Table of Contents
Acknowledgments xix
Prologue: Invest in Property Now xxi
1 ACHIEVE A PROSPEROUS FUTURE: 22 WAYS YOU CAN EARN PROFITS WITH PROPERTY 1
22 Sources of Profit from Investment Property 2
Will the Property Experience Price Gains from Appreciation? 2
Will You Gain Price Increases from Inflation? 4
Earn Good Returns from Cash Flows 5
Magnify Your Equity Gains with Leverage 5
Magnify Returns from Cash Flows with Leverage 6
Build Wealth through Mortgage Payoff 7
Over Time, Returns from Rents Go Up 7
Refinance to Lift Your Cash Flows 9
Refinance to Pocket Cash 10
Buy at a Below-Market Price 11
Sell at an Above-Market-Value Price 11
Create Property Value through Smarter Management 12
Create Value with a Savvy Market Strategy 12
Create Value: Improve the Location 13
Convert from Unit Rentals to Unit Ownership 13
Subdivide Your Bundle of Property Rights 14
Subdivide the Physical Property (or Space within a Property) 15
Create Plottage (or Assemblage) Value 16
Obtain Development or Redevelopment Rights 16
Diversify Away from Financial Assets 18
Is Property Your Best Investment Choice? 18
2 OPM: BORROW SMART, RAISE CASH, BUILD EQUITY 21
The Birth of “Nothing Down” 22
Should You Invest with Little or No Cash or Credit? 23
What’s Wrong with “No Cash, No Credit, No Problem”? 23
Leverage: Pros and Cons 26
What Are Your Risk-Return Objectives? 32
Maximize Leverage with Owner-Occupancy Financing 33
Owner-Occupied Buying Strategies 34
Current Homeowners, Too, Can Use This Method 34
Why One Year? 34
Where Can You Find High-LTV Owner-Occupied Mortgages? 35
What Are the Loan Limits? 35
High Leverage for Investor-Owner Financing 37
High Leverage versus Low (or No) Down Payment 37
Creative Finance Revisited 37
Are High-Leverage Creative-Finance Purchases Readily Available? 45
Build Confi dence with Lenders, Investors, Sellers, and Sales Agents 46
Credit Scores and Credit Record 48
Capacity (Monthly Income) 48
Cash Reserves and Source of Down Payment 50
Collateral 51
Loan-to-Value Ratios 51
Recourse to Other Assets or Income 52
Character 53
Competence and Experience 54
Compensating Factors 54
Automated Underwriting (AUS) 55
3 APPRAISAL: INS AND OUTS OF MARKET VALUE 57
What Is Market Value? 58
Sales Price Doesn’t Necessarily Equal Market Value 59
Underwriting Rules Determine the Value in LTV 59
How to Estimate Market Value 60
Property Description 61
Identify the Subject Property 68
Neighborhood 68
Site (Lot) Characteristics 69
Improvements 70
The Cost Approach 71
Calculate Cost to Build New 71
Deduct Depreciation 72
Lot Value 73
Estimate Market Value (Cost Approach) 73
The Comparable Sales Approach 75
Select Comparable Properties 75
Approximate Value Range—Subject Property 76
Adjust for Differences 76
Explain the Adjustments 77
The GRM Income Approach 78
Income Capitalization 80
Net Operating Income 80
Estimate Capitalization Rates (R) 83
Compare Cap Rates 84
Relative Prices: The Paradox of Risk and Appreciation (Depreciation) 85
Valuation Methods: Summing Up 86
Appraisal Limiting Conditions 87
Valuation versus Investment Analysis 87
4 MAXIMIZE CASH FLOWS AND GROW YOUR EQUITY 89
Will the Property Yield Good Cash Flows? 89
Arrange Alternative Terms of Financing 91
Decrease (or Increase) Your Down Payment 92
Buy at a Bargain Price 94
Should You Ever Pay More than Market Value for a Property? 95
The Debt Coverage Ratio 97
