Investing in Real Estate
Bird dog
A Bird Dog is someone who finds deals and turns them over to other real estate investors for a fee, usually a few hundred dollars if the deal works out. In many state most real estate agents consider this illegal because only real estate brokers are suppose to get fees on referrals. None the less there are a lot of beginning real estate investors acting as bird dogs. Just do not expect a licensed real estate agent to give you a finder.s fee.
Whole Sale Properties
Real estate Whole Sale is when an investor finds a property puts it under contract then sells the contract (assigns the contract) to another investor. Once again many real estate agent think this is illegal however because the investor is selling the contract which gives him equitable interest in the property it is generally legal. The contract however does need to be assignable otherwise assigning it could breach the contract. Note that many Board of Realtors contracts that real estate agents typically use are not assignable without an addendum making them assignable. Some times a double closing is used to get around this typically if the property was bank owned since the bank is not likely to accept and assignment addendum.
Renovate (Rehab)
Property Renovators commonly known as Rehabbers buy run down properties fix them up and then sell them for a profit. Rehabbers typically use hard money lenders to finance the short term loan need. Renovators typically focus on the home owner market when properties are selling well and rentals when the home owner market slows down. There are also those that renovate commercial properties. Typically renovators look to buy a property at 70% of After Repaired Value (ARV) minus repair costs. If all goes well the renovator will make 15% of the sales price which should roughly match the estimated ARV.
Residential Rental (Landlord)
Residential Rentals is the bread and butter of real estate investment world. At first it may seem like a highly leverage property would only net you a very small cash flow and therefore is not going to give you much of a return. However because rents will typically go up faster than expenses so the cash flow will increase over time and the property will appreciate so when you sell it you annualized gain over a 10 or 20 year period can be considerable. Typically the more leverage the higher the return as long as there is some positive cash flow to start with. On the down side you have to contend with tenant issues some of which might affect your cash flow. Using a property manager will help with many of the issue that arise but you still need to build into your budget vacancy and tenant turn over cost.
Commercial Rental
Commercial real estate includes office builds, stores, strip malls, malls, etc. It does not include factories which are classified as industrial real estate. While the principle of commercial rentals is the same as residential there are a number of differences. First there is a wider variety of leases types some of which place many or all the expenses such as utilities, insurance and tax on the tenant as in net and triple net lease. Commercial real estate is a larger scale and more sophisticated investment type and is usually not for beginners. In purchasing commercial real estate you will want to you a real estate agent that is CCIM certified or is in the process of becoming certified.
Hotel Condos
A Hotel Condo is a suite in a hotel that is owned as a condo. When you buy the suite you and the hotel management sign a contract for them to manage the room as if it were a regular hotel. Typically there is a 40%/60% gross proceeds split with the management getting 40% and the condo owner getting 60%. Besides the 40% split the management may also charge several hundred dollars in condo fees that are used for overall insurance, maintenance and utilities. The condo owner will most likely need to get some additional insurance as well just like with a residential condo.
Pre-Construction
Pre-Construction is when a developer sells a house or other types of developed property before the improvement (house) is built. The price of the land and the improvement (house) is usually less before and during development than what the complete property would sell for so there is an opportunity to buy the pre-constructed property and then sell it for a higher price at completion. In some cases investor sell the contract to close on the completed property much like a whole sale properties. This all works well in an appreciating market but when the market turns, you could be stuck with the property and it may cash flow as a rental.
Development
There is wide range of development types some of them include: housing subdivision, condo conversions, apartment buildings, strip malls, office buildings, etc. Development is one of the most difficult investment strategies and requires a lot of planning. In a good market gross profit margins can be around 30% of sales with most of the development finance by the bank.
Hard Money Lending
A Hard Money loan is loan against a property that typically is being bought to renovated then sell. Hard Money lenders are typically previous or current renovators that have sufficient cash to loan to other renovators. Hard Money loans are usually at a much higher rate and have terms of 1 year or less.
Trade Notes
A note is a financial lien on a property (a mortgage). Besides the typical bank mortgage when a property is purchase there are other loan notes that maybe place on a property. For example a buyer purchases a rental property with 10% of his own money, an 80% bank first mortgage and a 10% second mortgage from the seller. So now the seller has a mortgage worth 10% of the sales price and is receiving monthly payments. A few years later the seller would like to get the rest of his money so he sells the mortgage note. This is similar to the bank selling loans they originated to the secondary mortgage market. There are two ways to make money here. First you could buy the note for less than the face value and therefore get a higher interest rate this is similar to buying bonds or you could broker a trade to a buyer and get a commissions.
Real Estate Investment Trust (REIT)
A Real Estate Investment Trust (REIT) is a security that sells like a stock and invests in real estate in the form of properties or mortgages. REIT stocks typically offer investors higher yields than most stocks and since they are sold as stock on major exchanges they are more liquid that real estate. There are also mutual funds and exchange traded funds (ETF) that specialize in REIT if you want diversification while buying a single investment.
Tax Liens
When a property owner does not pay their property taxes the county the property is in either sells the property (Tax Sale) or sells the a lien (Tax Lien Sale) at auctions. State law dictates whether the county conducts a Tax Sale or a Tax Lien Sale. For Tax Sale states the owner usually has any where from 6 months to a couple of years to redeem the property by paying the taxes and interest. In Tax Lien Sale state the owner typically has 6 month to a year to pay the taxes and interest otherwise the lien purchaser can begin the process of taking ownership which can take up to a year or more. The state sets the interest rate of the liens which can vary from 12% to 24% of the lien.
Tenants In Common (TIC)
Tenants In Common (TIC) also known as Tenancy In Common, is a form of property ownership in which two or more legal entities each own an undivided interests in the property or designated interests of differing sizes. Basically like owning shares in a company as it were. Each owner is on the deed and is considered an owner of the real estate and shares a pro rata in the income, tax benefits and appreciation of the property. Tenants In Common (TIC) is typically used by a real estate investor that wants to do a 1031 Exchange but is having difficulties finding a suitable replace property. However anyone that has the need money can buy into a TIC. Types of TICs include:
  • Single and Multi-Tenant Office Buildings
  • Multi-Family Apartment buildings
  • NNN-Triple Net Lease
  • Industrial Complexes and Warehouses
  • Retail Shopping Malls
  • 1031-REITS (Real Estate Investment Trusts)
  • Oil and Gas Royalties