American investors can thank an Australian investment vehicle for letting them invest in real estate the lazy way. Officially born in 1971 in the land down under it was, and still is, known as the Real Estate Investment Trust (REIT).
When I was a stock broker, some of my clients fell in love with this income producing product because they quite often paid higher yields than stocks or bonds. They also were and still are highly liquid.
The REITs with sound properties in their portfolio not only paid like clockwork but paid well. The same holds true today even though the market has been whacked around a bit.
I am not advocating anyone or everyone become a REIT investor. While I still like them, I prefer to slog around neighborhoods looking at potential inventory and doing the attendant research. My son on the other hand is the true lazy American. He will let someone else do the work for him. REITs are perfect for him.
For those who may not be familiar with real estate investment trusts, they are simply entities that invest in different kinds of real estate or real estate related assets, including shopping centers, office buildings, hotels, and mortgages secured by real estate. You buy shares in them through your broker.
There are three types and all three have a level of risk so it is important to understand your risk parameters. Chances are excellent if you already invest in real estate, you have a handle on your risk taking level.
According to the SEC, the three types of REITs are:
1) Equity REITS, the most common type of REIT, invest in or own real estate and make money for investors from the rents they collect; 2) Mortgage REITS lend money to owners and developers or invest in financial instruments secured by mortgages on real estate; and 3) Hybrid REITS are a combination of equity and mortgage REITS.
You can visit the SEC website for more information. Another good source of information is the National Association of Real Estate Investment Trusts. Both provide information that should help you make an informed decision. Due diligence is extremely important in this arena as it is in any other investment.
By the way, some REITs offer a dividend reinvestment plan (DRIP). This means you can let the dividends buy more shares. If you have a REIT that is doing well, you now have the benefit of compounding working for you.
REITs may not be for everybody but they may be for you. Happy investing!
Note: Image Copyright © Globe Business Publishing Ltd 2008 - Globe Law and Business - Real Estate Investment Trusts: A Global Analysis
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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.
The Lazy Man’s Way To Real Estate Investing
1. Build your TEAM If there was one thing that will make a difference between a good experience/deal or a bad experience/deal…it is your team. Your team could consist of a Real Estate Agent, Mortgage Broker, Title/Escrow Agent, Insurance agent, Home Inspector, General Contractor, Real Estate Attorney, and the list can go on. We are going to start with the most important…and that is your Real Estate Agent and Mortgage Broker.
So how do you know the difference between a good team member and a bad one…we recommend the book Rich Dad’s Real Estate Advantages …in chapter 5 it covers some of the questions to ask and what to look out for. We have listed a few of these questions for you….
2. Your Exit STRATEGY (& Credit) = Loan Options
You need to start with your exit first. If we break down your exit strategies, they will fall into 2 categories…cash flow or capital gains. What is the difference? My parents have a ranch and they raise cattle for beef. They raise the cattle and sell it for a profit (hopefully) and get that profit only once. Had they chosen to be a diary farmer, the cattle would continually produce milk which equals a profit. Real Estate is the same way, I can sell it for a 1 time gain (or loss) or I can us it for a monthly income. All of the real estate investing strategies fall into 1 of those 2 categories…cash flow or capital gains.
Most mortgage brokers focus on your credit as the key factor in placing you into a certain type of loan. While your credit is important…It is your intended exit of the property that will define your loan options. If you are looking to hold this property for the long term then you may be looking for a 30 year fixed loan that is paid off within the 30 years or sooner. If you intend to only keep this home a few years, then an interest only loan may make the most sense. Why, because it will keep your monthly payment low.
No matter what your exit is, there is a loan program for everyone. The problem, most people look for the ‘best deal’ instead of the loan program that is the ‘best fit’. Team Members Needed - Mortgage Broker, Credit Repair specialist Tools - Mortgage Calculators , Online Mortgage Application
3. FIND a Property So here comes the step of going out and finding a property. One of the most important parts of this process is managing your emotions. Yes, the purchase of a property can be an emotional decision…lets just be aware of that. To give you a different perspective though, it is important to understand the difference between a consumer and investor. Consumers make decisions based on emotions while an investor makes decisions solely by the numbers.
