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Real Estate Articles By William Bronchick
Real Estate 101: Five Big Mistakes Newbies Make
How to Create a Real Estate Cash Cow
Seven Ways to Flip a Property
Real Estate 101: Five Big Mistakes Newbies Make
By William Bronchick
"Real estate investing fever" has hit like a plague.
Zillions of "newbie" investors are jumping on the bandwagon trying to make a profit after losing big in the stock market. I meet them all the time, and many are making big mistakes!
Mistake #1: Stock market mentality
You'd think after losing $7 trillion in the stock market, people would have learned! Nope, they are making the same mistake, which is assuming that what happened yesterday will happen tommorrow. Nine of ten new investors I meet say they are interested in real estate because they saw someone else make money from the rapid appreciation of the market over the last few years.
But, buying real estate solely for short-term appreciation is often a big gamble! If you buy real estate to hold for fifteen years or more, the chances are that you will come out on top. If you buy a property and flip it in within a year, you'll probably do fine, too. And, despite the risk, many people can intelligently time the "boom" of a local market (or subdivision within a market) and make a profit.
But, if you buy a rental property for full-market price with break even or negative cash flow, you'd better have a backup plan if the market doesn't keep going up. Investing is a lot like surfing; if you don't know how to ride the wave, you will drown!
So, should you refrain from investing if you think the market has peaked? Absolutely not! You can find bargain-priced properties in every market, even the hottest. You can find low-interest rate financing that will increase your cash flow, so if values drop, you still are covered.
You can plan short-term (six to twelve months) because markets rise and fall slowly. And, if you keep a cash reserve for your business, you won't sweat when the market tanks. You know that in the long run, real estate markets virtually always come back.
Mistake #2: Investing blind
You'd think after losing $7 trillion in the stock market people would have learned! Nope, they are making the same mistake--blindly buying real estate based on bogus advice or complete lack of education.
Real estate is one of the few investments in which risk is directly proportional to knowledge. True, it has a higher learning curve than investing in the stock market, but there's no proof that having knowledge of the stock market reduces risk (just ask your mutual fund manager).
I read a comment on a real estate discussion group on the Internet. In response to an inquiry as to whether a particular seminar or training program was worth the money, someone answered, "Why waste your money on that stuff? Just use your money as a down payment and learn as you go."
This is probably the worst advice you could ever give a beginner. Money for deals is easy to find if you can find good deals. But, you won't know what a good deal is without having first invested in your education!
The more knowledge of investing techniques, financing, acquisition, negotiating and, of course, your local marketplace, the less risky your investments will be. A bargain real estate purchase will generally always be a safe investment; a bargain stock purchase isn't. After all, who says the company you bought into will be in business next year?
Mistake #3: No cash reserves
Ask anyone in real estate long term (or any other business, for that matter), and they will tell you the two most important words for survival are: cash flow. Heck, even K-Mart failed to learn that valuable lesson!
In order to stay in real estate long term, you need cash reserves. Buying real estate nothing down is easy; handling negative cash flow, repairs, and other expenses in the meantime is the trick. In fact, if you can handle the bad times, you will always come out on top.
Lack of cash reserves puts unnecessary pressure on you to do substandard repairs, accept less than qualified tenants, and give into tenants' demands for fear of vacancy. When you have a sufficient cash reserve, you act rationally.
- You hold out for a higher sales price.
- You hold out for a qualified tenant.
- You leave properties vacant rather than accepting unqualified tenants.
- You call a tenant's bluff when they threaten to leave.
- You take care of necessary repairs and improvements on your properties.
It's a whole different ball game than operating from a lack of cash. Like I said, buying properties with no money down isn't hard; it's handling the cash flow. In other words, you can buy real estate without money, you just can't survive in business without cash reserves. Consider accumulating cash reserves before investing in rental properties.
Mistake #4: Being greedy
Many investors get started flipping properties to other investors, which is a good idea to generate cash reserves. However, you must be realistic about how much profit is in a deal.
If there is a potential for a $20,000 profit in a rehab project, you can't expect to make $10,000 flipping that property to a rehabber. A rehabber has a huge risk embarking in such a project and wants a large enough profit to justify the risk.
For example, if a house needs $10,000 in repairs, and the rehabber investor wants to make at least a $20,000 profit. If you find a deal with $20,000 in profit potential, how could you expect to get $10,000 for flipping the property if the rehab investor is only going to make $10,000?
