Rental Income Property Taxes Image by alancleaver_2000 via Flickr

Give To The IRS What is Due To The IRS – Paying Taxes for Your Rental Income Property

Letting go of 25 to 35 percent of your income to tax is often a painful but compulsory thing to do. You would think of the things you could have bought with the said amount: renovate your multi-door apartment, go on a family vacation, finance another investment, or whatever it is that you want to spend on. However, the tough reality remains that we have to pay the IRS their share but there are many ways to minimize that tax burden. Check back soon for info on how to minimize your rental income tax burden.  So to deal with reality, let us abide by the law and file our income taxes so that our friends from the IRS will not haunt us. If you are a landlord, here are some tips in filing your income tax for your rental income property.

Points To Consider When Paying For Rental Income Property

What To Include in Filing Tax. As a general rule, any amount that you have received as rent or as payment for the use or occupation of property should be included in filing for taxes.

When To Report Income. A cash basis taxpayer is someone who declares income gained from rental income property on the year that he actually or constructively received it, irrespective of when it was gained. Income is received constructively when it becomes obtainable to you, such as when it has already been wired to your bank account.

When To Report An Advance Rent. Any amount that you have received before the period of use or occupancy of the property has arrived is considered advance rent. However, you count it in your rental account on the year you received it without consideration of the period it encompasses or the accounting method that your business employs. For instance, let’s say that you inked a contract for a 5-year lease to rent out your property. In the initial year, your tenant pays you $1,000 as rent for year one, and another $1,000 as rent for year five. The last payment is considered as advance payment, and thus, must be reported on the year that you have received it, which is year one, and not on the year that it covers, which is year five.

Should You Report Security Deposits? Any amount paid to you as security deposit that you plan to reimburse to your tenant at the close of the lease must not be counted in as part of rental income. However, in the event that your tenant breaches contract during any year, you are entitled to keep possession of part or all of it. When this happens, you must include that particular amount in your income in that year. Sometimes a security deposit is employed as final rental; in this case, it is considered as advance rent, and thus, must be counted in as part of your rental income on the year that you receive it.

Should You Count in Rental Payments in Kind? Yes you must, using the fair market value of the property or services used as form of payment in your rental income. You can use as fair market value the agreed or specified price of the services, except if there is proof that it is otherwise. Let’s say that you accept a proposal from your tenant, who happens to be a plumber, that he do the necessary plumbing job in your rental property for a month in exchange for a month of rent. When reporting your rental income for filing taxes, add that one-month rental to your rental income, and add that same amount as maintenance expense for plumbing job for your rental property.

It is every landlord’s obligation to pay taxes for the income he earns from his rental income property, whether from monthly rental payments, advance payments, and other possible forms of income related to the property. You should, thus, get to know what are to be included and when they must be included.

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• Best Kept Secrets on How to Make Money Through Tax Lien Investing Revealed
• 7 Awesome Benefits of Lease Options For Landlords
  
• Make Money with Mobile Home Investments

Tax Lien Investing Image by John C Abell via Flickr

Don’t Be Alien to Tax Lien Investing

If you think you can make money in real estate investing only by buying, selling, fixing and renting houses, think again. Take the time to explore the vast field of real estate investing and you will discover other earning opportunities that involve minimal risk and require little capital since you do not actually pay for a piece of the real estate. One of which is through tax lien investing.

What is Tax Lien Investing?

The local government, the state or the county collects various forms of taxes so that it can provide services and benefits to its citizens. One kind of tax it collects is property tax, which is typically paid to the county where the property is located. In the event that the property owner misses a tax payment, the government imposes a tax lien against the property. Despite this move, the county still did not receive the amount of the tax, and thus cannot be used to add to the funding for the delivery of services and benefits of the county. So to solve this problem, the local government sells at public auction either a Tax Lien Certificate or Tax Deed.

