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