Numbers Change, Principles Remain 97
Will the Property Yield Profi table Increases in Price? 98
Low-Involvement versus High-Involvement Investing 99
Compare Relative Prices of Neighborhoods (Cities) 100
Undervalued Neighborhoods and Cities 101
Beverly Hills versus Watts (South Central Los Angeles) 101
Demographics 103
Accessibility (Convenience) 103
Improved (Increased) Transportation Routes 104
Jobs and Economic Base 104
Taxes, Services, and Fiscal Solvency 105
New Construction, Renovation, and Remodeling 106
Land-Use Laws 106
Pride of Place 107
Sales and Rental Trends 107
Summing Up 109
5 PAY LESS THAN MARKET VALUE 111
Why Properties Sell for Less (or More) than Market Value 112
Owners in Distress 113
The Grass-Is-Greener Sellers 114
Stage-of-Life Sellers 115
Seller Ignorance 116
Prepare Screening Criteria 117
Bargain Sellers 118
Networking/Get the Word Out/Social Media 118
Newspapers and Other Publications 119
Cold Call Owners 119
Agent Services 121
Internet Listings 124
Seller Disclosures 124
The Disclosure Revolution 125
Income Properties 126
Summary 126
6 PROFIT WITH FORECLOSURES 127
The Foreclosure Process 128
Lender Tries to Resolve Problem 128
Filing Legal Notice 128
The Foreclosure Sale 129
REOs 129
Buy Preforeclosures from Distressed Owners 130
Approach Owners with Empathy 131
The Difficulties of Dealing Profitably with Owners in Default 131
Prequalify Homeowners and Properties 134
Finding Homeowners in Default (Prefiling) 135
Networking 135
Mortgage Collections Personnel 135
Drive Neighborhoods 136
Find Homeowners (Postfiling) 136
Cultivate a Relationship with Property Owners 137
Two More Issues 137
Vacant Houses 139
Satisfy Lenders and Lien Holders 140
All Parties Are Better Off 141
Win by Losing Less 142
Profi t from the Foreclosure Auction 142
Why Foreclosures Sell for Less than Market Value 143
Make the Adverse Sales Efforts Work for You 144
How to Arrange Financing 145
The Foreclosure Sale: Summing Up 146
7 PROFIT FROM REOs AND OTHER BARGAIN SALES 147
Sad for Sellers and Builders, Bargains for You 147
How to Find REOs 148
Follow Up with Lenders after Foreclosure Sales 148
Locate Specialty Realtors 149
HUD Homes and Other HUD Properties 150
Homeowners versus Investors 151
As-Is Condition 151
Potential Conflict of Interest 152
Buyer Incentives 153
The Bid Package 153
Department of Veterans Affairs (REOs) 153
Big Advantages for Investors 154
Fannie Mae and Freddie Mac REOs 155
Agent Listings 156
Investors Invited 156
Federal Government Auctions 157
Buy from Foreclosure Speculators 157
Probate and Estate Sales 158
Probate 158
Estate Sales 158
Private Auctions 159
How to Find Auctions 160
8 PROFIT BY CREATING VALUE 163
Fix, Sell, Profit! 163
Your Fixer-Upper Search 164
The Browns Create Value in a Down Market 165
Research, Research, Research 166
Improvement Possibilities 167
Deep Clean the Property 167
Add Pizzazz with Color Schemes, Decorating Patterns, and Fixtures 168
Create Usable Space 168
Create a View 169
Capitalize on Owner Nearsightedness 170
Eliminate a Negative View 170
Enhance the Unit’s Natural Light 171
Reduce Noise 171
Required Repairs and Improvements 172
Plumbing 172
Electrical System 172
Heating and Air Conditioning 173
Windows 173
Appliances 173
Walls and Ceilings 173
Doors and Locks 174
Landscaping 174
Storage Areas 174
Clean Well 174
Safety and Health 175