2 Ways to Make Money Through Tax Lien Investing

1. When the homeowner repays his taxes. As a tax lien investor, you temporarily shoulder the tax owed by the owner to the government so that the government can use it to fund its obligations to the people. The owner has to repay the taxes within a set period. Once the owner makes his payment, the government will give you a check to pay back your investment including interests and penalties mounted up within the repayment period. Here, you can gain between 16 to 30 percent depending on the state the property is located in. The actual amount earned may not be as substantial as when buying and selling houses, but the beauty of it is it is virtually risk-free, unlike other investment vehicles.

2. When the homeowner cannot settle his taxes. When this happens, you gain first position on the deed to the property through the tax lien. With this, you are legally authorized to foreclose on the property even if there is a mortgage against it. This means that by just paying for the tax deficiency, which is just a few thousand dollars in most cases, you can obtain the property free and clear. Now compare that amount to the actual value of the property and you will see how much money you can make.

You must realize that the second scenario does not take place often since most homeowners who have liens against their properties are able to repay the county within the set time. But there is still the possibility that you can own a property for such a ridiculous price especially now with the ailing economy.

Not everyone knows about this investment vehicle as it does not receive much publicity. The government has not given banks and brokerage firms the impetus to inform people about it. Because it is lucrative and is relatively easy to do, most investors who are already into tax lien investing are not eagerly telling others about it for fear of competition. Lucky for you, you came come across this post.

Tax lien investing is another way real estate investors make money. Not many people know about it but now that you do, you need to do more research on how to get things done especially in the specific county or counties you intend to operate in before you buy your first tax lien certificate.

Photo Courtesy of thinkpanama on Flickr

In the past, real property has been a symbol of wealth and power. The moneyed elite own vast lands and were the landlords. Today, buying investment property has stood the test of time as a vehicle for accumulating wealth. In recent years, the idea of investing in real estate with little to no money-down has become popular especially since it means that anyone can own a property even without much funds. Many people also look into buying investment property as another investment vehicle to prepare for retirement. With the profitability of real estate investing, many people were said to be able to achieve early retirement.

Buying Investment Property for Appreciation

“Don’t wait to buy real estate. Buy real estate and wait.” This is real estate guru Robert Allen’s way of saying buy, hold and wait for the value of your property to appreciate. This was the common idea of investing in real estate in the past where only the well-heeled can afford to speculate and plonk their extra funds in property.

Buying Investment Property to Satisfy a Universal Need

Real estate is a commodity needed by everyone wherever they may be. While the world population is growing, the expanse of land is constant in this world. It cannot be manufactured like other commodities.  Although the demand for real estate in some markets plummeted, when the economy bounces back, the demand will rebound with it.

Buying Investment Property to Leverage

Another powerful advantage of buying investment property is you can invest only 10 to 30 percent as downpayment. When you are able to act fast and find a hot buyer for your newly-acquired property, then you do not have to produce the entire amount but still make the same amount of profit. This translates to higher cash-on-cash returns. You can also use it as collateral to make a loan should you need the full amount or to make other personal loans.

In contrast, if you invest in the stock market, you cannot just make a downpayment for the stocks that you want to buy. Moreover, when you invest in the stock market, you leave the profitability of your investment in the hands of those managing the company of the stocks you bought. In many instances, buying investment property is also less volatile than paper assets.

Buying Investment Property and Control How You Rake In Profits

If you are not the type to leave fate into the hands of chance, such as hoping for the value of your property to appreciate soon, then you have a handful of other options where you can control how you profit. You can buy and wholesale or flip a property to make a quick buck. You can also buy a property, rehab it to increase its value and sell it with a higher margin. You may also make buying investment property into a cash machine regularly spewing cash into your account. This is by buying a property, maybe fix it and then rent it out. Although this may entail more work such as property management, the cash flow it can potentially bring you may mean semi-retirement if you develop the right system. You can also hire property managers to do the extra work for you.

Buying Investment Property to Defer Tax

Buying investment property, maybe a bigger one, using the proceeds of the sale you made for another property entitles you to a tax deferment under the Internal Revenue Code Section 1031. You do not get taxed until you liquidate the investment. This is not applicable to paper investments.

