision.

Tax benefits, loss shelters, and liability issues are a few of the factors to consider when you are deciding how to make a property purchase.

Cutting the Tax Burden

One of the best reasons to get a loan when buying a property is the tax benefit.

Not only can you write off the property tax, you can also write off any interest you pay on the loan. Of course, if you pay cash, you avoid paying interest entirely.

The tax write-off helps reduce the cost of the loan but does not eliminate it.

Managing Investment Risk

A big part of any investment is the risk.

Typically, the riskier the investment, the more the potential payoff. In real estate, the same is true.

If you buy a property using cash, you can develop immediate cash flow. Every rental dollar you collect — minus taxes — is pure profit.

Of course, if the property sits vacant or the market drops out, you are left holding a worthless investment.

If you take out a loan to buy an investment property, you pay the bank most of the free cash coming from the property, but you don’t put your own dollars at risk.

One of the first things you learn in investing is to use someone else’s money whenever you can. That keeps your cash available for further investment opportunities.

Leveraging Your Assets and Cash

When you buy a property using cash, you limit your ability to buy additional investment properties. More of your money is tied up in the single purchase.

In the short term, you can generate more income from a property when you don’t have a mortgage.

In the long term, leveraging your holdings to close on additional properties will generate more wealth.

The more properties you own, the more rent you collect and the less a vacancy will affect your cash flow.

With the money you spend to buy one property outright, you could leverage the funds to own as many as ten investment properties.

Avoid Over-Leveraging

Using loans to buy properties allows you to buy more, but it can also encourage you to over-leverage.

Owning more properties means that you will eventually enjoy a comfortable income solely from rent, but you need to be cautious. The more mortgages you have, the more vulnerable you are to market shift.

f a property sits empty for too long, you could face foreclosure.

Before you choose to max out the number of loans available (typically 10 mortgages), you’ll want to take a serious look at your cash flow.

If every property is showing positive cash flow, and you can sustain the loans even if you face a high vacancy rate, you should be in good shape to continue expanding.

If your cash flow fluctuates and you pull money out of your pocket to pay your mortgages, it’s not the time to keep buying.

Over-leveraging and expanding too quickly are some of the risks associated with using a loan to build your property portfolio.

Quick Pros and Cons of a Cash Purchase

Buying with cash has some clear benefits and potential negatives.

Pros:

  • You own the property outright, so there is no threat of foreclosure.
  • Less pressure to keep the property occupied.
  • No mortgage loan that must be paid, even when the property is being repaired.
  • All rent collected, after taxes, is profit and can go into property maintenance.
  • Potential long-term property appreciation, increasing the value of your investment.

Cons:

  • You must have the cash in-hand to make the purchase.
  • Almost every dollar you collect is subject to income tax.
  • Reduces cash flow, which also reduces your ability to diversify and grow your portfolio.
  • Risk of property depreciation is entirely yours.

Quick Pros and Cons of a Mortgage

When you either don’t have the cash to buy outright or would simply prefer to dilute the risk, you need to understand the benefits and negatives of financing the purchase.

Pros:

  • You don’t have to have the entire purchase price in free cash.
  • The bank’s money is at risk, not your own.
  • Tenants pay off the mortgage, tying up cash flow in exchange for equity.
  • Greater financial flexibility with less of your free cash tied up in property.
  • You can deduct the interest paid on your loan, reducing your tax burden.
  • Potential property appreciation in the long-term increases the value of your investment.

Cons:

  • A big chunk of rental income goes right to the mortgage payment.
  • Foreclosure is a risk if you can’t meet the financial obligations of the mortgage.
  • Must fill vacancies as quickly as possible to avoid missing mortgage payments.
  • You pay interest to make the purchase, adding to the price of the investment.
  • Risk of property depreciation that could cut into your earned equity.

Deciding Between Cash and Loan Purchases

Ultimately, both cash and financing options have clear benefits. I

f you already have a well-diversified property portfolio, you might not need to finance.

If you have enough cash on hand to buy a rental property, consider the benefits of leveraging that cash to purchase several rentals. The amount of risk will influence your decision.

If you are comfortable taking moderate risks to increase your eventual return, financing is a great option for investing in real estate.

How to Make Top Dollar on a Real Estate Investment

If you are buying property as an investment, the first priority is profit. You want to make as much money as possible, in the shortest amount of time.

With real estate, you have several options for ensuring positive returns on your investment.

You can buy, renovate, and sell; buy and rent; or buy, live and rent. Endless variations on these themes exist, and there are many more possibilities.

When you first start investing in real estate, you will probably want to start with one of these basic practices. To get the most out of your property investment, keep these things in mind.

Real Estate is NOT a Short-Term Investment

The only way to turn a quick profit on real estate is through a renovation model.

You buy a distressed home at below its market value, improve the property, and then sell it.

This model can give you some quick gains, but unless you plan to do most of the renovation work yourself, it can also be a very expensive way to turn a profit.

If you are planning on doing the rehab, you need to know what you are getting into. Rehabbing a home takes a lot of work, a big investment in time and materials, and may not go according to plan. If the renovation takes too long, you could see property prices dive, leaving you selling at a loss.

The buy, renovate, and resell business model works best for those with a lot of experience in construction and the real estate market. Plus, it only generates a one-time return. Looking at real estate as a long-term investment gives you more flexibility in how you deal with a property.

Becoming a Landlord

Renting out a property is the way to generate consistent income.

Mixed-use and multi-family dwellings are often the best way to get the most income with immediate returns. It is easiest to line up financing for owner-occupied buildings, so finding properties in which you can live and rent space makes a lot of sense.

They also offer benefits during renovation periods.

If you need to do repairs to one unit, you can still draw income from one of the other units.

As a landlord, you can get many of the same benefits as someone who renovates and resells, without the risk.

Because you plan to keep the property for several years, you do not need to rush renovations or worry about temporary price fluctuations.

Building Wealth with Property Appreciation

One of the most common ways to earn a good return on real estate is by gaining appreciation on the property.

A building you buy now might be worth considerably more in a few decades.

On top of that, you can collect rent every month, giving you income as you wait for the property value to go up.

Like with any investment, you should set some hard and fast targets before you buy.