My recommendation is be both a consumer and an investor, get what you want (emotions) yet make sure it makes financial sense. So how do we make sure that a deal makes financial sense? Well that is entirely based on your exit strategy that we discussed in step #2. But lets talk about the 2 different tracks that you may look at…Cash flow vs. Capital Gain. If you want cash flow you will need to evaluate the income of the property…if you want capital gains you want to evaluate the future value of the property. Lets break these 2 elements down. Cash flow is a relatively easy formula…
income – expenses = cash flow
So why do so many people end up with negative cash flow? Simple answer…they don’t use the formula. They so often mistake different numbers for different things or don’t use the formula at all. An example of this…your real estate agents tells you the Cash Flow is $800 on a 3/2 single family home. The problem is, this number didn’t include the largest expense…your mortgage. So you got a great deal, unfortunately your mortgage turned out to be $1000 a month so you are losing $200 a month. The other problem is that so called investors are using the wrong formula…they use the formula for capital gains to evaluate cash flow. I will hear from people that the property is 20% below market value…problem is it is still over priced from a cash flow perspective. Capital Gains. How do you predict the future value of a property?
Do you have a crystal ball?
I don’t…but if you do let me know as I will pay you a lot of money to use it. So lets get real, to invest in capital gains you are not going to use a crystal ball and predict where the market is going, you have to base your decisions on where the market is today. The key with capital gains is to build in your profit before you buy. So how does this look, another simple formula of addition and subtractions. ARV – Expenses – Profit = Your Highest Offer
Team Member Needed - Real Estate Agent Tools - Real Estate Listings
4. CONTRACT When in doubt, tie up the property by getting the property ‘under contract’ and just ensure that your escape clauses are in place. Earnest money…it is important to know ‘how much’ earnest you need to put down. Truth is, all that you need to put down is $1 to $100, whatever amount is required by your title/escrow company to open an escrow account. Real Estate Agents will tell you they like 1% or some other amount because it show that you are a ’serious’ buyer. Point is…earnest money is negotiable. Everything is negotiable.
Quick Contract tips…if you want something, be specific. If you want an ‘escape’ be broad. Two examples, I want the Viking Refrigerator so in my contract I am going to add the serial number and photograph…or; This deal is subject to my partners approval. You may not want that Viking to be replaced by a GE (no offense GE) and for the other example I never said that my partner was my dog and the property didn’t pass the sniff test.
Team Members Needed - Real Estate Agent…getting into serious contracts, use a Real Estate Attorney. Tools - Your real estate agent will have a standard purchase agreement. In case of you are looking for other legal forms click here.
5. ANALYSIS of the Property There are 2 areas of property analysis to consider: Property condition and property value. Property Condition- Do you know if you are buying a dog? Do you want to buy a dog? (Believe it or not some people do as they love the concept of fixing a property up.) The point is do you know what needs to be ‘fixed’ or ‘updated’ on the home prior to purchasing. A good home inspector will identify issues or problem areas throughout the entire home. If your home inspector does identify issues, then you will want to bring in specialists to quote the work and evaluate what it will take to handle the work. Property Value - When buying a home there is one primary number that you want to be aware of…The Appraised Value of the property. You will get this from an appraiser, but one tip…ask for (and review) a copy of the appraisal before you close.
Team Members Needed - Real Estate Agent (introduce you to an appraiser and home inspector), Appraiser, Home Inspector, any other specialists required. Tools - Sample Appraisal
6. LOAN Analysis
Below is a quick checklist of items that you will want to know concerning your loan. You will want to compare this information to your current financial situation and your exit strategy to ensure that this loan fits your needs. It is always recommended that you talk to at least 3 mortgage brokers about your deal, as every mortgage broker may have access to a different loan program.
