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To get the biggest return, real estate investors need the right financing. And as they buy multiple properties, their debt to equity rises, making it more difficult to get the kind of deal they need. As many investors have learned the hard way, getting the wrong financing can wipe out their profits, hold them back from selling because of a lack of equity, or force them to try to sell for more than the market will bear. The Real Estate Investor’s Guide to Financing is the one book that shows readers how to get the...
To get the biggest return, real estate investors need the right financing. And as they buy multiple properties, their debt to equity rises, making it more difficult to get the kind of deal they need. As many investors have learned the hard way, getting the wrong financing can wipe out their profits, hold them back from selling because of a lack of equity, or force them to try to sell for more than the market will bear. The Real Estate Investor’s Guide to Financing is the one book that shows readers how to get the right financial package for the biggest return on their investment. As a respected author and mortgage banker, David Reed has spent more than 20 years helping investors finance their properties. Here, he offers advice on such crucial topics as:
• financing options for different property types
• the financial implications of renting vs. flipping
• setting rental rates
• the challenges and benefits of being a landlord, including rent loss coverage
• the pros and cons of having partners
• tips on financing a second home, duplex, multi-family unit, or condo
Complete with essential advice on financing and a glossary of investment terms, this is the one guide that will help readers start making real money.
C H A P T E R 1
Basic Finance for the Investor
While there are certainly plenty of real estate books on the market that
specialize in real estate investment, those same books fall short when
it comes to one of the most important aspects of real estate investing:
Buying real estate as an investment can bring great rewards. Holding
real estate and watching its value rise over the long term is a nice way to
retirement for many people.
One of the advantages of real estate can also be a disadvantage, however.
It’s not a liquid asset. You can’t get your money out of it as easily as
you can get money out of an ATM. If it’s a stinker, you have to sell it, and
that takes time and it takes money.
You can’t just change your mind because of a heavy dose of buyer’s
remorse, take your receipt for your investment condo back to the store,
and get your money back after saying something like, ‘‘Well, it was the
wrong size, and my aunt gave me one for Christmas.’’
Real estate investment needs commitment. You need to decide that
it’s right for you before you get involved.
There are two different types of investors: those who buy and hold,
and those who buy and sell quickly, a process that is often called flipping.
Flippers attempt to find bargains, fix them up, then sell them for a profit.
And these two types of investors are not exclusive; you can both be a
flipper and hold for the long term.
Flipping brings a whole new element to real estate investing compared
to simply holding onto property for a long period of time, then
either selling it when you think you’ve made enough money or keeping
it and passing it down to your grateful heirs.
Flipping requires more than just buying; it requires you to know how
to make repairs on a home and evaluate how much of a return in the
form of increased value those repairs would generate. Or maybe the issue
isn’t just increased value but simply making the place livable.
Flipping requires different financing strategies from those used for
long-term investments. Any real estate investment book you read concentrates
more on either finding, fixing, and flipping real estate or finding
and keeping real estate while paying little attention to the financial
aspect—perhaps one of the most critical pieces of the real estate investment
Getting the wrong financial package can wipe out your profits, hold
you back from selling because of lack of equity, or perhaps require you
to sell for more than the market will bear because of the bad loan you got
when you bought the property in the first place.
If you’re a flipper, financing is critical. If you’re long term, financing
is also critical, but at least in long-term deals you can always refinance
the property down the road if you made a bad loan choice in the beginning.
We’ll discuss refinancing investment properties in detail in Chapter
But then again, because you’re reading this book, you won’t be making
those mistakes, now will you?
One advantage that a long-term investor has is the ability to buy in
Let’s say, for instance, that your local real estate market is humming
right along. You know that you can find a property, fix it up, and sell it
for a profit. Or maybe your market is really moving and you can find a
piece of property that takes absolutely no work (or very little), and
because of the real estate demand in your area, you know you can make
another 10 percent on your investment.
You know you can do this because you know your market. You know
the neighborhoods. You know the contractors who work on your properties,
or if you do most of the rehab yourself, you can drive to the job site
That’s not true if you’re buying in Texas and you live in California.
Yes, you can fly in and look at properties, but if you want to fix and flip,
you’ve got a brand-new problem. How do you find someone you trust to
be the contractor while you’re a couple of time zones away? How do you
monitor the contractor’s progress?
