Real Estate Investing FAQ

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1. The housing market has crashed, it seems crazy to buy a house now. Will I lose my money?

The housing market, like the stock market is cyclical. The general trend is towards increasing value. However, housing prices go up and down like stock prices (though usually more slowly). Also, remember that much of the cycle is local as industries relocate and people follow the jobs. Depending on your local real estate market, this is a great time for owning rental property .

2. I don't have much money. How can I get started in rental property investing?

If you don't own a house find a rental house and ask the landlord if they might be interested in giving you a lease-option . Ask for generous rent credits. Pay your rent on time and repair your credit while you are renting. Once you are able to, purchase the house, do the best home improvements, rent the house out and start the process over again.

3. I already own a house, can you recommend a strategy for me?

If you own a house now, look for another house and convert your current home to a rental property. By doing this you will get a preferred homeowners interest rate on your new home and still maintain the lower interest rate on your first house (now a rental).

4. Why not just tell the bank that I will move to the new house and then "change my mind" just after closing?

This is called loan fraud and you could be criminally prosecuted for it.

5. Someone told me that I should buy abandoned properties - is this a good idea?

Maybe. In some cases this may indicate a very motivated seller. However, be wary of areas that people are abandoning due to high crime or loss of industry. Unless you have inside information about changes, buying a property in this type of location is highly speculative.

6. Do I need to be a licensed real estate agent to invest in rental properties

No - this is not necessary. If you are a licensed agent you must disclose this to a seller or buyer. This could work to your advantage or disadvantage depending on the buyer/seller's frame of mind.

7. Where should I buy a rental property?

You've heard that real estate is all about location and this is true. The best place to buy is where families are buying their first home. Buying a $1,000,000 house in suburban LA is probably not a great idea while neither is buying an abandoned house in a drug-infested neighborhood.

8. Why not buy a duplex or four unit apartment building? I can get more income.

While this is tempting, it has its downsides. Dealing with tenants that have no ownership stake leads to lots of headaches. You could hire a management company but that will take away about 10% of your income.

9. What's the best real estate investment?

If you buy a single family house and give the tenants an ownership stake with a rent to own strategy you will have the fewest headaches. Single family houses are also the highest demand type of residential real estate.

10. Where can I find "good deals"?

Look for motivated sellers

11. Should I use a real estate agent to find a rental investment property?

    If you find a good one they can be quite worthwhile. Make sure you use a "buyers agent". Do not sign an exclusivity agreement with any agent.

12. What is the MLS?

MLS stands for Multiple Listing Service and is used by Realtors to list houses. Realtors have special MLS privileges that allow them to do comparable searches but you can look at properties for sale at websites like Realty.com.

13. What is REO?

REO stands for Real Estate Owned which is property owned by banks gotten through foreclosure. Review bank owned real estate.

14. What is a short sale?

A short sale is a sale that is made at a price below what the mortgage value of the property is. A bank may accept less than what is owed against the property to avoid the costs of foreclosure.

15. How important is my credit score?

Unless you buy property directly from sellers who are willing to finance their property, your credit score is pretty important. In addition, many real estate agents won't even work with you unless you have a "pre-approval letter" from your banker.

16. Where can I get money for my rental property investment?

Lots of places: banks, mortgage brokers, the seller, your 401k, IRA's, private investors and even family members. Check out this discussion of financing investment property.

17. What is the most important criteria I should use in deciding whether to buy a property - outside of location?

Does the property have a positive cash flow based on what you can get from a typical rent minus your expenses of ownership? Learn the rules of buying rental properties.

18. Do I need a real estate attorney?

In some States it's a necessity, in others not so much. If you are a novice, it would not hurt to have a real estate attorney look over the contract (make the contract "subject to" a legal review). Experienced lawyers can keep you from making a foolish mistake.

19. Should I have a home inspection done?

Certainly you should in the beginning of your investment career. Even experienced investors overlook some problems that can cost you lots of money down the road.

