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Real Estate, How To Make Money

In this educational video you will learn how to make money with investment real estate and what criteria lenders use when making loans on investment real estate. These are questions asked by real estate investors to Terry Painter, president of Business Loan Store and Apartment Loan Store.

1. What is the current state of the real estate market?                          

Nationally, property values are going up again, and it takes more time and effort and money to find a property that is going to be a good investment. But it is still well worth the effort and will just take more time. Most fixer-uppers have already been snatched up. Banks are still cautious and prefer making loans on properties that are in good condition, in good neighborhoods, with good net incomes and stronger borrowers.

When searching for investment real estate it would be wise to do the same three evaluations lenders do. Evaluate thoroughly:

1. The quality of the income – In doing your due diligence, ask for 2 to 3 years of annual income and expense statements to make sure that the property is running profitably not only now (when the seller wants to sell it) but historically. To obtain a spreadsheet that has three years of income and expenses on one page to compare, go to our web site: www.apartmentloanstore.com or www.businessloanstore.com.

2. The quality of the property – Does the real estate you want to buy look old and tired? Does it need new floor coverings, appliances, paint, roofing, etc? Ideally have a property condition assessment report done on the property that determines what it will cost to put the property in good condition.  

3. The quality of the borrower -- Since the recession, this is the most important thing you need to obtain financing. To get a 75% to 80% low-rate loan you will need a credit score of 680 or above, have low consumer debt (credit cards and car payments), and not only have the down payment but a minimum of six months of mortgage payments in post-closing cash in the bank. Usually you will need a net worth equal to the size of the loan as well.

2. Where is real estate lending headed in the future?

Today it is still not easy to get a real estate loan from a bank or mortgage banking firm. You need good to excellent credit, at least 20% down, and no bankruptcies or foreclosures on your record. Furthermore, if you have any mortgage lates, they will have to be explained and verified. Because so many people do not have good marks on the above criteria, many lost their homes and have been pushed into the rental market. As a result, most apartment complexes and rental homes are full, and there is need for more. Many previous homeowners no longer have enough storage space and are renting it. So this is a good time for self-storage businesses. Most banks have cleaned up their non-performing loans and have few, if any, foreclosures. They have more money to lend than they have borrowers to qualify.

Going into the future, banks will still be cautious and only be making loans to borrowers that are solid financially. Home prices will likely continue to rise, and this will also make it more difficult for previous homeowners who lost their homes to get back into the housing market. Apartments will stay full. The National Real Estate Investor (http://nreionline.com/) has good information on the current and future trends in the real estate market.

3. Where do you see the most opportunities today to invest in real estate?

Most of the fixer-upper foreclosed homes (also known as REO properties) have already been sold in most areas of the country. It seems like even properties in shabby condition are priced high. So this means that you have to spend more time to find good deals. Although it is best to find investment real estate in your own neck of the woods, you may have to look elsewhere, where rents are decent. Major MSAs in the south, many parts of Florida, Ohio, Indiana, Michigan and Nevada have some good buys.

Also, if you can afford to invest in commercial real estate, five units or more with multifamily, self-storage and light industrial are properties with very low vacancy. Light industrial properties are small warehouse units where someone has their business.  Loopnet (http://www.loopnet.com/forsale/), the has the most extensive listings of commercial real estate for sale, is an excellent resource for finding the right property.

4. What are the top three traits of the most successful investors in real estate?

1. Tenacity: Not giving up, being resourceful, doing whatever it takes to find good properties and raise the capital if necessary. Also to find alternative sources of financing (like owner carry) if you do not qualify for bank financing. If many things do not work, study, learn and try something else.

2. Extensive due dilligence: Take the time to find properties that are in decent condition, have good verifiable net incomes, and that you can obtain for a good price. Get a property condition report if necessary, obtain 2 to 3 years of financials on the property, and do extensive market research to determine what the property is really worth.

3. Excitement about the property to attract investors: Many investors do not have enough capital raised for the down payment, or the net worth or liquidity to qualify to buy an investment property with financing. The ability to generate excitement and sell the investment to others is important. You must also really know the numbers, so the investment will sell itself based on its financial strengths. See this article from Norida (http://www.noradarealestate.com/blog/stated-income-loans-for-investment-property) for additional information.

5. What are the traits of real estate investors who fail? 

1Underestimating the cost of repairs: If the property needs substantial improvements or rehab, underestimating the cost.

2. Underestimating the time it will take to improve the property: The longer it takes for you to improve the property and it stays vacant without income, the more money it will cost you. If you have financing on the property, you still have to make payments on it without rental income.

3. Underestimating the fill rate: If you are purchasing a commercial property or a multifamily property of five units or more, and it takes twice as long for you to find tenants for the property than you anticipated, this can cost you a lot of money.

4. Over-leveraging: Over-leveraging means you leverage mostly someone else's money into the venture. This means that if the going gets tough, you might not stick it out (after all, it’s not your money that will be lost).  Also, real estate investors that over-leverage often do not have an rainy day funds – capital left in the bank to take care of cost overruns and delays in renting the place up.

5. Not doing your due diligence: This one can cost you the most. If you don’t take the time ahead to find out what the actual condition of the property is – you didn’t walk all the units or did not, at a minimum, get the opinion of an experienced property inspector -- it will likely cost you more money than you anticipated. Also, not taking the time to examine all the property financials. This is a business. Do you want to take the risk of buying a business that is failing? Lastly, not taking the time to do research on the neighborhood. Is the property located in an area where people will feel safe? Is the property priced where it should be for this neighborhood? 

6. What is the difference between commercial and residential investment property?

For multifamily, it’s a commercial property if it has five or more units. Otherwise, business-occupied properties, retail complexes, office buildings, self-storage properties and warehouse buildings are all examples of commercial properties. Loans on commercial properties are different because they start by looking at the property's income first. After all, it will be the property, not the individual, that will be making the money for the payments. The Commercial Property Executive (http://www.cpexecutive.com/) has great information about the business of Commercial real estate.

7. How do you get a lender excited about your real estate deal? 

Find a high quality deal, meaning:

The property is in decent condition.
The property cash flows the size loan that you are applying for.
You are qualified to buy the property. You have some experience and good credit, and be sure to show them a bank statement that proves you have the down payment.

8. How does the beginning investor in real estate get started?

1. Go shopping. Go to Craigslist, Loopnet (for commercial properties), Google, or to a realtor, and start looking for decent properties.

2. Do your due diligence. Really examine the condition of the property, and look at the property financials to determine that this property will provide the net income you are expecting it to.  

3. If you do not have the experience to do the first two steps above, find a mentor or coach who can train you and help you find the right properties. This might seem expensive, but in the long run it will save you a lot of money.

By Terry Painter, President of Business Loan Store and Apartment Loan Store