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Guide to Real Estate Investing: REITs & Tax Liens

This is the final installment to the Trisha Allen’s Guide to Real Estate Investing.

As a reference, the Active/Passive measure is a five star scale with one-star being the most active and five-stars being the most passive.

Real Estate Investment Trusts (REIT’s)

A Real Estate Investment Trust is an entity that invests in real estate–usually large commercial cashflowing rentals. When you invest in a REIT, you’re not buying real estate—you’re buying stock in a company (a trust, actually) that buys and manages real estate. Typically, you’ll receive dividends. But, dividends from REIT’s are taxed at ordinary income tax rates, unlike stock dividends. So, REIT’s may not be a great choice for people in higher tax brackets.
Entrance Difficulty Level: Easy
Active/Passive: ****

Tax Lien Certificates

Tax liens are imposed on properties when property taxes go unpaid for an extended amount of time. And, until the overdue taxes, accrued interest, and fees are paid to the local government, the tax lien will stay with the property. Anyone purchasing the property will be subject to the lien. In many states, private investors can purchase the liens themselves as tax lien certificates—which then transfers the government’s interest and rights over the property to the investor! The rules vary from state to state. But, in some states, when you purchase a tax lien certificate, you receive the right to collect the interest on the unpaid taxes. The interest rates can range from 8% to 50% per year, depending on the state. Also, depending on the state, if the taxes go unpaid for long enough, the tax lien certificate purchaser can either sell the property or the property will be auctioned off for them to collect the total amount of interest and fees.
Entrance Difficulty Level: Easy
Active/Passive: ***

Note: I did not include a category regarding purchasing property in hopes of capitalizing on future appreciation. In my mind, that’s not investing—it’s gambling! If the property doesn’t cashflow well or can’t be sold for more money than was put into it, a buyer is taking a HUGE risk that could result in selling at a significant loss or losing the property to foreclosure.

An educated, careful investor has no reason to be afraid of investing in real estate. With an education behind you, you’ll be able to spot opportunities as they come along—sometimes when no one else can! Much of the knowledge you’ll need can be found for free by investigating online resources like blogs, forums, and even reading books from the library or while sitting in the café at your local bookstore. Now, don’t just read one motivational book and think you’re ready! Take the time to get to know your target market, cover your bases, and you should do just fine.

Trisha AllenI’ve done real estate investing successfully since 2003 and have blogged about it since 2005. A word to the wise: before you invest, check with an attorney and a CPA to evaluate your goals, investing options, and the laws in your state.


 Investing 
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Guide to Real Estate Investing: Buy & Sell

This is the third edition to the Trisha Allen’s Guide to Real Estate Investing, written by Trisha Allen of Building an Empire.

As a reference, the Active/Passive measure is a five star scale with one-star being the most active and five-stars being the most passive.

Buy-And-Sell Investments

Commonly known as “flipping” or “resaling”, purchasing a residential or commercial property to sell for profit can be very lucrative for you or absolutely disastrous! You can perform every type of inspection known to man but still not be able to anticipate every “gotcha” that comes your way! With real estate markets plummeting in certain areas of the country, flipping has become a risky business indeed. The idea behind this type of investing is to benefit from the profit made by selling a property for more than you paid for it, plus any expenses you incurred during your ownership. Land can be flipped for a profit as well.

Fix-And-Flips - After purchasing a property for the right amount at the right time, performing the right fixes for the right amounts, and selling at the right price at the right time, an investor can make a killing! (That’s a lot of right’s that could go wrong!) Fix-And-Flips take a lot of know-how, money for repairs and upgrades, intimate familiarity with the local real estate market, good project management skills, and a little dash of luck to boot. There’s nothing passive about this type of investing, either. Don’t be fooled into thinking that you can hire a contractor and trust him or her to get the job done right, on budget, and on time! But, with greater risk, comes greater rewards…maybe.
Entrance Difficulty Level: Difficult
Active/Passive: *

Wholesaling – Frequently an entry point for beginner investors, wholesaling involves purchasing a property or putting it under contract at a discounted price while the wholesaler locates a buyer to purchase it from them for a higher price. The property is flipped immediately after purchase—without any upgrades being performed–or possibly before the closing even occurs! The wholesaler can accomplish this by either holding a double closing (which is when two closings happen back-to-back from seller to buyer, then from the first buyer to the next buyer) or by assigning their position on the contract to the next buyer for a fee. The biggest risks for wholesalers is being stuck with a property they cannot sell for a profit, or losing their earnest money if they cannot locate a buyer and decide not to close on the property at all.
Entrance Difficulty Level: Easy
Active/Passive: *

Final Edition: REITs & Tax Liens

Trisha AllenI’ve done real estate investing successfully since 2003 and have blogged about it since 2005. A word to the wise: before you invest, check with an attorney and a CPA to evaluate your goals, investing options, and the laws in your state. You can read more about my own experiences at TrishaAllen.com.


 Investing 
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Guide to Real Estate Investing: Buy & Hold

This is the second edition to the Trisha Allen’s Guide to Real Estate Investing.

As a reference, the Active/Passive measure is a five star scale with one-star being the most active and five-stars being the most passive.

Buy-And-Hold Investments

Congratulations, you’re a landlord! There are tenants to be found; leases to negotiate and sign; regular property maintenance issues and emergencies to be handled; possible evictions to be filed; then taxes and insurance to be paid. A property manager will charge a percentage of the monthly rents to perform many of these tasks. Finding a good property manager falls on your shoulders, however. Then, you’ll manage the property manager, receive the monthly rent, and verify the math on the monthly statements. The idea behind this type of investing is to benefit from cashflow (when a property produces profits above and beyond the mortgage payments, insurance, taxes, property management fees, repairs, HOA fees, and other expenses). Bare land can even be leased out for cashflow, although it doesn’t provide tax benefits like improved property. Overall, landlording’s not a bad gig when everything goes well!

