Beginning Real Estate Investing - Understanding Leverage

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!

Real estate investing does not have to be complicated!

Real estate investing does not have to be complicated

Do you know what is the hardest deal to ever do in real estate?

Your first one!

The challenge is that most people will quit before ever getting their first deal.

I also feel that there is sooooooo much information available in the marketplace that even getting started is almost as challenging as getting your first deal!

I think one of the reasons for this is there are so many ways to invest in real estate!

Do I buy No Money Down?

Do I invest in Foreclosures or Pre-foreclosures?

Do I invest in “Fixer Uppers?”

Do I do “Flips”?

Do I adopt a “Buy and Hold?”

Do I Lease-Purchase or Lease option?

Do I buy “Subject to” the existing financing?

Do I buy Single-family homes? Condos? Mobile Homes? Apartment buildings?

You get the idea! There are so many ways to invest in real estate today!

Ok, let’s say you’re lucky to pick one way to invest in real estate, let’s say Foreclosures.

There seems to be a hundred ways to do a foreclosure deal!

Now, in addition to finding your first foreclosure deal, you then have to figure out which of the hundred ways to do that deal!

I still wince in pain whenever I see a real estate program that has anywhere from 12 to 36 CD’s or audio tapes!

Who really has the time to go through all of that information?

And even if you make time, can you say, “Information OVERLOAD”?

We always said that we did not want to learn 100 ways to do a real estate deal but one simple, proven way that would take us to the bank!

When we wrote “Buy With No Credit–How to Make Money This Month in Real Estate” it was with the belief that people would appreciate a course that simply “cut to the chase” and taught one simple method (no credit checks and $1-10.00 down) to invest in real estate.

Something so simple that anyone could read it in a day and begin contacting homeowners the very same night!

We appreciate people that do not “Mickey Mouse” around and are direct and to the point!

So our strongest recommendation is to find one way to invest in real estate and then pay the price and really learn that one method.

Vickie and I recently went to our first “bootcamp” (yes we believe in continuing education)

During this 3 day event, there were 7 “guest speakers” and these speakers all had an upcoming “boot camp” they were promoting. The thing that blew us away was all the people who signed up for those additional “bootcamps”.

We saw some folks that signed up for every one!

I wanted to scream out, “What about the information that was being presented this weekend?!”

When would these people ever have time to implement the strategies they were learning that weekend?

The reality is that most people would rather write a check then to take action!

So the only action they have in a year is going from Bootcamp to Bootcamp, a massive credit card bill, and to officially be a “jack of all trades” in real estate!

Do not try to be a “jack of all trades” in real estate!

Jacks of all trades in real estate never make the money that the specialist will!

Let me ask you a question: Who makes the most money in the health field? Is it the General Practitioner (Family doctor) or the Specialist?

The Specialist, of course!

Choose this day to become a specialist in one area in real estate and then apply yourself to becoming a Specialist in that one method!

Once you have mastered that one method, then and only then, you can diversify and learn another method.

A word of warning:

When choosing a course or training program on any real estate method, do not confuse the price of the program with the value of the program.

Just because a program is a lot of money does not mean that it has more value than a less expensive program.

Case in point: One of our students spent $12,000 with a “real estate mentor” and was frustrated because it was like he was spinning his wheels.

He ordered our course for the special price of $97 and within 4 weeks was closing deals on his first 2 properties!

Remember this and remember it well… The value a real estate course or training program has nothing to do with the price!

Just because it is expensive does not make it automatically better than a more affordable course.

The value is only determined by the impact the course or training program has on that person!

This is absolutely critical!

Truly caring for your success! TC and Vickie Bradley http://www.tcandvickiebradley.com

About the Author

TC and Vickie Bradley are authors of the #1 best selling course “Buy With No Credit, How to make money this month in Real Estate”.

It has maintained a #1 ranking in Real Estate at one of the Internet’s most trusted and respected web sites since it was released in April of 2003.

This dynamic and caring couple has a passion to assist others in walking into the greatness that is already within them!

Real Life Real Estate Investing

I bought my first apartment 10 years ago, on my 20th birthday. I had spent the previous 5 years working and saving for college; but when I finally entered college at 19 on a full academic scholarship, I decided that instead of spending my accumulated savings, I would try my hand at investment.

Here I am 10 years later. What you’ll probably notice by looking at my site is that this is not a story of extreme or fast wealth building.

But it is a story of effective “forced savings” that has provided me significant insight into financial planning, real estate investing, and balancing the books. While it hasn’t always been a barrel of laughs, overall, I’m reasonably satisfied with the outcome so far.

I thought I would share some real world real estate investment thought. Let’s start at the end, where I am today: I currently own 7 condo apartments in my general geographic area. All of these condos are revenue neutral or revenue positive. I don’t have significant savings to fall back on, and I am just now in the process of “cashing in”, by selling my first apartment. My approach is best described as “slow and steady”; my outlook is 20 - 25 years.

