Real Estate Investing Financing Truths - Part 2

No Money Down and other 'Creative' Real Estate
Investment Methods

For many years, investors have seen the traditional
real estate investment methods described in Part 1
of this article as a lot less than desirable!

They began looking at the prices of houses and
finding methods of bringing the price more in line
with making more money in a faster way.

These savvy investors developed ways to get loans
on properties that allowed them to pull money out
whenever they buy a real estate investment (cash
back at closing) and lower their payments to build up
their cash flow ('creative' investing).

They even developed methods of determining a
Sellers motivation for selling - and bought the
property at a discount price.

These creative investors also saw that some Sellers
were not able (for whatever reason) to sell the
property at a discount price, however, they still
needed to get rid of the property, as they didnt
know how to manage it as a landlord, or make
money from it - not that it couldnt be done, they
simply lacked the knowledge of how to do it.

The Seller just never learned how to profit from a
real estate investment.

These investors understood how to make money
from such properties, and did.

They bought the property on discount terms, and
made money from the spread by selling it at retail
price and/or terms (certainly one of my favorite
methods of real estate investing).

Buy Every Real Estate Investment via Discount Price
or Discount Terms.

Several years ago (actually, it really took off in the
1980s), Real Estate Investment Experts began
seeing the potential for making money in bringing
this treasured knowledge to the public in the form of
home-study courses, seminars and Boot Camps.

They found that it wouldn't create competition for
themselves, as many people, even though they
purchase real estate courses and attend seminars
and Boot Camps, will not actually take the
information and utilize it to make the hundreds and
even thousands of dollars possible for anyone
serious about Real Estate Investing.

These Real Estate Investment Experts (being
dubbed 'guru') found that this side of the business
was lucrative often making more income from
teaching about real estate investing than the actual
real estate investments themselves.

It is important to understand that these real estate
investment gurus learned early that they can only
teach others what to do, not be responsible for the
other persons success.

Providing the information to those that choose not
to use it is very similar to the old adage "You can
lead a horse to water, but you cant make it drink".

Yes, these real estate investment gurus got wealthy
from selling this information, but their theories,
principles and techniques taught thousands of
others (those that take action on what they learn)
how to realize their dreams utilizing their tried and
true methods of real estate investing.

From home-study courses and seminars, to boot
camps and one-on-one training, these methods
have been proven to be not only interesting to
millions of people, but capable of bringing massive
wealth to those that take action on what is taught -
those that go on and actually make real estate
investments themselves.

Knowledge changes things...

This knowledge of no money down real estate
investing techniques being known by thousands of
Sellers has made changes in the industry.

By bringing the Seller into the knowledgeable realm
of Real Estate investing, Sellers now know many of
the methods that the gurus teach.

This is both a blessing and a curse.

To the talented investor, these knowledgeable
people are more likely to work to create a WIN-WIN
situation.

Investors that avoid the tricks and stick to the basic
real estate investment techniques and terms that
have been proven to work over and over again,
have proven these powerful real estate investment
strategies work even with these informed Sellers.

Oh, yes, many of these real estate investment
techniques work today, as they have for many
years. So much so that it is almost possible to say
they have become principles; things that work, over
and over, the same way no matter what happens -
like gravity.

However, sadly, they are not really principles, as
several of the real estate investment methods and
techniques that worked in the 1980s and even
through the 1990s are today not as powerful, nor do
they work as often as they did before (although
some 'gurus' are still teaching the same methods -
even after 20 years...).

Some of this decline is due to a more educated
society (due to the flood of real estate investment
information available via books, tapes, home-study
courses and the Internet), while some of it is due to
simple changes in policies and laws.

It seems like a wave started late in 2003, the FHA
announced that flips (transactions where investors
buy houses cheaply and sell them at or near market
rates) are "illegal". (Note that illegal in this context is
not a legal term, but one that has been adopted
from "you are not allowed to do that and do
business with us".)

