5 Magic Paths to Making a Fortune in Real Estate

JAMES E. A. LUMLEY is a real estate broker with more than thirty-five years of experience as a real estate salesperson, consultant, and educator. He is also the author of How to Get a Mortgage in 24 Hours and Challenge Your Taxes, both from Wiley.

Preface xiii

Acknowledgments xv

Introduction xvii

Introduction to the Second Edition xxi

CHAPTER 1 Five Magic Paths to Making a Fortune in Real Estate 1

The Five Magic Ways to Wealth 1

Now It’s Time to Make Real Money 5

Guidelines for Getting Started 6

Combine Techniques to Ensure Success 6

Before You Roll Up Your Sleeves 7

Take Some Measurements of Your Market 8

Magic Paths FAQs 9

CHAPTER 2 Making Money with Fixer-Uppers 12

The Fix-Up-and-Sell Strategy 12

Buying a Fixer-Upper 13

Seek Fixer-Uppers in All Price Levels 15

You May Wish to Live in Your Investment 16

Eight-Point Checklist for Making Money with Fixer-Uppers 17

Some Bargaining Ideas 19

Rehabbing: Frequently Asked Questions 20

CHAPTER 3 Finding the Fixer-Upper Bargain 25

Mining for Gold: Target a Neighborhood 25

Find Sellers with Neglected Properties 27

Screen the Seller’s Motivation—Using the Telephone to Advantage 28

Ways to Find Sellers 30

Don’t Overlook Out-of-State Owners 33

You’re Ready to Meet the Seller at the Property 33

Seek Houses through MLS or the Internet 34

Get Agents to Bird Dog Property for You 37

Have a Contact System for Agents and Prospects 37

When You’re Offered a Group of Houses 38

It’s All about Prospecting 39

CHAPTER 4 Finding Foreclosed, Repossessed, or Condemned Property 40

The Perils and Rewards of Buying at Foreclosure 40

Finding Properties before Actual Foreclosure 42

Step In and Negotiate before the Foreclosure 43

Solving the Problems of a Homeowner Facing Foreclosure 43

Taking Over a Qualifying Foreclosure 44

Getting Started with Your First Auction Foreclosure 45

Deciding Whether a Deal Is Good 46

Some Reminders on Foreclosures 48

When the IRS Has a Lien on Property Being Foreclosed 48

Get Acquainted with Auction Procedure 49

Getting an REO from the Bank 50

Use Your Repair Estimate to Drive the Price Down 51

Find Condemned Houses in Respectable Neighborhoods 54

CHAPTER 5 Repairs That Make You the Most Money 57

Start by Getting Accurate Estimates 58

Four Broad Areas of Repairs 58

Six Major Areas of Inspection and Repair 59

From Preliminary Outline to Finalized List 60

A First Priority: Arranging Time for the Repair Estimation 64

Early Inspections Avoid Problems Later 64

Typical Repairs You May Encounter 65

What Repairs to Avoid 66

Always Solve Code Violations 66

Getting to Know the Bricks and Mortar, or, The More You Know, the More You’ll Earn 67

