A Short, Real-Life Lesson on How to Bank 6 Figures in a Bear Market

Bear Market
A title company wired just over $97,000 into one of my bank accounts this afternoon. Once I get the insurance and escrow refunds, it will amount to a little more than $100,000. It’ll be my second six-figure payday in less than eight months. And it was the end result of a four-unit building I bought two and a half years ago - at the height of the bubble market where I live.
But I succeeded because I wasn’t stuck in my local bubble market. Instead, I went after the best values in the best non-bubble markets I could find. And, thanks to that approach, I’ve been able to bank a few of these types of checks in recent months.
The property I just sold was in Texas. In fact, just a few miles away, another Texas four-unit resulted in a $137,000 cash dump in my bank account… after just 14 months of owning it.
Unfortunately, many people who bought properties in January 2006… when I bought the first of these Texas four-units… are now struggling with falling values and rising interest payments. But if you understand market cycles, and how to evaluate properties correctly, you can consistently make money no matter what the real estate market is doing.
Here are the five key steps:
1. Find a good market at the right point in its cycle.
2. Find a property in that market that’s an exceptional value.
3. Find the right loan and investors for the property.
4. Find the right management.
5. Bank six-figure checks.
Now let’s go over them, one by one.
Step 1: Find a good market.
A good market offers growth and value. Both are easy to define. A good level of growth is one that exceeds the long-term U.S. national average - both for population and jobs. A good value market is one that still makes fundamental sense. People could still afford to buy the homes they bought years ago. Investors can get cash flow with normal leverage (80 percent loan to value) on an average property.
You can find good markets (with value and growth) today in select areas of Texas, Georgia, North Florida, and the Carolinas, to name a few places.
Step 2: Find a property in that market that’s an exceptional value.
Ideally, you want a property that (1) can be acquired at a substantial discount compared to similar properties, and (2) will comfortably cash flow. For the discount, it should be undervalued both on a dollar-per-square-foot basis and on a cap-rate (rental yield) basis.
Step 3: Find the right loan and investors.
Why play Russian roulette with real estate? Always fix your interest rate for at least two years longer than you expect to own the property. (You never know.) If you use equity investors, make sure they have at least a three- to five-year window. And make sure your deals are well capitalized.
In other words, don’t just get funds from banks and investors to cover the buy and fix-up. Get money to back up the property once it’s been rehabbed and leased.
Step 4: Put the right management in place.
Bad management is a cancer that must be gotten rid of immediately. Good management is transparent, reports clearly every month, provides itemized bills and competitive quotes. You want integrity, competence, and experience - in that order.
Don’t lock yourself into agreements. The contract should stipulate that you can cancel without penalty if the manager does not meet certain objective criteria of economic occupancy and maintenance.
Step 5: Bank 6-figure checks.
Do Steps 1 through 4 correctly, and this one is easy. Plus, when you invest this way, you don’t have to do a million deals, running around like a chicken with its head cut off to make some money in residential real estate. Instead, you can make well over a million dollars with a manageable number of smart investments in the right types of properties in the right markets at the right times with the right financing.
[Ed. Note: Real estate headlines may be full of doom and gloom. But if you know where to look, you can find tremendous opportunities. Real estate expert Justin Ford can tell you how to "turn back time" and make it seem as though the national real estate boom is beginning all over again.

Learn more here.]
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Build Your Own Multimillion-Dollar Instant Financing Network From Scratch

Don't you think it’s ugly out there?.
Properties aren’t moving; sales volume has plummeted. Foreclosures are up 48 percent from a year ago. Prices are down as much as 20 percent to 30 percent in markets ranging from Miami to Los Angeles.

