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The Good, Bad, and Ugly of Real Estate Investing
A lot has changed in the world of real estate in the past couple of years. Let me give you the good, bad, and ugly of it all as we prepare to enter 2019.
Let's get The Ugly out of the way first:
Real estate agents and brokers are really difficult to deal with in the investment income property business. They tend to be rude, pushy, and demanding. Most won't return your phone calls, give you critical information about a property, or will be helpful in ANY way in the acquisitions process of helping you get your investment property deal.
Also, there are still -- even more than 10 years past our 2008 market crash -- some very creepy unscrupulous characters out in the world of lending. Although they can't get away with the former lending practices that got us into all that financial trouble a handful of years back because of so many newly implemented federal regulations, they are a little more brazen with their front-end scams such as "money-up-front" loans, ridiculously high loan application fees, equity partnership scams, due diligence legal fee scams, and a wide variety of other illegal behavior that's pretty obvious unless you're emotionally desperate to do your deal, then you may actually fall for the scam at hand. There are still Uncle Guido loan shark types out there with super high loan points and borderline illegal interest rates that make investing in any type of property not only incredibly risky but just plain stupid.
Many sellers right now are listing their properties at peak-market prices, even after watching their property rot on Loopnet.com with no activity for many months or, in some rare cases, years. They also think that their property is the hottest thing since the Gold Rush in California in the 1800s and won't budge on their price, probably even thinking their building was built out of 24K gold bricks; this is how deluded many of them are, even as we see our market cooling off a bit (with the next recession right around the corner). Yet on the flip side, because the market is still hot in many major metropolitan cities/areas of the country when it comes to real estate of all kinds, many of these sellers will firmly and stubbornly hold out for exactly what they're asking for, no matter how outrageous or overpriced their property is.
Competition pretty much took over the investment real estate property market virtually overnight, especially with multifamily investing. This happened because everyone realized (at the precise same time) that the market wasn't getting any lower on pricing, interest rates weren't going to get any lower and commercial banks started lending with much less strict mortgage criteria. This "perfect storm" happened over the summer, probably while you were at the beach. Tighter competition means that the days of 100% owner financing are officially over. So is expecting a lot of seller carry.
Investors are still picking up properties so fast (even though many know that they are buying at top-of-the-market) that they are limited to choosing stabilized properties in order to manage their cash flows and/or appease their investor partners. Most of them are not in the position to rehab or lease-up an underperforming property because of being cash poor. This leaves the REO (foreclosure) and underperforming property market pretty much wide open for you because most investors want what we call "turnkey" properties that are fully rehabbed and 95% - 100% leased up with rent-paying tenants.
Bigger investors tend to leave the smaller properties alone. This includes 4-plexes ("quads"), SFRs (single-family residences), smaller MHP properties (up to 20 pads), and smaller apartment buildings (5 - 24 units). The good news about this is that the really small properties are much cheaper to operate. Your operating expenses usually never exceed 35% on these properties and can be as low as 20% (in warmer climate areas). (Bigger properties have operating expenses as much as 65% or higher in some cases!) Having a bunch of smaller properties is the way to go because the cost to operate them is much less, thus putting more cash into your pocket.
The other good news is that being part of an equity partnership deal and other investor partnership opportunities is much easier now. Every investor and wannabe investor with money wants in on real estate right now. Long gone are the days of twisting an investor's arm to get him or her to invest in a deal or convincing them how awesome apartment building investing is. Their pens are poised to write checks. Now! You just have to find these people through a variety of specific methods that I've taught over the years. (Now is time to use my streamlined highly effective methods in finding these investors for your deals.)
Also, mortgages are actually much easier to get right now and interest rates are still really low. If you have good personal credit, you're in. Even if you have no built business credit yet, you can still buy a building under a newly formed LLC and use yourself as a personal guarantee since all loans under a million dollars are recourse loans (requiring a personal guarantee) anyway.
Gaining access to unsecured lines of business credit has never been easier because of a newly implemented government program encouraging business banks to lend more money to businesses to keep the economy strong. Banks get special incentives for lending money to businesses. Of course, this requires that you take some time to build some business credit which takes anywhere from 3 - 6 months. (You should have a good mid-FICO of about 720 or higher to be able to access good lines of credit, loans, and mortgages from any bank or lender.) Good business credit can put you in an unsecured line of business credit in the low- to mid-six figures which can, in turn, be used for down payments on properties. Since you're going to be focusing on smaller properties from now on (priced $100,000 to $1,000,000), having unsecured cash will easily give you the 20% required for the down payment on these deals. (Please note that residential-classified properties or those from 1 - 4 units do require a 25% cash down payment to acquire.)
Your most profitable types of real estate investments are as follows:
1) Smaller properties like small apartment buildings, MHP properties, and even SFRs.
2) REO apartment buildings and unstable properties requiring a revamp on management.
So, get going! What the heck are you waiting for?? Start investing in your passive income investment properties right now!
Before it's too late!!
See you at the top!