The advantages of buying investment property makes it a lucrative and versatile way to accumulate wealth and a great vehicle to fund retirement.

Buy Investment Property – Learn How To Buy Investment Properties and The Things To Consider When Buying A Buy To Let Property

Buy Investment Property Now!

With the benefits of buying investment properties spelled out above, topped up by the current rock-bottom interest rates and prices of homes in a market that is starting to bounce back, the question you must be asking now is not anymore “should i buy an investment property?” but “where to buy investment property?” and “how to buy investment property?” The following discussion will answer these two significant questions of a newbie real estate investors.

How to Buy an Investment Property

Strategy. The first important thing to do is to decide on your strategy, whether you want to buy a rental property (or buy to let investment property if you are buying investment property in UK), buy, fix and resell, wholesaling and flipping, or buy and hold to wait for appreciation. The type of property you buy will greatly hinge on this strategy helping you to decide whether to buy a multi-door apartment building, 3BR/2TB single family units, handyman specials, or commercial properties.

Financing. Your buying investment property checklist must also include your strategy on where to source your funding, be it from your own deep pockets, from your self-directed IRA, from hard money or private money lenders, from banks and other traditional mortgage lenders, or using equity to buy investment property. Here is a helpful article on obtaining financing when buying property investment.

Real Estate Agent and Attorney. You will find the expertise of a veteran real estate agent and attorney who work in this niche very valuable in your real estate business. So invest time in looking for competent people in your team who can give you valuable advice and deliver competent services.

Location. This consideration is more important than the structure itself. It can dictate how easily you can rent out or resell the property. It also holds sway on the asking price you can quote, as well as the type and quality of tenants or buyers you can lure. Understand the needs of your target tenants. Think about what type of neighborhood they would want to live in. Consider the following discussion in locating the best place to buy investment property.

The Best Place to Buy Investment Properties Should Be…

…In a neighborhood with low crime rate. Who would rent in a well-built multi-apartment building that is located in a high-crime-rate neighborhood? You may also be putting yourself at risk if you invest in such a neighborhood when you visit your property for inspection or when dealing with tenants.

…Accessible to schools, shopping malls, and work places. So you must consider a location where the  local economy is bustling offering a host of employment opportunities that way you can be sure of tenants that have the capacity to pay for rent.

….Ideally accessible from where you live so that when you need to inspect, supervise some maintenance work, or talk to the tenants, it will not incur you additional costs, such as substantial gas expense, plane fare and hotel fees.

….In a neighborhood or area negatively affected by new regulations or changes in the laws related to zoning, land use planning, and the like, as these may affect the value of your property.

Buying Investment Property With No Money Down

Do you want to know how to buy investment property with no money down? Yes, buying property for investment is not just for the moneyed, as what most people think. You can buy investment property with no money down with the help of traditional, hard money, and private lenders. Savvy real estate investors have also developed creative techniques in buying investment property with no money down, such as by negotiating an installment plan for the down payment, by taking over existing mortgage, negotiating foreclosed properties, and many others.
Here are some more helpful articles on buying an investment property tips and property investment buying.

What Is A Buy To Let Investment Property

Buy-to-let investment properties are UK’s version of rental properties. Investors buy investment properties and rent it out to tenants for monthly cash flow, and some years later when property values have appreciated, they can sell it for profit. Just like in the US, the British real estate industry is also struggling making it a tough time even real estate investors with buy to let investment properties. Rising mortgage rates are eating up cash flow, while falling values of properties is threatening prospective capital gains.

Buying investment property is indeed a lucrative business that can be done with little to no money down. Although it can be a gnarly undertaking and market conditions can be against you, once you understand the mechanisms of the market, the techniques of trade, and know where and how to buy an investment property, it can be developed into a semi-automatic source of income.

Related articles

• Speed-Up Retirement Fund Growth Using Self Directed Real Estate IRA’s (buyfixandprofit.com)
• Understanding ROI in REI (buyfixandprofit.com)

Image by thinkpanama via Flickr

Investing in real estate can be truly financially rewarding when you know what you are doing. When you buy investment property, you should already have in mind what many real estate investors call the exit strategy that you are going to implement for that particular property. This means that when you get involved in a deal, it must be clear in your mind how you are going to make money out of it. When you buy investment property, you can consider five ways of earning.