When buying stocks, you can set up sell thresholds, and you should do the same when buying a property. Waiting too long can leave you struggling to sell after the market corrects.

Instead, commit to specific targets and act as soon as you reach them.

Expanding Your Property Portfolio

A few small units can give you a regular income, but to make real estate your primary source of income, you need a fair number of units.

That is where small apartment or office buildings come into the picture.

You’ll want something that has less than 50 units and more than five.

More units mean more income per property, and if you can buy the property outright or pay down the mortgage quickly, most of that money goes right into your pocket.

The reason why most new real estate investors don’t dive into an apartment building is due to the more complex financing requirements. Commercial lending on that scale has more limitations.

Buy Low, Sell High

Ultimately, making money on real estate comes down to the simple concept of buy low and sell high.

You want to find undervalued properties or areas you think are likely to experience a renaissance.

For example, in Maryland, the addition of the Rt. 200 toll road made property further from Washington D.C. more valuable. With quicker access to the Metro and other major highways, homes further from the city could commute in a reasonable time.

Find areas with similar construction plans in the works or new businesses coming to the area.

If you get in before the property values start to rise, you can make a real killing.

Diversify and Wait

When you are in real estate for the long haul, you have the potential to earn a lot.

Each property in your portfolio represents a significant capital asset. By renting units, you get someone else to pay the mortgage, leaving you with a valuable investment and direct income.

Don’t invest in property expecting to see rapid appreciation, and don’t spend all of your time on renovations.

To get the most money out real estate with the least stress, invest in properties that will give you positive cash flow from day one. If you do, you can rapidly expand your property portfolio and gain capital assets.

The 4 Secrets To Estimating An Accurate ARV

So, you have completed your comparative market analysis and research and finally decided on a location in which you would like to purchase your rental property.Image courtesy of SellingUp.com You have decided on the amount that you can afford, and arranged provisional financing – and now the fun begins!

It is time to go shopping for your investment property. You can search using online real estate sites, such as realtor.com and zillow.com. Sites such as these allow you to search hundreds of properties in your chosen area and also set up alerts, which let you know the minute a property which meets your criteria comes onto the market.

It also makes sense to meet some real estate agents in person, as they have a wealth of knowledge that can prove invaluable. They may also have access to exclusive properties that have not been shared online. The best tactic is to widen your search using as many angles as possible, to give you the greatest chance of finding a bargain.

Looking at properties is a case of checking your wish list against the reality that exists beyond every front door. Perhaps your research has shown that the majority of renters in the area are families with 2 school-aged children, which means three bedrooms is ideal. Maybe the demographic leans more towards young professional couples, which means two bedrooms is plenty, but the living space should be open for entertaining friends at dinner parties.

Plus, the bottom line for most successful rental properties is that the decor is fresh and neutral, with a modern and attractive bathroom and kitchen fitted.

No property will be perfect, and that will mean that you will need to make numerous changes and upgrades in order to achieve the overall outcome and renter appeal that you have hoped for and banked on.

Keeping all of this in mind while you are visiting potential new properties can be difficult. The asking price for a property has to be coupled with the cost of repairs and upgrades. Of course, the upgrades should add value to the property, which will hopefully exceed the cost of the work. This equation provides a figure known as the ARV, or after repair value.

ARV – The value that the property is worth after you have completed repairs and upgrades.

It goes without saying that it is vital to estimate this figure as accurately as possible, as it is one of the most important determinants of the profit you will make with your investment. Fortunately, you don’t have to come up with this figure blindly. We are sharing the 4 top secrets to estimating an accurate after repair value, which will help you to choose your investment wisely.

Secret 1 – Make The Realtor Your BFF

Image courtesy of cache2.asset-cache.netThe first secret to estimating an accurate ARV is to build a good relationship with your realtor. Always be honest with them about your motives and goals with investing in a rental property, and they will be more than happy to share their thoughts on the value of a property, as well as expected value increases based on their experience. They will be able to tell you specifics on other properties that appeal to renters, whether a new kitchen will be a better investment than upgrading the double glazing, for example.

They will also know of comparable properties currently on the market that may already be closer to the ideal that you are looking for.

Secret 2 – Find Three Good Contractors

Once you have shortlisted a couple of potential investment properties, it is wise to invite three contractors to take a look inside and provide you with a written estimate for completing the work that you would like to have done.

Three contractors will offer you a broad enough idea of what the average cost of the work should be, plus you will be able to see immediately if one is considerablyImage courtesy of CasaandCompany.com higher or lower than the others. The written estimates will enable you to compare the quotes fairly, so that you can be sure that they are like for like.

Be honest with the contractors that you are obtaining three quotations, and explain that you are trying to estimate an accurate ARV at this stage. Building a good relationship will pay dividends in the future. Any reputable contractor expects to spend some time providing quotes in this way, and even offering advice on upgrades that may be more cost effective in their opinion.

You can also take your efforts a step further and research the costs of supplies and parts that you will need to complete your upgrade from local hardware and building depots. While contractors will usually receive a discount when purchasing these items, it is useful to have an idea of the figures that you should expect to pay.

Secret 3 – Research The Market

Image courtesy of NCSL.orgOnce you have compiled the quotations from your ‘team’ of realtors and contractors, you should have a good idea of what you will be paying out in total, and what other similar ‘fixed-up’ properties are selling for. This is the time to brush up on your knowledge of what is selling and renting well in the area.

It is not uncommon for people to pose as tenants in order to visit rental properties and speak to existing landlords about what is offered. This kind of investigation provides insider knowledge that could make your investment a real success, showing you exactly what other landlords are offering, and the amount of rent that they expect in return. It could give you the edge in offering extra value to your potential tenants, ensuring that you will never be left with an empty rental property.

Secret 4 – The Word On The Street

The final secret is to take a close look at comparable sales in the area, with a comparative market analysis. This is the actual sales value of homes in the local area, Image courtesy of BoomerBenefits.comand is usually limited to sales within the last 90 days, as fluctuations over a longer period of time can make the figures useless. The radius to use in order to compare sales prices would be around 1/4 to 1/2 a mile from the property that you are considering.