So, of course, it’s becoming a remarkable buyer’s market.
But you need money to buy. If not yours, someone else’s. And therein lies the rub. Properties are getting cheaper, but financing is getting harder to find.
So today, we’ll look at the different types of investors you can pursue. And we’ll look at how to structure your offers so investors understand that (1) your interests are completely aligned with theirs, and (2) you’re offering them a good deal.
Are You Looking for Debt or Equity Investors… or Both?
Let’s say you’re looking at an apartment building selling for $800,000. It needs $150,000 in repairs. You’ll have $20,000 in closing costs and you want $30,000 in a dedicated bank account as reserves. Once you’ve rehabbed and leased up, the building will generate a net operating income of $120,000 a year.
So your total capital requirement is $1 million. And you have three people to whom you can go to get that money: Louie the Lender, Ed the Equity Investor, and Hal the Hybrid Investor.
Let’s go to Lou first. Keeping in mind that he is a debt investor, not an equity investor, here’s a simplified version of the kind of proposal that might appeal to him:
"Hey, Lou. I have a property under contract that will be worth $1.33 million once I rehab it and lease up. That’s what comparable properties in the neighborhood are selling for. I’d like you to lend me $1 million (75 percent of the after-repair value). In exchange, I will…
Pay you a 9 percent interest rate
Give you a first mortgage against the property
Sign a personal recourse note (giving you recourse to all my personal assets if I should default)
Make you the beneficiary on the title insurance
Make you the beneficiary on the property insurance."
With a deal like this, even if the property doesn’t end up being profitable, you are making a commitment to pay Lou his interest and return his principal. And you are backing it up with your own assets.
Now my view on personal recourse contradicts what most real estate "gurus" teach. On the one hand, I agree that when dealing with institutions, if they don’t require a personal guarantee (and they often don’t for commercial deals), you should do a non-recourse loan. Hopefully, the institution is doing its homework and only lending up to the point where there is enough equity in the property to protect them. All the better for you.
However, when dealing with individuals, if you believe a deal merits their personal savings - then, at the very least, it merits your personal assets as collateral. What’s more, by willing to back up your promissory note and mortgage with your personal assets, you can get a better interest rate than if you only offer a non-recourse note.
Okay, let’s shift gears and see how you might approach Ed the Equity Investor…
"Ed! Have I got a deal for you! Pony up $360k and you get 50 percent of an undervalued, cash-flowing apartment building in an up-and-coming neighborhood."
You explain to Ed that the $360,000 is to cover the $160,000 down payment, $150,000 in repairs, $20,000 in closing costs, and $30,000 in reserves. He puts up the money. Once you’re done with renovations and leasing up, the property’s value has increased by $330,000 over your total investment. So Ed gains 50 percent of that increase, or $165,000. That’s a 46 percent return on his $360,000 investment in short order.
But wait, there’s the proverbial "more!"
Ed also will get 50 percent of the distributed cash flow on the property. As I said, the net operating income on this building is $10,000 a month. If you borrow $640,000 at 7 percent over 25 years, your monthly payment will be approximately $4,525 a month. That leaves $5,475 in free cash flow. Let $1,000 per month accumulate as added reserves, and you have $4,475 per month to distribute.
Ed’s half of that distribution is about $2,238 a month or $26,851 a year. Against his $360,000 investment, that works out to a dividend yield of 7.5 percent. And that’s on top of the 46 percent equity gain he made in the first year. Ed is doing great, especially on - what is for him - a totally passive investment!
You’ll find that debt investors (like Lou) are generally people who want safety first and would like income now - such as retirees and people late in their career who are in wealth-preservation mode, rather than wealth-accumulation mode.
Equity investors (like Ed), on the other hand, often don’t care about current yield. They have a good income from their job, so they don’t need passive income right now. Instead, they’re more interested in the maximum leveraged returns they can get on a property - without having to do any of the work or management themselves.
But there is a third class of investor that likes to choose from both menus. They want a higher total return if the risk can be mitigated or eliminated. I call these investors "hybrids," since they’ll be receptive to offerings that include the safety features of a bond and the leveraged, higher potential return of an equity stake.
So what kind of offer can you construct for them? One that has guaranteed yield and a piece of capital gain… and maybe even some of the net cash flow. For example, here’s the proposal you might make to Hybrid Hal…
"Hal, baby! I got the best of all investment worlds for you."
You describe the property and explain why it will take $1 million to do the deal. But instead of offering Hal a 9 percent guaranteed yield or 50 percent equity, you offer him some of both. You might, for example, offer a 7 percent guaranteed yield plus 20 percent of the capital gain and 20 percent of the net cash flow after the payment of the note.
This is a great deal for Hal. He has the security of a bond. (You’ll collateralize it and structure it as such.) Yet he could end up making 12 percent to 15 percent a year with this kind of lower-risk investment. And it’s a great deal for you, since you end up with 80 percent of the capital gain and net cash flow.
(Of course, you wouldn’t really use language like "Hey, Lou!"… "Have I got a deal for you!"… or "Hal, baby!" in your proposals. That was strictly color.)
Structuring the Right Deal for Potential Investors
The key to making all three of these approaches work is to:
1. Recognize what most interests your potential investors: low-risk, collateralized income now… leveraged capital gains… or a combination of both.
2. Structure the offer in a way that gives your investors 100 percent confidence in it. That means you align your interests with theirs. When in doubt, you give them the benefit of that doubt. In other words, your first priority is the return of your investors’ capital. Then - and only then - do you start splitting profits.
Here’s what that means for every equity deal you put together…
The only way you can make money as the general manager is if your investors make money. Period. No exceptions.
You invest your personal money in all of your deals. It doesn’t matter if it amounts to only a minor stake of total equity capital. The point is, you have money to lose and you don’t get your money back until your investors get 100 percent of their money back. So you have no reason to enter the deal unless you believe it will be profitable.
You get the bank financing. The investors are never on loan docs and never have any liability at all for the mortgage loan.
You do NOT charge fees. This, again, is controversial. Some gurus advise you to charge fees on equity deals. But - especially when you’re starting out - it’s important to make it clear to your investors that the only way you can make money is if they make money. Later, if you go into real estate investing full-time, you can charge fees to keep the office running. But even then, make sure your fees are fully disclosed and not a "surprise" or buried in fine print.
Provide regular reporting to your investors, at least quarterly. The report should be a brief description of the market and the property - not to exceed one page for each - followed by financial statements, including income statement, balance sheet, and general ledger.
I’ve relied on these same basic principles time and again to fund my deals and make my investors healthy returns. As a result, investors become repeat investors, and they recommend me to friends and associates. And as a result of that, I always have more money available to me than I can put to work… so whenever an excellent deal arises, I’m prepared to act, What about you!

