Wholesaling Real Estate
Wholesaling real estate is a “no money down” investing technique where an investor finds a motivated seller willing to sell their property for a “significant discount” from retail and places the property under contract to purchase. During the closing period they begin re-marketing the property to find a “cash buyer” willing to buy the property at a “discount” from retail. The difference between “significant discount” and “discount” ends up being the wholesalers profit on the deal.
Obviously there are a few more steps involved when learning
how to invest in real estate and tactically completing a wholesale transaction, but for now we want you to understand the general concept and the fact that it IS POSSIBLE to flip a house
(or any real estate for that matter) without needing any of your own money! You simply find, negotiate, and assign your rights to buy a property to another investor that has the money necessary to purchase the property for a small fee. You move on to hunting down your next wholesale deal…and the end cash buyer gets a great fix-n-flip or rental at a great price!
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Creative Real Estate Investing
According to Wikipedia.org,
Creative Real Estate Investing is defined as a term used to describe non-traditional methods of buying or selling real estate. In a typical real estate transaction, a buyer will secure their financing from a lending institution, pay cash, or a combination of the two. With creative real estate investing either the buyer or seller proposes a different form of financing which can include seller financing (Subject-To, Wrap, Carrying back a Note), or a form or renting with the ability to buy in the future (Lease Option otherwise known as a Rent-To-Own program). Furthermore, there are creative real estate investing ways to simple control a property such as placing an Option on a piece of real estate giving you control without actually owning the property. Below you will find a brief description of each creative real estate investing strategy.
Real Estate Options
A real estate Option is a contractual relationship between an owner of real property and a buyer (investor) where the investor has the right to purchase the property for a specified price (Strike Price) during a specified period of time (Option Period). The investor will purchase an Option ( by paying the seller an Option Consideration) because they hope that the value of the property will increase during the Option Period, or because they were able to negotiate a discounted purchase price. Once an investor has an Option to buy a property they in essence have “clouded title” not allowing the seller to sell the property to anyone else during the Option Period. This control allows an investor to either purchase the property for the specified price anytime during his/her Option Period, or sell their rights to the Option to another investor or end buyer that wants to live in the property!
Real Estate Lease Options
What is a real estate Lease Option? A real estate Lease Option is a way to rent a property with the ability to purchase it some time in the future for a pre-determined price. A Lease Option is made up of two parts, a Rental Agreement (also known as a Lease Agreement) and an Option to Buy Agreement. The primitive goal of a lease option transaction from the view of the investor is to collect market rent (or above market rent) on a property for a specified period of time (usually 1-3 years) and then to sell the property to the tenant for a substantial profit if they execute their Option. Investors like leasing to “rent-2-own” tenants because they get to collect a non-refundable “Option Consideration” deposit on top of the rent. Plus the tenant is typically lower maintenance because they generally take care of their own miscellaneous, lower cost repairs on the property.
Sandwich Lease Options
Sandwich Lease Options are a creative real estate investing strategy that requires little to no money or credit and allows you to insert yourself between a motivated seller and a rent-to-own tenant in order to earn monthly cashflow and a potential payday at some point in the future. The basic idea is to find a motivated seller / landlord that is trying to rent their property. You the investor structure a Lease Option (see above) with “favorable terms” (low Option Consideration payment, below market rental payments, low Strike Price, and long Option Period). Once you control the property you immediately begin marketing to find a Rent To Own tenant willing to rent the property from you for “favorable terms” (high Option Consideration payment, at or above market rental payments, high Strike Price, and a short Option Period). In essence you now control a property you don’t currently own and get to profit off of the spread between the rent you owe the original landlord and the rent you collect from the Rent-2-Own tenant you placed in the property. If the Rent-To-Own tenant decides to exercise their Option then you in turn exercise yours with the original motivated seller / landlord and profit the spread between the two Strike Prices!
Wrap Around Mortgages
What is a Wrap Around Mortgage? A Wrap Around Mortgage (also called an All-Inclusive Deed of Trust or Wrap) is a seller financing arrangement where the seller of a property has a current loan (typically with a standard lending institution such as a bank) as well as some equity. Instead of selling the house outright, paying off the bank loan and getting his/her equity in the form of cash, instead decides to sell the house to a buyer that has a small down payment and “wraps” the underlying bank loan with his/her equity creating a new financial arrangement called a Wrap Around Mortgage. The new buyer typically has some sort of a balloon payment after a certain timeframe forcing them to “cash out” the seller at which point the seller will pay off the original loan to the bank.
Yes we understand that initially this can be somewhat of a complicated concept, but a “wrap” has some awesome advantages for both the buyer and the seller. As a buyer you get to buy a house (you actually own it and your name is on the Deed) without having to go to a BIG Bank and get financing. The buying process is typically fast and painless. As a seller you get to sell faster, for more money, and get better terms. Plus you get a nice cash down payment, monthly cashflow, and another cash payment when the buyer re-finances in a few years. It will definitely benefit you to learn more about Wrap Around Mortgages if you are trying to be a creative real estate investor.
Subject-To Investing
Subject-To investing, (sometimes spelled Subject Too or Sub 2) is a form of creative financing that is used by investors when acquiring a property. The investor approaches a distressed seller, generally somebody who is behind on their mortgage or facing financial hardships, and offers to “solve their housing problem” by taking over their loan payments. In exchange for leaving their financing in place the investor typically offers some amount of money paid directly to the motivated seller. The property is then deeded over to the investor and the old homeowner typically moves out. This is not an assumption of a mortgage. The mortgage remains in the name of the original motivated seller but the investor now is the owner on title and has control over the property. When doing Sub 2 transactions you want to focus on properties that have good existing mortgage structures in place (I.E. a mature amortizing loan with a low interest rate) as well as lower priced properties where the investor can easily earn cashflow by Renting or “Rent-To-Owning” the property once they have control over it.
