It is time to take what you have learned and start applying it to the area where you are going to invest. Now you must learn everything you can about your local market. The more you know, the better your investments can and will be.

Each community has prime, and not so prime, investment opportunities waiting for you. It is up to you to find each, and invest in only those that make the most sense for you and your plans.

Do not overlook the information in this chapter. Your knowledge of your local area will be one of the most important keys to your success as a real estate investor.

One of the biggest advantages you can create is learning everything you can about your local market area. By now, from reading this book, you should be forming a good idea of where you are going to invest in real estate. In the beginning, the properties should ideally be within a half hour or less of your home. As you learned in the last chapter, you should not be focusing on distant properties, at least while getting started.

Depending on where you live, that probably means you should only be considering properties that are in about a 25-mile radius from your home unless you live in a sparse location. Using a map, draw a circle, and highlight it. This is your investment circle, where you will be focusing your efforts. The smaller the circle the better, and the easier it will be for you.

As you closely look at your investment circle, start identifying the following:

After gathering this information, it is time to start taking action. For the beginning investor, here is a list of actions you should check off within the next 90 days:

It is critical that you stay informed about the community where you are going to invest. Newspapers routinely cover school board meetings, town meetings, and county commissioner meetings. Many people pay little attention to what occurs at these local government meetings, yet what the local officials decide can affect your real estate investing business. It is here where local tax rates are set and levied. It is here where plans for new schools, new roads, developments, expansions, land use, and so much more are decided. Any one of these factors can affect your business.

For example, the local school board might have approved construction of a 400 million dollar high school in an adjoining town. Property taxes for that school district may be increasing as a result. Properties in that area might become cheaper as homeowners or other investors decide to get out now. Alternatively, once the better school is built, people may want to live in that district so they can send their children to a new and better school. This is the knowledge you must always be gathering as an active real estate investor.

Meeting working real estate agents in your investment area is good for the active real estate investor. Be sure to tell the agent that you are an investor. Be prepared to tell the agent what properties you prefer. Always be courteous and polite. Take the opportunity to look at the property when visiting at an open house. You are gaining important knowledge just by browsing at a property offered for sale.

Local news is often presented with huge fanfare. Do not act impulsively when the local media announces a tax increase or other “shattering” news. Take time to absorb the full story before acting. A tax increase, for example, might mean a $40 a year increase for you. But the media may make the local increase sound much bigger—they have to sell advertising in their newspapers, or on their airwaves.

Real estate is a competitive business. Once you make the decision to begin searching for an investment property, you are pitting your wits and experience against other real estate investors with years or even decades of experience. How can you expect to win? First, understand your competition and second, apply the experience you already have.

Your competitors come from two areas—buyers looking for homes for themselves to live in and buyers who are buying for investment (in other words, other real estate investors). The buyer looking for a home to live in will most likely have a different mind-set than an investor. Despite all that has been written about how to profit from fixer-uppers, most buyers looking for their own home are looking for something that is already in move-in condition.

The good news is that your real estate investing competitors were once beginners too. It should make you feel good knowing that because they were successful, you can be also. The chances are that many real estate investors with extensive experience have probably moved on from the beginning investments to other opportunities.

There are some quick ways you can start now as a real estate investor.

One way to get started is to buy your own home, especially if you do not have one already. The best financing rates and terms in residential real estate are reserved for the owner-occupant. You will have access to these favorable terms so long as the property you are buying has no more than four residential units. A four-unit property is still treated as owner-occupied property as long as you live in one of the units.

You can start today as an investor by buying a four-unit with an FHA Loan, a loan guaranteed by the Federal Housing Administration, which is administered by HUD. An FHA loan is obtained from a local bank or mortgage broker. You only need a 3 percent down payment to qualify. Closing costs (up to 6 percent) can be paid by the seller. Best of all, the down payment can be from a gift from a blood relative, government entity, or nonprofit association. You do need to plan to live in the property to qualify for the loan.