See you soon to talk more about this

Happy reading,

[Ed. Note: Now you know how to go after funding for your real estate investments. But if properties in your area are still over-inflated, you may need some guidance to find the investments themselves. Real estate expert Justin Ford knows how to locate the best real estate values in the country. Find out where you can make your real estate riches right here.]

How to Avoid the Foreclosure “Spin” and Make a Bundle in This Crazy Market

Welcome Dear Reader,

The news media is all doom and gloom about the current real estate market, and the economy in general. But let me tell you. You can still make money with foreclosed property, especially in today’s economic climate. I’ve had great success with this, and it can work for you too.
But it’s crucial to separate the facts from fiction and ignore the hype.
Almost everyone approaches real estate investing with the same point of view. They try to convince themselves that they’ll make a ton of money quickly, without any risk whatsoever. You’ve seen many of those people profiled on evening news shows or in newspaper articles. They’re the ones who were caught short when the real estate bubble burst.
The get-rich-quick impresarios almost never reveal the full extent of the downside risk of the strategies they’re promoting. And the downside risk is a big deal for me.
Take, for instance, the "buy, fix, and flip" strategy. The days when you could make money doing this are over for the short term (the next three to five years). Why? Because buyers are scarce.
Despite all this, opportunities for making huge profits with foreclosed and bank-owned properties can’t be ignored … even by entrepreneurs who are coming into the market for the first time. This is especially true if you are able to acquire foreclosed or bank-owned properties at deep discounts.
But before you jump on the "foreclosed train," here’s something to keep in mind …
Just because a property is foreclosed or a bank owns it, does NOT make it a good deal. As with any business or investment opportunity, due diligence is necessary. Whatever your experience level, the best foreclosure deals can be identified through patient research.
The Perfect Insider Strategy
The current trend in real estate emphasizes rental revenue (versus appreciation). That’s why foreclosed and bank-owned property is worth a look.
If people can’t afford their homes or condos, where will they live? Smaller, more modest homes and/or rentals. So there are still buyers and renters out there, but they are looking at smaller, cheaper properties. That’s where the opportunity lies for you.
One way to capitalize on this current market demand is to acquire foreclosed homes or bank-owned properties - at deep discounts − and rent them out. When I tell you to purchase at deep discounts, I’m talking about buying from desperate sellers - sellers who must sell, no matter what.
Billionaire real estate developer Sam Zell is known as the "Grave Dancer" because he gets interested in a property when it’s almost dead and gone … and no one wants it. You should take a similar approach if you want to make money with foreclosed and bank-owned property.
One of the largest banks in the world is Bank of America. They have a new website featuring hundreds of bank-owned properties for sale. You’ll be amazed at some of the deals. But don’t go hog wild. Be patient and develop a clear strategy for your business.
Before You Get in, Know the Downside
Buying foreclosed property can be a lot of fun and it can be very profitable. But it’s important to avoid the typical foreclosed property "spin."
If a renter’s bull market develops, you’ll want to be sure you’re not left holding the bag. So always consider the worst-case scenario. There’s always a possibility that something will go wrong - especially when it comes to real estate.
Consider the fact that millions of so-called investors who were planning on making big bucks with their "buy, fix, and flip" strategy are now holding properties that are worth less than what is owed. Most of the homes the flippers are trying to unload are too nice (or pricey) to offer as rentals. But what if hundreds of those fixer-uppers hit your market at the same time?
In larger cities, renters have been easy to come by. But what happens if the rental market softens or collapses? Can you afford that foreclosed or bank-owned property you have your eye on if the rental income goes down? This is a calculation you must make before buying.
Let’s say you’re looking at a foreclosed property within two miles of a Super Wal-Mart for $50,000. (A potentially excellent investment.) Let’s say the mortgage payment is $415 a month ($50,000 at 5.75 percent for 15 years).
