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“Ex-Wall Street executives” as they are called in the media, have formed dozens of new capital investment companies and Real Estate Investment Trusts for the purpose of buying up foreclosures by the tens of thousands. The general idea is that all these foreclosures will be rented to people who can no longer obtain a mortgage. But this is not a foregone conclusion for all foreclosures.

Buying foreclosures is not, in and of itself, an investing strategy, whether you intend to rent them or not. Foreclosure is a fundamental. It is a fundamental because it represents the status of a property. It is a circumstance if you will, not a plan for making money.

Renting a property for cash flow is an investing strategy because it is one of a number of choices you may have, with regard to how you will make money with a particular property. Foreclosed properties are a source of potential leads, but even after you buy the foreclosure, there is no guarantee that you’ll make money with it.

People seem to think that simply buying foreclosures guarantees that they will automatically make money, but that is not true. I’ve seen dozens of cases where a property was purchased after a foreclosure, but the plan to make it cash flow or produce a profit did not pan out as expected. This usually happens because other fundamentals were ignored, and the strategy that was chosen was ultimately undermined by the fundamentals.

Strategies are the choices you make about how to buy, sell or hold a property. Fundamentals are the circumstances pertaining to the specific property or the local real estate market, that cannot be changed. You don’t have a choice about fundamentals, they are what they are. (For a detailed explanation of real estate investing fundamentals and strategies, you can watch my videos on youtube, here). A property that has been foreclosed on has the fundamental issue of being a foreclosure. That may mean you can get a better deal on it, but this is not guaranteed.

Foreclosures are a large pool of available properties which are relatively easy to find these days, but making money with them depends on your abilities as an investor, and your choice of investing strategy. For example, what if I told you I can sell you a 3 bedroom, 2 bath foreclosure for only $40,000. Is that a good deal?

It may sound like it. But what if I also mention that there is significant termite damage and other items that will require another $45,000 for repairs? Is that still a good deal? (repairs are another fundamental issue). If the property happens to be located in a very high income area, and will resell for $200,000 after those repairs, is it a good deal now? (location is one of the most important fundamentals).

Or, what if you find out that you can’t get a permit to renovate this foreclosed property because your desired renovation is a violation of the neighborhood zoning laws. That is another fundamental issue. I’ve seen folks buy a foreclosure because they thought it was a good strategy to buy a foreclosure, only to discover that unanticipated repairs or other problems completely ruined the profit potential.

What if the foreclosure you bought does not fit well with your choice of strategy? Rental is all the rage right now, because everyone seems to think that everyone else is going to have to rent a home. But what if you bought a foreclosure, then discovered you can’t rent it because there are 25 other houses in the same neighborhood that are also for rent. There are lots of fundamental issues that can lead to your success or failure; supply-and-demand-ratio is a big one.

Buying a foreclosure does not guarantee that you will automatically make a profit from renting it, especially if your mortgage payment is $900 per month and you discover that you can only rent the property for $700 a month. Oops–that mistake is more common than you think.

So when you see those tantalizing advertisements offering you a “great deal” on a foreclosure, don’t assume that this is a “great opportunity”. Do your due diligence, and determine the ideal strategies you may use to cash flow that foreclosure if you do buy it. There are limits on what you should pay for any specific foreclosure, and the fundamentals in your particular area will help determine whether you should rent it, sell it, or stay away from it.

You can’t be sure that any foreclosure is a great opportunity for an investment until you have done your due diligence, run your numbers, and checked it out thoroughly. Then you can make an informed decision about the right choice of strategy, once you are aware of all the fundamental issues involved.

The key to profitable real estate investing strategies lies in knowing the fundamental issues in play, and then choosing the correct strategy that will work with those fundamentals. As fundamentals change over time, so also, will your strategies.
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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

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Note that I did not say “what you should charge”, but rather what your tenants likely can afford. Affordability is going to be a huge issue going forward, as renters fight the headwinds of increasing payroll taxes, inflation of food and energy costs, the new health insurance mandate, and stagnant incomes.

