With the many tips and advice being given by successful real estate investors, it can become difficult for beginners and striving real estate investors to take in everything. All those mounting information will become a jumble in the head in the process.
That’s why it is important to have a system in investing in real estate, a system that you have researched on and one which you have tested and corrected.
T – time tested
R – results proven
E – effective
S – save
Y – your
S – self
T – time
E – energy
M – money
This will become the code of the TRUE SYSTEM of real estate investing.
Within this system, the process of real estate investing can be broken down into ten steps. This process will be your guide in how to buy right and win, gaining wealth and profit!
THE TEN STEPS
1. Put together a “Power Team”
Your power team will be made up of the entire team that you’ll be working with throughout the process of investing in a property. The power team consists of realtor or brokers, lenders or bankers, home inspectors, contractors, appraisers, attorneys, accountants, and other people who are necessary to start and finish the project.
2. Locating Properties
In locating properties, you can either look for it in your area by driving around and looking out for notices of sales or foreclosure, or you can look in the Internet and do a wide search on properties that you can invest in. The following are some sites that can help you search for property:
Other sources to know where to find properties are just around you. You only need to ask. Ask your family, your friends, associates, or people in the business. You can look it up on record services or auctions, too.
3. Research Property
Once you’ve found a potential property, you normally don’t go in and take the plunge. First, you need to do a thorough research on the property — its area, the market, the deed, insurances, mortgage, and a lot more.
Here is a list of websites that can help with your property research:
www.hpapts.com (Hendricks and Partners publication and website)
www.city-data.com (for specific city information)
www.bea.gov (Bureau of Economic Analysis)
www.rentslicer.com (market rents)
4. Inspect Property
The home inspectors in your team can handle this. But, of course, you should still know what the property has and needs.
Here are websites that can help when you’re looking for home inspectors:
www.ashi.org (American Society of Home Inspectors)
5. Financial Analysis
A financial analysis is needed, and it is crucial that you have one. You need to come up with a solid assurance that this project won’t go down the drain. Project budgets and calculations as to how much the property will cost you and how much it will bring back to you.
One of the bases in the financial analysis of whether or not a property is worth investing in is the CAP rate. It is the rate of return on net operating income considered acceptable for an investor and it is used to determine the capitalized value of a property. The higher your CAP rate, the better results you’ll get. A cap rate of 10% is considered a very good deal. Just remember that it has to be your personal CAP rate and not the market CAP rate.
6. Negotiate and Structure Your Contract
The results of the deal will mostly be determined by how well you negotiate and structure your contract. So it is important that you pay close attention and be very critical of how you handle this process.
Within the negotiations, always ask for seller financing. Ask if the seller will be willing to pay all or a portion of the closing costs. This may not always be the case, but it would never hurt to ask.
Compare the market value of the property, and try to reduce the offered price of the property for the needed maintenance. Make sure to estimate construction costs, holding costs (mortgage, insurance, utilities, etc.), and estimate the time needed to cover them all. Estimate the other finances that have to be considered, such as the required profit for a great deal, the income to be generated to determine the profitability of the deal, and the closing costs.
Always confirm 1031 funds if there are any, prior to making your offer and prior to closing escrow. Make sure there are no prepay penalties, and negotiate a lower sales price if you find that the property has defects and requires maintenance. Confirm that there are no hidden leases existing and base your estimated income based on actual copies of the leases. It is clearly evident that you have to obtain all the documents and contracts on the property to make your decisions and for the negotiations to go smoothly.
Make a clear inventory of the property. Makes sure specific equipment are privately owned by the seller, and require an inventory list of the things that go with the property. Research and ask for the building plans, engineering, bids, and estimates that have been completed or are in the process of completion.
These are mostly some critical points that you shouldn’t forget when going through a negotiation. Remember that negotiating is just equal to producing your profit!
7. Buy it Right!
When buying and investing in a property, there are precautions and check-ups to be made with the property. First of all, you have to procure landlord insurance for your protection before doing anything with the property. Obtain bids on all the necessary components of rehab and check on the lights, plumbing, and other utilities. Make a proper budget plan for the rehab, and immediately put your rehab team to work. Time also costs money, so it is important that you optimize every second of it.
Develop contract with the default language, with specific penalty clauses, and clearly define your terms and conditions regarding payment and costs. Don’t forget to obtain copies of insurance and licenses, too!
In your rehab and improvement project, it is normally wise to start with the exterior of the property. Remember that every second counts, so you might want to start advertising the place after you’ve renovated the outside. You can work on the inside even if the advertisements are still going since it’ll be the outside that will first be shown to the public.
In offering your price for the property, remember not to offer too much too soon. You should proceed with this negotiation as conservatively as possible. Remember that you have to buy it right!
Here is a list of websites where you can get contractors for your team:
8. Get property appraisal
The appraisal of the property can be either done by you or a recommended contact of your lender. Always ask first if your lender has a list of appraisers. This will also help in fostering your relationship with your lenders and in building a healthy network in real estate investing.
If you’re going to choose the appraiser yourself, ask and confirm if they have any errors and omissions insurance. Most lenders do not actually accept appraisal without errors and omissions insurance so be particular about this one.
Here are some websites that you can look up for property appraisal:
9. Refinance for Tax Free Proceeds
The financials continue to be first priority, from the start to the finish of the deal. Refinance for tax free proceeds and go over your income and profit. Remember that proceeds from loans are not taxed.
10. Retain property or do a 1031 Exchange
You have either the option to retain the property and get residual income and monthly cash flow or you can sell the property and do a 1031 exchange to protect your equity.
Throughout the process of investing in a real estate property, remember to be critical. At first glance, consider looking at purchase price, the amount of money needed to fix it up, the rent, the existing market pressures, and the uniqueness of the property and the benefits it can give. Do not forget to base your purchase price based on today’s value.