Some of the best real estate profit opportunities may surprise you. When you find an opportunity that interests and excites you, act on it! Don’t let your friends and relatives discourage you. Here are the top five ways to maximize your real estate investments:
1 – YOUR PERSONAL RESIDENCE. Did that surprise you? If you don’t already own your own home, what are you waiting for? Home mortgages have never been easier to obtain. Even if you don’t have perfect credit, mortgage lenders offer “sub-prime” loans for your situation. However, if you have bad credit, no down payment, and no job, that might be a problem!
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Sound, well-located, single-family detached houses have proven to be the best long-term investments. On average, they have been appreciating about 5 percent every year. Ho-hum, you reply! But 5 percent is a tremendous annual yield if you make a cash down payment of 20 percent or less, like most home buyers should and do make. The reason, of course, is leverage!
EXAMPLE: Suppose you buy a $200,000 house with a typical 10 percent cash down payment of $20,000. If you can get an 80 percent first mortgage and a 10 percent second mortgage (also called a home equity loan), you will avoid the dreaded PMI (private mortgage insurance) premiums that can be very expensive. PMI protects the lender (not the homeowner) and is hard to remove when your equity grows. Avoid PMI if possible.
Now let’s suppose your $200,000 house appreciates just 5 percent in market value during the next 12 months. That’s only $10,000, meaning your home will be worth $210,000 a year from now. That’s not very good, is it? Yes, it is! That modest $10,000 profit is a tremendous yield of 50 percent on your $20,000 cash investment. Where else can you do as well while enjoying a nice place to live? Even if your monthly housing cost is a bit higher than it costs to rent a similar house or apartment, please remember (1) the probable 5 percent annual appreciation in market value, plus (2) the income-tax savings from your itemized mortgage interest and property tax deductions.
In the last few years, many condominiums and townhouses have seen an increase in their annual appreciation rate that traditionally lagged single-family houses. But because of all the potential problems with condos, which single-family houses usually don’t have, I can’t recommend condos as primary residences if you want to maximize profits from appreciated market value.
2 – RENTAL HOUSES. After you have acquired your personal residence house, why not own several? But please don’t misunderstand – I suggest owning one or more rental houses near your principal residence.
But I do not recommend buying a second or vacation house in a vacation area. The reason is vacation homes cost money to maintain, especially if left vacant, and they often decrease in market value if there is no strong local demand from other buyers in the community. I can cite you many examples of vacation homes in areas of primary summer (or winter) use that have lost value because (a) the popularity of the area shifted to other “in” spots and/or (b) there was over-building, causing a glut of houses to come on the market, thus depressing sales and rental prices. If you buy a house in a vacation area, thinking you will rent it to tenants when you aren’t personally using it, please research the rental market very carefully and be aware of the high risk.
Traditional rental houses, held for at least five years, have proven to be superb real estate investments in most communities. But in the last year it has been very difficult in many areas to find good tenants because it has been so easy for prospective rental house tenants to instead become home buyers, thanks to low mortgage interest rates. That’s why many rental house owners have begun offering their houses for rent with lease-options. There’s always strong demand for lease-options, when properly marketed.
3 – FIXER-UPPER HOUSES AND INVESTMENT PROPERTIES. Perhaps fixer-upper houses offer today’s greatest profit opportunities. The same profit principles, but usually involving more investment cash, also apply to fix-up shopping centers, apartment buildings and commercial buildings. High-risk fixer-upper properties include office buildings, warehouses and other special-use properties where tenant demand is currently extremely weak in many areas.
Having written about fixer-upper house opportunities, based on personal success stories, long-time loyal subscribers are probably tired of reading about them. However, I cannot over-emphasize the profit potential of the right kind of fixer-upper houses. By “the right kind” I mean sound, well-located but run-down houses that need cosmetic fix-up to increase their market values. Cosmetic non-structural fix-up work includes painting (the most profitable improvement of all because it adds far more market value than the paint and labor cost), cleaning, repairing, landscaping, and re-carpeting. Kitchen and bathroom remodeling can also be profitable if the costs are not excessive.
