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What Kind of Real Estate Investor Are You?

Oct 9, 2007
When you enter the exciting world of real estate investing, you'll soon learn there are many different types of deals you can get involved in and a number of ways to profit. People get rich from doing all types of deals, so you can find the type of deal you like and focus on it, or get good at all of them to make your fortune. This article will explore the most common types of real estate deals and break down what is entailed with each.

1. Buy and hold. This is the most conventional type of real estate deal. This is when you buy a property, rent it out and collect rent each month to pay down the loan. To acquire these properties, you can either take out a new loan or take over the existing payments "subject to."

After a few years, you would have built up good equity. If you wait long enough, the money you collect from rent can eventually pay off the loans. You can even collect money each month if you the rent is higher than the house payment.

This is a great type of deal in a market where rents are higher than mortgage payments. If you are in a market where rents can't cover the mortgage payments, you will have a negative cash flow each month which will get old...fast.

2. Wholesale Deals. - This is when you find an ugly and many times abandoned house that needs repairs and purchase it way below market value. After you find the property and agree on price and terms with the seller, you will tie the property up under contract and then assign or sell the contract to another investor for a fee. That investor will rehab the property.

You may also do a simultaneous close, but many escrow companies won't do this. A typical wholesale fee can range from $10,000 up to $100,000, depending on how good of a deal you get. You can make a quick profit without all the headaches of rehabbing the house.

You must buy these houses cheap. Take the after repaired value of the property, subtract the repair, holding, and selling costs and your profit. That is the price you should aim to sell the property at to another investor.

In order for you to make your profit, there must be enough room for the rehabber to make a profit as well. These houses are usually paid for all cash. Because they are in need of a lot of repairs, many times these houses are old and abandoned and free and clear. You can entice the seller by offering him or her all cash and a quick closing.

For these deals, you must make sure you don't pay too much!

3. Retail Deals. - The type of property you are looking for in this type of deal is the same as a wholesale deal. You buy ugly, usually vacant homes in need of repairs. Only in this case, instead of selling the contract to another investor, you will rehab the house yourself and then sell it.

This type of deal requires a lot of work and if you aren't an experienced rehabber or contractor, you might not want to do this type of deal as your first. You must also be very skilled at estimating repairs. Many times things go wrong in these types of projects and they take longer and cost more than expected.

4. Foreclosure Deals - This is when you find a house where the homeowner is behind on mortgage payments. You can pay them cash for their equity, bring the payments current and then take over the payments on the existing loan "subject to." With these deals, time is of the essence so many times there is not enough time before the house goes to sale to get a new loan.

These properties have distressed owners so more often than not, you can count on them needing repairs. When getting involved in these deals, make sure you get a payoff statement from the bank to know exactly what you are getting yourself into. Always do a title check to see if there are any other liens on the property such as delinquent property taxes.

Foreclosure deals can be very lucrative, but you must do your research before hand to make sure there is enough profit in the deal.

5. Short Sales - This is when the homeowner is behind on mortgage payments, and the house has no equity or the loan amount is more than the house value. You will negotiate a discount on the loan(s) with the bank to create the equity you need to make the deal worth your while. You can also give the seller a few thousand dollars on a bill of sale for any furniture or goods they are willing to sell to you.

You are not allowed to give the seller any money for the discount the bank gives you on the loan. From the bank's point of view, the seller should not be getting any money because they were unable to make the payments on the loan. Beware though, because when a short sale is approved and the house is sold, the homeowner will receive a 1099 from the IRS at the end of the year for the amount of the discount on the loan.

6. Preconstruction - This is when a homebuilder is going to build a lot of homes in a community. In order for them to get their loan from the bank, they must sell a certain amount of houses. Because of this, they are willing to sell the first phase homes at a discount. If they don't have the first phase of homes sold, they won't be able to get the loan for their project.

To complete the community of homes usually takes 6 months to a year depending on the size of the project. The homes are sold in phases. By the time the builder gets around to Phase five or six, the value of the property value would have gone up in a hot market.

If the market is not hot, these types of deals are not recommended. Profit is made solely on the appreciation from the first phase to end of the project which is usually phase five or six. Once your property has appreciated, you may then sell it and cash out.

So now that you know what kind of deals there are, you can find the one that best suits your style. Real estate investing is fun and exciting and can make you a boatload of money. Once you find the type of deal that works for you, stick to it to build the foundation of your wealth.
About the Author
Jared Lim is widely known for his innovative real estate marketing apparel, Money Magnet Shirts. After generating a ton of leads with a t-shirt he designed as a joke, Jared designed a full line of apparel. The entire selection of apparel, can be found at www.MoneyMagnetShirts.com
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