Here is the hit list of what should be included in a Good Faith Estimate: -Interest Rate -Monthly Payments -Taxes and Insurance -Loan Amount -Pre-payment Penalties -Fixed or Variable Rate -Term (Length) -Amount of money needed to close (your check to bring to closing) Team Member Needed - Mortgage Broker
7. CLOSE on the property
Closing takes place at a title/escrow company. As we discussed in step 6 - Loan Analysis, you will need to know how much money to bring to the closing table. There are a lot of documents, take the time to make sure you know what you are signing. If you don’t know what a document is for, ask the title agent for clarity. While all of the documents are important, the HUD 1 is very important to review. This outlines who (seller, buyer) pays what and who (mortgage broker, Real Estate Agent, Title, etc.) gets paid what.
Take a friend, spouse, therapist, family member to closing with you. Remember this can be a very emotional experience, so if you need to have some ’support’ with you, take it. Team Members Needed - Title/Escrow Officer, Mortgage Broker Tools - Sample HUD 1
8. Execute your EXIT
Now that you have closed and own the property it is time to execute your exit. Is your plan to hold the house for a few years and then sell it? If so, you will want to talk to your CPA to discuss when to sell. Owning the property for 1 year and a day could be the difference between paying 30ish% tax (taxed as ordinary income) or using a 1031 exchange to roll the profit into another property, tax deferred. If you own and have lived (occupied) in the property for 2 out of the last five years, you could take the profits with no tax hit. 1 day could be the difference between thousands of dollars that you may need to pay in tax.
Maybe your plan is to accelerate your loan pay down? Your mortgage broker should have tools to help you take what is normally a 30 year payoff to a 10 or 11 year payoff by using a combination of increased monthly payments and utilizing a HELOC (home Equity line of Credit).
Team Members Needed - CPA, Mortgage Broker
9. EXPAND - What’s Next No matter where you are starting from, there are tremendous opportunities in real estate to create and make money…even in an up and down market. It often starts with your first home, and then you build from there.
So what resources are available to you get the education and find the right team members…
1. Join a Real Estate Investors Club - National REIA Website 2. Attend seminars in your area - you can find these in your local newspaper.
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The Real Estate Investor Buying Process
Will we ever learn? Doesn’t look like it.
You’d think what with all that has gone down with the subprime mortgage/credit mess, the real estate industry (or, at least, segments of it) would be in the forefront of a much needed reform movement.
Instead, there seems to be an almost pathological desire to return to “normal” as soon as possible.
While it is certainly true that people all over the country are finding it difficult to obtain mortgages–even people with good credit ratings, hardly a week goes by when I don’t read a newspaper ad or hear a radio commercial that tells would-be home buyers that they can get a mortgage even with rotten credit, the very thing that go us into this ordeal in the first place!
Since most people with bad credit are finding it nearly impossible to get reasonable mortgages, it is baffling about why some places are advertising that they can?
I don’t have a good theory on what they might be up to and would be interested in informed opinions (as opposed to speculation, please) as to why this may be the case?
Regardless, it is discouraging that it took so little time for these potentially abusive practices to resurface.
It is understandable that Americans want to see the light at the end of the tunnel. But, things just aren’t that simple I’m afraid.
When Fannie Mae on Tuesday issued what Reuters calls “reassuring comments about the credit and housing markets” the stock market took notice and went up…investors eager for any bit of positive news they can find.
But, it would be foolish not to take note of the other bit of news Tuesday: a barrel of oil went above $122 for the first time!
Another dose of reality comes by way of Las Vegas. Yes, I said Las Vegas.
According to the New York Times, Vegas is starting to feel the pain caused by the real estate/credit crisis. The city way overbuilt based on an economic model that just doesn’t hold up anymore. The prospects are apparently not very good that the city will quickly rebound,either.
