Investing in real estate is one of my favorite subjects and the one item in my career that has been my largest estate builder. Using the three main leverage points of real estate has always been my goal. Let me explain.
Sellers (listings) produce buyers. As you search unlisted inventories for their purchase, buyers produce sellers. However, the best leverage point of real estate is that as an agent you get paid by your clients to examine and find real estate inventory everyday. Sometimes that inventory is the correct investment to add to your personal plan.
There is never a better time to buy than when prices are soft. I do not want you to assume that I base my investment decisions on buying low, because that would assume that I sell high. I can buy during all market types. My investment philosophy is not to sell but instead let the tenant pay the mortgage off. You might thing this takes a long time, but if you buy a breakeven or cash flow property and manage it well for rental increases, you can pay it off much sooner than the standard amortization periods. If you take any positive cash flow from a real estate investment and apply it to the underlying loan every month, you can amortize a 15-year loan in 7-10 years. Almost anything that produces an income will qualify. Houses, condos, multi-family, and commercial properties are all candidates for purchase.
As an agent, you have access to the MLS so it is easy to check the “hot sheet” each morning for new listings. Then you can apply my six rules for purchase.
1. Can I own it forever?
2. Is it break-even or positive cash flow after the first 6 months?
3. No balloon payments.
4. No variable or adjustable interest rate loans.
5. Do not choose horrible areas where pride of ownership is not practiced, and good school districts help, too.
6. Buy within a two-hour drive time from my home.
After implementing the six steps, my investment goal is to increase my net worth then create income as the loans fully amortize. Use that income to accelerate the other amortizations, creating a snowball effect of paid off properties for retirement.
The analysis is fairly simple. Imagine what you can get the income to in about 6 months. Use a 35% expense factor. This expense factor is high to most investors, but I have found it to be more realistic. Subtract this expense factor from the proposed income to find what is left over to pay principal and interest. Next, work backwards to see how much of the loan this payment will pay off with the current interest rate. Take the loan amount and divide it by the inverse percentage of the down payment you are going to use. This gives you the sales price. Using a digital offer form with a nice cover letter, E-mail the offer to the listing agent.
This plan works in any market; however, you find more properties that qualify in a slow market than you do in a crazy market. It is important that you try to buy for the long term. It gives you holding power if you get the market direction wrong. I never buy to sell, but sometimes I sell if I discover that I do not like the property. Investors who buy for appreciation usually loose more than their original investments because they keep buying bigger properties. Finally when the market changes, they loose everything because they can not hold on.
It is important with this program to get a fixed loan, because I believe we have no where to go but up. It is harder to get fixed loans on commercial and multi-family, so private money or carry backs on free and clear properties would be options.
Managing while you are doing great in brokerage can be a horrible time drain. I teach that sellers are easier to handle rather than buyers; but almost anything is easier to handle than bunch of tenants! You can mitigate the time drain by using my management secrets.
1. Rent a good property at a fair rent. Be the best option available.
2. Get a great tenant. This requires a full background check by confirming every detail. Run reports for credit, sex offender list, job history, previous landlords history, and police reports.
3. Get a large security deposit. If they have to pay it over time, fine.
4. Get long-term leases. Your greatest cost is turnover.
5. Have their current place of residence checked out. It is difficult to watch your cute little rental destroyed! Referral directories for other cities are helpful in this regard. Other REALTORS® are usually glad to help if your new tenants are from out of town.
As a great real estate agent, you owe a fiduciary responsibility to your clients and everyone else to deal with them fairly and ethically. Even though I have bought my own listings, I don’t recommend it. I would give the seller the option to get out of the transaction any time they wanted, and I would disclose what the property might be worth if properly marketed. However, when I negotiated a great deal for a buyer then that buyer stepped out of the deal, then I would step in.
Being in this business offers agents the greatest leverage! Other people pay you everyday to look over the investments for your family and future.
Walter Sanford was one of the top real estate agents in North America for nearly thirty years, and now, he is one of the most requested speakers, trainers, and coaches. He has authored dozens of systems and books on checklists, pro-active lead generation, affiliate lead generation, plus others. You can hire Walter for speaking engagements or coaching or buy his products by visiting his website. For more details, visit www.waltersanford.com, call 815.929.9258, or email Walter at walter@waltersanford.com.
