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Getting Rich in Real Estate Investment

Investing in real estate for profit is one of the most popular ways of generating additional income in the United States today.

It is not only a relatively safe way to make your money work for you, but it also appeals to those people who favor a common sense approach to making money, to wit: person buys land, person sells land, person makes profit.

Just about anybody can understand a formula like that, and often, the real estate game is that easy. If you have common sense and good instincts, you can get rich fast in real estate.

There are several ways to make money investing in real estate, depending on how much money you have to put on down payment, and how long you want your money tied up in your investment. (The average mortgage runs 20 to 30 years, but your money may not have to be sunk into the real estate for such a long time).

An attractive thing about real estate is the great deal of flexability it offers. The amount of work you put into improving property -- or not improving -- is up to you. You can have a great deal of capital to invest in your venture, or you may be able to squeak by with a few thousands of dollar for down payments. You can see your real estate every day, or you can hire someone to take care of it and never set foot on a piece of sod. You have a lot of choices and options.

The 30-Day Wonder

One method of capitalizing on real estate might be called the 30-Day Wonder. The way to make it work is to put a few thousand dollars down on what a city considers abandoned property. Often, you can find a property that is not as bad as its appearnce shows. Often, you can find a house or storefront that just needs a fresh coat of paint, a few repairs, and some back taxes paid.

Your first step is to open charge accounts with area lumber yards and home building centers. This way you will be ready to get to work on your property as soon as you get title to it. Next, secure a loan from a bank as close to the sale time of the property as possible. The few thousand dollars you invest covers down payment and paperwork charges. It can also pay for repair and material charges if you cannot get charge accounts at home centers set up.

Once you have title and bank clearance, get to work on repairs, if any are needed. You have 30 days until your first payments to the bank and the lumber yards come due. It is your job to make the house presentable and find a buyer within those 30 days. If you succeed, you make enough to pay off all debts incurred for the home and a generous profit for your troubles. If you don't find a buyer within 30 days, you end up with mortgage, homeowner's insurance, and charge account payments for at least one month.

The risk is somewhat high, but the potential rewards are even higher. This is the kind of investment that beneifts from invesment partners who can share the burden of the payments and workload, as well as the profits.

Cleaning the inside and outside of a home can go a long way toward making a house presentable. Painting inside and out can also greatly help the looks of a home. If you have time, plant some trees or shrubbery for landscaping. Real estate studies show that many potential home buyers aren't looking for the fancy patio or swimming pool in the backyard. Many are simply looking for a decent, comfortable place to live.

With this in mind, you don't want to buy a home that is too run down for your 30-Day Wonder home. Find something which can be made presentable within a reasonable amount of time. Educate yourself on what to look. Also, look for interesting features in the house, such as a fireplace, extra bathroom, or large kitchen with extra counter space. All of the above are very much in demand in today's real estate market.

If you have the extra time and money to invest in a home for beyond, 30 days, you could fix a place up and make it a valuable rental property, or perhaps sell it for a handsome profit.

What to Look Out For in Seized Property

Of course, buying real estate seized for back taxes or other reasons can also have its disadvantages. When considering a piece of real estate, there are some items you need to know about. They are:

* Location - Is the property you plan on buying located in a decent neighborhood? If it is located in a neighborhood with a bad reputation, you may have an impossible time finding an interested buyer.

Another facet of location that needs looking into is future building plans around your property. If the city intends to annex and expand commercial developments around your property in the near future, the value of your targeted investment may increase four fold.

* Back taxes -  Definitely check to see how much the back taxes or other liens add up to on your targeted property. Sometimes, the taxes can add up to an amount greater than you can initially handle. Sometimes, they are more than the entire house is worth, even after remodeling.

* Zoning restrictions - Within a city, each neighborhood is zoned for a particular use. Some are strictly residential, others are commercial only, and still others are a combination of both. Before you buy a piece of real estate, make sure it is located in a zone which fits your future plans for the property. If the house you buy is to remain a place for people to live, it will be fine within a residential zone. However, if you plan to turn a house located in a residential zone into a store, the city probably won't allow you to do that.