4 – FORECLOSURES AND OTHER DISTRESS PROPERTIES. If you understand the basics of real estate investing and are interested in acquiring foreclosures and other distress properties at steep discounts of 20 percent to 40 percent from retail or market value, this specialized property type offers superb profit opportunities – and some risk! Depending how you count, there are three or four basic foreclosure profit opportunities:
A – THE REINSTATEMENT PERIOD. After a homeowner or commercial property owner defaults on their mortgage or deed of trust, the first foreclosure step the lender takes is recording a Notice of Default or filing a judicial lawsuit (depending on state law and whether a mortgage or deed of trust is being foreclosed).
Before this “public notice” is recorded, sometimes called “pre-foreclosure,” many defaulting property owners try to sell or refinance their property to salvage at least some of their equity. This can be a tremendous profit opportunity if you can learn of the default before the lender records the official notice.
After the official reinstatement period begins, the borrower usually has three to six months (depending on state law) to take action before the actual foreclosure auction sale. However, in a few states, the reinstatement period is only about a month. The biggest chore for foreclosure property buyers is tracking the defaulted properties and contacting the defaulting owners to learn if they are willing to sell.
Although you might be thinking it is unfair to take advantage of owners who are about to lose their property, somebody profits from every foreclosure and distress property – that person who benefits might as well be YOU! But the big drawback for investors is it takes W-O-R-K to track foreclosures. Some folks just aren’t good at keeping records of which properties are in default, their market value if in good condition, the amounts owed on first and second mortgages plus other liens, the owner’s name and contact information, and other details. However, many foreclosure buyers love the “hunt” to track and buy these properties direct from the defaulting owners far below market value before the property goes to the public foreclosure sale.
B – THE FORECLOSURE AUCTION SALE. Depending on state law, the actual foreclosure auction sale is either a judicial sale supervised by a judge, sheriff or court-appointed referee, or a non-judicial trustee’s sale held by a private party “trustee” who is the foreclosing lender’s representative.
The big disadvantage of buying at these auction sales is cash is required – either at the sale or within a few days thereafter. Many prospective bidders just don’t have the cash required to buy at this step in the foreclosure process. However, the big advantage of buying at the foreclosure auction is any junior liens, such as a second mortgage, are wiped out by the foreclosure sale on a senior mortgage.
C – BUY AFTER THE FORECLOSURE SALE FROM EITHER THE SUCCESSFUL HIGH BIDDER OR THE FORECLOSING LENDER (IF THERE WERE NO BIDDERS). Personally, I’ve had good experiences buying from high bidders, who usually want a quick profitable resale and will often help finance their buyer’s purchase. Also, I bought several foreclosed properties that the foreclosing lender took back because there were no bidders at the foreclosure sale. These institutional lenders financed my purchases (although some lenders want all-cash sales and refuse to offer special financing for their buyers).
Where to learn more about foreclosure opportunities: In many areas, it is now possible to learn on the Internet about foreclosure purchase opportunities at bargain prices. One Web site is www.foreclose.com; another is www.foreclosurefreesearch.com. But the best resource I’ve found is www.foreclosures.com.
5 – FLIPPERS. The last of today’s best real estate profit opportunities are known as “flippers.” These might be fixer-upper properties, foreclosures or properties you acquire at an incredible below-market purchase price, perhaps because the seller wants a quick, clean, cash sale. Some investors have become adept at acquiring these properties and reselling them at a profit within a short time, usually less than six months. That’s why they are called “flippers.”
The biggest drawback of “flippers” is the resale profits are taxed as ordinary income. However, if the property is held over 12 months, then it qualifies for the much lower long-term capital gains tax rate, currently a 15 percent maximum on federal income tax returns.
SUMMARY. Today is an especially good time to invest in the five best real estate profit opportunities. As always, study and investigate carefully before purchase to maximize your profit potential.
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