Here the top points I like to share about investing in real estate:

1) Path to (instant) riches

I will never argue that real estate investing is an instant, or even particularly easy, path to significant wealth.My bank statement demonstrates that. I am willing to grant that many people are able to turn real estate in wealth quickly; I’m afraid that hasn’t my approach. Instead, I’ve taken the long view, as you can see at my site, with the hope that my real estate portfolio will provide a steady cash flow in 10-15 years time. For me, slow and steady really does win the race.

Just think about it: if you can manage to buy and hold 5 properties, within 15 years all five will turn in heavy revenue and heavy profit. For example, my two oldest properties now generate $3500 in revenue each month, with monthly expenses of just $1400. Imagine what that will look like once I’ve paid off all the mortages!

2) For a cautious investor, take the long view

This a vast generalization, but I hold to it pretty firmly: if your outlook is long enough, you will not lose money. At the worst, investing in real estate is a forced savings.

That’s not to say that you’ll never lose money; circumstances such emergency repairs, a destructive tenant, or rapidly inflating interest rates certainly increase the risk. But, if you can hold on through any such upheavals, you’ll find that within two or three years things will settle and you’ll start to benefit from increased appreciate in property value, increased rental income, or both.

And, while property values might dip for periods, keep in mind that over 5 years it’s virtually impossible that your overall property won’t appreciate. At the very worst, you’ll have paid down some of your mortgage.

Plus, you have a tangible, physical asset. There’s a lot to be said about that kind of peace of mind.

3) Operating costs - if they balance, you’re in the good!

You’re probably not going to earn back your down payment quickly - that’s ok! Keep in mind that the portion of your down payment that goes toward principle (ie: the part not eaten up by lawyer and realtor fees) is still in your hands. It just happens to now be in your property. You will see this money again when you sell.

So, the real goal is to be at least neutral on an operating basis. Ideally, that means that your rents will cover mortgages, strata fees, taxes and maintenance. This might not be possible for the first year or three, but even if you’re paying out a few dollars each month, you are still gaining more than if you were not investing.

4) Tenants - do your research,

I learned this lesson the hard way, when I had a tenant cause about $5000 in damage to one of my apartments. What I learned is that tenants have histories; if they are unwilling to share, or if you don’t receive sufficient references to make you comfortable, it’s probably better to just wait. Personally, I now ask for 3 references, and I require proof that the people I’m talking to are actually who they say they are (requiring a work phone number, for example). It might seem extreme, but this type of due diligence at the beginning increase comfort throughout a tenancy and reduce the chances of serious damage.

5) Tenants, Part Two - Late rent is forgivable - Once and don’t be afraid of the eviction notice

Real estate investing is a business. And, like many small businesses, it is sometimes operated on small margins. That means, if a tenant doesn’t pay their rent, it comes out of my pocket. I know that nothing works perfectly, so I will always forgive the first missed rent if there is a reasonable explanation. However, a second missed rent, and I will immediately begin eviction proceedings.

The laws of our state are very strict when it comes to evictions; there must be good and reasonable cause; here, at least, missed rent is just cause for eviction. Don’t misunderstand; I always keep an open mind. But many individuals will take advantage of a situation if they believe there is no consequence.

All in all, I’d say real estate investing has been a very positive experience and I would recommend it to anyone who has patience and fortitude. Do your research, though, because real estate investing has highs and lows, just like any other type of investment vehicle.

About the Author

Michael Lee-Smith is a real estate investor with over 10 years of experience in buying and holding residential real estate.

Why Use Private Money For Real Estate Investing?

There are many reasons a real estate investor might want to have a ready access to private money for real estate investing. This article will explore a few of those reasons.

The first reason to use private money for real estate investing is to protect your credit rating. Think about this… if you borrow the money from a private individual, rather than a bank or lending institution, the loan will never be reported to the credit bureau. It won’t count against your debt-to-income ratio, and no record of the payment history will be kept. No one will ever know about that loan, unless you tell them.

Next, and one of the very best reasons to use private money for real estate investing, is the elimination of paperwork. I have never had to complete a loan application for private money for real estate investing. The lenders I work with all know me and the kind of investing I do. Many of them never even care to see the property. When I apply for a mortgage, on the other hand, the application process itself can take several days, and there are mountains of paper.

Yet another reason to use private money for real estate investing is the ready access to fast cash. Sometimes, when a deal is especially good, moving super-fast is a necessity. With bank financing, that kind of speed is often impossible. Even lines of credit don’t always give you the same speed capability that private lenders do. With one phone call to one of my private lenders, I can tie up a deal that other investors only dream about.