Special Problem of Dealing with a Cracked Foundation 69

Another Common Rehab Problem: Fire Damage 72

Six-Point Checklist for Fixing Up 72

CHAPTER 6 Valuing Properties Is the Key to Profits 74

Judging the “After Repairs” Value 74

Repair Costs Lead to Finding Value 75

Getting Started in Valuing Houses 76

You Start by Finding Comparable Properties with Recent Sales 77

Doing a Mini-Appraisal 78

What to Consider in Determining Value 79

Making Adjustments to Equalize Value 80

Features to Adjust in the Mini-Appraisal 83

Pricing Adjustments Accurately Improves with Experience 85

Make Sure Comparable Sales Are Arm’s-Length Transactions 85

Neighborhood Prices Tend to Cluster 86

CHAPTER 7 Negotiate to Get Your Offers Accepted 87

How Much Profit Do You Take? 87

How to Determine Maximum Offer Price 89

Now That You Know Your Limit, Where Do You Start? 91

Use Repair Costs to Convince the Seller 94

Be Ready to Walk Away If No Solution 97

Make Offers on a Regular Basis 97

Seven-Point Strategy to Get Your Offers Approved 98

Always Use “Contingent on Financing” Clause 101

CHAPTER 8 Wholesale Property for Steady Gains 103

What Are the Basics of Wholesaling, or Flipping, a Property? 103

Getting Started with Wholesaling 104

Advice for a Newbie! 107

Searching for a Property to Flip 108

To Whom Do You Wholesale? 109

Run an Ad to Attract Investor-Buyers 110

Make Sure Your Wholesale Buyers Have Cash or Credit Line 110

Finding Cash Buyers for Wholesale Property 111

It’s All about Establishing Relationships 112

Why a 3% to 8% Profit in Wholesaling Fixer-Uppers? 113

Contract Provisions for Wholesaling 113

Using Two Contracts to Separate Seller and Buyer 115

Problems and Solutions in Wholesaling 116

CHAPTER 9 Financing I:Working through Conventional Lenders 119

The Differences between Home and Investment Mortgages 119

Down Payment and Closing Costs 120

Shop for Mortgage Loans 120

What Types of Mortgages Are Available? 121

Comparing Different Mortgages 122

Two Ways to Qualify for Fixed Rate Loans 123

Second Mortgage Financing from a Conventional Lender 123

Cash from a Home Equity Credit Line 126

Be Prudent in Risking the Equity in Your Home 129

Using a Blanket Mortgage to Cover the Down Payment 129

Consider a Construction Loan to Finance Repairs 130

Credit with a Commercial Bank Is Better than Gold 131

Rehabbing through the FHA 203(k) Loan 131

Fannie Mae HomeStyle Loan 135

CHAPTER 10 Financing II: Help from the Seller 136

Secondary Financing from the Seller 136

Seller Financing with Second Mortgage 137

When Seller Financing Is All That’s Available 138

What “No Money Down” Really Means 138

Buying “Subject to” and “Assuming” an Existing Mortgage 139

Problems of Buying “Subject to” 141

Takeover with Management Agreement and Escrowed Deed 143

Using a Land Trust 143

Using Credit Cards to Help with Down Payment 144

Word of Warning 145

Title I Loan Guarantee 145

Questions and Answers on Financing 146

A Final Note 148

CHAPTER 11 Lease/Options I: Arranging Rent-to-Own with Tenant-Buyers 150

Be a Matchmaker 152

Owner’s Reasons to Participate in Lease/Option Are Varied 155

Make the Lease/Option Appeal to the Seller 155

Making a Lease/Option Offer 156

Doing the Typical Lease/Option Deal 158

Your First Lease/Option Deal 161

Making Sure You’ve Got a Great Deal 162

Five Ways to Find Tenant-Buyers 165

Use a Lease/Option to Take a House with Little Equity 166

A Final Note: Keep a Working Relationship with Your Agent 167

CHAPTER 12 Lease/Options II: Arranging Contracts and Closings with Tenant-Buyers 168

Structuring a Safe Lease/Option 168

Advanced Techniques—Use Lease/Purchase/Option to Sell Fixer-Uppers for Best Price 169