When looking at comparable sales, it is important to look at properties with a similar square footage, which are a similar age and in a similar condition. If you can find a property to meet these requirements, it will give you a very accurate idea of what you should expect to pay – and this will help to make your overall ARV more accurate. Your real estate agent should have access to this information and will help you to make sense of the specifics.

Knowledge is Power

Once you have these 4 secrets covered, you will have a wealth of information at your fingertips with which to make a measured decision about whether a property will be a useful investment for you. An accurate ARV can make or break the profitability of a rental property venture.

However, even with your figures compiled so carefully, it is still wise to be conservative and work with the worst-case scenario. Markets change quickly with little or no warning, and it is always best to give yourself a margin to work within. If you find that you are unable to make a worthwhile profit with anything but the most optimistic ARV, then it may be wise to let a property pass, no matter how much you have fallen in love with it.

Finally, do listen to the team that you build around you. It is true that they will make money from your decision to purchase, but they have experience that money can’t buy. If you trust your real estate agent and contractors, then be grateful for their expert advice. After all, they have no emotional investment in your decision and the ARV can make all of the difference to your final figures.

Why Real Estate Crowdfunding Should Be on Your To-Do List Today

So, you have made the decision you want to get into the real estate business, but not necessarily by becoming a landlord. It is no surprise that this is a popular choice when investing in property is a decision that is bringing financial freedom to many, but the first obstacle can be a tricky one.

How are you going to afford to finance your new business venture?

Image courtesy of oneaim.euOne creative route that is starting to be used for this very reason is real estate crowdfunding. As surprising as it may sound, this method of investment is redefining the world of real estate, and is proving to be a very lucrative method of earning a passive income.

Crowdfunding is rather different from the traditional route of investing in property, and has leveled the playing field to such an extent that people with a moderate budget are able to invest and diversify their portfolio, something that would be unheard of in recent years. Real estate investment via crowdfunding is quick and easy … it takes only minutes to sign up on a site that offers investment properties to choose from at your fingertips.

Justin Pierce from The Washington Post is passionate about the concept as we can see here:

“Through crowdfunding, iFunding has opened the opportunity to invest in private real estate to millions of individual investors by lowering the minimum investment to $5,000. Crowdfunding is the future!” [source]

The opportunity to invest and make money is easier than ever with this route, but there are some important points to understand in order to remain informed about just what you are financing and how to protect your investment.

What Exactly Is Crowdfunding for Real Estate?

Real estate crowdfunding is the pooling of finances in a real estate project by multiple investors. The types of property available to invest in are varied, Image courtesy of crowdsunite.comwith everything from family residences to commercial property on offer in a broad geographical region across the various platforms. It works in two ways:

  • Equity Investment – Each investor holds a stake or shares in the property (commercial or residential), and in return, receives a portion of the rental income. This is typically paid out on a quarterly basis.
  • Debt Investment – Each investor pays towards the mortgage loan for a particular property. The loans are paid over time with interest, and the investors receive a share of the interest as the loan is repaid. This may be received on a monthly or quarterly basis.

The two options vary in their degree of profitability and risk. Equity investments tend to result in bigger returns, but they can be riskier and take longer to pay off. On the other hand, debt investment is limited by the interest rate set on the loan.

What Are the Benefits of Real Estate Crowdfunding?

Real estate crowdfunding, using either of the two methods (debt or equity investment), is considered to be a lower risk investment compared to other methods of financing property. This is because it is possible to spread funds across a variety of options, rather than pooling all of your available resources into just one property. With a Real Estate Investment Trust, also known as REIT, for example, investors are required to pay 25% upfront of the property’s value. When compared with real estate crowdfunding, which often stipulates a minimum investment in each property of just $5,000, you can see that the scope for diversifying your portfolio is huge.

When compared with REITs, real estate crowdfunding brings greater benefits to investors in many ways:

  • Crowdfunding deals are vetted thoroughly, offering increased transparency for investors. Take a look at what Patch of Land have to say about their due diligence in this regard: We ensure that borrowers and projects meet our stringent risk profiles and high underwriting standards using our technology, data analytics and vast real estate experience. [source]
  • The financial barrier to entry is far lower with real estate crowdfunding.
  • Through real estate crowdfunding, investors may enjoy certain tax benefits (including depreciation) that are not applicable to investors in REITs.
  • Thanks to the affordability, investors can diversify their portfolio, combining equity and debt investment, across commercial and residential properties.

The following except from RealtyShares explains the benefits in further detail.

“Commercial real estate investing in other contexts often involves large investment amounts and limited regional opportunities. RealtyShares, on the other hand, allows accredited and institutional investors to invest for as little as $1,000, all from the convenience of an investor’s laptop or tablet computer. This means that investors have the ability to participate in opportunities that historically may have been available only to large institutions. You’ll also be investing “passively” — similar to stocks and bonds — so that you don’t need to directly be concerned with the management headaches associated with a property.” [source]

Image courtesy of thenextsiliconvalley.comDo Real Estate Crowdfunding Investors Actually Own a Piece of Property?

This is a good question, and the answer isn’t exactly straightforward. The truth is, investments are structured differently across the various crowdfunding platforms – and, therefore, what an investor actually owns, can differ, too.

In some circumstances, a crowdfunding site will create a separate limited liability company for each investment opportunity – and investors own shares within this, which reduces their liability and provides certain tax benefits too.

It is important to read the terms and conditions of any real estate crowdfunding site that you choose to be a part of, so that you are clear about what you are purchasing and how that will affect you, before you go ahead and invest your money.

How to Choose a Real Estate Crowdfunding Platform

As we always reiterate, it is vital to thoroughly research your options before investing in real estate, as there is always risk involved when it comes to money. While it is true that crowdfunding can offer a simple solution to becoming involved in real estate investment (without the need to become a full-fledged landlord with 100% responsibility for a mortgage), it is vital you know exactly what you are getting into, before you start financing a project.

You need to remember that each and every platform for real estate crowdfunding is different. They are individual companies, with differing terms and conditions. Some may suit your needs better than others, so take the time to find out the finer details and identify the strengths and weaknesses of each option.

Remember to call on expert advice for specific information on the viability of investments. The crowdfunding platforms themselves are there to offer you a service, and they want you to sign up, so don’t forget that they are not investment advisors.