You should be happy making $2,500 and moving on to the next deal. If you want to make more than $2,500 on such a deal, then you must find and negotiate a better bargain that has more profit potential.
Mistake #5: Treating real estate as anything OTHER than a business.
People are lured to real estate because of the quick buck it promises. Don't hold your breath--you won't get rich quick. An "overnight sensation" usually takes about five years. More than 90% of the people who take a real estate seminar quit after three months.
Why the high fallout rate? Lack of action and unrealistic expectations. Investing should be treated with the seriousness of a career. It takes months, even years for a business to cultivate customers and have a life of its own. You need to treat real estate like any other business.
Give yourself at least six months to see if real estate works for you. It may even take a year before you buy your first property. Maybe in the second year you will buy three or four properties. If you work hard at it and keep your eyes and ears open, you may even find your first deal in 30 days. You will not make money by talking or thinking about it; you must go out and take action.
How to Create a Real Estate Cash Cow
By William Bronchick
Is your real estate bringing you enough monthly cash flow? Is landlording draining you of energy? Is property maintenance depleting your bank accounts? Are you open to new and safe methods of bringing huge annual returns on your cash? If you answered "Yes" to any of these questions, please read on . . .
The Dirty Little "Secret" of How Bankers Make Money
Actually, it's not really a secret at all. In fact, bankers have been doing this for over a hundred years. Bankers make money by borrowing at low interest rates, then lending at higher interest rates. You deposit money in a saving account and they pay you 3% interest. They lend the same money back to you for home loans at 7% or more. The "spread" between the interest rate they pay and the interest rate they collect amounts to incredible profit!
Consider this simple example: You are shopping for rates to refinance your home loan. A lender quotes you 7% interest. On a $100,000 loan, the monthly payment (amortized over 30 years) is about $665 per month. However, at the last minute someone at the bank decides that the color of you underwear isn't right, so your interest rate changes to 7.25%. Your monthly payment will now be $682. You aren't terribly upset, since, after all, what's $17 per month? What you don't realize is that the extra ¼ percent amounts to over $6,000 in additional interest! An Incredible Opportunity in Today's Market We are in a unique time in history in that real estate prices are rising, yet interest rates are dropping. This means that those who can borrow at low interest rates and loan at higher interest rates are making a bundle! Combine the interest rate "spread" and the "buy low, sell high" principle and your profit grows exponentially.
Enter Wraparound Mortgages
Consider this example: Susie Seller buys a $90,000 house for a 10% discount ($81,000). She borrows $81,000 from First Federal Financial on a favorable 8% thirty-year loan. Her principal and interest payments are roughly $594 per month. She sells the property to Barney Buyer on an installment land contract for $100,000 (about 10% above market), taking $10,000 down and carrying the balance of $90,000 at 11% for thirty years. She does not pay off the underlying loan, but rather collects payments ($952/month) from Barney on a monthly basis and continues to make payments on the underlying loan. She collects $358/month cash flow on the "spread" for 30 years!
This is a basic example of a "wraparound". The existing loan remains in place, and a new loan is created which wraps around the existing loan. Susie makes a profit on both an interest rate spread and a markup on the purchase price. People with poor credit rarely question the price of the property (especially since they do not have to qualify for the loan). When the new buyer pays off the remaining balance, Susie pays off the underlying loan. In the meantime, she makes monthly cash flow on the spread between the interest she pays and the interest she collects. This cash flow is not offset by property management, maintenance and the aggravation of tenants. There are no vacancies, calls from tenants, city code violations or other headaches to deal with. You can collect your monthly checks for thirty years, or you can sell your "wrap" note for cash!
You Don't Need Good Credit or Huge Sums of Cash
If you don't have the ability to qualify for low interest rate loans, not to worry! You can use partners who have good credit and income. You can take over existing loans with low interest rates, then re-sell the properties on a "wrap." There are multiple ways to make a profit on "wraps," and you don't need credit, provable income or bundles of cash! If you are looking for an alternative to landlording or a new way to create more cash flow, this is the ticket!
William Bronchick, J.D. is an author and attorney who regularly presents workshops and do-it-yourself seminars at real estate and landlord associations around the country. He is the president and co-founder of the Colorado Association of Real Estate Investors.