Roofs 175
Improvements and Alterations 175
You Can Improve Everything about a Property—Including Its Location 175
South Beach: From Derelicts to Fashion Models 176
Community Action and Community Spirit Make a Difference 177
Neighborhoods Offer Potential 177
What Types of Improvements Pay the Greatest Returns? 178
How Much Should You Budget for Improvements? 179
Beware of Overimprovement 179
Other Benefits 180
No-No Improvements? 180
Budgeting for Resale Profits 181
Estimate the Sales Price First 181
Estimate Costs 181
Future Sales Price – (Costs + Profi t) = Maximum Acquisition Price 182
Comply with Laws and Regulations 183
Should You Buy a Fixer-Upper? 184
Too Little Time? 184
Put Your Creativity to Work 185
9 MORE TECHNIQUES TO PROFIT WITH PROPERTY 187
Lease Options 187
Here’s How Lease Options Work 188
Benefits to Tenant-Buyers (an Eager Market) 188
Benefits to Investor-Sellers 190
The Lease Option Sandwich 191
How to Find Lease Option Buyers and Sellers 192
A Creative Beginning with Lease Options (for Investors) 192
Lease Purchase Agreements 193
Seems More Defi nite 193
Amount of the Earnest Money (Option) Deposit 194
Contingency Clauses 194
Conversions 194
Condominium Conversion 195
Convert Apartments to Office Space 196
Tenants in Common 197
Master Leases 198
Assignments: Flipping Purchase Contracts 200
Summary 202
10 NEGOTIATE A WIN-WIN PURCHASE AGREEMENT 203
Win-Win Principles 204
The Purchase Contract 207
Names of the Parties 208
Site Description 208
Building Description 208
Personal Property 209
Price and Financing 210
Earnest Money Deposit 210
Quality of Title 211
Property Condition 212
Preclosing Property Damage (Casualty Clause) 212
Closing (Settlement) Costs 213
Closing and Possession Dates 214
Leases 214
Contingency Clauses 216
Assignment and Inspection 217
Public Records 217
Systems and Appliances 218
Environmental Hazards 218
No Representations 218
Default Clause 219
Summary 221
11 STRATEGIC MANAGEMENT BUILDS EQUITY 225
The 10:1 Rule (More or Less) 225
Think First 226
Know Yourself 227
Know Your Finances 228
Know Your Capabilities 228
Smart Strategic Decisions 229
Tailor Strategy to Local Markets 229
Craig Wilson’s Profi t-Boosting Market Strategy 229
How Craig Wilson Used Market Information to Enhance Profitability 232
Results 236
Cut Operating Expenses 236
Energy Audits 237
Property Insurance 237
Maintenance and Repair Costs 240
Property Taxes and Income Taxes 241
Add Value: Closing Words 241
12 DEVELOP THE BEST LEASE 243
The Mythical Standard Lease 243
Your Market Strategy 243
Search for Competitive Advantage 245
Craft Your Rental Agreement 246
Names and Signatures 246
Joint and Several Liability 247
Guests 247
Length of Tenancy 247
Holdover Tenants (Mutual Agreement) 248
Holdover Tenants (without Permission) 248
Property Description 248
Inventory and Describe Personal Property 249
Rental Amounts 249
Late Fees and Discounts 250
Multiple Late Payments 250
Bounced Check Fees and Termination 250
Tenant “Improvements” 251
Owner Access 251
Quiet Enjoyment 251
Noxious Odors 252
Disturbing External Infl uences 252
Tenant Insurance 253
Sublet and Assignment 253
Pets 253
Security Deposits 254
Yard Care 255
Parking, Number, and Type of Vehicles 256
Repairs 256
Roaches, Fleas, Ants 257
Neat and Clean 257
Rules and Regulations 257
Wear and Tear 257
Lawful Use of Premises 258
Notice 258