Real Estate Notes
Creating real estate notes is fairly simple. A real estate Note can be drawn up by any attorney (or closing agent such as an escrow officer) once the note issuer and the note receiver have agreed on the terms. The terms that will need to be specified are interest rate, an agreed upon term, payment amount, and payment date on which the buyer of the property must pay the seller. Depending on your location a real estate note may also be referred to as an installment note or a promissory note.
Buying and selling notes is a normal practice between investors. The first investor issues a note to a buyer at a 10 percent interest rate with a purchase price of $120,000 amortized over 30 years. If the investor were to hold the note for the full thirty years, they would end up collecting $316,986.30. If the investor decides that they would rather see a profit in the near future instead of over the 30 years, they can sell the note to another investor who is looking to make interest over a longer timespan.
Likewise, if you are an investor looking to earn interest on an investment over a 10-30 year timespan, you may be more interested in
how to buy cash flow notes. Once you have identified a note holder that would like to cash out of their long-term note, you make an offer on the note. The offer you make should be based on the percentage of interest you would like to make on your invested money and how long you will be earning the interest. Before you purchase though there are a few other things you will want to consider. In the case that the borrower defaults on the loan, you will be responsible to foreclose on them and you may find yourself with an uninhabited house that you are paying taxes and maintenance on. To safeguard yourself from this, make sure that the note you purchase is placed against a house that you could easily rent. Also, check to see if the current market value of the house is around the purchase price, that way, you will have the option to sell it to a conventional buyer. If the property is too overpriced, the property will not appraise and the bank will not lend to the “would be” buyer. When you purchase a note, make sure that it is attached to a property that you wouldn’t mind owning. If you purchase the right note it is possible to make more money after having to foreclose on a borrower then without foreclosure. All in all if you keep all possibilities in mind, purchasing real estate notes can be very safe. Whether you are buying a note to earn long-term interest, or selling a note for some quick cash. Buying and selling real estate notes can be very profitable.
Buy, Fix, and Hold
For many Americans the fastest way to create real wealth is through owning real estate for investment purposes. Historically, the buy, fix, and hold method has created more millionaires than any other means because of the benefits provided by owning rentals. By learning
how to invest in real estate, you can create a steady cash flow and a secure future with as few as ten houses or create an empire by owning hundreds of rentals. Best of all, you get to design your portfolio according to your needs and wishes.
People often fall into the business of owning rentals and being a landlord. Maybe they moved and couldn’t sell their old house and decided to rent it out. Or maybe they inherited a house. Some of the most successful real estate investors I know started out as “accidental” landlords and grew their business from there.
The first question you need to ask yourself when it comes to owning rentals is “What do I want these properties to do for me?” Are you looking for cash flow now or some years down the road? Do you want this to be a hands off or hands on business for you? Do you want a little income or do you need a lot of income?
The answers to these initial questions will help you decide how to structure your portfolio. If you are limited as to time or money, you may build your portfolio slowly, adding one or two properties per year. Others jump in feet first by buying a portfolio of rental properties. There is no right or wrong in this; only what works best for you.
What are some of the problems with owning rentals? The first thing that everyone thinks of is problem tenants. And yes, there are some problem tenants out there. That is why I teach my students to do a thorough background check on all prospective tenants. Just saying that you do a background check will cause many of the potential problem tenants to skip over your property.
Another problem with owning rentals is vacancies. This problem is easily overcome by proper prioritization. Money that is lost due to vacancy can never be recovered. That is why any time a property opens up, your number one job is to clean it and turn it around as quickly as possible for the next tenant. Many properties lose money because the owner did not make re-renting it a top priority.
The third problem with owning properties is maintenance. This is easily solved through your rental agreement. If you have put the property in top condition before renting it, you will find that most subsequent repairs are small – a running toilet or dripping faucet. Simply put a clause in your lease that says the tenant pays for any repairs up to a certain amount — $75 or $100. Anything over that is covered by you. This keeps you from being inundated with phone calls concerning small issues.
What are the benefits of owning rentals? First, there is the monthly cash flow. When buying properties to rent, you want to be able to make a minimum amount per month after you have paid your principle, interest, taxes, insurance and put aside money for projected maintenance and vacancy (about 10% of the monthly rent is a good number). All seasoned investors have a minimum cash flow that they expect to make from each rental property. For some, it is as little as $100. Others won’t do a deal unless they can make $250 or more per month from a property. The amount is up to you; everyone’s needs are different. However, one of the benefits of holding rental properties long-term is that your cash flow increases with the passing years. Rents go up with the cost of living while your payment amount stays the same. In time, your rental houses will be paid off, increasing your cash flow.
The second benefit is that you have a built in retirement income. You can live on the cash flow or you can sell the properties. Some owners do a combination of both, selling one house in their portfolio every year or every other year while keeping some properties for cash flow.
But the most important benefit to owning rentals is that somebody else — your tenants — have paid for your assets. Their rent payments paid down your mortgage, paid the taxes and insurance. True investing is putting your money to work for you and the buy, fix, and hold strategy is your key to building long-term wealth for retirement!
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