Buy Investment Property for Appreciation

Some people who are unacquainted with the real estate business think that the only way to make money when you buy investment property is by buying and holding the property until its value appreciates. You make money through capital gains. Although the value of real estate has always been shown to eventually rise, however, this is rather speculative and there is no exact science that can calculate when and how much the rise would be.  Hence, if you rely on appreciation alone to make money, you are not in the locus of control. Also, certain cycles in the real estate market, such as now, may devalue the worth of your property. Only those who have a glut of funds can afford to park their money in this guesswork for an uncertain period.

Buy Investment Property for Rental Income

To address the uncertainty issue of the buy and hold strategy, you can just put appreciation at the back of your mind in the meantime. While waiting for appreciation to take place, you can be at the helm of your earnings by renting out your property and establish cash flow through rental income. You must keep in mind, however, that being a landlord is altogether a whole new ballgame where you have to deal with tenants and toilets. If you do not have the time or patience to manage the property, you can always hire a property manager to delegate the work for you.

Buy Investment Property for Cash Flow Sans the Hassles of Property Management

To help you sleep better at night and not worry over what damage your tenants could possibly do to your property, you may offer Lease Options. With this agreement, the tenant has the option to purchase your property. With the possibility of owning the place, your tenant will surely take care of it. The waves of earnings in Lease Options usually start with a considerable downpayment from the tenant-buyer.

Buy Investment Property for Quick Cash

A popular strategy for many real estate investors today, especially those who do not yet have sizable capitalization, is they buy investment property below market value and sell them usually also slightly below market value for quick cash. Buying investment property below market value ensures you of a wider profit margin. Selling slightly below market value helps you sell the property much faster so that you can get on with the next deal.

Buy Investment Property and Rehab for a More Handsome Profit

Many seasoned real estate investors also buy investment property that needs fixing at a bargain, rehab it and sell or rent it out for profit or cash flow. Buy-Rehab-Sell (or Rent Out) strategy requires a deeper pocket to fund the renovations. It also requires particular savvy in dealing with contractors and the rehab project itself. These demanding requisites are well compensated for by handsome profits. Rehabbing increases the market value of the property that is why with this strategy, you can also earn more than just simply flipping.

When you buy investment property, you can adopt any of the five strategies of making money according to your preference and style; you may even do a combination of them, or perhaps think of a new one.

Related articles

• How to Avoid a Common Mistake All Newbie Real Estate Investors Make (buyfixandprofit.com)
• Where to Source Your Rehab Funding (buyfixandprofit.com)
• Lease to own Charlotte, NC. A major hole in lease option (theleasetoowncharlotte.com)

ROI Photo Courtesy of thinkpanama on Flickr

REI Doors Open To All

The relative ease of entry is luring more and more people to turn their hands to real estate investing, or REI, not to mention that information about running the lucrative housing business is all over the Internet; you just have to discern which tips and advice to follow. It requires little, some would even say zero, capitalization that is why it is welcoming to beginners. Less capitalization also means lesser risk for losses for the newbies. However, the most enticing lure why people get into REI is the substantial profits that could be raked in in a relatively short time if you get things right.

ROI in REI

One of the most common measures of the quality of an investment is the Return on Investment or ROI. It measures the value of your Net Profit in proportion to the total amount you invested. This measure tells you how much increase you get on your total investment. For example, you bought a house at $100,000 and flipped it for $110,000. In this investment, you get a 10 percent ROI. Note that computing for ROI is not this simple. Remember to factor in all the Expenses you incurred for the property, such as Taxes, Repairs, Marketing Expense and many others.

What if, before selling the house, you rented it out first and you raked in some Rental Income? You also have to add this in computing for your Net Profit. Of course, this is together with the expenses that go along with running a rental property such as Property Management Expenses, Maintenance Expense, Contingency for Vacancy, Insurance, and Real Property Tax. Another item you must not forget to consider is Amortizations.

