Real Estate Investing Lessons

            Donald Trump built much of his empire through real estate.  He continues to expand his interests in real estate, and it made sense that the candidates for the apprentice position have to deal with real estate in their challenges.  Taking a property, improving upon it, and then renting or selling for a profit is a basic strategy when making money with real estate, and that is the task Trump set for the teams in several episodes. 

            Property can be a phenomenally lucrative investment.  Many, if not all, of the extremely wealthy either made their wealth, or keep their wealth, in real estate.  Property offers opportunities not found in other investments.  Opportunities such as leveraging through mortgage financing, buying properties at prices significantly below their true value, and the ability to do things to the property to further increase the value way beyond the cost of the improvements make property a better investment than most others.

            In addition, property has exceptional tax advantages, property prices tend to increase relatively smooth and consistent, and you do not necessarily need to sell a property to reap benefits of its growth.  Real estate and property development turned Donald Trump into a Billionaire, if for not other reason, that ought to make you think about its investment value if you desire to become wealthy yourself.

            During the seventh episode of the first season, we saw the teams tasked with negotiating with each other for one of two apartments, renovating the properties, and then renting the apartments for the greatest percent increase over the starting market value.  Later that season, the two teams had to lease out the penthouse on the 90^th floor of Trump World Tower for the most money for one evening.  Both tasks from season one dealt with different aspects of the real estate game.  The tasks then became larger for seasons two and three.

            During season two, the ninth task the teams were faced with involved real estate.  Each team was charged with renovating a house that was in desperate need of repair.  The teams were provided $20,000 and a few days to complete their mission.  At the end of the time period, professional appraisers reassessed the value of the homes and the team that increased their home’s value by the highest percentage won.

            It was the second episode of season three when the teams faced the largest real estate task yet.  Both teams were given $20,000 to renovate a motel on the New Jersey shore.  They had very little time to get things ready before guests started showing up.  The teams then had to manage the motels and they were judged on how the paying guests rated the motel and customer service with surveys they completed after their stay.  The team with the highest ratings from the guests won the task.

            All of the real estate tasks involved making money with properties.  Constructing, investing in, renovating, renting, and selling are all ways people make money through real estate.  There is not enough room in this chapter to go in depth regarding the many components of real estate investing.  There are many resources out there to further your knowledge in this area.  The following chapter on real estate blunders looks closer at some of the mistakes the teams made during the real estate tasks on the show.  The remainder of this chapter will look at a few of the basics in real estate to get you started.

Finding Investment Properties

            The candidates on The Apprentice had it easy when it came to finding their properties, they were provided by Donald Trump.  For everyone else, finding the properties to invest in is the first step.  There is no one special place to find great deals.  Often it will depend on many factors, one of which is your location in the country.  Therefore, it is up to you to do some research and find the deals in your area.  Do not worry if you miss one, another will be along shortly.  You cannot find them all, but you can find enough to make you wealthy if you are willing to look.

            Newspapers:  Many owner-sellers who are not using a real estate agent advertise in the classified advertisements of their local newspaper.  These will not be the big display ads by real estate companies, but rather the small three or four-line ads.  Many of these owners will be asking way above the market value, but often they will be way below.  If you know how to evaluate properties, this can be a great opportunity.  These properties often have less competition than those listed with real estate firms, since the small ads and the sign on the front lawn do not reach as many people as the real estate firms reach with their web pages, real estate magazines, and the multiple listing networks.  Once in a while you will even find a good deal in the newspaper that was put there by an agent.  A good deal is a good deal, no matter how you find it.

            Real Estate Magazines:  Real estate magazines nearly all have color photos of each listing.  A knowledgeable investor can quickly peruse the listing in particular areas, the number of rooms, asking price, and look of it in the photo and make a decision as to whether it is worth looking at in more detail.  One problem with these magazines is that they tend to go out of date much quicker than newspaper ads.  Depending on the market, the best deals may be gone right after, or even before, the magazine is printed and circulated.

