Most prospective investors I talk with want so badly to “flip properties” that they forget at the outset that they are talking about launching a business — a real-estate-investing business.
They simply say, “I want to begin buying and selling real estate.”
Sounds pretty simple, doesn’t it? Find a run-down home — maybe a foreclosure — go through it, repairing and painting walls, replacing flooring, and installing new appliances; put it on the market; and make $50,000 each time.
It isn’t that easy.
Before you set out into the real estate investment world, first consider how the transaction went with your primary residence. The agent probably took care of many of the details, such as lining up contractors for inspection items, helping you with financing and insurance, and even getting the inspector.
If you’re going to start investing on a regular basis, then you’ll want to develop relationships with these professionals yourself and to follow these steps to begin your real estate business:
m Locate financing. All investing hinges on this first action. If you don’t have financing, most likely, you won’t be investing. You’ll want to find a program that will allow you to put as little of your own money into the property as possible. In today’s competitive mortgage environment, there are now investor programs that allow 5 percent down on the investor’s part.
Since you might have remodeling or rehab costs, don’t forget to look for programs that include money for those activities.
If you can get it, try to get owner financing, as this can be the easiest way to get into a property. The owner holds onto the note until you’ve completed your rehabilitation of the house.
You also can try to get the owner to take interest-only payments until you sell, then pay them the balance once the property is sold.
There are plenty of other ways to finance an investment property, so talk with several mortgage providers to find out your options.
• Set up a limited-liability corporation. This protects you from any accidents that may happen during the refurbishing process. If someone gets hurt on your property, they could sue. The LLC is one way to protect your personal property.
m Find a real estate agent. Look for a professional who knows the marketplace you’re interested in to find the properties.
m Line up your contractors. Unless you’re going to do it yourself, then you have to ask the following questions: Do I have the expertise to handle tasks that require trade status, such as plumbing, electrical, heating-ventilation and air conditioning? Can I lay carpet? Can I hang or repair drywall? Can I fix dry rot and carry out other carpentry work? Can I replace subflooring and deck work? Can I repair the roof? If you’re repairing electrical and plumbing systems, you may need to get proper permits and inspections.
m Find a title company. You will need to check out titles of properties.
m Find a settlement or escrow company. These firms assist in real estate closings.
• Find an insurance company. If you’re holding onto the property short term, you’ll need a short-term insurance policy to cover the property until you sell it again.
Here’s the kicker: These steps are necessary whether you want to invest in one property or hundreds of them.
I haven’t even gotten into the tax ramifications of short-term investing. You would more than likely owe capital-gains taxes of 5 percent to 15 percent on all your profit. So, perhaps, among your business contacts, you should include some tax advisers — accountants or attorneys — to help protect your bottom line.
You can make money. You’re going to work hard to do it.
The good part is that returns in real estate investment are usually higher than you’ll find in any other business.
Before you get started, write down your financial goals together with your partner or spouse. Find a real estate agent who can walk you through real estate investing as it pertains to your area, then talk with your accountant about tax liabilities and benefits. Then, make your decision.
M. Anthony Carr has written about real estate for more than 15 years. Contact him by e-mail (manthonycarr@erols.com).
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