What’s your exit strategy? © Mopic – Fotolia.com

Each investor will have their own criteria for making a strategy choice. But as I’ve said many times, it’s best to choose a strategy that will be supported by the underlying market fundamentals. The fundamentals are the circumstances that you cannot change about a property. For example – the location of the property is a fundamental issue. You can’t change it. Interest rate activity is also a fundamental that has a widespread impact on the market. If interest rates are rising, it may be more difficult to sell, and when interest rates are low, as they are today, your cash flow from rental could be higher. So a key part of the decision making process is looking at the fundamentals.

Let’s compare a scenario in which we are going to decide whether to keep the subject property and rent it for monthly cash flow, or whether we’ll just sell it outright for a cash profit.

Here is a fundamental question: Where is your financing coming from?

Are you a qualified buyer who can get a long term loan with alow interest rate? Or are you a credit challenged buyer who cannot qualify for a low cost mortgage, but can get a hard money loan for 6 months? One buyer may get cheaper money, with a long time frame for repayment, but another buyer may only qualify for a short term hard money loan at 12% interest, that must be paid back in 6 months or less.

In this case, the fundamental money issue would determine that buyer one, who can qualify for cheap money, might prefer to hold the property for rental because his financing costs are low; he has a long time frame to work with, and his cash flow will be much better with that cheap money. Holding for rental or a lease-option strategy could yield tens of thousands of dollars in net cash flow over time, and eventually, when the property is paid for, the investment becomes a money printing machine.

On the other hand, what if you can’t get that cheaper bank loan, and have to go with a private, hard money loan. This loan is usually via a private, sometimes professional lender, who is willing to loan about 65% of the After Repair Value, to buy and fix the property. But this loan comes with a 12% interest rate, and 5 points at closing. (a point is 1% of the loan amount)

This money is not cheap, and you have to have it all paid back within 6 months. If you can’t get the long term financing, you must sell the property as quickly as possible, in order to pay off the hard money loan. So, the likely choice of exit strategy would be to “flip”, i.e. resell the property, to another buyer as soon as possible. If you negotiated a good price for the property, you should be able to sell it for a quick profit. The amount of cash profit will depend on how good of a job you did figuring out what the property will be worth after the repairs are completed. This is the After Repair Value.(ARV)

Let’s say the ARV of the property is $100,000. A hard money lender will loan you about $65,000 to buy and repair the property. You are a good negotiator, and you buy the property for $45,000, then allow $20,000 for the repairs. (including all holding costs as well). If your total investment is $65,000 and you then sell the property to an owner occupant buyer for $85,000, you’ll pocket a gross profit of $20,000. If you can do that before your loan deadline you’re good to go.

As an alternate, you can get the property under contract for the same price, then find an investor who wants to do the rehab himself. You decide to accept a quick cash profit of $5,000 and sell your $45,000 property to the other investor for $50,000 just two weeks after getting it under contract. That is $5,000 in two weeks, versus $50,000 from cash flow over 10 years.

The choice depends on the fundamentals that control the specific situation. When deciding whether to hold for rental or to flip quickly to another buyer for quick cash, this decision is often determined by your access to financing. Other investors may have access to both cheap money and hard money. In this case they may choose to hold the best properties for rental, while flipping the less desirable properties to another investor.

Creative financing strategies are also very popular these days, because millions of former homeowners now have a bankruptcy or foreclosure on their credit. Many others have a wage garnishment for other debts. Since the recession began, more than 7 million people have fallen victim to unemployment or reduced income. These folks still have options as well for buying a home to live in or a home for investment. It’s all a matter of knowing what strategies are best for you, and that decision is based on what fundamentals are in play. These choices are different for each person, but there are choices and opportunities out there, for anyone who takes the time and makes the effort to discover what they are.
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Donna S. Robinson is a real estate investor, author and investing coach located in Atlanta, GA. Follow her on twitter at donnaconsults, Facebook.com/RealtyBizConsulting and watch her videos on youtube. Her latest book, Basics of Real Estate Investing, is now available for Kindle on Amazon.com

These folks are ordinary men and women who began life without the benefit of parents or family who handed them an existing business. They began with nothing, had no special advantages, and have become successful on their own. The last names have been omitted to protect their privacy, as most of the REAL real estate investors are not selling seminars and prefer to keep their activities private for the most part. If you have not read part one, you can access that article here.