Take note of the ‘lock in’ periods for each investment, this is a very important factor to take into account when deciding on deals to finance. The liquidity schedule can have a big impact on the profitability of a project for you.

Be aware that there is always risk involved in any investment, and while real estate crowdfunding may seem like a safe option, it is important to consider the options, and the benefits of diversifying with a combination of properties spread geographically, for example. Take a look at the following FAQ from Realty Mogul, to keep your feet on the ground.

“Are these investments risky?

Yes. Similar to investing in the stock market, there is no guarantee when you are investing in real estate. The real estate market has economic cycles and it is difficult to know how and when the economy will change.” [source]

Summary

Image courtesy of crowdfundattny.files.wordpress.comIn conclusion, real estate crowdfunding has opened the industry and leveled the playing field, allowing more and more people to invest in property than ever before. Yes, there are still risks involved, but the great news is that lower barriers to entry mean that investors can diversify their portfolio to such a degree that these risks are largely minimized.

The important points to remember are that each crowdfunding real estate platform comes with its own set of terms and conditions that you should read carefully to ensure you understand exactly what you will own, as well as how long you are committed to any deal.

Be sure to check out the particulars of any deal with a professionally qualified financial adviser, too, and don’t be swept up in the emotions of a “great deal.” The real estate crowdfunding platforms are offering a fantastic service, but we must remember they are there to sell investments. So, keep your head straight and don’t let emotions run wild.

Once you have your information straight and are ready to invest, you can celebrate the fact that investing in real estate crowdfunding offers more transparency than other options, allows greater diversification and, best of all, has been producing greater returns. It seems that this could be the answer many individuals have been waiting for to become involved!

6 Common Real Estate Pitfalls to Avoid

Purchasing real estate is thought to be one of the wisest decisions when it comes to investment of money, and becoming a landlord is one way to ensure you are able to receive an ongoing income from your investment, while your capital wealth continues to build.

Of course, it is not as easy as the last paragraph describes! Investing your hard earned cash should not be done lightly, any decisions should be made after substantial research and consideration. However, many individuals take the time to research their purchase carefully, enlisting the advice of experts in the field and still make mistakes that can be extremely costly in the long run.

For this reason, we have compiled six of the most common pitfalls that landlords tend to stumble into when it comes to investing in real estate. Once you know what these mistakes are, which frequently cause problems for landlords, you will be aware of what to watch out for, and you can make your investment decisions wisely.

Image courtesy of blog.kpsol.co.ukMistake Number One – Deciding As You Go

The most serious mistake many landlords make, is not putting a full plan of action together before they start. Instead, they simply make decisions as they go along on the journey of choosing and investing in real estate – and all of the aspects that go along with that.

It is a far better idea to have a complete plan in place before financial decisions are made, and that should cover the location, type of property, budget for offer price, renovations and so on. By failing to adequately research their options and plan for all eventualities, landlords leave themselves more vulnerable to risks.

This mistake can be extremely costly when issues arise that landlords hadn’t considered, for example, unexpected problems with the structure of the building that has been purchased.

Mistake Number Two – Allowing Emotions to Rule

Image courtesy of socialvelocity.net/The second pitfall that tends to swallow landlords whole is allowing emotions to take the reins with regard to decision making. While it is easy to say that real estate should be regarded as a business with everything considered calmly and rationally, we all know how it feels to be “sucked in.” In some circumstances, the heart tries to rule the head.

But while we are all human, real estate is one situation where landlords must consciously control emotions, and consider decisions carefully from all angles. The “get rich quick” schemes, for example, can be tempting, especially when they are marketed in a shiny must-have package, but often these schemes really are too good to be true and are little more than a scam.

Another example in which landlords must watch their emotions, is in submitting an offer for a rental property. A sizable part of the long term profit is made at the point of purchase, so landlords must stay strong and stick to the budget that has been set. Paying below market rate for a property should be the goal.

Image courtesy of jencoinc.comMistake Number Three – Ignoring The Advice Of Experts

Landlords are required to excel at a number of roles in order to make their real estate business a success, but the great news is that they don’t have to do it all alone! Unfortunately, many landlords fail to depend on the experts for advice in certain specialized areas of the rental process, and as a result, costly and largely avoidable, mistakes are made.

There are many experts that can help landlords with various factors, such as a real estate agent to provide details about recent sales values, a broker to explain the finer details of a mortgage and an attorney that can advise you on legal matters. While certain aspects can be completed without the input of an expert, it is always valuable to ask questions and complete research with the help of individuals inside the industry. The best case scenario is to build a team around you, of professionals that you can trust.

Mistake Number Four – Relying on Inaccurate Estimates

Image courtesy of kmtpartners.com.auWhen it comes to making plans in real estate, numerous decisions are based on estimates that are made along the way. These include an estimated purchase price for a property, plus the cost of renovations, the final rental fee and even the health of the local economy on the whole.

It is impossible to assess the cash flow of a real estate investment accurately in advance due to the number of estimates that make up the foundation of the financial plan.

While this has to be accepted to a certain degree, it can be a pitfall for landlords when they rely on the estimates too heavily, taking the figures that have been drawn up as fact. The best way to handle the uncertainty of the estimates is to input accurate numbers into financial forecasts as soon as they are established. It can also be useful to build strong relationships with contractors and tradesmen, so that any quotations for renovations can be viewed as solidly reliable. This will be extremely useful when it comes to deciding on the viability of a property that needs work done to it. Always overestimate costs, and underestimate profits to a certain degree, this will provide a margin of error that could make all of the difference to your budget.

Mistake Number Five – Forgetting The Importance Of Cash Flow

Another mistake many landlords make is in focusing on the bigger, long term picture of their investment and forgetting the importance of cash flow. This can crop up in several ways including:

  • Failing to prepare for unexpected costs
  • Paying too much for property/tenant management
  • Failing to plan for vacancy

The costs of owning a property are constant, including the mortgage, taxes, insurance, maintenance and advertising for a tenant. Of course, it is necessary to balance the incoming cash with the outgoing costs, otherwise the landlord will find themselves in trouble very quickly, and the long term gains can be lost due to short term mistakes, which may eventually damage credit ratings and even lead to losing the property. Long term gains need to be balanced with short term needs in order to make the deal a success.