The FHAs announcement started a wave of concern
(if not panic) throughout the Real Estate investing
community.

Title and Mortgage companies began to tighten up
their reigns. Many of these companies, in lieu of
direct information, began simply not completing any
transactions that did not follow the traditional real
estate investment system. This made it hard for
investors to complete transactions that involved
simple buy-then-resell agreements (as they are not
really real estate investments, but a rather nice way
to make some fast CA$H!).

In rapid appreciation areas (California and Nevada,
for example), the ability to flip a property all but
stopped (became 'illegal'). All the 'traditional'
creative real estate investing methods were virtually
put on hold.

Ingenuity to the rescue, other methods of real
estate investing always seem to pop up. After all,
"Necessity is the Mother of Invention", and "Where
there is a Will, there is a Way" are absolute
principles.

Investors have to make a way to get things done - a
way to keep their real estate investments profitable,
and even more creative real estate investing
methods were developed - to keep real estate
investors, and the love of real estate investment,
alive forever.

3 Of The Top 9 Reasons That The Real Estate Bubble Is Bursting

If you own real estate or are thinking of buying real estate then you better pay attention, because this could be the most important message you receive this year regarding real estate and your financial future.

The last five years have seen explosive growth in the real estate market and as a result many people believe that real estate is the safest investment you can make. Well, that is no longer true. Rapidly increasing real estate prices have caused the real estate market to be at price levels never before seen in history when adjusted for inflation! The growing number of people concerned about the real estate bubble means there are less available real estate buyers. Fewer buyers mean that prices are coming down.

On May 4, 2006, Federal Reserve Board Governor Susan Blies stated that "Housing has really sort of peaked". This follows on the heels of the new Fed Chairman Ben Bernanke saying that he was concerned that the "softening" of the real estate market would hurt the economy. And former Fed Chairman Alan Greenspan previously described the real estate market as frothy. All of these top financial experts agree that there is already a viable downturn in the market, so clearly there is a need to know the reasons behind this change.

3 of the top 9 reasons that the real estate bubble will burst include:

1. Interest rates are rising - foreclosures are up 72%!

2. First time homebuyers are priced out of the market - the real estate market is a pyramid and the base is crumbling

3. The psychology of the market has changed so that now people are afraid of the bubble bursting - the mania over real estate is over!

The first reason that the real estate bubble is bursting is rising interest rates. Under Alan Greenspan, interest rates were at historic lows from June 2003 to June 2004. These low interest rates allowed people to buy homes that were more expensive then what they could normally afford but at the same monthly cost, essentially creating "free money". However, the time of low interest rates has ended as interest rates have been rising and will continue to rise further. Interest rates must rise to combat inflation, partly due to high gasoline and food costs. Higher interest rates make owning a home more expensive, thus driving existing home values down.

Higher interest rates are also affecting people who bought adjustable mortgages (ARMs). Adjustable mortgages have very low interest rates and low monthly payments for the first two to three years but afterwards the low interest rate disappears and the monthly mortgage payment jumps dramatically. As a result of adjustable mortgage rate resets, home foreclosures for the 1st quarter of 2006 are up 72% over the 1st quarter of 2005.

The foreclosure situation will only worsen as interest rates continue to rise and more adjustable mortgage payments are adjusted to a higher interest rate and higher mortgage payment. Moody's stated that 25% of all outstanding mortgages are coming up for interest rate resets during 2006 and 2007. That is $2 trillion of U.S. mortgage debt! When the payments increase, it will be quite a hit to the pocketbook. A study done by one of the country's largest title insurers concluded that 1.4 million households will face a payment jump of 50% or more once the introductory payment period is over.