How do you pay the workers, and how do you make sure they’re not
sitting around drinking beer all day long while you’re frantically trying to
get your contractor to return your voicemails?
The truth is, you can’t. If you’re a flipper, then a long-distance rehab
project may not be for you. In fact, if you were planning on making
$20,000 on a nice little flip, then all the labor, plane fare, and headaches
won’t be worth it at the end.
Yes, you can be a long-distance flipper if the properties you’re buying
don’t need any work and you think you can sell them quickly and for a
profit. Yet, you’re not local. You’re not the only real estate investor, and
there will be local professional investors who can sniff out a flip a lot
more quickly than you can simply by being where the property is. By the
time you’ve found a potential investment, gotten on the plane, and rented
a car to look at your potential investment, if it was such a good deal, it’s
probably been snatched up while you were checking your bags.
I will note that sometimes faraway investors can have the upper hand
when they’re in a part of the country that is doing better economically
than the locale they want to invest in.
For instance, a town may have experienced some huge layoffs as a
result of downsizing, creating a significant economic hit. If you are living
in an area that is not depressed, you may have more disposable income
and be able to buy a house for less than market value.
But even then, as a flipper, if you invest in a depressed area, who are
you going to sell to—another flipper? If the local economy you’re buying
into is in the middle of some major economic upheaval, then home buyers
aren’t exactly going to be lining up along the street waiting to bite on
that ‘‘bargain’’ house you found. Many of the people in the town where
you found your bargain have, unfortunately, been laid off.
Being a long-distance flipper, then, is a challenge. You don’t know
the area as well as the locals do, you can’t monitor your project efficiently,
and it’s hard to find buyers in a depressed market.
On the other hand, such opportunities bode well for long-term investors.
If you see that a certain area outside where you live is going through
some difficult times, you can find a bargain house and hold onto it, waiting
to sell until the economy recovers.
I own a home in Austin, Texas, that I bought in the late 1990s. The
seller was an investor from California who had bought the house some
10 years earlier—right in the middle of the S&L debacle. Combine that
crisis with an oil and gas industry that was suffering through perhaps
one of its most trying times, and you can see why real estate in Texas
The investor bought in 1988 during an economic downturn in Texas
and sold 10 years later, doubling his money, after the economy recovered.
He was long term.
Not just that, but the property I bought was listed as a ‘‘fixer-upper’’
that needed some ‘‘tender loving care,’’ meaning that it had its challenges.
In fact, the California owner had never lived in the property but
had rented it to various people for the entire decade.
When I bought the house, it needed some work. The carpet was old,
the tile in the kitchen area was coming up, and the entire house needed
some significant updating—Significant with a capital S.
My wife and I had been looking in that particular part of Austin for
nearly a year, trying to find the perfect deal.We had seen so many similar
houses that we knew immediately that the property was a steal. The property
had been listed, and within 24 hours of its original listing, it had had
three offers—all from locals.
We not only offered the asking price but also bumped it up by a few
thousand dollars (because we knew we had found a bargain) and won
the bid. We bought the home, completely remodeled it, and turned it into
a very nice piece of property. We still own the home today, and the property
has appreciated nearly fourfold since we bought it. And I doubt that
we will ever sell it. Okay, we will, but not for a long, long time. I know
the area, and it’s a keeper.
Sometimes people get into real estate investments by accident. For
instance, you find a house you really, really want to move into, but your
current property isn’t selling for what you’d like to sell it for, so you keep
it and rent it out.
Or perhaps you inherited a property from a relative and decide to
keep it long term and not sell right away.
Occasionally life simply causes you to get into real estate when you
had no initial motivation to do so. You’d never thought of it, and now
you’re in it. And you find out you like it!
Basic Finance for the Investor 1
Types of Investment Property 21
The Players 41
Loan Types for Investment Property 67
Interest Rates and Rate Strategies 101
Investment Properties and Closing Costs 125
Credit and Investment Real Estate 145
Documentation of Assets and Rental Income 161
Creative Financing for Real Estate Investments 181
Amortization Tables 217
Posted September 11, 2012
The book is a practical and useful guide to financing in Real Estate that everyone should know. A lot of in-depth examples and techniques. Was also an easy read which I would recommend to anyone in getting into real estate.
CA Real Estate Broker