Mistake Number Six – Failing to Complete Due Diligence

Image courtesy of interfima.orgWith the real estate market becoming increasingly competitive, deals often move quickly and investors can feel rushed through the process, cutting essential corners such as signing contracts and conducting research. This is one pitfall that can be disastrous for landlords and can result in losing substantial amounts of money.

The key is to take time to complete adequate due diligence regarding the real estate deal in order to minimize the risks of the investment. Nothing should be taken for granted. For example, it should not be assumed that newly constructed buildings will have no defects. Unfortunately, the opposite is often true due to pressurized deadlines on the builders.

Summary

There are many common mistakes that landlords make time and again, and they can be extremely costly to rectify. Fortunately, these can largely be avoided, simply by taking the time to research decisions thoroughly, reaching out to experts for advice as much as possible.

We recommend that landlords plan ahead in their real estate decisions, and avoid making decisions as they go, in order to be fully prepared for the investment business, completing adequate due diligence along the way.

This leads us perfectly to the reminder that the business should be run rationally and not controlled by emotions. While it can be easy to be carried away by how we feel around a deal, the viability of decisions should always come first.

Landlords should turn to the advice of experts to help them with this, working with a team of individuals across the industry is the best way to conduct business. A real estate agent can offer insights into properties coming onto the market in the best locations at a price that is right for you. In addition, a broker can walk you through the confusing array of loans that are available for landlords, and an attorney can save you a fortune in the long run, by keeping you inside the law in your choices.

Within your team, it makes sense to have a contractor that can help to provide accurate estimates of any work that is required. This will help you avoid the mistake of relying on inaccurate estimates of costs. The best way to handle this pitfall is to always remember that estimates are just that – inaccurate figures that should not be taken for granted.

This should help to keep the cash flow in check, which is something that landlords should have a close eye on at all times. Remembering that the short term cash health of the business is as important as the longer term profits. With this in mind, it should help landlords avoid the most costly financial mistakes, so they can save money and make their real estate business a success.

Top 10 Amazing Ways to Protect a Rental Investment

Protecting your rental property can take many forms. There are mistakes to be avoided, scams that you will want to stay clear of, the possibility of damage done to the property, etc etc… Your best bet is to get ahead of the issues before they happen, and make sure that you know how to properly protect your investment.

  • Avoid Common Mistakes – In real estate investment, some mistakes could cost you quite a bit of money. There are more common mistakes that would be best to avoid.
  • Know What to Expect – The difference between success and failure can boil down to preparation. Part of that is knowing what to expect and knowing how to avoid any common mistakes.
  • “Real Estate Guru” Scams – It’s always a good idea to seek out advice so that you can make the best decisions possible in your real estate investments, but be careful that you are looking to the right places and people for that advice.
  • Safely Applying for a Mortgage – When you apply for a loan you will be providing very sensitive, personal information. Check out these tips on how to protect yourself from identity theft during this time.
  • Protecting Your Vacant Property – There will often be a bit of time between an outgoing tenant and an incoming one, and this will leave your property sitting vacant. You will want to make sure that it will be protected.
  • Uses of a Security System – Security systems installed in a rental can help protect both your property and the tenants that are living there, as well as make your rental more profitable.
  • Renters’ Insurance – As a landlord you will have your property insured, but you may consider requiring renters’ insurance as well so that your tenants and their belongings are covered and protected.
  • Protecting Your Property With a Lease – When you accept an applicant as a new tenant you will want to sign a lease with them. This is meant to protect both parties involved and detail out what is expected.
  • How to Handle Late Payments – If your tenant doesn’t pay their rent on time you may have trouble paying the mortgage on the home or the upkeep. Make sure that you know how to handle late payments.
  • Protect Your Property During an Eviction – An eviction can be a stressful time for both landlord and tenant, but you’ll want to make sure that your rental property is protected.

How to Uncover a Potential Real Estate Goldmine

Do you know how to spot a real estate opportunity? Can you spot a “time waster” property before you pay out for surveys?

Initially, it can be more difficult than you might think. This is especially true when looking at two of the same kinds of property on the same street. How can you quickly compare the merits of both in terms of financial return?

This post aims to show you how to spot real estate opportunities quickly and easily, allowing you to move on from duds and choose properties to investigate more thoroughly.

Why Invest in Real Estate?

Investing in real estate is growing in popularity and is widely considered to be a better choice versus stocks when it comes to return on investment (ROI). People also enjoy the control over their cash when investing in property. As the landlord, you can choose whether to upgrade a property, raise the rents, etc. You are the CEO. There are also tax advantages to investing in real estate over stocks, and a house is, of course, a tangible asset.

But, in the recent times of economic change people are beginning to panic and the market is changing. This is the perfect time for great entrepreneurs to strike. Look for an opening in the confusion and buy when sellers are nervous about the value of their home.

There are also benefits to be found in certain tax rules, so investigate the aspects that appeal to you and your goals. A financial advisor may be able to assist you with this.

Indicators of a Good Real Estate Opportunity

Image courtesy of learnenglish.spybs.com1. Accelerating home prices in one particular area compared with other surrounding areas is a sure sign that things are changing in that location; try to catch this trend early to make the most out of the upward growth.

2. Look for early signs of development in an area, for example, land clearing, construction of roads, widening of lanes, etc. Spotting early signs of growth in a town is a great way to keep abreast of changes in housing prices before other investors sweep in.

3. Visit the town hall to find out about major projects in the area and details of upcoming developments. This can provide you advanced notice that an area may soon experience declining housing values.

4. Look for the construction of new schools and shopping centers in an area. This indicates that new people will start to take an interest in the location.Image courtesy of teamsterslocal166.org

“When buying a property to live in, you should always check the surrounding schools, and the same goes when buying an investment property. Good school districts often mean a more stable housing environment, which can play an important role when you eventually decide to sell. Plus, they might act as a draw for tenants that have or are considering a family.”

5. Investigate the tax structures of an area. Sometimes two almost identical locations can demonstrate a striking difference when it comes to housing prices, and this can sometimes be due to the tax structures. The lower tax location tends to be more desirable. With a little further investigation, you can find out when an area is due to be reassessed … a useful bit of information.

6. Identifying the ratings of the local schools is a great way to determine if an area will attract buyers. Parents are often governed in their real estate choices by the results of the schools in the area.