One of the challenges most landlords are facing today is the dwindling buying power of most of their tenants. Though not all tenants are in this situation, US Census data shows that the vast majority of wage earners in the U.S. are not making very much money…

Here are some facts it’s helpful to know:

1. According to Social Security wage data, 50% of all wage earners made less than $27,000 in 2011.
2. An additional 16% of all wage earners make less than $42,000 per year.

This means that fully 66% of all wage earners make less than $42,000, with three-fourths of them below $27,000 per year.

As a rule of thumb for lower income renters or buyers, allocate no more than 36% of net take home pay, and that is what the typical tenant should be able to afford in rent. Of course this depends on other debts such as car payments, credit cards, and such, but generally, 36% is a commonly used percentage for calculating how much of a mortgage payment a buyer can afford. The same rule of thumb can be applied to a tenant.

Real estate agents and lenders commonly use the gross income number and calculate from that, but I prefer to keep things rooted in reality, so I strongly recommend using net take home pay for this calculation, because clearly, tenants or buyers cannot make use of income that will be deducted for payroll taxes. You are not doing yourself or a prospective tenant any favors if you try to stretch what a tenant can afford beyond what is realistic.

When looking at a prospective rental property you are considering buying, I recommend using the above rule of thumb to help estimate your likely positive cash flow on the property. Search online to find out what the median income is in the immediate neighborhood where your subject property is located, and calculate an affordable rent rate for the subject property.

For example, let’s say that your property is located Albany, Georgia, a typical, midsized city in the south western section of the state of Georgia. According to the detailed Census Data that is available online here, Albany has a median income of $17,424, well below the average of $25,383 that is shown for the entire state.

Multiply $17,424 by .36 and you’ll get $6272.64 – This is the amount that a person with the median income in Albany, GA can allocate to pay rent for an entire year. Taking $6272.64 and dividing by 12 months, I get $522.72 per month. This is what a single person earning median income should be able to reasonably afford in rent each month.

And conversely, if you are using the 1% rule as a guide for making an offer on a property to be used for rental, you could assume that a 1-2 bedroom unit might be worth $52,272. (The “one percent rule” states that a property should rent for 1% of it’s value, or conversely, a rental property is worth it’s monthly rental amount times ten.)

A three bedroom home rented to two adults, each earning median income, could be estimated to gross $522.72 X 2 or $1045.44 per month. Using the 1% rule as our guide, this property is worth approximately $104,544.

Knowing what your tenants can afford helps you insure that you do not pay too much for a rental property going in, and also helps insure that your tenants will be able to pay on time every month. And when tenants can afford their rent, they are likely to stay longer, which reduces your vacancy and turnover costs.

This is merely a way to work with the fundamentals in your market, because real estate investing strategies work best when your strategy is in line with the general market fundamentals in your area.
Donna S. Robinson is a real estate investor, author and market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults. Her book, “Basics of Real Estate Investing” is now available on Amazon.com for Kindle Readers.

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But thanks to high government debts and the resulting monetary policy of forcing interest rates to near zero, retired seniors and boomers nearing retirement are discovering that “retirement planning” ain’t what it used to be. Seniors, like my own mother for example, are discovering that it’s quite a challenge to play the retirement game today, in a world that is in the process of changing all of the rules.

For many years, a low interest rate was 6% and a typical interest rate was 9%. The idea of saving for retirement meant that you could expect to earn enough to pay all of your living expenses, without drawing down your savings. But the rules have changed. Today’s monetary policy is challenging retirees because it’s resulting in a major reduction in income from savings, while inflation in food and fuel prices is adding to the cost of living in a way that was impossible to predict a mere 10 years ago.

The new challenge for retirees is earning income in a world where the traditional savings and investment vehicles are no longer as effective or predictable as they once were. This is why real estate investing remains one of the most popular investment vehicles for everyone from wall street funded investment companies to mom and pop entrepreneurs. Both groups realize that passive income is an essential part of today’s retirement and financial planning landscape.