Your objective would be to recoup the cost of your mortgage payment, simple maintenance, insurance, property management, taxes, and background checks on prospective tenants. And let’s say those expenditures add up to $650 month. So, in this case, you’d need to rent the house for $650 to cover expenses.
In most areas of the United States and Canada, this property would be fairly easy to rent. Of course, if hundreds of inexpensive rental properties suddenly hit your market, renters would have a smorgasbord of options. Bad for you. However, few of the "buy, fix, and flip" real estate investors and developers are likely to be in this particular market. The kind of properties they’re sitting on would have to rent for far more than $650 a month.
Sam Zell is confident the trend toward rental revenue (versus appreciation) has already begun. This doesn’t mean a foreclosed or bank-owned property will not appreciate. But don’t count on it. Instead, focus on patiently acquiring deep-discounted properties that will provide you with rental revenue. In 10 years, when it’s time to get back into "buy, fix and flip" real estate, you can sell all your rental properties for cash, or just sit on them with mortgages paid in full.
What happens if other landlords sweeten their deals to renters by including heat, electric, and water? This may happen in apartment buildings, but I don’t see it happening in single-family home rentals. You’ll have to adjust your strategy accordingly if this occurs. But I think you’re safe.
As with any business, you should expect the best but prepare for the worst.
The Big Upside
Despite the risks, there’s a big upside to buying foreclosures. Because foreclosed property can often be purchased for less than market value.
Contact the top 20 mortgage lenders in your state. Ask for the Real Estate Owned (REO) department. They’ll send you a list of REO properties that are currently available. Banks typically sell foreclosed properties "as is," and buying them is like buying anything else "as is": There are no warranties or guarantees. However, you can review the property (and its assessed value).
The next step is to submit an offer to the bank (with proper due diligence, of course). The bank will often return with a counter offer that is higher than you expected. If you feel the property still has tremendous potential, you should counter their offer with a new offer.
Granted, locating and purchasing a property before it reverts to the mortgage company is always the best way to go. But REO properties give you a way to get started quickly. The main objective is to find smaller homes at deep discounts and rent them out to qualified tenants.
If you purchase two deep-discounted properties this year and two each year thereafter for the next 10 years, you’ll have 20 rental properties. The debt service on those properties should be very manageable.
Let’s say you rent each of your 20 homes for $1,250 per month. If the debt service, taxes, insurance, and maintenance on these homes is $12,000 (about $600 per property), you could conceivably net $13,000 per month.
I hate generic illustrations. But if you work the numbers, you’ll find that acquiring deep-discounted bank-owned properties with a view toward renting them makes sense.
Hundreds of bank-owned property websites are popping up every month. Why? Because banks are not in the real estate business; they are in the money business. And so they are eager to get these properties off their books.
Getting Started
Okay. So how do you get your hands on deep-discounted foreclosed and bank-owned properties?
There are many sites on the Internet that list foreclosed homes for sale. And, of course, real estate agents always try to get in on the action. Though they seldom tell you about properties that are not listed by their agencies, it is possible to find agents who are unbiased and knowledgeable.
Here are some sites to help you locate deep-discounted foreclosed and bank-owned properties:
HUDWorks.com
RealtyTRAC.com
iForeclosures.com
Foreclosure.com
FannieMae.com
BidSelect.com
ForeclosureNet.net
Countrywide.com
BealBank.com
DowneySavings.com
Don’t be scared away by all the negative press the housing market is getting. It IS possible to make a great living and build substantial wealth by purchasing foreclosed and bank-owned properties.

Thank for showing interest in this article,

See you Over the Top

3 Keys to Real Estate Success for Beginner Investors

3 Keys to Real Estate Success for Beginner Investors

Hello Realtors,

Real estate can be your ticket to massive wealth, an early and fruitful retirement - even financial independence for the rest of your life. I’ve made millions by investing in real estate. But, as with any new venture, getting started can be tricky.
Over the past 20 years, I’ve made plenty of mistakes. By learning from my mistakes, you can sidestep some of the pitfalls and start making money much faster. And you do it by memorizing three simple words:

