Eric Tyson is a five-time bestselling author, real estate investor, and syndicated columnist who gives people the tools to better manage their personal finances and investments. Robert S. Griswold, author, teacher, and a successful real estate investor, is an active, hands-on property manager with a large portfolio of residential and commercial rental properties.

Introduction 1

About This Book 1

Foolish Assumptions 3

Icons Used in This Book 3

Beyond This Book 4

Where to Go from Here 4

Part 1: Getting Started with Real Estate Investing 5

Chapter 1: Evaluating Real Estate as an Investment 7

Understanding Real Estate’s Income- and Wealth-Producing Potential 8

Recognizing the Caveats of Real Estate Investing 10

Comparing Real Estate to Other Investments 12

Returns 12

Risk 12

Liquidity 13

Capital requirements 14

Diversification value 14

Opportunities to add value 14

Being aware of the tax advantages 15

Determining Whether You Should Invest in Real Estate 19

Do you have sufficient time? 19

Can you deal with problems? 20

Does real estate interest you? 20

Can you handle market downturns? 20

Fitting Real Estate into Your Plans 21

Ensuring your best personal financial health 21

Protecting yourself with insurance 22

Considering retirement account funding 23

Thinking about asset allocation 23

Chapter 2: Covering Common Real Estate Investments 27

Identifying the Various Ways to Invest in Residential Income Property 28

Buying a place of your own 28

Converting your home to a rental 29

Investing and living in well-situated fixer-uppers 30

Purchasing a vacation home 31

Paying for timeshares and condo hotels 33

Surveying the Types of Residential Properties You Can Buy 38

Single-family homes 39

Attached housing 40

Apartments 42

Considering Commercial Real Estate 43

Buying Undeveloped or Raw Land 45

Chapter 3: Considering Foreclosures, REOs, Probate Sales, and More 49

Finding Foreclosures and REOs 50

Taking a closer look at foreclosures 51

Examining lender REOs (real estate–owned) 57

Getting a Jump on Foreclosure and REO Competition with Short Sales 59

Recognizing seller benefits 59

Comparing short sales to other properties 60

Finding short-sale opportunities 61

Convincing a lender to do a short sale 62

Contemplating Lease Options 64

Probing Probate Sales and Auctions 64

Examining probate sales 65

Trying real estate auctions 65

Chapter 4: Taking the Passive Approach 67

Using Real Estate Investment Trusts 68

Distinguishing between public and private REITs 69

Taking a look at performance 70

Investing in REIT funds 71

Understanding Tenants in Common 72

Paying for 1031 availability and “hassle free” management 73

Asking whether TICs are right for you 75

Comprehending Triple Net Properties 77

Thinking ahead about landlord/tenant division of duties 77

Minimizing the risks of triple net investments 79

Eyeing Notes and Trust Deeds 80

Looking at Tax Lien Certificate Sales 81

Considering Limited Partnerships 82

Chapter 5: Fast Money: Small Down Payments and Property Flips 85

Purchasing with No Money Down 86

Being aware of too-good-to-be-true results 86

Understanding why we recommend skipping these investments 88

Finding no-money-down opportunities (if you insist) 90

Buying, Fixing, and Flipping or Refinancing 91

The buy-and-flip strategy 91

The buy, fix, and refinance strategy 94

Chapter 6: Building Your Team 95

Knowing When to Establish Your Team 96

Adding a Tax Advisor 97

Finding a Financial Advisor 98

Lining Up a Lender or Mortgage Broker 100

Understanding lending nuances 100

Building relationships with lenders 101

Working with Brokers and Agents 102

Seeing the value of working with an agent 103

Grasping the implications of agency: Who the agent is working for 104

Getting a feel for compensation 105

Finding a good broker or agent 107

Making the most of your agent 109

Considering an Appraiser 109

Finding an Attorney 111

Part 2: How to Get the Money: Raising Capital and Financing 113

Chapter 7: Identifying Sources of Capital 115