ROI Versus CCR in REI

What if instead of paying in cash, you used bank financing? This factor can totally tell a different financial story. Going back to the same house in our example, you get a 10 percent increase in your $100,000 total investment. This is the ROI and CCR (cash on cash return) you get since you paid in cash.

What if you only paid a 10 percent downpayment or $10,000? Then your ROI is still 10 percent, but your CCR is now 100 percent. This is the profit you get on the actual cash outlay that you made. The $10,000 actual cash that you invested increased by $10,000.  Obtaining a investment property mortgage when purchasing a rental property is akin to buying stock on margin but supercharged.   For real estate investors, achieving 20%, 30&, or 50% plus cash on cash returns on investment is common place.

ROI and CCR are just two measures that gauge the quality of your investment in real estate, and if you compare these figures with those of other investment vehicles, such as bonds and stocks, you will appreciate REI even more given the leverage available for buying investment property.

Image via Wikipedia

These days, getting funding for your handyman specials from hard money lenders are getting harder as their requirements become more rigid. Traditionally, getting funding from these private lenders was almost as swift as their speed of driving by the property involved in the deal for inspection.  At the present real estate climate, however, many of these lenders may check on the tax returns, bank statements and current pay slips of borrowers. For this reason, some REI’s may be seeking for other financial fountainheads to fund their deals. Usually in their search for alternative source, they give Federal Housing Administration’s 203K loans the brush-off.

Giving 203K Loans A Second Thought

Ever since the Department of Housing and Urban Development set down the moratorium on investor involvement in the 203k Rehabilitation Program, ethical REI’s avoid this loan program lest they be charged of mortgage fraud. But hold your horses! There can be some ways you can benefit from this financial reservoir.

3 Ways on How REI’s Can Dip Into The Financial Reservoir of 203K Loans

Despite the exclusion of investors to avail of 203k loans, it does not necessarily mean that you cannot use it to your advantage. It just takes a matter of expanding your context and thinking outside the box. Below are some ideas. You may be able to think of more.

1. This will not apply to all but will serve well for REI’s who are looking into buying and doing up their own homes. Well, this scenario is obvious. This is also applicable to REI’s who just recently bought their place of residence. It is expressed in the program that homebuyers who bought their property with cash within six months may refinance the house by availing of the 203k loan. It is as if the homebuyer bought the house through the said loan. If you are a recent homebuyer, you can claim a cash refund which is net of down payment and the closing cost that goes with obtaining a 203k loan. And presto! You can use the cash-back to fund one of your rehab projects.

2. Some resourceful REI’s also suggest to work around the provision that says that the loan can be utilized to refashion a single-family home into a double-, triple, or quadruple-family building. It is not clear whether these newly converted units can be rented out to tenants or not. A residential property which is also secondarily used for commercial purposes is also eligible for this loan. However, the commercial purposes seem to imply an office or store. In this case, it was not clear whether the owner must be the one occupying the commercial space or it can be rented out to other businesses. Probably, this may only apply to non-profit institutions which are also eligible for 203k loans. It is best to clarify these issues to avoid trouble.

3. This is applicable to any REI and is more of a “selling”, rather than a “buying”, strategy. You do not directly apply for a 203k loan so that you can buy and rehab the property, but you can help your buyer to avail of the government financing. As a consequence, you get to sell your property and you are freed from the trouble of rehabbing the property. It is akin to the ethical house flipping. Just make sure that you do not overprice and your buyer really has the wherewithal to pay back the mortgage. Your buyer gets to choose the color of the carpet and the paint and all other personal preferences he may have for his new dwelling. This means that you satisfy your buyer and with this, you could possibly get a referral to another homebuyer for your other fixer-uppers.

The Hurdles of 203K Loans

As with other government and bank loans, leveraging on this loan will encumber you with the red tape that rarely exist when dealing with private lenders, although it charges lower interest rates. The extra paperwork can snatch your time and speed in doing things so it would be great if you do not source financing from 203k loans often.