* Investments in Raw Land and Subdivision Lots - Some of the more fascinating -- and potentially dangerous -- real estate investments involve raw land and subdivision lots. Each has its potential for profit, but each also has pitfalls which can quickly sink any chance for a return on your money.

* Raw Land -  Raw land is land which has not been developed in any way. It has huge potential for profit if it is located directly in the path of city expansion, or has a gorgeous view someone would sell his soul to own, but as a piece of property unto itself, it may not have great monetary returns.

Part of the problem with raw land is that it doesn't even make a good tax deduction, because you cannot depreciate raw land. On the other hand, if you are looking for something in need of little or no upkeep, you might enjoy owning a piece of raw land.

* Subdivision Lots -  Subdivision lots can be potentially rotten investments because of all of the hidden costs. Before you buy anything, find out who pays for development of the land, including the installation of electricity, water, sewage, roads, drainage systems and garbage collection.

Inspect the property yourself. Make sure it isn't located in a low spot prone to flooding, or on the side of a mountain prone to landslides. Check state wetlands laws and make sure the property can even be developed at all.

Some of the items to look for in the contract are hidden costs, clear title to the land, and a statement which gives you the right to start building on the land before it is paid for. Then make it your responsibility to record the contract in your name at the county clerk's office.

Using a Real Estate Broker to Negotiate Deals

More often than not, you will find yourself making an investment purchase through a real estate seller or broker. As with any investment deal you may make, both sides want to come out ahead monetarily. For real estate investments, it pays to learn some of the common practices sellers occasionally use to come out ahead in the deal. They are:

* Low Operating Expenses - Sellers commonly make this statement to lure you into thinking it won't cost you much to run the property. Before you agree to anything, find out if the seller has been operating the building himself to cut on operation costs. If so, are you capable of running the building yourself? You may find that operating costs will have to increase as you hire an employee to operate the building.

* Reasonable Property Tax - Reasonable property tax may be another way of saying the building has not been assessed for years. Obtain a tax card or listing sheet from the local tax assessment office and check when the last time was the building was assessed. If more than two years ago, the building might have back taxes stacked up against it.

Another bad tax trap: make sure the amount of square footage listed in the seller's agreement matches the footage listed at the assessor's office. If the seller's footage is more than the assessor's, you may end up owing lots of taxes on a building addition which was never previously assessed.

* Energy Efficient - If the structure in question is an old building, the chances are pretty good its energy efficiency isn't as great as the seller claims. An easy way to check for energy efficiency is to go to the local electric company and find out what electricity actually did cost. The same holds true for whatever energy source is used for heating.

Make Money Through Discounted Mortgages

One effective way to avoid common real estate headaches while making as much as 30 percent return on your money is to invest in discounted, or second mortgages.

The reason this is such a great opportunity for investment is that many mortgage holders do not like having their money tied up for 20 to 30 years. Most people like the idea of having ready cash on hand, instead of receiving monthly payments for what seems like forever.

Your job is to offer the mortgage holder a price which is below the face value of the mortgage. Usually, you should begin negotiations at 60 percent of the face value. You can then work up to 75 percent and still make a 25 percent profit on your investment. Sometimes, when the holder of the mortgage needs cash fast, you can obtain the mortgage for as little as 35 to 40 percent of the face value.

Here's an advantage: Often, the real estate for which you have the second mortgage, is sold after 10 or 15 years because the owners died, divorced, or just could no longer make the payments. While the first mortgage holder is guaranteed payment for his investment before you are, most of the time the property is sold for a high enough price to pay everyone off.

Before actually getting involved with a second mortgage, check the credit history of the person who will be paying the bills. If the person has a good track record of paying all bills completely and on time, chances are they will be a good risk.

Being a discounted mortgage buyer is especially good for investors who have some capital-at least $15,000-to play with. You can find second mortgages available for as little as $2,000 or as high as $50,000, and the returns can be significant.

As with any major investment, being successful at buying real estate for profit hinges as much on knowing the market as it does on luck. Understand what you want in an investment, and know what the market will bear, and you can end up with a lucrative, long-term investment in real estate.



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Copyright David Pierson. 2001