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