• Goals
  
• Abilities
  
• Resources
  

If every new real estate investor would take these three words, analyze them, and build a plan for each, there would be few - if any - nightmare investments.
New investors can be fearful and very careful… or confident and decisive. But it really doesn’t matter. It comes down to goals, abilities, and resources for all of them. These three words can fill the voids, fix the shortcomings, and enhance the strengths of practically any real estate deal.
Here’s how to put them to work for you…

Key to Investing Success #1: Goals
Before you enter into any real estate deal, ask yourself what your goals are. You don’t need to become an expert in the lingo, investment practices, mathematics, evaluation, negotiation, or any other specifics of the process at this point. Simply decide what you want to accomplish. What do you want to see as a result of your investments? Sure, you want to make a lot of money. But do you want to make that money as a very active and hands-on property manager? Would you prefer the kind of deals that will require very little of your time? Do you want to do your real estate investing on the side, while you continue working at your primary career?
Just jumping in without knowing what they’re after has taken down many an investor. The eager newbie takes on more than he should, and ends up having to hire out management, repair, and maintenance. He finds that his positive cash flow investment has evaporated, and he has to search for a buyer to get himself out of the predicament.
It’s critical to the success of your investment that you sit down and honestly examine why you want to invest in real estate… what you’re willing to do to succeed… and what your expectations are for income and future ROI (return on investment). This will help you determine where to look for investment property… what type of property to buy (single-family homes, multi-unit buildings with hired management, etc.)… and how much time and money you can expect to put into the project.
Once you’ve completed this self-analysis, you will have a plan.

Key to Investing Success #2: Abilities
Once you’ve set your goals, ask yourself another critical question: “What are my abilities?” This is not meant to discourage you from implementing your plan. It is merely a transition step between establishing your goals and the actual act of investing. You can’t do a good job of determining what kind of help you’ll need until you know what you can do for yourself.
Here is a checklist of the skills that are necessary:
Gathering and analyzing market trends and information
Locating properties, even if they aren’t currently “on the market”
Evaluating properties for condition and possible repair or renovation
Determining the costs of repair or renovation
Valuation of properties with all the necessary ROI and math tools
Negotiating with sellers or their agents
Overseeing repairs and renovations
Property management, maintenance, rent collection, eviction, etc.
Again, honest self-assessment is critical. Don’t puff yourself up, but don’t sell yourself short either. Be conservative in evaluating your abilities - keeping in mind that you will be able to hire or partner with other people to take care of anything you can’t (or don’t want to) do.
If you’ve never lifted a hammer to build so much as a dog house, you would want to prepare for the necessity and expense of selecting, hiring, and dealing with contractors. If you buckle under at the first hint of opposition, you would want to consider working with a real estate professional or trusted associate for the negotiation phase. If you hate math and finances, you would want to find a partner who is good at it or plan to get help from a professional.
And that brings us to the last key to investing success:

Key to Investing Success #3: Resources
You have a goal and a realistic assessment of your abilities. You know what you want to accomplish. And you know what you can and cannot do on your own. Now all you need to do is fill in the gaps. It’s all about resources - where to find them and how to use them.
When it comes to market knowledge, area demographics, and local and national market trends, it used to mean spending hours in the library. But, as with most research these days, now it’s all about the Internet. It’s still worth checking out the library, but the latest and most valuable information will be on the Web. Learn to use the search engines, bookmark useful sites, and build a research database of information.
Two websites for researching your market are homefair.com and reia.org. And I have a free online forum where investors communicate and share information at deangraziosi.com. (I highly recommend getting involved in it.)
As Michael Masterson has said many times in ETR, having a mentor is one of the best ways to speed up your success in any field. As a beginning real estate investor, you can learn the ropes and start making money much faster by enlisting the help of experts. Build your support team early on. Ideally, your team should consist of the following:

attorney
accountant
real estate professional
general handyman
major-renovation contractor
title company
banker or lender

You’ll find that there are reliable and trustworthy people in all of the above areas who will be willing and ready to help you in your investment business. Start with friends, relatives, and other people you know. You can also check out craigslist.com or angieslist.com.
When you get into the nitty-gritty of real estate investing, you’ll become aware of tons of tools and techniques that can help you find great deals and make a healthy profit. In fact, you can learn plenty of strategies for investing right here in ETR. But when you’re just starting out - before you’ve made a single offer on a single property - make sure you set your goals, determine your abilities, and line up your resources. You’ll be laying the foundation for a truly successful career in real estate.

Thanks,
Dear Real Estate Investor, see you at the top.

[Ed Note: Dean Graziosi is a real estate investing expert, teacher, and author who began investing at 18. His book, Be a Real Estate Millionaire is a New York Times, Wall Street Journal, Amazon.com, and USA Today best-seller. For an ETR-reader-only special on this book, go here