Calculating the Costs of Admission 116

Forgetting the myth of no money down 116

Determining what you need to get started 117

Rounding Up the Required Cash by Saving 118

Overcoming Down Payment Limitations 119

Changing your approach 119

Tapping into other common cash sources 120

Capitalizing on advanced funding strategies 123

Chapter 8: Financing Your Property Purchases 127

Taking a Look at Mortgage Options 127

Fixed-rate mortgages 128

Adjustable-rate mortgages (ARMs) 130

Reviewing Other Common Fees 134

Making Some Mortgage Decisions 136

Choosing between fixed and adjustable 136

Selecting short-term or long-term 138

Borrowing Against Home Equity 139

Getting a Seller-Financed Loan 140

Mortgages That Should Make You Think Twice 142

Balloon loans 142

Interest-only loans 143

Recourse financing 144

Loan guarantees 145

Chapter 9: Securing the Best Mortgage Terms 147

Shopping for Mortgages 147

Relying on referrals 148

Mulling over mortgage brokers 148

Web surfing for mortgages 151

Solving Potential Loan Predicaments 152

Polishing your credit report 153

Conquering insufficient income 154

Dealing with low property appraisals 155

Part 3: Finding and Evaluating Properties 157

Chapter 10: Location, Location, Value 159

Deciding Where to Invest 160

Finding Properties to Add Value 162

Evaluating a Region: The Big Picture 164

Population growth 165

Job growth and income levels 166

Investigating Your Local Market 168

Supply and demand 169

Focusing on the path of progress 174

Considering barriers to entry 176

Government’s effect on real estate 181

Evaluating Neighborhoods 182

Schools 182

Crime rates 183

Pride of ownership 183

Role play: What attracts you to the property? 184

Mastering Seller’s and Buyer’s Markets 187

Understanding real estate cycles 187

Timing the real estate market 188

Chapter 11: Understanding Leases and Property Valuation 191

The Importance of Evaluating a Lease 191

Reviewing a Lease: What to Look For 193

Comprehending a residential lease 194

Making sense of a commercial lease 194

Understanding the Economic Principles of Property Valuation 196

Determining highest and best use 198

Comparing fair market value and investment value 199

Reviewing the Sources of Property-Valuing Information 200

Establishing Value Benchmarks 201

Gross rent/income multiplier 202

Price per unit and square foot 203

Replacement cost 204

Chapter 12: Valuing Property through Number Crunching 205

Understanding the Importance of Return on Investment 206

Figuring Net Operating Income 207

Evaluating income 208

Tallying operating expenses 211

Calculating Cash Flow 214

Servicing debt 215

Making capital improvements 216

Surveying Lease Options 217

Comparing some of the options 218

Accounting for common area maintenance charges for commercial buildings 219

The Three Basic Approaches to Value 219

Market data (sales comparison) approach 220

Cost approach 223

Income capitalization approach 224

Reconciling the Three Results to Arrive at a Single Value 226

Putting It All Together: Deciding How Much to Pay 227

Examining the seller’s rental rate and expense claims 228

Deciding which set of numbers to use 229

Chapter 13: Preparing and Making an Offer 233

Negotiating 101 233

Starting with the right approach 234

Building a solid foundation of knowledge 235

Assembling attractive and realistic offers 238

Preparing to Make Your Offer: Understanding Contract Basics 241

Bilateral versus unilateral contracts 241

Elements of a contract 241

Addressing Key Provisions in the Purchase Agreement 244

Showing intention with an earnest money deposit 245

Assigning your rights 246

Setting the closing date 248

Using contingencies effectively 249

Ironing out straggling issues 251

Presenting the Purchase Agreement 252

Chapter 14: Due Diligence, Property Inspections, and Closing 253

Opening Escrow 254

Escrow instructions 254

Preliminary title report 255

Removing contingencies 256

Estimating the closing date 256