Image courtesy of cali.org via flickr.com

Investor Number 3 – Andrew

Andrew worked for many years at a corporate job. While working he spent much of his commute time listening to educational CD’s recorded by well known real estate investors, as a way to educate himself about the business of real estate investing. Andrew was also a regular attendee at many of my own investing classes at a local investor association as well. While working a full-time job, he spent all of his free time studying, listening and reading books on various investing topics. In short, he did everything he could do to educate himself about investing.

About 3 years ago, the corporation that Andrew worked for announced that they would be laying off some people in response to the recession. Andrew saw this as his opportunity to escape the corporate grind, and start really getting involved in real estate full-time. He went to his boss and volunteered to give up his job. The boss obliged and Andrew set out to become a real estate investor. He had saved some cash and had several thousand dollars to work with when he left his job, and a few months severance pay to keep his bills paid. But he had to hustle and get something going as quickly as possible.

Since Andrew did not have a track record, he could not go out and borrow money from a bank when he began. So, he decided that he would focus initially on buying cheap mobile homes which he could fix up and resell with owner financing. Andrew is also handy with tools and has a strong work ethic. He soon found his first mobile home and bought it. It needed lots of work, but he stuck with it until he got all of the repairs finished, marketing the property for sale while he did the repairs. By the time the repairs were completed, just a few weeks later, he had it sold for more than double the price he paid for it. He also took back a note for the financing, earning additional income from the interest on the note.

In just three years time Andrew, who also studied to become a skilled negotiator, had bought and sold quite a few mobile homes and had built up a nice cash flow. Of course there have been some bumps and bruises along the way. One of his mobile home buyers sold the carport cover to get money to make his payment. Andrew had to inform the buyer that selling the place in pieces in order to make the payment would not be allowed! And he’s had a repo here and there, which he has resold to other buyers. That is all part of the business. But Andrew worked hard and quickly established himself in his local area.

Today Andrew has built up a track record and has been able to establish himself with several local banks. As a result, he has recently completed the purchase of his first major commercial property, financed with a bank loan, and has seen his income and net worth grow well beyond what it was when he was working his corporate job. He now owns a variety of residential properties and is developing a strong presence in commercial investing as well. And he’s done all of this in just a little over 3 years, right in the middle of a recession.

Investor Number 4 – Bruce

Bruce is the kind of guy who is so laid back and non-assuming that you’d never know he is a true real estate guru unless you knew him personally. There are no suits, no limos, and no ego. But Bruce knows his stuff when it comes to real estate investing.

Bruce has a very simple but very successful investing business. He finds great deals on nicer homes in the better parts of town, rehabs them as needed, updating appliances and fixtures to make the properties highly desirable, and resells them to owner occupant buyers who get a new loan. This means that Bruce collects a nice cash profit at closing. He is usually in and out of a deal in just a few months, realizing a profit in the range of $30K to $50K per property, on average, depending on the price range of the home.

Occasionally Bruce finds an extra good deal, such as the time he found a brand new home that was part of a builder foreclosure. The home had 1800 square feet of living space, granite counter tops and had never been lived in, as the builder had gone under before the home could be sold to an owner occupant buyer. Bruce bought the home from the bank for $20,000 cash. Since it was located a good distance from his home, Bruce elected to flip it for some quick cash. He sold the home to another investor just a few days later, and picked up a ten grand net profit for what amounted to just a few hours work. He could have made more, but Bruce also likes to leave money on the table for his investor buyers.

Each of the investors I have featured in parts one and two of this series has worked hard to learn their business, found niches in the business that work best for them. They all have developed their expertise over time. These folks are familiar with a wide range of investing strategies, but they tend to focus on one or two that fit their skills and lifestyle best. They only do deals that make sense, they know how to “run their numbers”, and they keep it legal. As a result, all four of them have become wildly successful real estate investors.