The second reason that the real estate bubble is bursting is that new homebuyers are no longer able to buy homes due to high prices and higher interest rates. The real estate market is basically a pyramid scheme and as long as the number of buyers is growing everything is fine. As homes are bought by first time home buyers at the bottom of the pyramid, the new money for that $100,000.00 home goes all the way up the pyramid to the seller and buyer of a $1,000,000.00 home as people sell one home and buy a more expensive home. This double-edged sword of high real estate prices and higher interest rates has priced many new buyers out of the market, and now we are starting to feel the effects on the overall real estate market. Sales are slowing and inventories of homes available for sale are rising quickly. The latest report on the housing market showed new home sales fell 10.5% for February 2006. This is the largest one-month drop in nine years.

The third reason that the real estate bubble is bursting is that the psychology of the real estate market has changed. For the last five years the real estate market has risen dramatically and if you bought real estate you more than likely made money. This positive return for so many investors fueled the market higher as more people saw this and decided to also invest in real estate before they 'missed out'.

The psychology of any bubble market, whether we are talking about the stock market or the real estate market is known as 'herd mentality', where everyone follows the herd. This herd mentality is at the heart of any bubble and it has happened numerous times in the past including during the US stock market bubble of the late 1990's, the Japanese real estate bubble of the 1980's, and even as far back as the US railroad bubble of the 1870's. The herd mentality had completely taken over the real estate market until recently.

The bubble continues to rise as long as there is a "greater fool" to buy at a higher price. As there are less and less "greater fools" available or willing to buy homes, the mania disappears. When the hysteria passes, the excessive inventory that was built during the boom time causes prices to plummet. This is true for all three of the historical bubbles mentioned above and many other historical examples. Also of importance to note is that when all three of these historical bubbles burst the US was thrown into recession.

With the changing in mindset related to the real estate market, investors and speculators are getting scared that they will be left holding real estate that will lose money. As a result, not only are they buying less real estate, but they are simultaneously selling their investment properties as well. This is producing huge numbers of homes available for sale on the market at the same time that record new home construction floods the market. These two increasing supply forces, the increasing supply of existing homes for sale coupled with the increasing supply of new homes for sale will further exacerbate the problem and drive all real estate values down.

A recent survey showed that 7 out of 10 people think the real estate bubble will burst before April 2007. This change in the market psychology from 'must own real estate at any cost' to a healthy concern that real estate is overpriced is causing the end of the real estate market boom.

The aftershock of the bubble bursting will be enormous and it will affect the global economy tremendously. Billionaire investor George Soros has said that in 2007 the US will be in recession and I agree with him. I think we will be in a recession because as the real estate bubble bursts, jobs will be lost, Americans will no longer be able to cash out money from their homes, and the entire economy will slow down dramatically thus leading to recession.

In conclusion, the three reasons the real estate bubble is bursting are higher interest rates; first-time buyers being priced out of the market; and the psychology about the real estate market is changing. The recently published eBook "How To Prosper In The Changing Real Estate Market. Protect Yourself From The Bubble Now!" discusses these items in more detail.

Getting Started in Residential Real Estate Investing

Residential real estate investing is a business activity that has waxed and waned in popularity dramatically over the last few years. Ironically, there always seem to be a lot of people jumping on board with investments like stock, gold, and real estate when the market's going up, and jumping OFF the wagon and pursuing other activities once the market's slumping. In a way that's human nature, but it also means a lot of real estate investors are leaving money on the table.

By understanding the dynamics of your residential real estate investment marketplace, and acting in opposition to the rest of the market, you can often make more money, as long as you also stick to the real estate investing fundamentals.

Real estate investing, whether you're buying residential or commercial property, is not a get-rich-quick scenario. Sure you can make some fast cash flipping houses, if that's your bag, but that is a full time business activity, not a passive, long term investment. The word "investment" implies that you are committed to the activity for the long haul. Often, that's just what it takes to make money in real estate.

So, while the pundits are crying about the residential real estate market slump, and the speculators are wondering if this is the bottom, let us return to the fundamentals of residential real estate investing, and learn how to make money investing in real estate for the long term, in good markets, as well as bad.