Failure to Deliver 258
Utilities, Property Taxes, Association Fees 259
Liquid-Filled Furniture 259
Abandonment of Property 260
Nonwaivers 260
Breach of Lease (or House Rules) 260
No Representations (Full Agreement) 261
Arbitration 261
Attorney Fees (Who Pays?) 261
Written Notice to Remedy 263
Tenants’ Rights Laws 263
Tenant Selection 263
Property Operations 265
Evictions 265
Landlording: Pros and Cons 266
Possibilities, Not Probabilities 266
Professional Property Managers 266
13 CREATE PROMOTIONS THAT SELL 269
Design a Winning Value Proposition 269
Yet Generic Prevails 269
USP versus WVP 270
Craft Your Selling Message 272
Use a Grabber Headline or Lead 273
Reinforce and Elaborate 273
Add Hot Buttons 273
Establish Credibility 274
Compare to Substitutes 274
Evoke Emotional Appeal 274
Reduce Perceived Risks 274
Make It Easy for Prospects to Respond 275
Follow Up with Your Prospects 276
Reach Potential Buyers 277
For Sale Signs 277
Flyers and Brochures 277
Networking (Word of Mouth) 278
Websites and Links 279
Sales Agents 279
Should You Employ a Realty Agent? 279
Services to Sellers 279
Services to Buyers 280
Co-Op Sales 282
Listing Contracts 282
14 PAY LESS TAX 285
The Risks of Change and Complexity 285
Homeowner Tax Savings 286
Capital Gains without Taxes 286
Rules for Vacation Homes 287
Mortgage Interest Deductions 288
Credit Card Interest 288
Rules for Your Home Offi ce 289
Depreciation Expense 289
Land Value Is Not Depreciable 289
Land Values Vary Widely 290
After-Tax Cash Flows 290
Passive Loss Rules 292
Taxpayers in the Real Property Business (No Passive Loss Rules) 292
Alternative Minimum Tax 293
Capital Gains 293
A Simplified Example 293
The Installment Sale 294
What’s the Bottom Line for Sellers? 295
Implications for Buyers 295
Tax-Free Exchanges 296
Exchanges Don’t Necessarily Involve Two-Way Trades 296
The Three-Party Exchange 296
Exchanges Are Complex but Easy 297
Are Tax-Free Exchanges Really Tax Free? 298
Section 1031 Exchange Rules 299
Reporting Rental Income and Deductions 300
Tax Credits 301
Complexity, Tax Returns, and Audits 303
Use a Tax Pro 305
Property Taxes 306
Summary 308
15 MORE IDEAS FOR PROFITABLE INVESTING 311
Out-of-Area Investing 312
Reasons to Invest Elsewhere 312
What about Property Management? 313
Tenant-Assisted Management 314
Property Management Companies 314
Emerging Growth Areas 314
The Creative Class 314
Implications for Investing in Real Estate 315
Right Place, Right Time 315
Emerging Retirement and Second-Home Areas 316
Which Cities and Areas? 316
Income Investing 317
Out-of-Area Caveats 317
Commercial Properties 318
Low Effort Management 319
The Upside and Downside 319
Opportunity for High Reward 320
Commercial Leases Create (or Destroy) Value 320
Triple Net (NNN) 322
Self-Storage 323
Mobile Home Parks 325
Profitable Possibilities with Zoning 327
Tax Liens and Tax Deeds 327
Localities Differ 328
Are Tax Liens and Tax Deeds an Easy Way to Make Big Profits? 328
Discounted Paper 328
What Is Discounted Paper? 329
Here’s How the Loan Sale Works 329
Sell the Note at a Premium 330
Delinquent and Nonperforming Loans 330
Due Diligence Issues 331
Should You Form an LLC? 332
Different Strokes for Different Folks 332
Court Rulings 332
One Size Doesn’t Fit All 332
16 OPPORTUNITY FOR A LIFETIME 335
USA: Right Time, Right Price, Right Place 335
Personal Opportunity 336
Index 339