There are a number of strategies that involve living in your own investment property. You could move into a fixer-upper, make any needed repairs, improve the appearance, then move out and rent out the home, or sell it for a profit. This works for either a single-family home or multifamily property. However, there are many pitfalls to this strategy:

In general, only you can decide how investing in real estate fits into the lifestyle you and your family would like to have. If you are thinking of embarking on a strategy that will require your family to live in a construction site, live next to tenants, or move more frequently, get your family’s support. They need to understand the benefits to come and not just the sacrifices to be experienced now.

Being able to live in your own investment property is a great way to start, but it is an avenue that is often not available for every beginning investor. Regardless, there will come a time when you will want to begin acquiring properties for investment that you will never live in. For many, if not most new real estate investors, that time will be when they buy the first investment property.

Happily, many of the strategies for finding a property to invest in are the same whether you intend to live in the property or not. In fact, there will be more properties that you will be able to consider for investment if you do not have to meet the restrictions you may impose on yourself for a property that you would be willing to live in. For example, if you want your children to be able to stay within the same school system, then you are restricted by where you can move and the properties that you can consider buying as a real estate investor.

Some of the most logical ways to look for properties include the following:

Use your imagination to get the word out that you are an active real estate investor.

Your search for real estate investment properties is going to take time. You might get lucky and locate a property immediately. But most likely, you will need to look at many different properties before finding one that meets all the criteria that make it a great investment property for you.

Remember there are other investors out there. Everyone wants the easy deal—the one you can buy with little down payment, bought far below market value, with exceptional cash flow. You have to search extensively to find such deals—and they only come along now and then. Most deals will require work on your part—searching and analyzing to determine if the property would make a good investment.

To be successful as a real estate investor, you need to market yourself, and let others know that you buy and sell real estate. Just like any other business, you need to get the word out about what you do. This is especially true if you are going to acquire preforeclosure properties. This is because you want potential foreclosure property owners to call you before the property begins the foreclosure process and becomes public knowledge. At that point, you will be competing with other investors.

When searching the real estate ads looking for properties, there are certain key words that will often indicate that the seller may be looking for a fast transaction. Often, these types of sellers are those who might be willing to take less, or agree to pay additional closing costs, or perhaps offer partial seller financing to make a deal work.

Some of the key words you might see in advertisements are:

All of these words suggest the current owner might be willing to sell the property quickly and is looking for a deal now.

As you continue to review the real estate ads, you will soon discover properties that are being advertised for sale week after week. You will see other properties that move quickly. A property that is constantly advertised and not sold is property that may be overpriced.

Read not just the advertisements for properties for sale, but also for properties for rent. It is important to learn what a one-, two-, or three-bedroom apartment in any specific area is renting for now.

Look at the business property and investment property sections of the advertisements, too. Do not overlook any listing in the real estate section of the newspaper.

You have already learned a great deal about how to find properties to buy. So far you’ve learned about the conventional methods investors have applied and been successful with for decades. If you likewise work hard and apply these methods, you should be able to acquire investment properties at a fair price.

However, there will be those investors who demand more. Some investors are willing to go the extra mile to catapult their investments forward by ferreting out true real estate bargains. If you see yourself in this description and you are ready for the additional challenge, this next section is for you.

Earlier, you read about how knowledge was key to getting started in real estate. In fact, the first three rules for getting started are knowledge, knowledge, knowledge! To stay ahead of your competition, you want to leverage the knowledge you already have. This is why you will want to draw your investment circle close to home.

Chances are, if you have been living in your current community for any reasonable amount of time, you already know which communities have the great schools, the better shopping, lower crime, and faster appreciation than surrounding areas. Whether you realize it or not, you already are an expert on your home turf. You just need to start paying closer attention.

Start with your drive to work or your typical route when you are running errands. Start taking note of the properties that you drive by each day, and not just the ones that have a sign indicating that they are for sale. Look at everything. What you are looking for are properties that are not improved to their full potential. This could be something as simple as the property with the peeling paint and the unkempt landscaping, or it could be something subtler. For example, make note of the property that underutilizes the land it was built on. Consider a small home on a large lot in a desirable neighborhood. The lot may be worth more with the small home removed from the property. Or maybe the lot can be subdivided into two lots, creating additional value.

