- The Washington Times - Wednesday, November 12, 2003

Most correspondence I receive inquiring about how to start investing in real estate starts with the foreclosure. It’s quite simply the easiest real estate investment strategy to figure — buy low, sell high (or buy low, rent high).

There are plenty of ways to get started in real estate investing, and here are some short descriptions of how to do it, with the pros and cons listed.

• Foreclosure. Purchase the property at a courthouse auction — preferably for less than it’s worth. Fix it up, and sell it or rent it out.

Pros: This is a common-sense approach to getting started in real estate investing. If you can get the property for a wholesale price and then rent it out for more than your mortgage, you’re on your way to building wealth one month at a time.

Cons: You get into the property and find out it has major problems costing a lot more than you’ll ever recover. Ever heard of concrete being flushed down the drain (usually out of spite by the former owner)? It means having to remove all the sewage drains. Hidden defects can run costs up and give you a red-ink bath before it’s done. Because the bank or note holder is selling the property as is, there’s not much recourse.

• Fixer-upper. Purchase a property that needs major repairs. This is not a property that just needs paint and carpet. This type of property usually has rot, flooring, roofing, basement and just overall problems — but that’s what makes it so enticing.

Pros: For investors with their repair ducks lined up in a row, this can be a great moneymaker. The key here is to hammer on the seller early in the negotiating process. Get the house for as low as possible, and know what your bottom line really is.

Cons: For those wanting to flip the property, if you can’t make $30,000 to $50,000 on the projected profit, then you may want to pass. Why? An unseen defect can run into the tens of thousands of dollars fast.

• Rental investment. Keep your eye open for underpriced properties in an area in which rentals are brisk. This would be a house that really does just need paint and new carpet. Be sure you know what the rents are before going into the property. You want a positive cash flow before you even walk inside.

Pros: A house that is in good shape can rent for years without any major expenses if it was taken care of early on.

Cons: Good rental properties (say, in a college town or near a military base) don’t come on the market often, so you could be waiting a while before you find one.

• “Paper” real estate. Invest in the mortgages of real estate instead of the real estate itself — financing second trusts, purchasing mortgages at a discount, wraparound mortgages, etc.

Pros: For those who have cash, this one can give major returns on your money. For example, if you can pick up a $20,000 note at 12 percent for $15,000, your return on the note jumps to 16 percent. This is not going to fluctuate, as the stock market is sure to do.

Cons: The borrower could skip town, leaving you to foreclose — right behind the first-trust note holder who usually gets paid first.

For more education, find a good agent to start working with who can show you the ropes and help you avoid the pitfalls.

M. Anthony Carr has written about real estate for more than 15 years. Contact him by e-mail ([email protected]).


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