It is more than okay for real estate and potential real estate investors to reach for optimism, so long as they keep their eyes open to what is really going on in the world around them.
Real Estate Lessons Learned Or Lost?
When U.S.News & World Report’s Luke Mullins was researching and writing an article about using the internet for home buying, I’m pleased that he turned to BiggerPockets.com as one of his key sources of information.
Six Secrets of Internet Home Buying by Mr. Mullins, a really nice guy, BTW, details some good tips for home buyers who may be using the internet to assist in their quest for a new home.
The interview and mention was another nice acknowledgment of what we’ve been able to accomplish with BiggerPockets, and I look forward to working with more journalists in the future on their articles.
What’s great is that several friends of BiggerPockets, including the always great Pat Kitano were also interviewed for the piece.
I hope that everyone gets a chance to check out the article and all of Luke’s other articles.
Thanks, Luke!
BiggerPockets.com Mentioned in U.S.News & World Report: Six Secrets of Internet Home Buying
There are many thousands of savvy investors across the United States who would love to begin investing in apartment buildings but they just don’t have a plan for success. In other words, they don’t have a clear understanding of the necessary skills, knowledge, and mechanics of commercial real estate investing. Unfortunately, there are very few resources available to the first time apartment building buyer that offer clear, concise and effective information that can be followed like a business plan. The market is flooded with gurus and secret formulas but most of these gurus and formulas are ineffective and actually will have a negative impact on the efforts of the first time apartment building investors for reasons that will be explained in the following article.
Many real estate gurus that teach apartment building investment seminars are very successful real estate investors, however, their major flaw as educators lays in the fact that they teach one “system” that has worked for them personally in one or two markets during one small period of time.
Heraclitus, the Greek philosopher, is famous for saying “you can’t step into the same river twice”. I would say that you can’t invest in the same real estate market twice. Recent headlines make it apparent that the real estate market is in constant flux. What the gurus teach in their courses, to return to the river metaphor, is the way that they personally crossed the river and reached their own personal success at one particular time. Unfortunately, when students try to follow the gurus system they find that the market has changed and the system no longer works. This causes frustration and the student concludes that is impossible to succeed in commercial real estate investments and the student eventually quits or goes on to the next guru, hoping that he or she has the answers and the formula that work.
For the first time apartment building investor these secret strategies and proven formulas for apartment building investment success can seem irresistible because they promise that investing in commercial real estate is really an armchair activity that requires very little work and pays back big profits. However, in reality, nothing could be further from the truth. Commercial real estate investing is more difficult and complicated then residential real estate and the beginning investor should first spend as much time as possible learning the subject and studying the market.
Here are some real world tips that I would give to the first time apartment building buyer:
Buy an Apartment Building with No Guru Included
In the late 1990s country music star, Trisha Yearwood, had a hit song titled Walkaway Joe. The title of that song would be an apt description of many borrowers today. These people invested in real estate by leveraging themselves as much as possible. Many of them bought homes with little or no money down.
The softening of real estate prices has left many of these investors owing significantly more than the house is worth. A lot of people decide to walk away from the homes rather than fulfill the obligation that they signed for. They make a business decision based strictly on dollars and cents rather than feeling any moral obligation to repay the loan.
There will always be people that are blindsided by some catastrophe in life that sends them into foreclosure. Perhaps a job loss or medical crisis has impaired their ability to repay. I hope these individuals find a way to get back on their feet and find a way to get on with their lives. They are not the problem.
Born to Be a Leaver…
The foreclosure crisis has resulted in a blitz of advertisements from bankruptcy lawyers and others looking to capitalize on this mess. The media has portrayed those who are walking away from their homes as victims. While unscrupulous lenders, real estate agents and others may have preyed upon some of them, most of them are victims of nothing more than their own greed. They should have known better. Now they are being told that it is okay, or that the government will bail them out.