A Return To The Fundamentals of Residential Real Estate Investing

When real estate is going up, up, up, investing in real estate can seem easy. All ships rise with a rising tide, and even if you've bought a deal with no equity and no cash flow, you can still make money if you're in the right place at the right time.

However, it's hard to time the market without a lot of research and market knowledge. A better strategy is to make sure you understand the four profit centers for residential real estate investing, and make sure your next residential real estate investment deal takes ALL of these into account.

1. Cash Flow - How much money does the residential income property bring in every month, after expenses are paid? This seems like it should be easy to calculate if you know how much the rental income is and how much the mortgage payment is. However, once you factor in everything else that goes into taking care of a rental property - things like vacancy, expenses, repairs and maintenance, advertising, bookkeeping, legal fees and the like, it begins to really add up. I like to use a factor of about 40% of the NOI to estimate my property expenses. I use 50% of the NOI as my ballpark goal for debt service. That leaves 10% of the NOI as profit to me. If the deal doesn't meet those parameters, I am wary.
2. Appreciation - Having the property go up in value while you own it has historically been the most profitable part about owning real estate. However, as we've seen recently, real estate can also go DOWN in value, too. Leverage (your bank loan in this case) is a double-edged sword. It can increase your rate of return if you buy in an appreciating area, but it can also increase your rate of loss when your property goes down in value. For a realistic, low-risk property investment, plan to hold your residential real estate investment property for at least 5 years. This should give you the ability to weather the ups and downs in the market so you can see at a time when it makes sense, from a profit standpoint.
3. Debt Pay down - Each month when you make that mortgage payment to the bank, a tiny portion of it is going to reduce the balance of your loan. Because of the way mortgages are structured, a normally amortizing loan has a very small amount of debt pay down at the beginning, but if you do manage to keep the loan in place for a number of years, you'll see that as you get closer to the end of the loan term, more and more of your principle is being used to retire the debt. Of course, all this assumes that you have an amortizing loan in the first place. If you have an interest-only loan, your payments will be lower, but you won't benefit from any loan pay down. I find that if you are planning to hold the property for 5-7 years or less, it makes sense to look at an interest-only loan, since the debt pay down you'd accrue during this time is minimal, and it can help your cash flow to have an interest-only loan, as long as interest rate adjustments upward don't increase your payments sooner than you were expecting and ruin your cash flow. If you plan to hold onto the property long term, and/or you have a great interest rate, it makes sense to get an accruing loan that will eventually reduce the balance of your investment loan and make it go away. Make sure you run the numbers on your real estate investing strategy to see if it makes sense for you to get a fixed rate loan or an interest only loan. In some cases, it may make sense to refinance your property to increase your cash flow or your rate of return, rather than selling it.
4. Tax Write-Offs - For the right person, tax write-offs can be a big benefit of real estate investing. But they're not the panacea that they're sometimes made out to be. Individuals who are hit with the AMT (Alternative Minimum Tax), who have a lot of properties but are not real estate professionals, or who are not actively involved in their real estate investments may find that they are cut off from some of the sweetest tax breaks provided by the IRS. Even worse, investors who focus on short-term real estate deals like flips, rehabs, etc. have their income treated like EARNED INCOME. The short term capital gains tax rate that they pay is just the same (high) they'd pay if they earned the income in a W-2 job. After a lot of investors got burned in the 1980's by the Tax Reform Act, a lot of people decided it was a bad idea to invest in real estate just for the tax breaks. If you qualify, they can be a great profit center, but in general, you should consider them the frosting on the cake, not the cake itself.

Any residential real estate investing deal that stands up under the scrutiny of this fundamentals-oriented lens, should keep your real estate portfolio and your pocketbook healthy, whether the residential real estate investing market goes up, down or sideways. However, if you can use the real estate market trends to give you a boost, that's fair, too. The key is not to rely on any one "strategy" to try to give you outsized gains. Be realistic with your expectations and stick to the fundamentals. Buy property you can afford and plan to stay invested for the long haul.