Find out more about William Bronchick, J.D and his programs now!
Seven Ways to Flip a Property
by Attorney William Bronchick
"Flipping" is the buzzword of the year in real estate - flipping books, flipping articles in the newspaper, and even flipping shows on TV! What is flipping, how does it work and how you can profit?
Flipping simply means buying a property and reselling it quickly, as opposed to holding on to a property long term as a rental. Flipping comes in several varieties, most of which are legal and profitable, some of which are not.
Flip Strategy #1: Buy, Fix and Flip
Let's start with the most common form - the good, old "fix 'n flip". This process involves buying a property that needs work, fixing it up, then selling on the "retail" market, that is, to a person who will live in the property. This method is tried and true, and works very well. You can easily make $15 - $50k on one deal, depending on your market and how good you are at finding bargains.
The danger in fix and flips is either paying too much or underestimating repairs. Be very conservative in your fix-up costs and length of time it may take to resell. Also, make sure you include in your analysis the cost of paying a real estate agent to sell the property.
Flip Strategy #2: Buy, Refi & Lease/Option
Rather than sell the fixed up property for all cash, sell for terms. Once you have completed the rehab, refinance the property at its new appraised value. If you did the math correctly, you should have little or no money in the deal. Sell the property on a lease with option to buy. The rent payment from your tenant/buyer should cover your mortgage payment (if not, consider an interest-only or adjustable rate loan that is fixed for 3 years). When your tenant exercises his option to purchase, you reap a larger profit, since you don't have to pay a broker's fee. If the tenant exercises his option after 12 months, you benefit from a lower capital gains tax rate.
Flip Strategy #3: Buy & Flip "As Is"
Don't like to do fix-up work? Consider selling the property "as is" as a light fixer upper. If the local real estate market is hot, you should be able to sell the property in poor condition just a little below market. This is especially the case with houses in "transitioning" neighborhoods. Make sure, of course, that you acquire the property sufficiently cheap enough that you can sell it below market quickly and still profit.
Flip Strategy #4: Wholesale
Strategy #1, the fix and flip, is very popular, which means there are a lot of investors looking for rehabs. You can buy the property cheap and sell it for just a few thousand dollars more to another investor without doing any work. You won't make nearly as much as the rehabber, but you will realize your profit quickly.
Flip Strategy #5: Pre-Construction
In very hot real estate markets, prices are appreciating as much as 2% per month. If you time things right, you can put a contract on a pre-construction house or condominium, then flip it to someone else when the development is complete. If it takes 12 months for the development to be complete, and the condo price is $500,000, you could make $100,000 or more in one year! Of course, the opposite is also true - you could end up losing money if the local economy tanks and you end up with a worthless condo that you can't sell for more than you paid. Use this approach very carefully...
Flip Strategy #6: Scouting
The Scout is an information gatherer, so not technically a property flipper. He is the "bird dog" who finds potential deals and sells the information to other investors. Many people get started as a Scout for other investors because it does not take any cash or prior knowledge to look for distressed properties. The Scout finds a property for sale, gathers the necessary information, and then provides this information to investors for a fee. The fee will vary depending on the price of the property and the profit potential. The Scout can expect to make five hundred to one thousand dollars each time he provides information that leads to a purchase by another investor.
Flip Strategy #7: Illegal Flipping
OK, I am not advocating this approach, because it is illegal. Illegal property-flipping schemes work as follows: unscrupulous investors buy cheap, run-down properties in mostly low-income neighborhoods. They do shoddy renovations to the properties and sell them to unsophisticated buyers at inflated prices. In most cases, the investor, appraiser and mortgage broker conspire by submitting fraudulent loan documents and a bogus appraisal. The end result is a buyer that paid too much for a house and cannot afford the loan. Since many of these loans are federally insured, the government authorities have investigated this practice and arrested many of the parties involved. As a result, the public perceives is flipping to be illegal.
The fact is, "flipping" - as I described in the beginning of this article - is NOT illegal. Loan fraud in the process of flipping is what is illegal, so don't confuse the two. The other six ways to flip are very legal, very ethical and very profitable!
William Bronchick, J.D. is an author and attorney who regularly presents workshops and do-it-yourself seminars at real estate and landlord associations around the country. He is the president and co-founder of the Colorado Association of Real Estate Investors.
Find out more about William Bronchick, J.D and his programs now!
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