One company that has sprung up is You Walk Away, LLC, located in San Diego. Their Website states that they can help you live in the home for as long as 12 months without making payments or being hounded by creditors. What happened to personal responsibility and the stigma of defaulting on a large debt? Insanity.
Destined to Deceive…
It’s not just the small time investors who are abandoning their obligations. Just last week on the TV show, Inside Edition, former baseball star Jose Canseco made a stunning admission. He stated that he stopped making payments on his $2.5 million mortgage and is letting the house go into foreclosure. According to Canseco, “It didn’t make financial sense for me to keep paying a mortgage on a home that was basically owned by someone else.” In essence he just decided that he didn’t want to pay anymore.
Guess who pays for all of this? The irresponsible borrower gets a break while the responsible one gets nothing. We all pay in the end. We now have a situation where lenders don’t want to provide loans to qualified borrowers. Can you really blame the lenders? If the consequences of not living up to your obligations are so minimal how can they trust anyone?
We’ve become a nation of victims. It seems so few people have any sense of personal accountability. It’s like the four-year-old kid with cookie crumbs all over his face who claims that someone else raided the cookie jar.
Everybody wants to take responsibility when you win, but when you fail,all these fingers are pointing. -Mike Krzyzewski Duke University
A Walkaway Joe
I was just reading an article about how Mortgage Fraud is now a specific crime in Missouri, but couldn’t help but think to myself whether or not this law goes far enough. While I haven’t read the law itself, a $2,500 fine and/or jail is just not going to cut it. The loans must still be written off by the lenders, and of course, what happens is the banks eat up the cost, and the general public funds the bailout.
We’ve been bailing out banks due to the housing bubble for months now, and funding the crimes of those people who engaged in mortgage fraud and who in the end, couldn’t afford, or simply didn’t want to pay their mortgage anymore. I was thinking about all of this and came up with an innovative idea that would likely stop 90% of future mortgage fraud. Is it something that would ever go into law — not a chance — but if it did, it could change the fate of lenders and could prevent the average citizen from having to pay for the stupidity of others.
Those people who specifically committed this crime should NOT be let off the hook for the rest of us to pay. I believe that the law should mandate some kind of recourse beyond simply imposing a fine and/or jail. Frankly, I think the law is extremely weak. While it may have some teeth when dealing with real estate professionals who endorse such crimes, if the law looked deep enough, it would actually hold people responsible for their default. Why not write a law that requires people who commit mortgage fraud and who default on their loan, to be responsible for a long-term payback of that loan?
If they couldn’t afford the loan in the first place, you’re asking how exactly they’d be expected to pay it back, right?
Why not add the ability for banks to garnish wages for people who commit mortgage fraud?
Actually, we can take it even further and also garnish the wages of those professionals who allowed or encouraged you to commit this fraud. Basically, you put the professionals on the line for the money in addition to the guy who directly engaged in the fraud . . . that would be a deterrent, wouldn’t it!
Landlords can go after renters who stop paying the rent and owe them money, with a garnishment. Why shouldn’t the banks or the federal government be able to go after the money that were screwed out of by the lying consumers/professionals?
While they may not be able to recover all of the money that was lost due to this mortgage fraud, at least they’d continue to bring in funds, ad-infinatum, from the guy who committed the crime and the “professional” who allowed it to happen.
Not only would this act as a deterrent from committing mortgage fraud, but it would also place a big red flag on someone’s credit saying that they are now paying off a loan that they lied to get. Essentially, the law could create a scarlet letter. Any future lender would then know to scrutinize your application EXTREMELY closely before giving you the benefit of a doubt and loaning you any money.
Wrap Up Would such a law ever come to pass . . . I think it is extremely unlikely. But, if it were to, I believe we would see the virtual end of mortgage fraud as we currently know it!
Any thoughts on this little thought experiment about dealing with Mortgage Fraud?
Creating a Mortgage Fraud Law with Some Bite - A Thought Experiment