If you are running low on funds but have plenty of time to allocate for the processing of 203k loans, then you can consider the ways mentioned above on how you can use it for your REI business.

Photo courtesy of Philip Taylor PT

With the tremendous earning potential in real estate investing and the velocity of money with which one can rake in earnings doing this business, financial freedom and early retirement could just be on the horizon for many successful real estate investors. If you are one of them, then perhaps, the forecast that Social Security may no longer be able to pay full benefits in the years to come as it is about to run a negative cash flow by the year 2017 is none of your concern. It may not even matter to you if you cannot yet avail of tax-free distributions from your IRA. However, a savvy real estate investor like you can make use of your expertise to accelerate the growth of your IRA. This is through self directed real estate IRA’s.

Self directed IRA’s are a type of Individual Retirement Accounts that allows the account holder have control over money and investment decisions. While the typical IRA’s involve mutual funds, CD’s, stocks and other paper assets, self directed real estate IRA’s can also make investments in the real estate. For instance, you put a rental property under your self directed IRA by putting the rental income into the retirement account. However, properties that you personally use are excluded from this account. You are also not allowed to rent out properties under your IRA to your spouse, parents, grandparents, children and grandchildren. But you can take in your siblings as your tenants. Besides these, there are many other rules that complicate self directed real estate IRA’s. Nevertheless, this type of retirement account has several advantages that outweigh its complexity.

Why Bother With Self directed real estate IRA’s

Enjoy Tax Free or Deferred Tax Advantage.

Depending on the kind of IRA, you can enjoy either deferred tax or exemption from paying tax. In the first kind, your yearly contributions, which you make using pre-tax dollars, is not taxed. You will not be taxed until you make withdrawals when you retire.

The tax-free kind is called Roth IRA. Here, you pay annual contributions using after-tax dollars. Although you do not enjoy tax advantage in the year you paid the contribution, but the growth of the retirement account and the income you withdraw when you retire are not taxed. Because of this tax advantage, the majority use as instrument Roth IRA for real estate investments. By using this, all the profits you make from your real estate deals would be tax-free.

Benefit From the Power of Compounding

Just like in other financial vehicles, the power of compound interest speeds up the growth of your retirement fund. Combine that with lucrative real estate investments in your self directed IRA, plus the fact that the amount you ought to pay as tax is also added in the total account balance also compounding interest, and witness how fast your money grows. Too bad, you will have to wait for your 59th birthday, before you can start making penalty-free withdrawals. But at least, your future is secure.

Protect Your Assets From Creditors

Under the shelter of federal bankruptcy law, IRA’s are normally protected from creditors in bankruptcy cases.

Pass On Tax-Free Inheritance for the Next Generation

Roth IRA’s allows you to pass on a growth savings instrument to your heirs after death sans the burden of assets.

Leverage On Your Expertise in Real Estate Investing

As a savvy real estate investor, you can cherry pick the real estate investments to include in your IRA. With a self directed real estate IRA, you may not always need the services of a hard money lenders. You can flip a house using funds from your self directed real estate IRA as option money or as downpayment.

In the world of real estate investing, you can make money with little to no money. Hence, it is an excellent tool to achieve financial freedom and fund your retirement. Enhance that with self directed real estate IRA’s, and you can zoom your way to financial security and bliss.

photo courtesy of Cayusa

Why Try Private Money Lending?

To Extinguish an Impending Burnout. While you push your way in the real estate investing arena, do you sometimes wish you could slow down and slack off from the frenzy of scouring for handyman specials, hammering away rehabs and hawking your wares? Were there times you wish you can just call for a time-out, watch the game from the sidelines and hand out water to the thirsty players? If you are feeling this way, why not consider crossing over to the other side and try your hand at private money lending.

To Satiate Curiosity and Spur Growth. Let’s say you have considerable amount of capitalization as a successful real estate investor who has been around the block for some time.You have stabilized your finances after several flips and have constructed streams of passive income trickling from your rental properties. Some of these funds may just be idly sitting somewhere. For sure, you are already skilled at identifying which deals deserve a seat on the drawing board and which ones to be flushed down the drain. So it would be to your advantage to keep your market for private money lending within the real estate industry.

