Beginning Real Estate Investing - Understanding Leverage
March 9, 2010 by Kenny Santos
Filed under Real Estate Investing
This is one of a series of articles on beginning real estate investing. One of the fundamental concepts to understand as you are beginning real estate investing is the concept of leverage. Leverage is the ability to move or control something very large with a very small object or force. Leverage as it applies to real estate investing is the ability to control high value properties with small amounts of your own cash.
To understand why this is important, and why leverage is so valuable, an example will help. Let’s assume you are just beginning real estate investing and you have $20,000 cash to invest. The exact amount is really unimportant, so long as you understand the principle involved. To illustrate the power of leverage, let’s assume you are faced with three possible choices of how to invest your $20,000.
Choice one is to purchase a small single family home with a purchase price of $20,000. The market rent for this home is $250 per month, or $3,000 per year. For purposes of this illustration, let’s pretend there are no such things as taxes, Realtor fees, or any other costs involved with purchasing a piece of property. Wouldn’t that be nice? As a you are beginning real estate investing you’ll soon learn otherwise, but for now let’s indulge in a little fantasy.
Choice two is to purchase a duplex for $40,000 by putting our $20,000 cash down and borrowing the additional $20,000. The market rent for this duplex is $500 per month, or $6,000 per year. The monthly payment on our loan is $200, so positive cash flow is $300 per month, or $3,600 per year. Not too bad, considering we are just beginning real estate investing.
Finally, choice three in beginning real estate investing is to purchase a multi-unit apartment building for $140,000 by putting $20,000 cash down and borrowing the additional $120,000. The market rent for all the units in the building totals $1,500, and our monthly loan payment is $1100, leaving us a positive cash flow of $400 per month, or $4,800 per year.
Let’s see which of these three situations best demonstrates the power of leverage. To do this we need to make a simple calculation, called Return On Investment (ROI) for each choice. This is a very important calculation to learn as you are beginning real estate investing. ROI is calculated by dividing the amount of return we get back in a year’s time by the amount of cash we have invested.
In choice one, $3,000 return divided by $20,000 gives us a Return On Investment of 15%. Not bad, considering we’re just beginning real estate investing, but let’s see if we can do better. Choice two gives us a return of $3,600 per year for the same $20,000 invested, so our ROI is $3,600 divided by $20,000, or 18%. That’s excellent, but we still have one more choice to look at.
Choice three gave us a return of $4,800 on our investment of $20,000, so our ROI is a whopping 24%! Why so big? Because even though we’re just beginning real estate investing, we were able to “move” or control a much more valuable piece of property with a very small “lever”… in this case, our $20,000. What gave us that leverage? The ability to use Other People’s Money (OPM), but that’s a topic for another article.
Until next time, I’ve written another in-depth article called Beginning Real Estate Investing.
Now, go make more offers!
|
Crush The Biggest Obstacle to Your Success in Real Estate… or Anything Else! Download my FREE report HERE! Tom Dunn is a successful real estate investor and author of the popular DealFiles Real Estate Investor Stories free newsletter. You are welcome to share this report, unedited and in it’s entirety, with anyone you like. You may not remove this text.? 2007 by Tom Dunn. Website: DealFiles.com e-mail: tom@dealfiles.com |
Private Money Real Estate Investing - One Clause You Should Never Forget
December 17, 2009 by Kenny Santos
Filed under Real Estate Investing
When you use private money for real estate investing there are several clauses your lending agreements should never be without. One of those clauses is the ?Substitution of Collateral? clause. Here?s how it works.
Wouldn?t it be great to be able to just swap one property for another on your mortgages? Of course it would, and when you use private money for real estate investing, you can? just by including one little clause in your private lender?s notes.
Here?s how the clause would read.
