Mark Prigun - Real Estate Investing for Beginners: The Complete Step-by-Step Guide to Start Your Passive Income Business from the Plan to Finding a Deal with Real Estate Investment Tools and Tips

Real Estate Investing for Beginners

The Complete Step-by-Step Guide to Start Your Passive Income Business from the Plan to Finding a Deal with Real Estate Investment Tools and Tips

By Mark Prigun

Crght 2020 by Mark Prigun;

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Introduction

R eal estate investment includes the acquisition, ownership, management, rental, and sale of land for profit. Realty property improvements as a part of a real estate investment strategy are generally considered a sub-feature of land investment, such as land development. Land is a form of asset with limited liquidity relative to other assets. It is also capital intensive (although capital can also be obtained through mortgage leverage) and is very income dependent. If the investor does not understand and manage these factors well, the land becomes a risky investment.

Real estate markets in most countries are not organized or efficient for other, more liquid investment instruments. Individual properties are unique to themselves and are indirectly interchangeable, which presents a severe challenge for an investor seeking prices and investment opportunities. For this reason, properties that must take up space to locate may involve substantial work and competition among investors, with individual properties also being highly variable upon knowledge of availability. Information asymmetries are regular inland markets. This increases transaction risk, but also provides investors with many opportunities to acquire assets at bargain prices. Land entrepreneurs typically use a proliferation of valuation techniques to ascertain the value of properties before purchase.

Typical sources of investment properties include:

Market listings (through a multiple listing service or commercial information exchange)

Real estate agents and land brokers

Banks (such as REOs and short-sale banks for land-owning departments)

governmental entities (such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and other government agencies)

Public auction (foreclosure sale, sale of the property)

Crepitate sale (transaction by owner-buyer)

Real estate wholesaler and investor (flipping)

Purchase of a listed stock investment is done, once the investment property is located, and the initial due diligence of checking and verifying the status of the situation completed. The investor will need to negotiate the purchase price and the terms of the sale with the seller, then execute a contract to purchase.. Most investors employ land agents and land lawyers to help in the acquisition process, as they are often quite complex, and improperly executed transactions are often costly. During the acquisition of a property, an investor will usually make a reasonable offer to make a purchase to pay "earnest money" to the seller for the deal, ordering the investor's rights to terminate the transaction at the beginning of the negotiation if price and conditions are not satisfactorily negotiated. This earnest may or may not be refundable and is considered to indicate the seriousness of the intent of the investor. The terms of the offer will typically include a variety of contingencies that allow the investor to cease diligence, inspect the property, and obtain financing among other requirements before the final purchase. Within the contingency period, the investor usually has the right to cancel the offer without penalty and to receive a return of earnest deposits. Once the contingency ends, the request is typically required to forfeit the earnest deposit upon resuming the proposal and must include other penalties.

Real estate assets are generally costly compared to other widely available investment instruments (such as stocks or bonds). Only rarely will land investors pay the entire amount of the property's acquisition price in cash. Typically, a large portion of the acquisition value can be financed using financial instruments or loans, such as the collateral of a real estate loan by the property. The amount of acquisition value financed by debt is called leverage. The amounts funded by the investor's capital through cash or other asset transfers are referred to as equity. The leverage ratio of the total estimated value (often referred to as "LTV" or loan to a standard mortgage) is a mathematical measure of the risk an investor is taking to finance the acquisition of a property. Investors typically seek to reduce their equity requirements and increase their leverage, so that their return on investment (ROI) is maximized. Lenders and other financial institutions usually have minimum equity requirements for the land investment they are asked to finance, generally on the order of 20% of the appraised value. Investors looking for lower equity requirements may explore alternative financing arrangements as part of the acquisition of the property (e.g., seller financing, seller subordination, private equity sources).

If the property required repairs

If the property required repairments, then traditional lenders like banks will often not lend on such a property, and so the investor has a hard lender. Hard money loans may require borrowing from a personal lender, like a short-term bridge loan. Hard money loans are usually short-term loans where the lender charges a higher rate of interest due to the upside risk nature of the loan. Hard money loans are generally at a lower loan-to-value ratio than traditional mortgages.

Some land investment organizations, such as the Land Investment Trust (REIT) and some pension funds and hedge funds, have ample capital reserves and investment strategies, which allow 100% equity in the purchase of those assets. This reduces the risk that levitation brings, but also limits potential ROI.

By taking advantage of the acquisition of an investment property, specified periodic payments to service the debt create ongoing (and sometimes large) negative income from the time of purchase. This is sometimes mentioned because of the carrying cost or "carry" of the investment. Land investors must manage their cash flow to minimize enough positive income from the property to offset carrying costs to achieve success.