            Real Estate Agents:  Forming a relationship with a real estate agent is a must if you wish to become a serious real estate investor.  A real estate agent can offer a stream of recommendations that may not be listed in the newspapers or magazines yet.  Many of the best deals are never even advertised.  Your real estate agent should know what you are looking for, and therefore not waste your time with properties you would turn down quickly.  And do not stick to just one agent.  Yes, you should be loyal and develop a relationship, but know that every agent will not have access to every property on the market, and will not necessarily hear about every good deal that comes along.  Ask people you trust for recommendations for a real estate agent, and then interview them.  You may want to interview a few at random.  Just be sure to find a good agent that you can work with, and one that understands investing in property.  You are not out looking for a residence or home, you are looking for an investment that will provide a positive return.  If your agent is also an investor, he will provide you with the information you want to know when analyzing the deal.

            Other Sources:  The three sources above are probably the most common and where the majority of people think of first when looking for property.  There are, however, other sources if you look.  There are foreclosure sales, bank owned properties, and places that have not been listed yet.  Do not forget the importance of networking.  Use the strategies outlined in Chapter 10 to improve your networking skills and you will find opportunities arise through your dealings with others.  Once people know you are a real estate investor, you may be provided “inside” information and learn of hot properties before they are known to the public.  People may seek you out, knowing you invest in real estate, to offer you deals.  You can also run your own advertisements.  Rather than sit and wait for deals, proactively look for and find them.  Take the initiative and offer to buy properties in your own advertisements.  Investment properties are out there.  Good and great deals are out there.  It is up to you to find them.

Analyzing Deals

            Many experts agree that investing in real estate is a numbers game.  You must be willing to look at large numbers of properties to find the deals that will make you money.  Out of one hundred properties, you may find ten that are suitable to make offers on.  Out of these ten, you will not have all of your offers accepted, unless you are offering way too much.  You must also consider financing, since part of the investment strategy with real estate is the leverage gained by mortgages.  When all is said and done, you may only actually buy one property out of every one hundred looked at.

            There are a number of ways to value a real estate investment.  Yield is simply the rental income divided by the purchase price.  This is not a very good measure because it does not take into effect how much cash has been put into the property as well as other important considerations.  Cash-on-cash return is more useful than yield in determining if a property is a good investment.  This equation is determined by the rental income divided by your capital outlay.  This still is not the most effective way to analyze a property.  The internal rate of return is a more complicated, but more accurate, picture enabling you to see into the future regarding the property.  It cannot be worked out quickly like the yield and cash-on-cash return can be.  It is extremely difficult to calculate.

Fortunately, computer programs can do this for you.  The software designed to determine the internal rate of return of a prospective investment property take into account:  purchase price, renovation costs, true market value, closing costs, rental income, vacancy rates, expected capital growth rate, expected inflation of rents and expenses, mortgage interest rate, mortgage structure, mortgage application fees, property management fees, property taxes, maintenance, repairs, your income level, and prevailing tax rates.

Software that analyzes all of these factors provides results that give you insight that is extremely valuable when analyzing prospective investment properties.  You can run the numbers differently to satisfy your curiosity regarding the possibilities of your mortgage interest going up, rent changes and so forth.  Software and resources are available to assist you in valuing and property and their use can be very beneficial to the beginning and experienced real estate investor.

            Another factor that should be considered when investing in property is its location.  This is subjective, and relative to the type of property you are investing in.  But just as we learned in week one, location is important.  If you are investing in residential properties for instance, the quality, reputation and location of nearby schools can be important.  Access to grocery stores, routes to city hubs and entertainment venues, parks and the general community and neighborhood are all important considerations.  These are all subjective, so it is difficult to dictate any set guidelines as to what you should look for while investing, but they must be considered in your analysis.

Look at many properties when analyzing deals.  Study all of the factors when determining which investment properties will meet your goals.  The more properties you look at and analyze, the better educated you will become in the field and the easier it will be to determine the good deals from the duds.