Real estate investing is one of the few industries that can provide a variety of passive income models for investors, from your basic “mom and pop” owners with a small portfolio of single family rental houses, all the way to a sophisticated investor like Donald Trump, who probably does not own any single family properties but likely owns hundreds if not thousands of apartments. And if you don’t like the idea of managing rental houses, and you don’t have millions to buy apartment buildings in New York City, there are plenty of real estate investment trusts, or REITs, that can take your small investment and pool it with many others so that you can earn passive income from things like office buildings and apartment complexes.

The internet has also brought a new ability for individuals to start and operate web based businesses for much less than the traditional “brick and mortar” operation costs. Opportunities for passive income abound both online and offline.

Many folks today figure that they cannot save enough for retirement, even if they are working and have a good income. But passive income streams can alleviate that problem by allowing you to have a consistent stream of income for years on end, even if you have not saved a million dollars for retirement. Passive income models are the answer to the question of how one can retire when they have little savings, or their savings are earning way less than expected 30 years ago, when you set up a retirement account.

Passive incomes ideally have three main components:

1. Automatable - can this business operate without me being there? Will I earn money from this investment even if I am unable to work? A REIT or a rental house fits in this category because income is earned from rents, not your labor.

2. Duplicatable – is this model a business that is easy to duplicate? How about writing a book? Once written, a book can potentially sell copies for years to come. Not everyone can write a good book, but many enterprising authors have created incredible passive income streams by creating products that only have to be made once, but can sell thousands of times without having to recreate the labor. There are many categories of passive income such as books, songs, jingles, video games, movies, etc., that fit into this category. If you don’t write books or program video games yourself, look for people or companies that do and invest in them.

3. Residual – the ideal passive income models not only create income today, they produce residuals from future sales for owners and investors. Some companies such as MLM’s are popular because of their residual component. But beware when choosing business models, and be sure that you won’t have to spend 40 hours each week recruiting folks in order to keep your “passive” income. Many entrepreneurs own a glorified job, not a passive income stream, because they did not realize that they’d have to work to keep the whole thing going.

Real estate investing is a perennial favorite of investors the world over because it’s never too late to generate passive income from real estate investments of various types. Even with simple, single family rentals, you find elements of all three criteria. It’s possible to automate the buying or selling process to an extent, either through agents or using technology. It’s relatively simple to duplicate. Building a portfolio of 10 properties over a 5 year span is something virtually anyone can understand and implement. And it’s residual. As long as you keep your properties occupied, and manage your expenses properly, your properties can continue to put money in your pocket for years on end. Or you can keep it simple and find companies to invest in that will do all of the work for you, and send you a dividend check.

Whichever model you choose, focus on these three criteria. Even if you think it’s impossible to save enough for a comfortable retirement, that does not mean that you can’t have a decent income for life. We can’t depend on social security checks as our entire income. You must have an income of your own that will pay you regularly even when the day comes that you can no longer work. And rest assured, that day will come. There are many passive income models out there to choose from. Many of them do not require expertise, though you should check out any companies or opportunities carefully. But when done correctly, owning passive streams of income is the true lazy mans way to riches, because you are creating an income you don’t have to work for.
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Donna S. Robinson is a real estate investor, author and entrepreneur located in Atlanta, Ga. Follow her on twitter at donnaconsults. Her latest book, “Basics Of Real Estate Investing” is now available for Amazon Kindle.

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The 1% rule simply states that a property should rent for at least 1% of it’s total value. Put another way, your rental property is worth 100 times one months rent. If your property rents for $500 per month, then it’s worth $500 X 100 or $50,000. If more investors had known and followed this rule during the housing boom years, we would have seen a lot fewer foreclosures on single family houses that were sold as investment property between 1998 and 2007.

The 1% rule is a valuable tool for real estate investors who invest primarily in single family homes, for several reasons. Yes, it is an excellent ratio for rental rate to total value. But it also acts as a control mechanism that functions well to keep investment property values at a realistic level. When real estate investors keep the 1% rule in mind when making offers on properties, they are much less likely to pay too much for a property.