As Another Source of Semi-Passive Income. Since you use the funds of hard money lenders to finance your deals, the money you have accumulated from flipping houses may just be lying idly somewhere. Financing a real estate deal requires less work than going through the process of buying, fixing and selling properties to make money, although you will be making greater returns as a real estate investor.

Start Small As a One-Man Private Money Lending Entity

Recall the first time you dipped your toe into real estate investing. Most likely, you started with one small deal which earned you some money. Then you proceeded with doing a couple of deals, until you were handling multiple deals at a time. You can use the same baby steps in private money lending. While still doing real estate deals, get involved with one deal wherein the tables are turned and you are the private money lender instead of being the investor. You can finance a partner or someone you know who is good at it. Of course, this has to take place with the counsel of your lawyer and the services of a title and escrow firm to ensure that the deal is properly handled. You may also approach friends and business connections with deep pockets who are interested to invest their money so that you have additional source of funding once you venture into bigger deals.

Once your many small deals convince you that private money lending is your cup of tea and you want to take it seriously, then consider registering a limited liability corporation (LLC) to protect your personal assets and so that you can get access to more substantial financing from other sources. You also need to form your financial and legal team, among other things.

Things to Keep in Mind As a Newbie Private Money Lender

Lend money at less than 75 percent of LTV to mitigate risk. Ensure that these loans are collateralized by real estate. Set interest rates that are comparable to those offered by banks, other public institutions and other hard money lenders. Just make sure that you do not go against any federal laws related to money lending so familiarize yourself with these.

With your experience as a real estate investor borrowing money to fund your deals, you already know that you can charge interest rates higher than those offered by banks because you are less strict with credit rating, offer red tape-free processing, hence, facilitating quicker funding which the typical real estate investor needs.

This may lead to something or this may not, but by trying your hand on private money lending, you get the chance to delve into the private mind of a private money lender.

Private money lending could be something a real estate investor can venture into.

Foreclosures Drowns Banks With Unwanted Assets

The turbulent waves of foreclosures continue to wash out distressed home owners who are unable to keep their finances afloat. As these combers ebb, their backwash brings back to shore hordes of homeless families for the government to look after and piles of foreclosed properties for the banks and developers to deal with. Unlike a seashell collector who may not mind the extra weight of the pieces she gathers from the shore, these institutions do not enjoy collecting these foreclosed properties as loads of them cause an imbalance to their financial statements.

Bulk REO Packages – Banks’ Life Jacket, Nourishment to RE Investors’ Pocket

That is why they have come up with bulk REO packages or groups of “real estate owned” by the bank that are greatly discounted for bulk purchases so that banks can quickly get rid of these “unwanted” assets which are rapidly accumulating in their inventory due to the waves of foreclosures. The longer they hold these REOs in their hands, the greater their losses. Real estate investors like this urgency because it means that the banks are motivated sellers, and motivated sellers are willing to lower their price just to sell off.

True to form, banks offer great discounts, that could go as high as 60 percent, to encourage real estate investors to acquire them by bulk, sell them off as individual pieces of properties. The more massive the bulk REO package, the greater the discount. This affords investors of bulk REO packages to make heaps of profits. Investors can also rehabilitate some and groom them to become sources of steady cash flow. This is a classic illustration of the advice given to newbie real estate investors to “make a profit when you buy, not when you sell.”

Bulk Up Your Real Estate Investor’s Muscles Before Diving Into the Sea of Bulk REO Packages

Considering the relative enormity of the properties included in the bulk REO packages, this kind of deals may not be for the newbies. There are a number of things that an investor has to put together to succeed in venturing in this type of deal.