If a property has potential, but it does not appear to be for sale, research the ownership and contact the owner anyway. Often, the owner will have no interest in selling, but once in a while, you will hit on a great deal.

Once you have exhausted the properties on your work commute or on your errand route, start deliberately taking a new route to work or on your errands. Yes, this may be more time-consuming. However, if you make a few good deals, you may never need to drive to work again by any route.

Truthfully, while taking note of the properties that you come in contact with through your daily commute or chores is a good start, you probably will need to apply a more deliberate effort to finding the right investment property.

The first step is to decide on a neighborhood to invest in. Within the 25-mile radius of your investment circle there are probably some neighborhoods that are appreciating more rapidly than others. Some neighborhoods may be stagnant, and some areas in decline. The obvious solution may be to gravitate toward the appreciating neighborhoods. However, future expected appreciation is almost always going to be factored into the present prices. The result is higher prices. You may even be priced out of some of the best areas.

An alternative strategy is to target the neighborhoods that you think are poised to take off and experience a rebirth. In essence, you are applying the same thinking that you used to identify individual properties that are not at their full potential to identifying entire neighborhoods that are not realizing their full potential.

Before you embark on a strategy of trying to predict the future for a neighborhood, you should understand some fundamentals of the risks associated with real estate. Every investment in real estate assumes certain predictions about the future. For example, you may be assuming that there will not be massive layoffs or that a neighborhood that is desirable now will be desirable in the future. As you begin to assume that circumstances in a particular area will be dramatically different from how they are now, you are beginning to make bolder predictions about the future and are therefore taking on more risk. Perhaps this is not a risk that you should be taking. You do not have to make wild gambles to be successful in real estate investing. But if you want to get on the real estate fast-track, you may need to be more aggressive about finding those sleeper neighborhoods and investments that are waiting to be rediscovered.

Any conclusion about a neighborhood experiencing a renaissance must be based on something more than wishful thinking. You do not want to be a pioneer with your first real estate investment. If the neighborhood you are considering is legitimately poised for growth, there will be signs of that potential even before the growth takes off and everyone becomes aware of this new great location.

Gentrification is the process of reclaiming old deteriorated neighborhoods. Signs of growth include the wonderfully remodeled home in among the derelict houses that are ready to fall down. On further investigation, you may find that by driving around other parts of the community, there may be a few more of these freshly minted diamonds in the rough. If there are too many of them, maybe your discovery has come too late.

Whether you are considering an individual property or an entire neighborhood for investment, you should be asking yourself how this property or neighborhood could dramatically increase in value, commanding higher rent and making available higher cash flow. Most of the time you will not know the answer to how a particular neighborhood or property could be improved. This is because most properties and neighborhoods are already at their maximum value, or at their highest and best use. If you cannot determine how a property or neighborhood can be improved, perhaps you should just keep looking at other opportunities.

There is no requirement that you get involved in gentrification to be successful in real estate investing. This is just one proven strategy that has worked for many real estate investors in the past. The key is to find and develop your own niche or strategy that you can employ over and over on your way to success.

For example, David knows of an investor who routinely buys single-family rental homes that do not have a garage. He then adds a two-car detached garage to the property. This investor finds the whole is greater than the parts. By adding a garage, he expands the number of potential customers that would be interested in renting the property. With increased demand comes a higher price, both in rent and resale value.

Whatever investment strategy you may develop, knowledge will always be the foundation of your investment approach. Become an expert in the neighborhood where you intend to invest. Before you buy, you should have a good handle on what the sale prices have been on the properties in your area. You should know the rental market equally well. You should be able to walk into an open house in your area and know immediately whether the home is priced within reason. Similarly, if you visit a property for rent you should be able to discern quickly whether the rent asked is above, below, or at the market price. If you are not confident about your opinions in these areas, you are not ready to buy investment property yet. Keep doing your homework.