Of course that last statement assumes that an investor has taken the time to do proper due diligence to determine what the realistic rental rate would be for a given property before purchasing it. As obvious as it sounds, you’d be surprised just how often this mistake is made. The biggest mistake one can make in single family rentals is assuming a property will rent for more than the market will bear. Verifying an accurate rent rate before making an offer is essential for making sure that you will not over pay for a single family home that you intend to use as a rental property. From a fundamental perspective, properties that can be rented for at least 1% of their total value are much more likely to have a positive cash flow. Up to a point…

Every rental market has a ceiling beyond which rental rates cannot rise. That is the crossover point between the cost to rent and the cost to own. Once a rental rate reaches a certain point in any given market, it becomes cheaper to buy. Those homes with rent rates that exceed this point will have high vacancy rates and negative cash flow in most cases.

This means that you can’t arbitrarily assume that you can always raise rents to keep up with the cost of a property. For example, in the Atlanta, GA market, where I’ve had years of experience, I have found it to be a consistent rule that you can’t cash flow rentals if the rent rate goes above about $1500. In the metro Atlanta market, where homes are less expensive than many other large metro areas, the vast majority of rental homes rent for less than $1500 a month.

If you approach your property buying by first verifying the most realistic rental rate for a property you are considering, then offer no more than 100 times that amount for the property, you’ll be in good shape if your offer is accepted. If your offer is rejected for being too low, don’t worry. Let someone else overpay and deal with the headaches that will be the inevitable result.

Fundamentally, once housing prices reached a point at which they were low enough to buy at a price that would allow for a 1% rental rate, it was time to start buying. Smart investors know this, and thus the buying has already begun to reach a frenzied pace. As a result, housing has stabilized for now, and prices appear to be improving, though very incrementally. For investment purposes, the 1% rule is a key fundamental that can help you steer clear of cash flow problems, even if you are a novice investor.
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Donna S. Robinson is a real estate market analyst, investor and investing coach located in Atlanta, GA. Follow her on twitter at donnaconsults – Check out her latest book, Basics Of Real Estate Investing just released on Amazon.com

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An alternative investment many are choosing to take is in real estate. As the economy starts to pick up, some feel this the right time to be venturing into investment property. Instead of making employee contributions to pension schemes or squirrelling money away in savings, it could be worth considering channelling that money into a second property. Better still, diversifying your risk by both investing in real estate as well as contributing to a pension may be an attractive solution for your future.

Signs of Recovery

Living as we do in the aftermath of a housing market decline, it pays to be weary when investing in real estate. However, while some investors are still shy of venturing back into real estate, now could be an attractive time to invest. According to the Wall Street Journal last week, the housing market is showing signs of improvement and the S&P/Shiller Home Price Index showed that on a national scale, prices had returned to their early 2003 levels, so perhaps now is the time to buy while prices are still relatively low.

You Can’t Live in a Pension

It may sound obvious, but you can live in a property. Choosing to invest by buying, for example, a rental apartment which is lower in value than your own home gives you options should your personal financial circumstances change for the worse at some time in the future. If monthly mortgage payments on the apartment are lower than the payments on your own home, then if times were really difficult, you have the choice of selling your home and moving into the apartment, thus freeing up any equity from your former home and reducing your monthly outgoings. This isn’t why you invest in a second property as a pension provision; but it can certainly add to your peace of mind.

Keep it Local

If you have lived somewhere for a considerable time, the chances are you know more about your local property market than you may realise. In addition to an awareness of sale prices, you are likely to know about transport links, schools and businesses in the area; all important factors in investing in a good rental property. This knowledge is what could give real estate the edge over other forms of investment for your pension: you may well feel more confident investing in what you know.

Holiday Home Pension

Becoming a landlord isn’t the only way to use property to provide for your future. If you are fortunate enough to be able to afford a holiday home, you have all the same benefits that come with the choice of selling to realise appreciation in price or leasing – perhaps to holiday makers – to take an income, but with the added advantage of being able to holiday there yourself and enjoy your investment in the interim. However, if contemplating a holiday home overseas, be especially diligent in your research and consider local taxes, bureaucracy and exposure to interest rate fluctuations; all of which will have a bearing on the success of your investment.

