Dear Steve -

One of the major things I would learn is: when you ask for something,
and get it, say "Thank you!" In case that isn't clear, somebody took a
lot of time to answer you; it would have taken you less than a minute
to thank him.

speednxs wrote:

- quote -

An acquaintance of mine went to one of these seminars in hopes of
becoming a real estate investor. The info he came back with seemed
legitimate enough, except for subject-to's. This was the first I had
heard of them and I was surprised that they are legal. A little
research shows that they are, but are they as seedy as they seem to be?

Oversimplifying, a subject-to is an agreement that allows a buyer to
purchase a home, taking possession of the seller's property and mortgage
payments, without transferring the debt to the buyer. In other words,
the buyer gets the house, makes the payments, but the seller is still
the one at risk of a default because the seller is still the owner of
the mortgage.

Why would anyone in a legitimate transaction do this? This is great for
the buyers, they get the leverage and the ability to sell/rent the
property but with no risk. Meanwhile the seller relinquishes the
property but gets to carry the risk for the buyer. My acquaintance
claims that this type of transaction can be a great "help" to those you
need cash fast and can't sell their property for some reason. Of
course, in this instance the buyer would want to buy at a steep discount
in order to make money when the property is flipped.

An example he gave was: An seller has a $100,000 house with $40,000 of
equity that the seller needs to move because the seller can't make the
payments and is about to enter foreclosure. The seller transfers the
property to the buyer via a subject-to for a purchase price of $70,000
(leaving the seller with $10,000 of the original $40,000 equity). The
buyer prevents the property from going into foreclosure by bringing the
seller's account current, and sells the house for something like
$100,000, paying the mortgage until the sale of the property. Of
course, the buyer can let the property go on the market for much less
than $100,000 since the buyer has a $30,000 cushion to play with.

In this scenario, says my acquaintance, everybody wins. The seller
avoids forclosure and pockets $10,000. The buyer flips the property and
pockets as much as $30,000 (less expenses and any discount the buyer had
to put on the property to move it). But it seems to me that the seller
just gave up $30,000 of hard earned and paid for property equity,
without relieving the seller's risk on the mortgage should the buyer
default.

I'd be interested to hear others' thoughts on this.

Thanks,
-Will

steve.howlett[at]gmail.com wrote:
- quote -


1) Learn to calculate a fixed rate 30 year mortgage payment. While
straightforward, I'm not going to give equations that would bore and
scare readers. There are lot's of mortgage calculators online, but
this is a bit clumsy in practice. Find a table of values and learn how
of multiply by sales price to find the mortgage payment. There are
numerous types of mortgages that you want to know about.
2) Learn to calculate annual Net Operating Income (NOI). Keep monthly
and annual calculations appropriately. This is essentially the money
you have left over after paying monthly expenses to make the mortgage
payment and possible profit. Remember to adjust for 12 months in a
year. Typical recurring monthly expenses are: insurance, property
taxes, utilities, repair budget, homeowner's fees, miscellaneous and
landscaping fees. Taxes vary widely by state and county. An occupancy
factor is used to de-rate the rent. Mortgage payment is NOT included
as the NOI is used to pay the mortgage.
3) Learn to calculate CAP(italization) rate. This is annual NOI/sale
price. If the CAP rate is above the cost of borrowing, life is pretty
good. If not, big down payments are in your future.
4) You will find that there is a relation between mortgage rate (and
terms) and Loan To Value (LTV) and CAP rate. If you know 2 of the 3,
the third is defined. LTV determines your Leverage and how fast your
real estate empire grows. Appreciation rate is obviously important.
Nobody can predict the future, but you can always ask: "if the future
is similar to the past, what will happen?" There is nothing sillier
than for everything to go right and you still lose money.
5) Selecting renters is the most important thing a landlord does. Good
tenants are a joy and bad tenants will cause you to lose tremendous
amounts of money and quit the business. This is why I never allow
subletting and have a large monthly fee in the rental agreement for any
additional roommates that are "discovered" to be living there.
Changes in occupancy are done at the discretion of the landlord. This
may be hard to enforce if immediate family members are involved, but
anyone else should be under the landlord's control. If the renter
says "how I use the property is none of your business as long as I
pay the rent" is wrong. How the property is used IS your business.
Will his boss let anyone do his job and pay him the salary? I hope
he's not an airplane mechanic. Get written authorization to run
credit reports and read them. Actually call the references given by
the applicants. The landlord before the current landlord is especially
important. If the current landlord has the tenant from hell, he is
going to give glowing references in order to get rid of the bad apple.
Go over the important points of the rental agreement (written in your
favor) with the tenant. If he seems disinterested you may want to come
up with some excuse to back out. Both parties have to agree to a
contract.
6) Do your own property management and assemble a team of tradesman
(plumbing, electrical, handymen and cleaning among others). You will
also want a team of professionals such as (eviction) Attorney, CPA and
Real Estate Agent/Broker. Property managers aren't "building
supers" and will farm out all the work, possible with overhead tacked
on. Santa Claus doesn't exist and the property management fee
doesn't "cover all the expenses". The property manager isn't
going to pay for the new refrigerator out of his "10% fee". Or the
mortgage payment while there is a vacancy. You'll pay it out of your
pocket. They also aren't risking the physical assets of your rental.
If damage occurs, they don't lose money, they simply give you the
name of the person on the rental agreement they think YOU should sue.
See item 5 above about selecting tenants. The "normal wear and
tear" condition that the last tenant thinks is reasonable is always
far short of the "shiny and sparkling" condition the new renters
wants. The landlord pays for the difference. Rental vacancies come
with large expenses at the exact moment you have no money coming in.
Get familiar with the term "working capital".
7) Landlording is a business. Tell your tenants this frequently. They
aren't your friends. Friends do favors for each other that just
don't belong in the tenant/landlord relationship. They are your
customers. It is very hard to stop short of being friends.
8) Almost all your expenses are business tax deductions. Depreciation
lowers your tax bill. Talk to a CPA about the details here. Have him
explain depreciation re-capture. No taxable income is common. Being a
"professional real estate investor" has some big tax consequences
(of the good kind). See IRS publication 527, available online, for
this and general federal tax information.
9) All Real Estate is local. Especially creative real estate
investing. Subject-to's, lease options, foreclosures,
pre-foreclosures, short sales and wholesaling may work in your area.
Or they may not. The guru selling you the course isn't going to tell
you the truth about your zipcode.
10) Liens against property are very important. Title reports/insurance
uncover these details. There is very big money in real estate.
Everybody is trying to stick it to everybody else. This often shows up
in items recorded against the title. Order (date) of lien is very
important. The government always wants to jump to the front of the
line. Written agreements are very important in real estate. Recording
agreements is very important. Don't do verbal agreements. Not
understanding title can leave you being the stuckee with thousands of
dollars in losses. Hear about the guy who bought a house for a great
price, but the seller's wife never signed off on it? He owned half
of a house for that great price.

None of this answers the question "Where are all the bubble-sitters
going to rent when all the landlords dump their rentals?"

Hi,


Please can you answer a simple question, which is:

"What are your top ten tips for investing in property or real estate?"

Don't worry about coming up with all 10 - just a few would be good.

Thanks!


(This is for research into an article, which will be given away on the
Internet - if you would like a finished copy please let me
know....thanks again.)