“Borrower reserves the right to substitute like collateral of equal or greater value” Did you see what just happened? By inserting one tiny little phrase in your private notes, you?ve created a scenario where you don?t have to pay off your loan and get a new one every time you sell and buy property. The flexibility and power this one little clause will give you is outstanding. Suppose you own a duplex that you used private money for real estate investing to obtain, but now you have the opportunity to sell at a large profit. Instead of worrying about the hassle of paying off the note and getting a new loan for your next property, why not just go out and find an equal or greater value property to invest that money in.
Once you finalize the transaction, it?s important that you file your lender?s security against the property with the appropriate government agency, normally your county clerk. Your lender will most likely insist on having a mortgage or deed of trust on file to protect their interest.
The flexibility and leverage this clause gives you is yet another great reason why using private money for your real estate investments is a wise idea.
Your investor will be happy to keep his money working, and you will too. It?s a win-win for both of you, and it?s possible because you thought to include a ?Substitution of Collateral? clause in your private money for real estate investing note. For more information visit http://www.private-money-real-estate-investing.com
Smart? very smart.
|
Want a shot of adrenaline for your beginning real estate investing? Tom Dunn writes “DealFiles - Real Estate Investor Stories”… stories of real investors just like you and their real deals. Why not check it out right now? It’s FREE! |
7 Steps To Make Money In Real Estate Investing
December 1, 2009 by Kenny Santos
Filed under Real Estate Investing
|
|||||||||||
|
#1 Know that you can do it too! Have you ever stopped to think about who owns all the downtown buildings? Or how about all those apartment complexes you see everywhere? When you see a “For Rent” Sign on a house do you wonder how many more rental houses that guy owns. Well, the point to these questions is to say that you can be one of the millions of people that own rental real estate too? That actually comes as a surprise to some people and that is why the title above says KNOW that you can do it too! You can and you should. Let me repeat that. You can and you should. There are plenty of excuses people use to say; “well, I can’t do that” and as the saying goes - “You either can or you can’t, either way you are right!” Here’s what I want you to do. Just below write out the first few “I can’t” reasons. I’ll even get you started… What if you could turn it around so there were no excuses, no more “I can’t”? Wouldn’t that allow you to achieve your goal of financial freedom? Wouldn’t that allow you to create the result of buying properties below market value so you could make money time after time? What we intend to do is what we will ultimately get. The more clear the intention, the better chance we will do the things necessary to get it. For instance, if you say; “I want to invest in real estate”, that intention is very vague and not easily acted upon. However if you can describe what kind of real estate you want it becomes much clearer and much more likely to happen. As an example, if you say; “I want to own a rental duplex in the hospital district with each side being 3 bedrooms and 2 baths and it needs to cash flow at least $150 per side and I don’t want to pay more than $10,000 down and would love owner financing”, you are much more likely to find what you are looking for. Is it easier to believe that you can own a duplex in the hospital district or that someday you want to be rich? Your mind will help you be successful if you truly believe and articulate what you want in detail. #2 Begin with the end in mind In Stephen Covey’s book “The Seven Habits of Highly Effective People”, habit number one is “Be Proactive”. You’re being proactive just by reading this article. You’re taking action. Habit number 2 is “Begin with the end in mind”. Set a goal. Know what you want and plan how to get there. So many would be investors don’t have a road map to where they want to end up so they don’t end up anywhere. THIS IS A CRITICAL STEP!! There is a major difference between investing in real estate and being a real estate investor. By inheriting a property or buying a house that pays you $2 per month, you are an owner of an investment property. (Many people actually loose money each month because they didn’t buy right but that is another story). Technically, they are invested in real estate. But they are not real estate investors. They don’t have a plan of accumulating wealth with strategies and tactics that get them there over time. (Sorry, this is not a get rich quick opportunity…lottery tickets sold elsewhere). A plan should have realistic goals. For instance, if your desire is to retire wealthy, what do you mean by “retire wealthy”. Be very specific. I have one client that defines it as “I want my wife to be able to stay