What Is the Difference between an Option and an Agreement to Purchase? 172

What Should Be in Lease/Option and Lease/Purchase Agreements 174

Keep Your Right to Assign Contract with Owner 176

Whom Do You Make Responsible for Repairs? 177

When Your Tenant-Buyer Wants to Change the Terms 177

Making Sure the Lender Accepts Rent Credits 178

Does a Lease/Option Trigger a Due-on-Sale Clause in the Mortgage? 179

Working Out a Simultaneous Closing 180

With Sellers You’ve Got More than One Arrow in Your Quiver 181

CHAPTER 13 Buy-and-Hold I: The Single-Family 182

Buy and Sell, or Buy and Hold 182

The Buy-and-Hold Strategy 183

Buying and Renting Out the Single-Family 183

Using Quick Ratios to Value the Single-Family Rental 184

The Five Tools That Lead to Wealth 187

A Capital Gains Tax Review 189

Maintaining Investor Status with the IRS 190

Exchange of Property to Preserve Long-Term Gains 191

One Indispensable Tool—The Financial Calculator 192

Example A: The Time Value of Money 193

Example B: Accumulated Interest and Loan Balance after a Specified Payment 195

Example C: Buying a Rental House 195

The Present Value of an Investment 197

CHAPTER 14 Buy-and-Hold II: The Multifamily 198

Why the Multifamily Is a Great Long-Term Investment 198

Target Properties That Throw Off Cash 200

Create an Accurate Income and Expense Statement 201

Start by Researching Rents, Vacancy Rate, and Expenses 201

Net Operating Income Is Basis for Establishing Value 208

Working with the Capitalization Rate 208

Cap Rate Is a Function of Building’s Age and Condition 210

CHAPTER 15 Finding the Value of an Income Property 213

A First Deal: Using Cap Rate to Peg Value 213

You Really Want to Know How Much Cash Is Left Over 217

Valuing Future Income—Discounted Cash Flow Analysis 217

Discounting Cash Flow after Financing 219

Internal Rate of Return 221

Depreciation and Interest Deductions Determine Your Taxable Income 223

Your Cash Flow after Taxes 226

CHAPTER 16 Making the Offer on the Multifamily 228

Beware of Gross Rent Multiplier 228

Using the Capitalization Rate to Know What to Offer 229

Again, Once You Decide to Buy, Make Two Offers 230

Deciding to Buy or Not to Buy 232

If It’s Not Worth Selling, It’s Not Worth Buying 236

Raising Rents Leads to More Value 243

Working with Agents on Multiunit Deals 244

CHAPTER 17 Financing the Multifamily 247

Cash and Skills Help Gain a Conventional Loan 247

Knowing the Lender’s Guideline—The Debt Coverage Ratio 248

Getting the Seller to Finance 249

After a Conventional Lender Takes the First Mortgage 249

Tax Law Promotes Seller Financing with an Installment Sale 250

Using a Land Contract to Bypass the Bank 254

Take Over a Large Mortgage 255

How Long Do You Want Your Mortgage to Run? 257

Accelerated Mortgage Payments in Perspective 258

Some Financing Guidelines 259

More Creative Techniques to Make a Deal Work 260

The Roth IRA 263

When Taking In a Partner Can Make More Profit 264

CHAPTER 18 Managing Your Property 266

First Time Out: Be Your Own Landlord 266

What a Property Manager Does 267

Getting Good Tenants 269

A Landlord’s Primer 269

When All Else Fails: Removing Late-Paying Tenants 273

On Looking for a Good Property Management Company 276

Your Liability as a Landlord 276

Limit Your Loan Liability to the Property 277

Should You Form a Corporation or Limited Partnership? 278

CHAPTER 19 The Magic Formula for Success: Use Flexible Strategies 279

Be Flexible—Profit with Different Strategies 279

Choose the Best Technique to Create Wealth 280

Before the Finish—Use an Attorney 281

Plan Ahead to Reduce the Risks of Real Estate 282

Knowledge Gives You Confidence 282

Let People Know You Deal in Property 283

Work Hard to Become Known 283

CHAPTER 20 How You Benefit from the New Tax Law 285

Recent Tax Laws Keep Dollars in Your Pocket 285

Sheltering Taxable Gains from Your Home 286

Using the Gain Exclusion with Multiple Residences 288

Tax Rules for Second-Home Ownership 289

Should You Turn Your Own Home into an Investment Property or Sell It? 291

Are You a Dealer or an Investor? 293

The Tax-Deferred “Starker” Exchange 295

Combining the “Exchange” with the “Exclusion” 299

A Final Note 300

EPILOGUE Success Is Not about Education, or Even Hard Work—It’s about Following Through 302

TIPS TO REMEMBER 303

FINAL THOUGHTS 305

Index 307