7. Another factor to watch out for is whether a town has become either overpopulated or overpriced. In these instances, it is useful to start watching the outlying areas, analyzing early signals of growth in the outskirts.

8. Once you have identified opportunities within a particular area, it is still useful to know how to find which properties within your chosen zone could be investment opportunities. The following quick calculations can narrow the pool further, allowing you to uncover a real estate gem.  

Quick Calculation for Rental Income

Image courtesy of eea.europa.euBelow is an overly simplistic but useful calculation to implement when narrowing down properties. It will give you a rough idea of how much rental income a property will command.

2% of the purchase price = rough estimate for rental income

This is not to be used as the final rent, but it will give you a ballpark figure. You should know if a property is worth considering for rental or not in a few seconds with this figure.

Quick Calculation for Profit from Rent

The next way to identify if you are looking for a good real estate opportunity is to determine the amount of the rental income that will reach your pocket. Below is the calculation.

50% of the rental income should go to expenses, not including mortgage payment.

The remainder is your income.

Once again, this is overly simplified but it is helpful for quickly spotting opportunities. The expenses include repairs, builds a buffer for times of vacancy, taxes and insurance. Fifty percent seems high, but landlords nearly always underestimate how much they should set aside.

The remaining 50% of the rental income should pay the mortgage repayment and remainder is your “passive income.” Most landlords are satisfied to receive $100-$400 per month from each unit.

When Is a Refurb a Good Opportunity?

Image courtesy of lawestmedia.comOne type of property that catches the most entrepreneurs out is the “fixer-upper.” The asking price is usually nice and low and surely it will only need a bit of work … right?

It is nearly always not as simple as that. The first thing to do before even considering a property that needs to be refurbished is to accurately estimate the after repair value (ARV).

“It is vital to estimate the ARV figure as accurately as possible, as it is one of the most important determinants of the profit you will make with your investment.” (Landlord Station)

This means walking around the place with a trusted contractor and obtaining a quotation for the materials you will need and the labor required to make it happen. You should also find out how long the updates will take as that will affect how long your property will stand vacant.

Quick Calculation for Fixer-Uppers

Once you have the ARV of a property requiring refurbishment, you can apply this overly-simplified but useful calculation to decide if you are looking at a good opportunity or not.

70% = the maximum purchase price you should offer, based on ARV minus repair costs.

You will find this calculation rules out several properties you may be considering.

Purchase Price Is Everything

Image courtesy of breakfrontsoftware.comNever forget when buying real estate that the profit is made at the point of purchase. Be sure to stop your emotions from getting in the way when you are buying investment property; this is not your personal family home.

Decide on the exact criteria you are looking for in your real estate, keeping your “shopping list” handy as you search to avoid being sidetracked by something that is almost right. Do your research so that you know what is on the local market and how much property is selling for right now. Be aware of the trends and stay focused.

If you haven’t enlisted the expert services of a real estate agent, you will have to learn to find a seller that is motivated to sell. This could be the deciding factor on whether you make money or not. The earlier comment about taking action during economic unrest comes into play here. Nervous homeowners may be more likely to sell for under market value.

Whatever happens, do not overpay! You should always aim to purchase investment property for below the market value and let your head govern the final decision.

Summary

Finding a good investment opportunity in real estate may not be as difficult as you initially think. There are a few key indicators of growth in an area you can look out for and with these, the earlier you can act, the more potential for profit.

Accelerating home prices in one particular area compared with other areas surrounding it, early signs of development (e.g., land clearing and construction of roads), town hall announcements about major projects in the area plus the construction of new schools and shopping centers are important signals when deciding to purchase property. It is also useful to watch for towns that have become overpriced or overcrowded and begin to analyze the growth of the outskirts.

The calculations shared here are overly simplified and are meant to be used as tools to enable you to quickly sift through the properties on the market to find the potentially great opportunities hidden amongst them. With these to hand, you can think clearly and quickly make decisions without wasting time on non-profitable investments.

Is Your Landlord Insurance Worth the Monthly Premium?

Landlords, we know you have a great deal to contend with. Maintaining a property, paying the mortgage, keeping the tenant happy … these are just three items on a very long list. Most landlords have a career and even family responsibilities to handle, too. So, when it comes to landlord insurance, it might be tempting to simply find a well-priced deal and sign on the dotted line.

We are here to tell you that by spending even a brief amount of time researching the particulars of the insurance policy, is an absolute must. Don’t be fooled into thinking that all policies are the same.

Many people don’t realize that landlord insurance is completely different compared to standard homeowner policies, where the policyholder actually lives on the property, but rentals are considered to be a greater risk for insurance companies. It’s simple: Tenants are not invested in a home in the same way the owner is; therefore, they may not treat it with as much respect.

Oftentimes homeowners have been caught when they fail to notify their insurers that they have moved out of home and are now renting it. The problem is, if you fail to distinguish your insured home as a rental property, the policy may not pay out when you may need it to. So, be sure to protect your investment and know that you are covered with adequate insurance.

To save you unnecessary headaches and cost, we have compiled a list of the five critical clauses that your rental insurance absolutely must cover.

Dwelling Coverage

Image courtesy of architectureartdesigns.com/Dwelling coverage, sometimes called “dwelling insurance,” is the part of your homeowners insurance policy that helps to pay for the rebuilding or the repair of the physical structure of your home if it’s damaged by a covered hazard.”

This is the main purpose of your housing insurance, and protects you in the case of structural issues, major plumbing problems and acts of nature (including hurricanes, earthquakes, riots, fire, break in, vandalism). The specifics will depend on your policy, so take the time to determine exactly what is covered. Various locations may exclude coverage during certain strong weather situations, for example.

The key point to look for here is whether you are receiving a guaranteed replacement cost, or GRC. GRC means that your property would be replaced and rebuilt in the event of structural damage, as opposed to you only receiving the depreciated value of bricks and labor, for example.

You should also be aware of the terms DP1 (basic), DP2 (broad) or DP3 (special), which identify the level of dwelling and fire coverage that a policy offers.

