Prosper Newsletter: February 2007 > Real Estate

You understand that the following information is educational in nature and is not intended to be legal, accounting, or tax advice. You are responsible for your own financial decisions and should consult your own legal, accounting, and tax advisors before making your financial decisions.

New Area Offers Advantages

I had visited family in another state where I saw the prices of houses and couldn't believe how low they were. That started me looking into the idea of investing in real estate. I live in Southern California where the market has blown way out of my comfort level for investing. With houses costing no less then $500,000 for a dump I didn't feel comfortable making the kind of financial commitment it would take in my own area. Since I signed up and started my coaching sessions about two months ago I now have 6 houses under contract with the first one closing this week. I'm looking for the residual rental income and not the quick flipping income. The most important part of investing in an area so far away is the local team that I depend on to give me good and accurate information about the area and the properties I'm looking at.

House one: Asking price was $55,000 with a market value of $65,000. We agreed on a price of $46,100. After inspection I found it would take about $5,000 of repairs and the attic was full of bats. I opted to tell the seller I would either be willing to pay $41,100 and he takes care of the bats and cleaning the attic or cancel the deal. He accepted my offer. It turns out his ex-daughter-in-law lives in the house and he wants to sell it just to kick her out. It also turns out that she likes living there and is willing to pay me the rent and doesn't require me to fix anything and the owner is still taking care of the bats. This house will generate about $150.00 a month profit.

House two: Owners had moved out town and was desperate to sell. Asking price was $62,250 with a market value of $68,000. They accepted my offer of $56,000 and they would pay 3% closing costs. The house does not require any repairs and will generate approx. $125 profit each month if just rented but I'm going to do a rent-to-own, which will generate even better cash flow.

Houses three-five: My realtor in the area put the word out to other realtors that she had an investor looking for properties in the area. A realtor came to her and told her that he had a client that owned three houses and already had them rented but he was moving out of the area and just wanted to sell off his properties and cash out. He had owned the properties for over 10 years and was willing to sell below market value just to make a quick sale. He provided an asking price that was on average 25% below market value and I offered him the asking price. Each house as-is will generate approx $125 per month. Within 6 months I plan to do some minor improvements to increase the market value even more and will increase the rent and finance 80% of market value to cover the purchase price and pull equity out. All three houses were purchased for $125,000 total from a home equity line of credit on my primary residence.

House six: Found this house on the HUD website for sale. I had been watching it for two months as they kept reducing the price each month. I asked my realtor why it wasn't selling and she said it was not listed on the MLS listing and no realtors were showing the house. Market value as-is is $49,000, I offered $25,000 and HUD to pay 3% closing costs thinking we could negotiate up from there and they accepted it. I was so excited and couldn't believe I got this house for only $25,000 and then I thought, dang, why didn't I offer less. The house requires paint and a new kitchen floor and will generate approx. $300 a month profit.

- Tim W.


Tip of the Month

Understanding Your Investments

Remember the Internet bubble burst of the late nineties? For many around the world, the memory is still fresh and the scars from the aftermath still present. During the exuberance before the tech stocks fell from grace, people, who thought of themselves as investors, would often buy stock in company after company based simply on the recommendation of others. The advice often came from a co-worker, friend, family member, or one of the many guys doling advice freely on television. Blinded by ignorance, impatience, and greed, many people bought stock in businesses and industries they knew absolutely nothing about. Mouths around the world hung open as people saw their portfolios crumble.

One of the major lessons to be learned from that painful and costly experience for all of us is that we need to identify WHY we are buying the types of investments we are buying. As real estate investors, we need to be able to think for ourselves about the forces that shape and control supply and demand in the markets that we choose to invest in. If we run out and buy a house or condo in a particular area simply because we were told it was a "hot area" by someone else, we're acting much like the people that lost so much in the tech stock bubble... and may someday share a similar fate. You need to be able to analyze and think about fundamentals for yourself so you can recognize areas of opportunity before others get the memo and recognize false value in a market before blood runs in the streets.

Sites like bestplaces.net give you a wealth of information about population, and population changes, job growth, school systems, crime, local health care, etc. Information on population shifts and unemployment changes, for example, can impact demand in an area. If more jobs come to town and the population grows faster than homes are being built, the result is usually going to be rising home prices. On the other hand, the opposite formula leads to soft or falling home values. That is a very simple example of one way that you can gain valuable insights from data that is readily available to all of us.

You can get current and historical information about new home starts and other construction forecasts and statistics from your local government. Universities often track this data as well and make it available to all who request it at little to no cost.

The main message here is that you should go into your purchases with your eyes open. You should know the forces that shape the economy in the area and drive home values. You need to know WHY you are buying property in the areas you choose to invest in and you need to know what you exit strategy is before you go in. If you can rely on your own evaluation rather than your neighbors' hot tip for your investing decisions, you'll feel empowered and likely sleep much better in 2007.

Article

Learning the Market

One of the first and most important steps you need to take as you begin real estate investing is to learn about the market around you. As you begin to learn the market, you will be able to better identify what characteristics buyers in your investing area are looking for when purchasing a home. You will also learn what characteristics to avoid.

Market knowledge is fundamental to your success as a real estate investor. It will allow you to prescreen properties that you come across even before you see the property. Some of the advantages of understanding the market include:

There are many ways you can learn the market. If you pay attention and ask plenty of questions you will be able to learn the market around you relatively quickly. Real estate agents are a great source of information about the market.

Once you have selected a real estate agent you trust, start by asking questions. Real estate agents stay on top of the market around them, if you ask the right questions, you will get plenty of information from them. Remember, your agent works on commission and will gladly tell you about the market.

As you start working with your real estate agent, you may want to ask the agent to search the Multiple Listing System (MLS) for different properties in your target area that are for sale. Your agent should be able to print off information for you on a variety of properties.

Once you have information on a variety of properties in your area, you will want to sort the properties into different classifications according to the amount of bedrooms and bathrooms in each property.

When the properties have been sorted, your real estate agent can help you look at a couple of key factors that will inform you of which properties are in higher demand. One of the most telling factors is the days on market (DOM) of a property. The DOM will let you know the average time it takes a property to sell once it is listed in MLS.

The more you know about the area you are investing in, the better you will be able to create investment opportunities. Take the time to learn as much as you can from the people around you. It will pay off in the end.

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