20. My real estate agent says a low offer will insult the seller - should I make a low-ball offer?

Get rid of that real estate agent. You never know what the homeowner will accept until they have something in writing with a check in their hand.

21. What is a contingency clause?

This is a clause that will help you get out of a real estate contract. Every contract should have several contingency clauses (for example, "subject to" financing approval, home inspection, etc.)

22. What other things can I insert into a real estate contract?

Everything is negotiable. You can include the car in the garage as part of the contract.

23. What if the seller turns down my offer?

If the buyer is open, you can try another approach. Try to find out what is important to the seller - time, price, terms?

24. What is a HUD-1 statement?

A HUD-1 statement is a required statement the closing agent must provide your when you take out a loan backed by the government. It outlines costs to the seller and the buyer at closing. You should receive it at least one day prior to closing.

25. How much money do I need to buy a house?

Typically you should plan for the following expenses:

• down payment of 10-25% of the purchase price
• closing costs on the loan, typically 2-3% of the loan amount
• escrowed real estate taxes and insurance as well as one year's insurance premium paid in advance
• Utility bills while you are rehabbing and showing the house
• any mortgage payments before the property is rented (holding costs)

Learn more about how to finance investment property from number of sources - but it should be in your checking account a couple of months before closing

26. Once I own the property what should I do?

First you need to assess the condition of the property and make the best home improvements. Determine if you are going to do-it-yourself or hire a general contractor.

27. How should I go about getting tenants?

I advertise with "Rent to Own" signs and on Craigslist. Advertising in large newspapers is a waste of money.

28. Why not just lease out my property? Why use a lease-purchase?

There are a number of reasons - better cash flow, larger deposit (some non-refundable), more demand for your property, reduced maintenance costs and, most importantly - higher quality tenant. Getting a tenant with an "owner mentality" eliminates 80% of the hassles of land-lording

29. I want to buy a house for a long term investment - what if the tenant exercises their option?

Tenants usually don't exercise their option to purchase. But, if they do, use a 1031 Exchange to buy another property and you won't pay taxes. That way you can continue to build equity for the long term.

30. What's a good way to screen tenants?

Always call their current landlord and verify their employment. References are useless because potential tenants always seem to give you a relative. You might find a Tenant Trace service from attending meetings at your local real estate investment club. I like to visit their current residence and see how they live now. That will give you a good idea of what type of tenant they will be. Learn how to be a landlord.

31. Why should I give tenants a rent credit?

    A rent credit is a powerful incentive to get the tenants to make their payments on time. In addition, it gives them more of an ownership stake and a reason to treat the property well. I give rent credits of typically one-third of the rent. But I usually charge more than the local market rent and command a premium sales price - so if they do purchase, I get the profit I desire.

32. Why do you use two separate documents?

You want to avoid the possibility that some Judge will think that this is a land contract and that you must follow foreclosure law to evict the tenants. Maintaining a separate lease with a refundable deposit is one way to help distinguish that.

33. What do you include in your lease-purchase contracts?

I have very strong language about late fees and loss of rent credits if the rent is not paid on time. I also make it clear that the tenant will forfeit all accumulated credits if they do not pay by the 25th of the month. I also require that the tenants assume responsibility for all small repairs (I use $200) so that they are not calling me every time the toilet plugs up or their child breaks a window.

34. What if I have to evict the tenants?

Some tenants will leave if you just give them an eviction notice. Others will not leave until you get a Court order. Learn how to evict a tenant. Check with members of your local real estate investment club for what is customary in your region and learn rental property law .

35. I'm not sure I want to manage my property. Why not use a management company?

If you follow my Rent to own recommendations, it is not that much work to actively manage your properties. If you use a management company you will lose at least the first months rent every time you get a new tenant. In addition, you will not be able to claim tax losses that exceed your income. Some, like depreciation, can be very substantial.

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