Conducting Formal Due Diligence 257

Reviewing the books and records 258

Inspecting the property 261

Negotiating Credits in Escrow 273

Determining How to Hold Title 274

Sole proprietorship 275

Joint tenancy 276

Tenancy in common 277

Partnerships 278

Limited liability company 280

Corporations 281

Closing the Transaction 282

Estimated closing statement 284

Title insurance 284

Property insurance 285

Final closing statement 287

Deed recording and property takeover 289

Part 4: Operating the Property 291

Chapter 15: Landlording 101 293

Hiring Management Help: Yes or No? 293

Evaluating your situation and the possibility of self-management 294

Assessing your skills and interests 295

Finding and Hiring Pros 297

Doing the research 297

Talking money 299

Testing for Environmental Issues 300

Deciding on Rental Policies 301

Determining lease length 302

Setting the rent 302

Deciding on security deposits 304

Creating policies and guidelines 305

Working with Existing Tenants upon Property Acquisition 306

Meeting tenants and inspecting units 306

Entering into a new rental agreement 307

Increasing rents 308

Finding Stable, Trustworthy Tenants 309

Establishing tenant selection criteria 309

Advertising for tenants 314

Showing your rental 315

Accepting applications and deposits 318

Verifying rental applications 319

Dealing with rental cosigners 322

Notifying applicants of your decision 322

Reviewing and signing documents 323

Collecting the money 324

Inspecting the property with your tenant 325

Renovating and Upgrading to Add Value 325

Enhancing external appearances 326

Improving what’s inside 326

Using contractors 327

Chapter 16: Protecting Your Investment 329

Developing a Risk Management Plan 329

Getting the Insurance You Need 331

Understanding insurance options 332

Determining the right deductible 337

Selecting potential insurers 337

Talking with tenants about renter’s insurance 338

Dealing with claims 339

Chapter 17: Recordkeeping and Accounting 341

Organizing Your Records 342

Keeping records up-to-date and accurate 342

Filing made easy 344

Knowing What to Account For 346

Documenting income and expenses 347

Creating a budget and managing your cash flow 348

Doing Your Accounting Manually 349

Using Software 350

Recognizing the value of professional accounting software 350

Identifying some of the better programs 352

Chapter 18: Looking at Tax Considerations and Exit Strategies 357

Understanding the Tax Angles 358

Sheltering income with depreciation 358

Minimizing income taxes 360

Considering Exit Strategies 368

Selling outright 369

Calculating gain or loss on a sale 369

Selling now, reaping profits later: Installment sale 372

Transferring equity to defer taxes 375

Using the capital gains exclusion to earn a tax-free gain 379

Selling as a lease-to-own purchase 380

Gaining tax savings by investing in “opportunity zones” 382

Transferring your property through a gift or bequest 383

Taking in a Final Note on Taxes on Your Profits 383

Part 5: The Part of Tens 385

Chapter 19: Ten Ways to Increase a Property’s Value 387

Raise Rents 388

Reduce Turnover 388

Consider Lease Options 389

Develop a Market Niche 390

Maintain and Renovate 390

Cut Back Operating Expenses 391

Scrutinize Property Tax Assessments 393

Refinance and Build Equity Quicker 394

Take Advantage of Tax Benefits 395

Be Prepared to Move On 396

Improve Management 397

Chapter 20: Ten Steps to Real Estate Investing Success 399

Build Up Savings and Clean Up Credit 400

Buy Property in the Path of Progress 401

Buy the Right Property at the Best Price Possible 401

Renovate Property the Right Way 402

Keep Abreast of Market Rents 403

Recover Renovation Dollars through Refinancing 404

Reposition Property with Better Tenants 405

Become or Hire a Superior Property Manager 406

Refinance or Sell and Defer Again 406

Consolidate Holdings into Larger Properties 407

Appendix: Sample Purchase Agreement 409

Index 417

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