Donna S. Robinson is a real estate investor, author, and investing coach located in Atlanta, GA. Follow her on twitter at donnaconsults, Facebook.com/realtybizconsulting Her latest book, Basics Of Real Estate Investing is now available on Amazon.com for the Kindle reader.

Image © freshidea – Fotolia.com

Investor number one: Gene

A down home country boy from north Georgia who is about as smart as they come. I selected Gene out of literally dozens of investors I could have chosen because Gene is one of the most successful investors that I’ve ever met, and has one of the more unusual investing strategies that you seldom hear about.

Gene told me this story himself during a casual visit to his office a few years back. Gene’s main strategy is keeping up with what state and local governments are planning to do, especially as it pertains to development of new projects.

Back in 1975 Gene was at a Department Of Transportation meeting when they decided to put an extension of an expressway system right through his small town. Through this public process, which anyone can attend, Gene discovered exactly where the new exits would be located for this expressway. Though the area was totally undeveloped, and at that time had virtually no value for immediate commercial use, Gene raised $86,000 and bought 100 acres surrounding the area where one of the planned exit ramps would be located.

During the ensuing years, Gene kept that land and paid very low property taxes, and waited for the expressway and the exit ramps to be built. It would be about 15 more years before the area became highly desirable for commercial use. But it eventually did. Today Gene prefers to offer 100 year leases to commercial clients, and has gas stations at this exit, restaurants, hotels and several other businesses, with land left over for new clients. If someone wants to buy an acre of this land, Gene’s asking price is $1,000,000 per acre. Not bad for an original investment of $860 per acre.

The main keys to his success are the ability to be very foresighted about what would happen in the future, and the patience to take advantage of it. In the years since that original purchase, Gene has duplicated this model many times over and owns a wide variety of commercial properties with tenants that include every one from mom and pop businesses to oil companies to fortune 500 retailers. He is a buy and hold guy all the way, and prefers to hold and lease rather than sell outright.

Investor number two: Mary

I had to get at least one of the ladies in here. I chose Mary because she too has a very unique storys as well as a creative approach to real estate investing.

Mary’s parents emigrated to the U.S. after barely surviving World War II in eastern Europe. After losing everything they had during the war, they arrived in the U.S. with nothing, to start a new life in America. Mary was born some years after their arrival in the U.S.

Today she is a highly successful real estate broker, who has her own realty company in addition to her investing activities. Mary owns apartments, buys and sells single family houses and has a typical investing business. But she did a deal once on a mobile home park that was very clever and something that you don’t hear about every day.

The mobile home park was one that had a reputation for drugs and trouble. The previous owners had allowed the park to run down, and because several of the tenants were involved with using and selling drugs, most of the better tenants had moved out, leaving the park half empty as well. But Mary is a bold investor who knows the real estate business inside and out. She saw something in that park that no other investor saw.

After closing on the park she promptly informed all of the current residents that there would be a crackdown on drugs and drug dealers. Using the legal tools at her disposal, she quickly rid the park of all those who had been identified as problem tenants or involved in drugs. Then she cleaned up the park to make it more desirable for future occupants.

Mary also had a creative idea up her sleeve that was truly a stroke of brilliance. While doing her due diligence on this park, she discovered that each of the individual mobile homes also had their own septic tank. Many communities of this type have several units sharing one tank, but in this case, they all had their own.

Because of this fact, Mary was able to get each of the units in the park rezoned as individual residences, with each lot partitioned into an individual parcel. As a result, Mary was able to offer the units for sale with owner financing. People could come in and buy their own unit instead of renting.

It worked like a charm and Mary sold the units off to owners instead of renting to tenants. The result was a higher cash flow per unit, while avoiding headaches and costs of maintaining the units. A run down, drug infested park was transformed into a major cash cow. Mary never stops learning, and considers all of the strategies that may be employed when looking at a potential investment.

In my next article, I’ll feature two more professional investors who have been wildly successful.