Writing an Offer

            Once you have determined you are going to invest in a property, you must either use a buyer’s agent who will write an offer for you, or be able to write an offer yourself that the seller will accept.  You can go to a real estate company, title company, attorney’s office or a supply store to find an Offer to Purchase and Contract form.  Find a real estate broker or attorney who will review the forms with you and explain them.  Practice filling them out and have them reviewed for feedback until you are comfortable with the process.

            According to The Weekend Millionaire’s Secrets to Investing in Real Estate by Mike Summey and Roger Dawson, there are certain things that all written offers should include, and others that you may wish to ad.  Among those Summey and Dawson state should always be included are the following:

• Buyer and seller information.  Include the full legal name of the buyer(s) and the name in which the property is currently titled.
• Property description.  Include both the street address and the legal description of the property.
• Purchase price.  The total price you are offering for the property.
• Payment of purchase price.  Specify the way you propose to pay the purchase price.
• Condition of property.  Record the condition of the property.  Be as detailed as necessary to describe repairs you want seller to make prior to closing.
• Closing date.  Date you propose to close the transaction.
• Occupancy.  Specify the date the seller is to deliver occupancy of the property.
• Deed and warranties.  Specify type of deed which you expect the sellers to transfer the property.  Include the warranties you expect the sellers to make concerning the title.
• Title review period.  Specify amount of time, following acceptance of the offer, needed to have the title and exceptions reviewed, and the amount of time you will allow the sellers to cure any defects found during the examination.
• Closing costs.  Specify costs associated with the closing that the buyer will pay and those which seller will pay.  These can include: revenue stamps, titled exam, title insurance, survey, appraisal fee, real estate commission, home inspection, termite inspection, recording fees, mortgage satisfaction fees, mortgage discount points, photographs, repairs, attorney’s fees, lead paint inspection fee, other miscellaneous fees and charges.  (Note: this is a partial list to give an idea of expenses that can be paid by the buyer or seller or split between the two.)
• Prorated items.  Income and expense items that will continue after the closing and specify the date which these items will be prorated.  Often prorated as of the date of closing, but other dates sometimes used.  Items such as rent, utilities, taxes, and so forth are often prorated items.
• Default and remedies.  Specify what remedies the buyer and seller may seek in the event either party fails to perform under the contract.
• Risk of loss.  Clarify which party suffers the loss, and to what degree, if the property is damaged or destroyed prior to closing.
• Miscellaneous.  Encompasses items often called “boiler plate” such as governing law, binding effect, captions and headings, survival, entire agreement, and notices.
• Termination clause.  Specific time to accept offer before it expires or terminates.
• Signature block.  Last section where buyer and seller sign the contract.

While the above items should be included in all offers to purchase, there are many other things that can be included as well.  Some items you may wish to consider are: assignment, apportionment of purchase price, survey, title insurance, inspections, condominium/homeowners association provision, third-party financing, seller financing, use restrictions, personal property, and other miscellaneous considerations.  If any of these terms are unfamiliar to you, some research into real estate investing should help clarify them.  Summey and Dawson ’s book and programs along with others listed in the resources section of this book explain these in much greater detail.

Remember, there is no perfect way to make an offer.  Whatever you and the seller agree upon constitutes a contract.  You can ask for anything, but if it is not reasonable, you may not get it.  The important thing is to start the negotiations, and that is what the offer will do.

Conclusion

            Real estate investing can be extremely lucrative.  The real estate investor can also lose his shirt.  It is not as easy and profitable as some late night infomercials make it seem.  Like most things, the more you learn and know, the better prepared you will be to make money in real estate.  You can start with the resources in the back of this book, and move on to many of the other resources out there on real estate investing.  Probably the best advice is to find someone who is already successful with real estate investing and develop a relationship where they can mentor you.  No book, tape set, or course will help you as much as actually investing with someone who knows what they are doing and is already successful.

Lessons From The Apprentice Main Page