Financing an Investment Property

With the Fed’s apparent commitment to keeping mortgage rates low and quantitative easing efforts focused solely on mortgage-linked debt; more affordable loans could make purchasing real estate as a pension provision more appealing. Although lenders have been more cautious in recent years, lending is starting to increase and if you have a sizeable down-payment this will work in your favour in attracting competitive interest rates. It may be worth considering fixed rate mortgages now when interest rates are at record lows to ensure you can accurately forecast the return on your investment. With property taxes open to increases, fixing your mortgage could mean one less thing to worry about.

Before approaching a lender for an investment property mortgage, discovering your credit score can give you a heads up on how your circumstances will be viewed and therefore what your options might be. When looking into financing a property investment, care should be taken to ensure that mortgage payments could be met during times of vacancy to avoid getting yourself into an undesirable situation.

Property as a Long Term Investment

Regardless of when you buy, if you decide to invest in real estate as a pension provision, the long view should be taken. One advantage of investing in property is that, assuming you meet the mortgage payments and pay the mortgage in full by the time you reach retirement age, you have the flexibility of taking an income from the property or selling if market conditions are favourable and reinvesting that lump sum elsewhere. It is the potential for appreciation over the long term in addition to the monthly income that can make such investment an attractive prospect.

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Waypoint Real Estate Group, LLC of Oakland, California has already secured a $65 million dollar loan from Citigroup. And according to a recent article in the Wall Street Journal, they are looking to purchase a total of 11,000 single family homes over the next few months.

Waypoint is said to be working on securing even more capital from Citigroup over the next few weeks and has already gotten a $250 million dollar loan from GI Partners as well. It’s getting rather obvious that the big capital companies are ready to give the traditional mom and pop real estate investors some serious competition in the biggest foreclosure markets.

Colony Capital LLC has opened it’s own investing company, known as Colony Homes. Colony just dropped a total of nine million dollars at the September 2012 foreclosure auction in Atlanta, GA, spending all of it in just seven metro Atlanta counties. Gwinnett county in metro Atlanta saw Colony buy three million dollars worth of foreclosures at a single auction. Colony already has around 3000 rentals and is looking to buy another 7000 single family properties over the next few months.

Frustrated with the slow pace of packaged pools of properties, for which investment performance can be difficult to predict, the big investors have decided on a strategy to target individual properties with the better locations in hard hit foreclosure markets like Atlanta, Chicago and Phoenix.

And hold on to your hat…there is talk that the streams of rental income from these properties could be the next big thing in securitization. Isn’t this what almost brought the entire economy to it’s knees in 2008? Yet the banks and the investment companies have made it clear that this could be their next move – securitization of rental income streams.

Wow, just when you thought the housing market might actually be stabilizing, now we hear that this new investing scheme is taking shape. Personally I think that the idea of securitizing rental income is just one step away from total insanity. And if they do, the final step toward global economic annihilation will be to have some credit default swaps handy just in case the tenants don’t pay the rent.

Where is Dodd-Frank when you need it? I’ll bet that there is NOTHING in D-F that would prevent this type of investing strategy – buy up the properties, get them rented, then package up the leases into a nice tranche of “safe” securities and sell them off to your favorite pension fund. Oh yes, happy days are here again for the banking industry. Not only are they able to unload REO’s at a frantic pace, driving up prices for foreclosures, but they’ll securitize them and make another fortune in the process. After all, Uncle Ben Bernanke, the patron saint of bank bailouts is looking down from financial heaven to bless their efforts through QE3.

On thing is for sure, this will have a big impact on the rental property business. It’s not your “mom and pop” rental market anymore. The level of funding and competition from big capital market players is unprecedented. It’s going to add more inventory to the rental market at a much faster pace, in a market where the supply is already exceeding real end-user demand. It’s a feeding frenzy for the “great whites” of the real estate investing world.

The traditional little “bottom feeders” need to beware, the big fish are moving in to swallow you up.
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Donna S. Robinson is a real estate licensee, investor, author and speaker in Atlanta, GA. Follow her on twitter @donnaconsults and read her blog at www.RealtyBizConsulting.com