Donna S. Robinson is a real estate investor located in Atlanta, GA. Follow her on twitter at donnaconsults. Her facebook page is facebook.com/realtybizconsulting Her latest book, Basics Of Real Estate Investing” is now available on Amazon.com

© Lambros Kazan – Fotolia.com

As you can see from these terms, commercial real estate has a “lingo” all it’s own and you must learn to speak that language if you are going to succeed in this tricky investment field.  Here is a breakdown of some of the more common commercial real estate terms you will encounter and how to put them to use in making an offer.

“Capitalization Rate” 

Also known as “cap rate”,  this is used as a measure of a properties performance without considering the mortgage financing. If you paid all cash for the investment, how much money would it make?  What’s the return on your cash outlay?  Cap rate is a standard used industry wide, and it’s used in many different ways.

For example, a high cap rate usually typifies a higher risk investment and a low sales price.  High cap rate investments are typically found in poor, low-income areas.  A low cap rate usually typifies a lower-risk investment and a high sales price.  Low cap rates are typically found in middle to upper income areas.

“Cash Flow” 

Positive “cash flow” is the goal of every commercial real estate investor.  Positive cash flows means you are taking in more money than you are spending on your investment.  It creates and maintains your investment’s momentum and generates income you can use to live on and/or invest into other properties.

A property’s cash flow is one of the main factors that a bank will use to determine whether to lend on that property or not.  For example, an apartment complex with a poor cash flow will almost always appraise much lower than another similar structure in it’s area because unlike residential property, cash flow is a major factor in determining commercial property values.  Also, positive cash flow acts as a buffer in economic down times when property values may be declining because your expenses on that property are still being covered and you can normally wait for the market to rebound without any loss of capital. (Assuming you can keep the property rented).

“Cash-on-Cash return” 

Also known as the “velocity” of your money, this term basically refers to the amount of time it takes for the money you invested into a property to come back to you.

For example if your down payment on a property was $25,000, Cash-on-Cash return is the time it takes for your monthly cash flow to add up to that $25,000 investment.  If it took one year to accomplish this then your cash-on-cash return would equal 100%.  If it takes two years to accomplish this then your cash-on-cash return would equal 50%, and so on.  Cash-on-Cash returns of over 100% are not uncommon in commercial real estate investing and is one of the main attractions it has to investors.  What other investment vehicles can give you that kind of return on your money?

“Net Operating Income (NOI)” 

This is one of the most important terms in commercial real estate investing when you are analyzing the profitability of any deal.  The NOI is the dollar amount that’s left over after you collect all of your income and pay out your operating expenses.  This amount is what is left over to pay any financing you may have on the property.  Always pay attention to your NOI and look for ways to increase it by either raising rents or lowering expenses.  As your NOI increases so does the value of your property.

Now that you know some of these basic terms you can calculate what a commercial real estate investment should cost.  The formula is “sales price = NOI ÷ cap rate.  So for example if the NOI is $57,230 and you want to make investments into 9 percent cap properties then the price you should offer is $635,889. (57,230÷ 9%)  This is a good place to start you first offer on the property.

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Daniel Doran is a 20+ year veteran in the real estate industry. He is a previous owner of a law firm, mortgage and title company. Daniel has also written several books on mortgage modification, short sales and real estate investing. He currently specializes in Commercial Finance and Real Estate Development and is a graduate of Manhattanville College and Brooklyn Law School. You can contact Dan at Buildings By Owner.

Image by HikingArtist.com via flickr.com

In early 2010, just as the housing market was heading for a crash landing, the elderly tenants both died about two weeks apart. Suddenly I found myself with a rental property that was vacant for the first time in 22 years.

But for that entire 22 years, my stepfather had allowed the tenants to maintain that property on their own, doing their own repairs, and generally modifying things any way that they pleased. As a result, when they died, I discovered that there were a myriad of items in the home which needed to be repaired, updated or replaced. Contractor estimates were close to $15,000 for all of the needed repairs.

