Three Real Estate Investing Secrets

The following real estate investing secrets are not so much secrets as they are principles that are not widely applied and often ignored. Use them and you will have less risk and a greater chance for success.

1. Speed Equals Profit

When investing in a fixer upper, many people are tempted to do everything themselves, from repairs to improvements and even selling on their own. Although this can work, if you are not very skilled you can end up spending just as much on some repairs and improvements as it would have cost to pay a contractor. But that's not the only problem with this strategy. The bigger issue is time.

Time is money they say, and this is certainly true in real estate. Between interest on the money you borrow, utilities, taxes, and insurance, your cost of holding a property might be $700 per month. If to save money you do your own repairs and so spend an extra six months on a project, you just spent $4,200 of your savings. Keep that in mind when deciding whether to hire help or not.

In addition, your plan is based on the market value you figure at the start. If conditions change while you are working on a fixer upper, you may end up selling for less. The longer the process takes, the more likely this is. Of course prices could rise as well, but making a little less profit from turning the property fast is not as bad a risk as losing money because of slowness in a declining market.

2. Cash Flow Trumps Appreciation

It certainly was fun for investors a few years ago when prices were rising fast. In many towns and cities you could buy homes and just sit on them for a year. You might pay out $10,000 holding a house, but then you made $25,000 profit when you sold it. Of course at the end this strategy burnt a lot of investors.

On the other hand, when you buy in a real estate market with strong rental demand and you buy at a price that assures you'll have positive cash flow, what happens to prices doesn't matter so much. This is often missed by those who look at real estate as more speculation than investment. In fact, the value of your rental house can drop for thirty years and you can still make money.

Suppose you put a down payment of $20,000 on a $100,000 home and rent it out for enough to make $100 monthly in cash flow, and eventually $200 monthly as rents rise over the years. Now suppose that by the time you pay off the mortgage thirty years later the neighborhood has declined and your house is worth only $50,000. Over the years you will have collected $54,000 in cash flow (assuming an average of $150 per month), and you could sell the house to collect another $46,000 (after selling costs). In other words, the home loses half of its value, but you still turn $20,000 into $100,000 ($54,000 cash flow plus $46,000 from the sale). That's the power and safety of buying for cash flow.

3. Low Offers Lower Expectations

People imagine themselves making an extremely low offer on a property and having it accepted by a desperate seller. But in reality, offers of 20% below the asking price are very rarely accepted (although somewhat more often at the moment - 2009). Now, there are some investors who still write a lot of very low offers because if you do this enough some seller will say yes. The problem with that as a real estate investing strategy is that it takes a lot of time to look at properties and now even a lot of time to write an offer. You could spend a year trying to get that "great deal," and the one who says yes might have the worst property.

But you may not know the following real estate investing secret: low offers are not meant to be accepted. If the seller says yes - great. The real purpose though, is to lower expectations. In other words, you won't get that 20% discount, but you might lower the seller's expectation enough that you'll get a 10% discount. Low offers work best as a negotiating ploy.