Assemble Your Buyers’ List. Getting hold of a bulk REO deal means that you will be marketing a great deal of properties, either by flipping the bulk REO package or by reselling properties by piece. Gathering names and pertinent details of potential buyers ahead and setting up a buyers’ database is crucial to shorten the time that the properties are in your inventory. With your buyers’ database, you know the real estate needs of specific buyers and you can match these needs with the corresponding properties that are in the bulk REO package. If the bank allows you to inspect the properties or with the help of compilers who allow you to tailor-fit your package, you can choose to include in the pack the properties that satisfy the needs of buyers who are in your list. With tailor-made packages, you can cherry-pick assets according to the average ARV, the target market for the properties, zip codes and package size of your choice.

Plot Your Exit Strategy. Prior to buying any bulk REO packages, you already must have drawn up your strategy on what you will do with the 91 properties that you would have acquired. Will you be flipping the whole package to another investor, just sell the properties individually, keep some for rehab and rental income? Plotting this would be easier with the help of your buyers’ list.

Round Up Documentation. The three documents you will need to present to the bank include a (1) Nondisclosure Agreement, (2) a Letter of Intent and (3) a Letter to Show Proof of Funds. To be able to come up with the third document, you either must have enough funding or better yet read the next item.

Find Financing. Access to substantial amount of capital is requisite to be able to pull off this large scale deal. There are a number of investment firms, some international, that can offer hedge funds to resolute investors.

Do not become a landlord or fix and flip real estate investor without the appropriate reserve funds.

Without the appropriate reserve funds you will most likely be adding to our economy’s foreclosure backlog and just become another statistic. Take this advice seriously, it has been learned the hard way by many investors that have come before you. Refer to Murphy’s Law.

The Perfect Rehab?

How many rehab projects have you heard of that have had no hiccups, no delays, and no surprises?  Ask this to a group of real estate investors at your local REI club and you’ll quickly find out that the perfect rehab or long term rental doesn’t exist.  From surprise foundation problems to the guaranteed buyer/tenant that all of sudden cannot close on the deal; surprises are a part of this business.

Property Rehab Gone Wild

Even the most scrutinized and detailed rehab project cannot account for your contractor skipping town with a portion of your money or your tenant being arrested and sent to jail in the middle of the night.  Always include at least $5K in contingency funds or better know as “oh shit money” for every foreclosure or distressed property rehab project.  This is based on rehab projects of $30K – $45K in scope.

Do you know what happens when your perfect tenant stops paying rent after month 7 because they just lost their job or their ex stopped paying child support?  You have a non-performing asset that you must deal with swiftly in order for this property not to become your last in your real estate investing career.  If a tenant has no where to go, they typically will not just pack up and leave because they feel bad for their landlord.  There will be 3 months of no rent before the sheriff comes out to the house plus the $600 -

$1000 to process the eviction.  Then there are the turnover costs (hopefully a security deposit was collected) and the time involved to re-rent the property.

Many newbie rehabbers and buy and hold investors do not take these scenarios seriously and tend to underestimate the amount needed in reserves to properly cover themselves for the unexpected.

So How Much Should a Real Estate Investor Hold In Reserves?

If you listen to the strict bank underwriting guidelines, that will be typically 6 months of the PITI (principle, interest, taxes, interest) in reserves.  When I first started out, I tended to believe that 2-3 months was more than sufficient.  I obviously could do it better than anyone else and saw the six month reserve guideline as overly conservative.  Heck, my first buy, fix and hold investment was accomplished with only $500 out of my pocket; I thought I was a pro.

My opinion changed after accumulating a portfolio of properties and encountering some of the most unreal situations. Our current recommendation is to maintain 6 months of cash reserves for every single buy and hold property purchased.  There can be 5 months of perfect performing rentals and then all of a sudden 4 separate unrelated issues will pop up all at once.  When it rains it pours. If you, as a budding real estate investor, are not prepared to deal with multiple crises at the same time, you will not be in this game for long.

What If That’s Too Much Money to Save Up In Reserves?

Good luck then.  Call me when you’re entering foreclosure so I can buy your property from you for less than what you paid because so you’re so desperate to sell it now.

What’s everyone else’s opinion on this topic?  6 months in reserves for every single property.  Is that too much or too little?  Comment below, I would love to see what investors think.