There are several strategies in Real Estate Investments. Traditionally, buying rental properties have been a good source of income that others (tenants) pay for mortgages. However, with the new economy and new creative minds, others have come up with different methods of real estate investments. Depending on your time, comfort level, risk tolerance and budget constraints, you can find a strategy/ niche market or a combination of different strategies to work in your area and needs. The investment properties can be single family houses, multi-units and commercials.

| LANDLORDING | FLIPPING | WHOLESALING | REHABBING | RETAILING | LEASE-OPTIONING |  OWNER-FINANCING | WRAPPING | TAX LIENS |
  
 

LANDLORDING 
BUY AND HOLD rental/ income-generating properties is one of the oldest methods that most people are familiar with. In short, when you know your mortgage payments, property taxes, maintenance expenses and your rents are higher than your expenses, you produce a monthly cashflow. However, your cashflow may be positive or negative. (Positive if your rents are higher than your expense and vice versa). Depending on your areas, your cashflow for your properties may be negative for the first few years. Some places like California and New York may fall into this category. At the same time, when you did not purchase the properties at the right price to begin with, you may also sometimes suffer a negative cashflow. Therefore, education is crucial in the success of your investments.
A niche market of the rental investment opportunity is low-income housing. Most cities offer this program to alleviate themselves to provide housing for the low-income residents. Therefore, the cities partner with "investors". All or a portion of the monthly rents are paid by the cities. One of the huge benefit of this program to investors are timely and direct deposits of rents from the city. The common myth about renting to low-income people is that "tenants trash your properties". Most cities now have regulations that mis-behaved tenants may be terminated from the program. For more information on Section 8 housing, please download the presentation.

Section 8 Housing  Presentation

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FLIPPING
Flipping means buying and re-selling quickly with intentions of a profit. Basically, there are two methods of flipping. One: to flip wholesale to a rehabber or investor; second: to flip retail to a home-owner. Flipping wholesale can be quick while flipping retail may depend on the condition of the home and/or home-owner may want to purchase the property in its condition. Most new investors can start their new business this way because it requires hardly any money and credit. If the flipper can find a buyer before closing, the down payment and credit of the "buyer" is used, not the flipper's. To flip a property, first, make an offer on the property. Then he/ she buys the property with his/ her "name and/or assigns" on the contract to protect his/her vested interest in the deal. At closing, the flipper collects an assignment fee (typically between $500-$3000). Since this method is relatively simple and quick, the profits from these investments may be comparatively small.

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WHOLESALING
Investor who are interested in wholesaling may buy properties from other investors or homeowners. A wholesaler buy properties in its "as-is" condition and turn around to sell to other investors or rehabbers. This method, similar to flipping can generate some quick cash. Since the wholesaler generally put money as down payment, the profits for him/her could be better than a flipper. At the same time, there are very fine lines between a flipper and a wholesaler. As an investor, no matter which side of the table you are on (as a buyer or seller) remember to always leave something back (ie profits) for the next person.  

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REHABBING
A rehabber purchase a property that needs work. The type of property that a rehabber selects to work on may involved from light cleaning and clearing up to total run-down conditions. The rehabber can decide if he/she wants to do the actual work himself/ herself, hence retains a higher profit due to savings in labor. However, if you do not have experience as a handyman, the chore of rehabbing can be over-whelming. 
It does not really matter which strategy you select (flipping, wholesaling and especially rehabbing and retailing), the better decisions you make about knowing how to "walk" your properties, what to look for and how to spot problem areas, and the repair costs, the smarter decisions you make about the price you offer for the property.

Working with other contractors on your properties can be an effective learning experience. Get a contractor to walk with you on the properties. Receive the estimated repair costs in writing and add an allowance, probably about 30% extra because it is difficult to provide an accurate visual repair costs. Plumbing, electrical and foundation problems are some of the harder areas to estimate.

"Buyers of ugly properties get the best terms"
 
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RETAILING
A retailer just like any business buys at wholesale prices and sells at retail values. In the real estate business, for a retailer to purchase at wholesale price must either purchase the property at retail price and add "value" through improvements. For example, a second bathroom, tile flooring and high quality cabinets, energy improvements. Kitchen and bathrooms are areas that will provide the retailer the most bang for the buck. A swimming pool on the other hand, do not provide the equivalent value as the investment. It usually makes the property easier to sell, if it is one of the criterias of the buyer. Typically, a remodeled bathroom returns 81% to the owner, a bathroom addition, 89 % and a master bedroom suite, 82%.Quality pays. Well-planned and well-executed remodeling jobs are a good investment while bad work seldom enhances value or livability.

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LEASE-OPTIONING
Lease-option is another strategy of Real Estate Investing. In simple terms, it is renting/ leasing with the option of purchasing the property at the end of the option period. Lease-option is a new method of landlording except that this method of Real Estate investment does not require any property maintenance. As a result of this, the landlord/seller offers a rent credit to the tenant/buyer. When the tenant/buyer signs the contract to lease-option, the tenant/buyer puts a downpayment that can be forfeited if the option to purchase is not exercised. If the purchase is exercised, the downpayment goes towards downpayment at closing.
A lease-option can also be used where the investor does not own the property. He/She lease-options the house from the landlord/seller and turns around to sub-lease/option to the tenant/buyer. The investor gets a spread/ profit with this method. Hence, very little upfront money is required from the investor.
 