The DP1 is a “named perils only” policy which only insures those limited perils specifically named in the policy. Unfortunately, a covered perils list that only includes fire, lightning and internal explosion is not much of a policy at all. To broaden the list, the DP1 allows an insured to add an Extended Coverage (EC) perils endorsement to increase the number of covered perils to a total of 12. These nine additional EC perils include Riot, Civil Commotion, Explosion (external), Vehicles, Smoke, Aircraft, Hail, Windstorm and Volcanic Eruption.

The Broad DP2 form, like the DP1, is a “named perils only” policy and contains all the perils provided under the Basic form. The additional protection you will find on the DP2 form include coverage for damage from Burglary, Weight of Ice and Snow, Collapse of Building, Falling Objects, Freezing, Artificially Generated Electrical Current, Glass breakage, Accidental Discharge of Water and Steam,  and damage from Sudden and Accidental Tearing, Cracking, Burning or Bulging of steam or water systems.

Special form or DP3 has the same “named perils” coverage as on the DP2 form for personal contents but adds open perils coverage on the dwelling and other structures. Open perils means that coverage will be provided, unless it is specifically excluded in the wording of the policy. This significantly expands coverage on the real property compared to the DP2 and, coupled with losses paid on a “replacement cost basis,” makes the DP3 policy the most comprehensive of the three dwelling forms.

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2. Water DamageImage courtesy of architectureartdesigns.com

Research the level of coverage you are offered for water damage, beyond that of the pipes and heating system. Excess water can cause catastrophic damage to your home, so this is something that should be carefully considered. Flood water, heavy rains and even backed up sewage may not be covered by your base policy … find out how to add this to your insurance depending on your location.

All it takes is a few inches of water to cause major damage to your home and its contents. This interactive tool shows you what a flood to your home could cost, inch by inch.”

3. Legal Liability

Image courtesy of careerjunction.co.zaIt can be easy to overlook just how vulnerable you are as a landlord when it comes to the law. Your agreement with your tenant means that you have certain legal responsibilities for their safety, as described by NOLO below.

Under most state and local laws, landlords must offer and maintain housing that satisfies basic habitability requirements, such as adequate weatherproofing, available heat, water, and electricity, and clean, sanitary, and structurally safe premises.

Local building or housing codes typically set specific standards, such as the minimum requirements for light, ventilation, and electrical wiring. Many cities require the installation of smoke detectors in residential units and specify security measures involving locks and keys. Your local building or housing authority and health or fire department, can provide information on local housing codes and penalties for violations.

If a tenant feels that you have failed to meet any of these responsibilities, they may choose to sue you, which can be a very costly experience. Therefore, it’s wise to check, in advance, that your landlord insurance covers you in these instances, with legal fees, settlements and even medical costs.

4. Fair Rental Income Protection

Image courtesy of i.forbesimg.comFair rental income protection is something that you can choose to add to your basic landlord insurance. This will cover the cost of lost rental, in the event of repairs or an emergency. This does not protect rental income in situations such as eviction or non paying tenants, however.

If you can’t rent out your property because it’s damaged, you’re losing valuable rental income. With Fair Rental Income protection, if your property becomes uninhabitable because of a covered loss, you’ll receive compensation for the rental income you would have received. This covers the time required to either repair or replace the rental unit — up to a maximum of 12 months.Allstate.com

While this is a very useful safety net, it is important to balance the increase in premium against the potential benefit you will receive from this.

5. Personal Property Protection

Image courtesy of howtofurnish.comPersonal property protection is a great addition to your landlord insurance if you are renting a furnished property. The majority of landlords rent empty units, but it is still useful to consider if you are supplying carpets and curtains, as these are covered in addition to any furniture. Again, it is wise to examine how much this clause will add to your monthly premium before you make any firm decision.

If the tenants are renting the property unfurnished, it is advisable for them to take out tenant insurance to cover their property, as well as any protecting their liability for any damage that they may accidentally cause to your property. The National Fire Protection Association found the average loss from a house fire was $19,500, which could drive your tenant into significant debt, rendering them unable to continue paying rent, even after the property is habitable again.NFPA.org

Tenant insurance is so useful to landlords, that many include it as a condition in their tenancy agreement, as there is no legal requirement for tenants to have this insurance otherwise.

Summary

When it comes to insuring your rental property, it’s best to take the time to ensure you are sufficiently covered. The amount of time, energy and, of course, money that you have dedicated to this investment must be protected in the case of accident or emergency. Here we have covered five key areas in your coverage to be aware of, and as policies are not created equal, it is prudent to dig further than the headline when you are choosing a policy. Levels of insurance coverage vary, as explained regarding the differences between DP1, DP2 and DP3, for example.

Determine whether you will receive the cash value or replacement value for any damage. It’s vital you understand the finer details of any policy in which you are enrolling, before disaster strikes. The average cost for landlord insurance on a small unit is only $500 per year, and this may be classed as a business expense. It is a small price to pay to protect your investment, and the right insurance could prevent the kind of loss that damages your financial future.

How to Make Money as a Realtor

Everybody knows there’s a huge potential to make lots of money in real estate. But if you’re working with a brokerage, the pressure to close a sale can be killer. And if you’re the individual running the brokerage, you take home a larger sum of money with each sale, but the nonstop work of acquiring properties, finding referrals and closing sales is enough to make even a seasoned professional’s head spin.

It’s important to educate yourself about the basics of how to make money in this potentially volatile, exciting field.

Read on to learn some basic tips on how maximize the amount of money you make in real estate.

Remember: You Work on Commission

Some brokerages work differently, it’s true. But if you’re like most realtors, you only get paid when you sell a house. Never lose sight of that. Your goal is always to close a sale.

Most jurisdictions require that, as a realtor, you learn the basics of real estate law and ethics.

They won’t teach you how to close a sale or make a property look most enticing. It’s up to you (and your brokerage) to teach you that, so grab a book (or find an experienced broker to tutor you) and start educating yourself.

Don’t Be Afraid: Network!

Early on, when you’re just breaking into the business, it can be very difficult to make the connections you need to make a sale.

That’s why networking is so vital.

It’s easy to conceive of your relationships with other realtors as strictly competitive, especially if you’re working in the same area.

And to be fair, an element of that does exist.

But don’t forget about referrals.