Residential Rentals – Residential rentals can be single-family homes, mobile homes, duplexes, triplexes, or quadplexes. Anything larger is considered commercial where financing is concerned. Residential rentals tend to be predominantly the beginner’s choice investment type due to the affordability of the property and downpayment, the availability of financing, and abundance of educational resources.
Entrance Difficulty Level: Moderate
Active/Passive: ***

Commercial Rentals - Commercial rentals can be apartments with five units or more, shopping centers, retail, offices, industrial/warehouses, even mobile home parks. Believe it or not, commercial rentals tend to be more passive investments than residential rentals! Property managers are easier to find and manage. Your property may be the ONLY property they manage, or at least make up a significant portion of their inventory. Other professionals and vendors tend to find your business more valuable and may be willing to bend over backwards to keep you. Conversely, contractors may think you’re loaded since you own a big property, and may charge you exorbitant rates for upgrades and repairs. Of course, you can have your property manager collect multiple bids to keep costs low. It probably goes without saying that commercial properties tend to be much more expensive to purchase than residential. Also, “how-to” resources are much harder to find, which makes it sometimes necessary to rely strictly on what a commercial mortgage broker, commercial Realtor, attorney, or CPA is telling you. In other words, you may find that you’re re-inventing the wheel at times!
Entrance Difficulty Level: Difficult
Active/Passive: ****

Next Edition: Buy and Sell Investments

Trisha AllenI’ve done real estate investing successfully since 2003 and have blogged about it since 2005. A word to the wise: before you invest, check with an attorney and a CPA to evaluate your goals, investing options, and the laws in your state.




 Personal Finance, Taxes 
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Guide to Real Estate Investing: Introduction

I know very little about real estate investing and I’ve always wanted to learn, so I had the brilliant idea to ask fellow blogger Trisha Allen to write a guest post on the topic and she agreed! What Trisha sent me was a very comprehensive article that I’ve broken out into several parts based on their topics and will be introducing them over the next few days.

I asked her for an intro and here’s how she described herself and her experience:

Leave it to me to start a real estate career at the beginning of a real estate bust! But, like a red-headed bumblebee who doesn’t know she shouldn’t be able to fly, I’ve forged ahead to purchase/remodel/lease/flip seventeen houses and one quadplex for profit. Believe me, it’s certainly been no bed of roses! Each deal has been its own unique struggle and learning experience, and I’ve been blogging about it for the world to see since 2005… all the good, the bad, and the ugly!

In early 2006, I decided to bite the bullet, volunteer for layoff from my day job, and get my real estate license in order to open up new avenues for our investing. I’m currently working for one of the largest local real estate offices as a sales/leasing agent, and juggling that with investing, remodeling, flipping, sleep, and very little sanity!

Introduction

Brace yourself. I’m about to utter the two dirtiest words in investing lately: Real Estate!

Everyone can agree that making money is the fun part of any investment. Late-night infomercials and real estate guru books feature lots of cheese-eating grins with captions that say things like, “I made five million dollars in five days using these techniques. And, you can, too!” They’ll tell you it’s easy to make money once you buy their program. Some of them even offer money-back guarantees if you’re not satisfied. But, are you guaranteed to succeed investing in real estate? No. In fact, it’s easy to get yourself into trouble. As with anything worth doing, there is an element of risk.

Real estate investments are a great way to add another stream of income. But, contrary to what the gurus may tell you, real estate income is hardly ever truly passive. Some lucky investors do experience periods of “passive income” — which implies that checks arrive in the mail with no effort invested. It seems the majority of real estate investors find that they spend many more hours than they originally intended with finding and closing deals, managerial tasks, bookkeeping, and tax preparation. While an investor with deep pockets can afford to outsource these tasks to professionals, most beginning investors probably will have to shoulder some of the work themselves. Even investors with a team of professionals will find that they still have to manage those managers. After all, no one cares about your business more than you!

In this economy, an investor can build a portfolio with foreclosures and pre-foreclosures. They’re a great way to purchase property for less. After all, lenders aren’t in the real estate business—or, at least, they don’t want to be. They’re in the “collecting interest” business. When they have a supply of properties, they’re forced to be in the property management and real estate sales business. It’s very costly for a lender to have to foreclose on a property—not to mention, it’s not what their investors want to see on the books. Foreclosures can usually be found on the MLS with the help of a qualified Realtor. Pre-foreclosures can be purchased by “short-sale”, which means that they’re purchased from the owner prior to the completion of the foreclosure process with the permission of the foreclosing lender(s). The owner is forced, sometimes reluctantly (sometimes happily), to abandon their equity stake to the investor-buyer. But, they may be able to walk away without a foreclosure on their credit record. In that case, the investor has performed a service for the both the owner and the lender.

OK, let’s say you’ve finally sold your herd of goats to get your downpayment for your first property. Where do you start? Well, first you’ll need to figure out what type of real estate investing is right for you. I’ll go through the usual types of real estate investments and tell you the general entrance difficulty level for each. In addition, I’ll score them each from one star for “Active” investments to five stars for “Passive” investments (Totally Active = *, Totally Passive = *****).

Next Edition: Buy and Hold Investments

Trisha AllenI’ve done real estate investing successfully since 2003 and have blogged about it since 2005. A word to the wise: before you invest, check with an attorney and a CPA to evaluate your goals, investing options, and the laws in your state.




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