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OWNER-FINANCING
Selling an Owner-Financed property involves negotiation and agreement in writing to a price, interest rate, payment schedule and covenants regarding possession, repairs, maintenance responsibilities and tax responsibilities. Basically, the buyer gives the seller a down payment and regular payments as agreed and the seller gives the buyer a deed to the property when it is paid in full. So many events can occur during this long-term agreement, it may not protect the buyer's interest; any liens or judgments placed against the seller will also attach to the property. If buyer decides to sell the property before it is paid in full, the seller will have to agree and sign the deed to transfer the property to the new buyer. Therefore, owner-financing for a long-term is not a good idea.

Seller can provide first mortgage to buyer. The advantage to the buyer is the property is in buyer's name and it is much easier to remodel, refinance or resell. The seller cannot just kick the buyer out on the property or change the locks without proper authorization. Unless, the buyer abandon the property, the seller has a covenant in the mortgage or contract to allow seller to protect his/her interests. Any legal resolution of a problem must be mutual. Seller can also carry a second mortgage. The seller may assist with closing costs and down payments or provide partial financing.

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WRAPPING
Wrapping involves two mortgages. In simple terms, the seller who still has a loan in place can "wrap" a new loan (higher interest rates) around the existing mortgage. The investor profits from the "spread" - difference between existing and new payment. The investor assist buyers with less-than-perfect credit to eventually own their own homes. Pay close attention to the "due on sale" language (the "acceleration" clause) to see if it is possible to have wrap financing.

EXAMPLE:
 
Purchase Price: $100,000
Amount down: $10,000
Loan Balance: $90,000 at 5.5% (30 yrs) $511/mth
Wrap Loan: $90,000 at 8% (30 yrs) $660/mth
Spread (Profit): $ 150/mth
Wrap Loan: $90,000 at 8% (15 yrs) $860/mth
Spread (Profit): $ 349/mth
 
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TAX LIENS
Texas is a deed-state. Tax foreclosures in Texas are judicial foreclosures and require court permission before a foreclosure can proceed and are governed by the Texas Property Tax Code.

When an owner owes property taxes, the property is sold by the county sheriff. Sheriff sale occurs on first Tuesday of every month and these properties auctioned at the courthouse are foreclosed on to collect delinquent taxes or to execute a judgment. The opening bid at these sales is generally just back delinquent real property taxes, penalties, interest and foreclosure costs. The secret investment to this is the possibility of purchasing property for a mere fraction of that property's current fair market value.

When a property goes into auction, anyone can bid on the property. Usually, the opening bid is the amount owed. The highest bidder gets a deed to the property. The deed is encumbered by a "right of redemption." That is, the property owner can purchased back the property. For homesteaded and agricultural use properties, the right of redemption is two years; for all other properties, it is six months.  Penalty must be paid to the "bidder" if the homeowner who wants to purchased back the property (25% if repaid in 1 year and 50% if repaid in 2 years.) Under the Texas law, the bidder now owns the property. And, as part of that ownership, he/she is entitled to collect the monthly rents from the homeowner. Furthermore,  the rents collected could not have been applied against the amount necessary for the property owner to redeem. If either of the properties had been redeemed, the couple would have gotten their 25% or 50% penalty return plus the rents collected. The tax lien "takes priority over the claim of any creditor of a person whose property is encumbered by the lien and over the claim of any holder of a lien on property encumbered by the tax lien, whether or not the debt or lien existed before attachment of the tax lien. The Texas tax lien is like a first deed of trust - only better. Consequently, when both of their deeds became deeds absolute, any and all liens outstanding against the property were wiped out. The bidder now owns the bargain purchase completely free and clear of all other liens!

TAX SALE EXAMPLE:
 
Property A: Opening Bid is $2,400 (the minimum bid), worth $50,000. Homestead property (24month redemption-period).

If Homeowner redeems in 1 year, profit to the bidder:

$2,400 + 25% penalty = $3,000
Rent collected (12 mth x $500/mth) = $6,000
Total Investment = $2,400
Total Profits = $6,600
ROI = 275% in 12 months 
If Homeowner redeems in 2 years, profit to bidder:

$2,400 + 50% penalty = $3,600
Rent collected (24 mth x $500/mth) = $12,000
Total Investment = $2,400
Total Profits = $15,600
ROI = 650% in 23 months 29days 
If Homeowner did NOT redeem, profit to bidder:

Total Investment = $2,400
Total Profits = $50,000
ROI = 2100% in 24 months (CLEAR TITLE)
 
Note: These examples are just illustrations of the possible ROIs. However, the bank who has the deed of trust most likely will not want to loose the property at auction because of just the property tax amounts. 
 
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