A great reason to use private money for real estate investing is the leverage that it gives you. Think about this… if you have $50,000 of your own money, is it better to pay all cash for a $50,000 property, or to put $50,000 cash down on a $500,000 property and use private lenders to finance the rest?

If you answered the $500,000 property, you’re right- and here’s why. Let’s say the $50,000 property rents for $500 per month, or $6,000 per year. Your Return On Investment (ROI would be 12% the first year ($6,000 divided by $50,000). It’s safe to assume the rent on the $500,000 property might be about 10 times that of the $50,000 property, or about $60,000 for the year. If your payback to your lender totals $4,000 per month, or $48,000 per year, what’s your Return On Investment (ROI) for the $500,000 property? If you answered 24%, give yourself a gold star!

Of course, you would need to take into account the cost of borrowing the money, but even after doing that, you can see there really is no comparison. Using private money for real estate investing gives you something called leverage. Leverage is the ability to move something very large with something very small… a lever. The lever, in this case, is your small amount of cash ($50,000). With it, you can “move” or control a $500,000 property, because the private lender’s money increases the power of your “lever”.

Here I’ve given you a few of the many great reasons for using private money for real estate investing. There are more, but you should have a clear picture of why private money can be so useful in your real estate investing toolkit. If you would like more information, I have written another article on my website titled Private Money For Real Estate Investing.

Now, go make more offers!

Is Birdogging Really Real Estate Investing?

I?ve been asked the question by beginning real estate investors, ?If I only birddog, am I really investing in real estate?? Good question.

My answer is, ?Are you making money, are you learning, and are you moving forward toward your goals?? If you can answer yes to those questions, then the right answer to ?Is birdogging really real estate investing?? is ?Who cares??

First, a primer on birdogging. It?s nothing more or less complicated than finding deals for other investors. As a birddog, you will do the legwork required to hunt down property that is in distress. That means it?s either vacant or in need of repairs, or the owner is experiencing some life situation that causes him to need to sell.

When you find a likely property, you will get another investor involved, and when they purchase the property you will receive a birddog fee. This usually amounts to between $500 and $5,000 depending on how much the property sells for and how much legwork you did to bring the deal to the buyer.

Birdogging is a great way to learn the ins and outs of real estate investing. You learn not only how to find distressed property, but also how to value real estate, how to use creative financing techniques, how to talk to sellers, and much more. In short, birdogging is a great way to get an education in real estate investing and earn a good living at the same time.

So, is birdogging really real estate investing? Not technically. It?s actually closer to being a real estate merchandiser. That is, you?re really in the business of locating property, or generating leads for other investors. Based on the amount of money you can earn, the education you?ll receive, and the low risk involved, that?s not really a bad thing.

Speaking of risk, that?s one of the chief advantages of birdogging. After all, since you?re not using any of your own money, there?s nothing to lose except your time. In addition, you really don?t need any cash or credit to get started in real estate investing? a perfect solution for people who are lacking one or the other, or both.

Now that you have a grasp of what birdogging is all about, why not make it a goal to birddog a few deals this month? You?ll have a blast, learn a ton, and make some money. What could be bad about that?

For more on beginning real estate investing visit http://www.dealfiles.com/beginninginvesting.html

Fundamental Principles of Real Estate Investing

Real Estate investing has always been viewed as a conservative investment opportunity. Real property is thought to not only hold value, but is expected to increase. This is generally true, but like any investment, there is risk involved. There are some fundamental principles of investing in Real Estate that will tend to reduce this risk. These principles hold true no matter where the actual location of the property. They apply to investing in Utah real estate as well as they do for any other area.

The first principle is education. Actually, this applies to any investment. Real estate is often about relationships. You need to learn about people. In many ways, they are going to be the key to your success or failure. You also need to learn all you can about markets and marketing techniques. Investors will have to evaluate properties and must know about home repairs. There is a lot of information that can impact your success or failure, and the more prepared you are, the better chance you will have.

Another principle is to understand cash flow. Real estate investments are not very liquid. Properties can rarely be sold quickly. The investor must be prepared for short term losses due to the need for costly repairs or the sudden departure of tenants. There are many relevant numbers involved in real estate. If you understand these numbers, you will be prepared to deal with cash flow fluctuations. It is a good idea to start small and look for every way possible to reduce risk. Although it is impossible to eliminate risk completely, when you are working to eliminate as much as possible, you are going in the right direction.

It is important to research your property. You need to find property that is going to be in demand. Provo real estate might always seem to be in demand, but every property and location has things that make it more or less desirable than the average. In addition to inspecting potential property, make an inspection of the neighborhood. It is better to be aware of conditions that might lower property value, or make rentals problematic, before you are the owner of the property.

The most important principle to remember in real estate investing is this: Your home may be where your heart is, and emotion and sentimental attachment may matter in selecting your personal home, but when you are investing, return on investment is all that matters.

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