The house is located near a small west Georgia town. It would rent for about $400 a month. Needless to say, I did not want to spend $15,000 to fix a house that would only gross $400 a month in cash flow. After taxes and insurance, it would take several years just to break even. That was just not an acceptable option. So I decided to put the property up for sale and see if another investor would buy it “as-is” and do their own repairs.

After two weeks of calling investors and marketing the house with no offers at all, I decided that perhaps all the investors were thinking the same thing I was thinking…too much money for purchase and repairs… too little rental income to justify the expense. An investor was looking at shelling out $22K for the house itself, and then putting another $10 to 15K into the repairs. It just did not make very good economic sense in a housing market that was in the process of crashing. The return on investment was simply too low. Local investor buyers were not responding.

So, I decided I’d have to get more creative. I needed to do something to turn this albatross into an eagle. I decided to offer the home “For Sale By Owner”, with seller financing. I would try to find an owner-occupant who wanted to buy a home with “no qualifying”.

I put a flyer inside a front window of the home, where anyone could read it, instead of a flyer-box in the front yard that curiosity seekers might empty out in a matter of hours. That way anyone who stopped by would know the asking price, and the fact that the seller was willing to finance a buyer would could verify their income, and get the repairs done at their expense, within 1 year of purchase.

I also put a basic lock box on the iron rail on the front porch, so that I could provide access to the house without having to be there in person. I also included three photos of the interior on the flyer. Simple but effective. There are plenty of good buyers out there who can’t qualify for a traditional mortgage.

Within a few days I heard from a young couple who sounded really excited about the house. After viewing the inside they were ecstatic and were ready to buy what they saw as their “dream home”. They were living with two very young sons in a small 2 bedroom rental trailer that was about to fall apart, and paying $400 a month rent.

Long story short, I verified their income, and asked them what they could afford for their monthly payment. They said $385 per month. I used a mortgage calculator with the asking price and the payment amount, to determine the term and interest rate.

We closed, and the young couple bought their first home. They had family members who were roofers, plumbers and painters. They got all of the work done on the home in less than 12 months, and everyone was happy. Today they are still in the home, paying $385 per month, and their escrow for taxes and insurance is included. A win-win for all involved. They got a home they could not have qualified for. I sold a home that was virtually impossible to sell, and generated a nice little cash flow to boot.

When sellers have a home to sell, they often do not think about how to make it easier for a buyer to buy the home. Many sellers merely list their home with an agent and hope the agent sells it. But when homes are more difficult to sell, it pays to consider creative options to help a good buyer.

Here are several ideas for selling a home that is difficult to sell:

1. Allow a buyer to take over your existing payments for a limited time. This is known as “subject to the existing mortgage“. A buyer can take over your payments for one to several years, then get a new loan and cash you out.

2. “A Wraparound“ – You create your own note for the buyer at whatever price and terms you agree on. Have the buyer make the payment to you, and you pay your mortgage company. You’ll make money if you can sell for a monthly payment that is higher than your current mortgage payment.

2. Seller Financing – As in my story above, you can always “create a note” and become your own bank. This is a great cash flow method, especially when you own the property free and clear and it needs significant repairs.

3. If you owe more than your home is worth, and you need to discount your price to a buyer, consider a short sale. If this is your personal residence, a short sale will be exempt from imputed income tax until December 31st, 2012. If you are underwater, now is the time to act if you are serious about selling and getting out from under a mortgage debt.

There are all sorts of creative things you can do. For assistance with how to structure a creative real estate transaction, contact a local real estate attorney who represents real estate investors, or contact Realty Biz Consulting at 888-915-9968 / info@realtybizconsulting.com

Remember to consider what a potential buyer will have to do to buy your home. I see this problem a lot. Even builders in this market can fail to realize how difficult it could be for most buyers to come up with a down payment and all of the cash and great credit it will take to qualify and get the deal closed. Many new houses sit unsold because it is more difficult for buyers to meet the cash and credit requirements these days.

The easier you can make it for a buyer, the faster you can sell a home that is not selling.
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Donna S. Robinson is a 16 year veteran of the real estate industry. A real estate licensee, investor and market analyst who helps individuals and companies make more money with real estate. Her website is www.RealtyBizConsulting.com