Houses aren’t identical commodities. If someone knows they can’t close a sale with a potential customer, and they know you have a property that’s more in line with the customer’s needs, they may very well send the customer your way — so long as you’ve forged a positive relationship with them, and are willing to pay a portion of the resultant commission.

Likewise, if you can’t meet a client’s needs, reach out to someone else in the area and offer to hook them up in exchange for a portion of the commission.

The going rate may depend on your area, but many brokers charge up to 30 percent for a referral.

Reach Out to FSBOs

People who try to sell their home themselves are typically trying to avoid having to pay a brokerage like yours to do the legwork for them.

But the fact is that the legwork is exhausting, and is often best left to the professionals.

If you’re aware that a for-sale-by-owner house has been on the market for a while, you may want to reach out to the owner and see if they’re interested in switching things up and going through your brokerage.

Make it clear what you have to offer and why it’s to their benefit.

If you succeed in convincing them, you’ll make a percentage of the money they get from the sale – how much, exactly, is something for the two of you to negotiate.

Consider Becoming a Broker or Branching Out

While laws vary from place to place (and the precise names used to refer to each profession may vary), many jurisdictions draw a distinction between real estate agents (who work for a brokerage) and real estate brokers (who are able to run their own brokerage, and have greater independence in general).

If you’re serious about making it in the field, and have the time and money to spend on the additional education required, you should think seriously about taking steps to become a real estate broker as soon as you can.

By starting your own real estate brokerage, you’ll be able to work independently and make decisions about what properties you acquire, and how much money goes into your pocket. There’s more potential for risk here, and you’ll have to learn how to make wise investment decisions, but the rewards can be great.

Investigate the laws in your area, but be aware that if your brokerage is holding on to properties you can’t sell, it may be better to try to rent them out instead.

And if you’re having a really hard time finding clients, in a lot of jurisdictions you can take your talents — and your real estate license — and work as a property manager instead or on the side.

Conclusion

There’s a stereotype that real estate brokers make a ton of money.

While many of them do, many of them don’t.

It takes time to find your sea legs as a broker, and it’s all about building connections, refining the art of closing deals and figuring out exactly what each customer needs.

You may not make a lot of money for your first year (or your first several!) in the industry.

And if you’re operating your own brokerage, you’ll swiftly find that finding properties to sell (or acquire) can be far more taxing and expensive than you’d estimated. If you’re actually acquiring the properties, you run the distinct chance of actually losing money.

But be patient.

Stick with your work, network, research and continue to educate yourself.

You’re getting better, and success will come over time. Good luck!

Building The Rental Marketplace of the Future: Why We Acquired RadPad

There has been a notable shift in the rental market in the last few years. The Millennial generation has come of age and is trending heavily towards renting rather than purchasing their homes, and this has opened up a new set of needs for the marketplace to allow landlords and tenants to more easily communicate and do business with each other. Renters took their search online years ago with sites like Zillow and Trulia, but are now demanding more than just the ability to look at listing sites for possible places to live.

More than any generation before them, Millennials are transacting on their mobile devices, not just looking for information, which is why we believe that the future of the rental business, especially for the independent landlords who make up more than 50% of the market in the US, is not a software (like Yardi or Realpage) or a lead gen media site (like Zillow/Trulia) but a transactional marketplace; effectively a 12-month long Airbnb.

This is why we acquired RadPad.

A new generation of renters needs new ways to pay rent, find a home, build their credit, get insurance, and interact with their neighbors. While LandlordStation was building a position as one of the largest service providers in the country for independent landlords and property managers, RadPad was busy innovating for renters. With a cutting-edge technology platform, RadPad had begun to change the way that renters approached this market, and adding that technology to our existing base of landlords, as well as some of our insurance and utility products, was the best way to push both platforms even farther.

So what is a “rental marketplace”?

One of the biggest shortcomings that we see in the old way of doing things, is that the time period from vacancy to first rent payment is a series of awkward introductions, cold leads, and mistrust. Renters and landlords find each other semi-anonymously online with no real knowledge of the other’s history. The landlord demands that the renter go through a background check and bases their decision off a credit score (which is not necessarily built as an indicator of a good tenant). This system worked when people signed one or two leases in their entire lives prior to buying a home. But for a generation that is renting well into their 30s, it’s like the car buying process x 10.

Radpad’s solution to this is simple and elegant: allow renters to build their profiles within a confined rental marketplace, and thus build trust within a verified community. Renters can verify all aspects of their rental lives from ID, social security number, credit score and income to Facebook, Linkedin, and contact information, and they can share those verifications with landlords with a single click from their iOs or Android app. They can log in socially so they can see if they have friends who are in the community, or if they share a friend with their potential landlord. They can message within the apps, so they can avoid giving out their mobile number to every listing they come across. And they can build their credit history by opting to have their rent payments reported to the credit bureaus in the same way that mortgage payments are.

On the landlord side there are similar benefits. In markets with a critical mass of tenants like Los Angeles, Chicago, and Dallas, landlords can fill vacancies faster, with warmer leads, and verified tenants. They can shorten the process of rental applications and background checks because they are effectively built into the renter’s shareable profile. Their listings on RadPad look and feel better than on other sites because they are free of ads, promoted real estate brokers, and pay-to-play pitches, all of which leads to a clean interface that drives higher engagement and better lead generation for the landlord.

The best part about the marketplace model is that there is no barrier to entry for either party. The system is completely transactional and based on success. Our goal is to be the platform that is the default transaction processor for the rental market, from listings, leads, and background checks, to rent payments, insurance and utilities. Each individual rental unit produces more than 75 individual transactions annually, and RadPad + LandlordStation has the ability to process them all.

With its most innovative feature, RadPad also allows the tenant to pay their rent online with a credit or debit card even if their landlord does not accept online rent payments. The payment is made through the RadPad app, and if the property does not to accept payments online, RadPad simply sends a check through the mail with a guaranteed on-time delivery to the tenant.

Combining RadPad’s technology and listings traffic with LandlordStation’s product expertise and more than 80,000 existing landlord accounts will pave the way to a single transactional marketplace allowing for a seamless experience for renters, landlords, and the various vendors that serve this market; making things easier, quicker, and cheaper for all parties involved.

We look forward to the many challenges ahead in building the rental marketplace of the future.