home and I don’t want to have to work. I need about $6,000 to pay my bills and I want to be able to do some traveling so I want $10,000 per month” You should have a long term goal of 10 - 15 years or more; medium term goals in the 5 - 10 year time horizon and shorter term goals in the 2 - 5 year range and immediate goals that define what you are going to do this year. Let’s take a look at a sample of this… A 52 yr. old working male with a wife that works as a teacher might start with basic goals as follows: 10 year goal retire at 62 with no reduction in lifestyle [so they need to replace $82,000/year income ($6,834 per month) which might take 10-12 free and clear houses generating cash flow in the $500 - $600/month range] 5 year goalOwn 15 housing units (could be apartment or duplex generating at least $150/unit in free cash flow ($2,250) to retire my wife to be looking for real estate full time). Own Real Estate in my self Directed IRA - grows tax deferred or even tax free if using a ROTH Join the local REIA - Real Estate Investors Association. Understand my financial situation - set a household budget, savings & Investment plan, income statement and balance sheet (which you will need for loans anyway). Develop a buying criteria - (what do you want to buy, where, how much, what condition, how big, etc). Find an investor friendly real estate agent (to help me find property that fits my criteria). NOTE: this is just a summary of goals while a real plan is more in depth & detailed. #3 Model success - Another way to say this is “don’t recreate the wheel”. If 8,000,000 people have already done something and hundreds of thousands are currently doing it too, DON’T TRY TO MAKE IT UP AS YOU GO! There are many real estate investors that are happy to share their experience over a cup of coffee or lunch (you buy of course). The investors I have been privileged to know are a caring, sharing group of people that want to give back and help people. That’s how I got interested. Now let’s talk specifics. If you were going to go into the hamburger business would your chance of success be better if you were starting your own burger place or buying into a big name franchise? Assuming all things were equal, you wouldn’t have to develop all the systems and training for your own business if you went the franchise way. You would have the expertise of people that have been there and made mistakes and refined their systems and processes to improve the business. You would have the help of other franchise owners in your area to let help you get started and to talk with about local business trends and situations and on and on…. The point of this is to find out what other successful people are doing and model them. Don’t recreate the wheel. If your advertising isn’t working to generate leads, find someone that has a “lead generation machine” and copy what they are doing. (Please don’t infringe on copyrights, etc). But if they have a web page driving lead traffic, you should consider it. If they are putting signs out, you should consider it. If they are doing direct mail, you might give it a try. I think you get the point. Look at every process as you find, fund, fix and flip real estate and break down the components to business processes and then put a system around the process to help you make it more efficient and more manageable. #4 Focus, Focus, Focus Lack of focus is probably the single biggest cause of new investor failure that I have seen. Every month people are buying new books and tapes from the circuit guru that flies into town for the REIA meeting or some big name putting on their own event. I’m not saying that you shouldn’t expose yourself to different techniques to buying and/or selling property but most people have a “flavor of the month” investing technique that they get excited about and don’t ever focus creating a business (being a real estate investor). Look at your resources, network of people and resources, time you have and level of difficulty and commitment to do a specific type of transaction. You should pick one that considers your time and resources and then get really good at it. #5 Take action You don’t have to be good to begin, but you have to begin to be good. This is the shortest section here. TAKE ACTION! Do something. One of my bible study teachers used to say to me after I asked so many questions was; “Larry, Just get a mitt and get into the game!” Translation for real estate investors….”Just get out there and make offers”. You can’t make money until you get a contract that is signed by the seller, right? #6 Build a team of experts #7 Make offers! You can learn a lot and not make money. You can plan a lot and not make money. You can network with hundreds of people and not make money. You can attend meeting after meeting and conference call after conference call and not make money. Start making offers and start making some money. How many? How about 1 a day to start and then get up to 50-100 per month? Believe it or not, at some point someone will accept one of your offers and you’ll be “off to the races”.
Article Tags: make, people, real
|
