The Beginner's Guide to Real Estate Investing by Sally Hansley Odum Investing in real estate is not for the faint of heart, especially during tough economic times. However, during a housing down-turn, you may also find the best opportunities and lowest prices you may see for years to come. A favorite refrain of investors is "buy low and sell high." Welcome to the wonderful world of real estate investing. In California, the housing market in mid-2010 was tumultuous, to say the least. The problem with buying low in a volatile market is that prices may have not dipped completely to their lowest point when you buy. Be Aware of Contingencies Assume you buy a home for $120,000. That sounds like a tremendous deal for any type of home in California. However, what if the market falls even further because of foreclosures in the area, falling home prices, economic climate or some other reason? You may have to hold a property a long time to recoup your $120,000, or you may find a buyer the following week who simply has to have this particular property and is willing to pay you $200,000. That's a quick profit of approximately $80,000--less expenses, fees and so on. But there are many contingencies in such a scenario. Did you think about repairs to the home? Is there any damage that was unknown at the time of purchase, such as termite damage, a faulty foundation, asbestos removal or black mold? Watch Out for Real Estate Bubbles A real estate "bubble" is caused by rapid increases in valuations of property. The valuations increase to unsustainable levels and then the bubble "pops" as prices descend quickly. Many contend that the housing crisis of 2007-2010 was caused by a real estate bubble. There is great debate on whether any type of economic bubble can be recognized beforehand and prevented. Many economists say bubbles can and should be prevented from escalating (thereby reducing the economic fallout and hundreds of thousands of foreclosures), and others believe the market should be left alone. Those who argue that housing bubbles can be identified beforehand point to housing indicators such as the Case-Shiller Index as early warning signals. Such types of housing indicators are very good tools for real estate investors as well. Consider REITs Another way to invest in real estate is to acquire property through Real Estate Investment Trusts (REITs). REITS are professionally managed. This means that you, the investor, do not have to personally go look at all the houses, buildings or properties in the portfolio. You entrust someone else to do this for you. You invest in the REIT and then share in the profits made on the portfolio of professionally managed properties. Finance Finance is one of the biggest factors in real estate investment. Your ability to get financing for a particular property will make or break your deal. With that in mind, it is a very good thing to check your credit report. Every U.S. citizen is entitled to a free report annually and, as of 2010, you are also entitled to a free credit score along with the report. Clean any erroneous entries from the report and try to pay off judgments or low balances that reflect negatively on you. Most experts agree that you should never close an account that has been open for a long time as longevity counts in your scoring. If you are serious about investment as a business, you may want to form a corporation. Forming a corporation limits your personal liability and allows you to keep your personal and business credit separate. Personal savings, co-investors, private lenders and government programs are all options for finance. Real Estate for Challenged Investors Do you have bad credit or low income? There are still options you may pursue. Admittedly, they are not as easy to find as normal financing routes. Most of these strategies fall under the umbrella term of "creative financing." This includes strategies such as lease option, rent-to-own options, real estate flips, government loans and grants (especially USDA and FHA for low income), For Sale by Owner, Owner Financing, assuming Old VA and Old FHA loans and buying foreclosed properties at very low cash prices. Unfortunately, most of the government programs and private lenders do require a good credit rating. However, government programs do have less stringent qualifications (some offer a lower credit rating, lower income qualification and lower or no down payment) than most private lenders. After the housing crisis, private lenders tightened their requirements even further to limit low- and no-documentation loans and buyers who fib about income levels. If you purchase a home with a lease-option (that means leasing a home with an option to buy it later), you may qualify for a second mortgage to purchase it outright, as many lenders treat the lease-option as a first mortgage. The main thing to remember is that "where there's a will, there's a way." This is true in real estate investing as with most things in life. Seller or owner financing was the golden parachute for many now-prominent real estate investors; it may be yours as well. Expert Insight Gain expert insight into real estate investing by reading books by "gurus" in the industry. Take a course in the local college or online. There is always something new to be learned, no matter how much you already know. A mentor will be able to share nuggets of wisdom with you which you might never have learned in a formal class.
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