There will always be properties to avoid. There are some deals that no matter how good they sound, you want someone else to buy rather than you.

One of the first questions you should always ask yourself is, “why is this property for sale?” The answer is important. Understand that sometimes there are two reasons the seller has for selling—the reason that he or she tells you and the real reason.

Most of the time, real estate properties are offered for sale for good and valid reasons. It could be the simple desire to move on. There could have been a death, birth, marriage, divorce, job change, or some other legitimate reason.

Often, you may never be able to discern the true reason someone is selling their property. Sometimes, however, the property is being sold because there are major problems with it.

The property may be offered for sale because of a foreclosure. Many times, foreclosure properties can be problematic because the people living in them did not have the money to maintain the unit, or deliberately caused damage when they realized they were going to lose the property.

Be leery of any property being offered for sale by another investor. Investors do not get rid of properties that are producing a positive cash flow unless they are moving on to some other investment. Or perhaps the investor is retiring. Otherwise, if the seller cannot make money from the property, ask yourself why you think you can.

Investment properties come in all sizes, shapes, and styles. You could invest in multimillion-dollar properties, or smaller, $30,000 units.

The price point is not a factor in determining what makes a good real estate investment. Would you be better off buying a property for 2 million dollars that brings in gross revenue of $300,000 a month, but costs $400,000 a month to operate? Or would you be better off buying a property for $100,000 that brings in $1000 month and costs only $500 a month to manage? Bigger dollars do not make a property a better investment.

The best properties to produce rental income are …

The best properties to buy and resell immediately are …

The best properties to buy and rehab are …

Of the three types of properties to acquire for real estate investing, notice that each has two similar characteristics. They should be close to your home and easily obtained through financing. Finding properties that meet your criteria is what most of the work of being a real estate investor is all about.

The bargain properties—the ones you want to buy—are in your investment circle. You just need to locate them. Some will be great bargains, while others will just be reasonably priced. What follows is a list of still more ways to look for properties at discounted prices:

In Chapter 5, you learned about how the appraisal theory applies three value yardsticks determining the value of a real estate property. These yardsticks are:

This is how lenders, real estate agents, and insurers will determine the value of real estate. As an investor, you need to look at each property a bit more critically. We will call this the Investor Approach.

The investor approach is where you apply the appraisal theory, but you also include other factors before moving to purchase a real estate investment property.

The additional factors are the answers to these questions …

Question #1: Does it make sense to buy this property now?

Only you can decide if it makes sense for you to buy the property now. Sometimes, it just feels right, and other times it does not. Some properties look good, but something tells you no. If you have any doubts, do not buy. Pass and move to the next possibility. Your self-doubts are there to protect you. Trust your instincts.

Question #2: How much will it cost me to purchase this property?

Real estate always costs more than the asking price. Even if you had the cash to buy the property, costs associated with the transaction will increase the price. Those costs include things such as title insurance, transfer taxes, recording fees, and so on. Look at the true bottom line, not just the purchase price.

Question #3: How much of my cash will it take me to buy the property?

A property that uses much or all of your cash may not be a good investment. You can be rich in real estate, but cash poor with your investments. When you give up your cash to make a purchase, you are at a disadvantage to buy anything else you may need. Always consider how much cash it will take to complete the transaction.

Question #4: What degree of management intensity will be associated with owning this property?

Some properties just require more of your time and attention to own and operate. One property owner had a property with 2 separate living units and 15 garages. The garages rented for $60 a month. The property was located in a town with limited parking and no nearby storage units. The $900 a month from the garage rentals was great additional income. In addition, the garages were always rented. The problem: collecting the money for the rent. Each month, the owner spent hours chasing the money. It was nearly impossible to catch people at home who rented the garages. Some people simply disappeared. What on paper looked like a great deal was, in reality, a hassle to own and operate. This is not to say that garage rentals are always difficult to collect, just that each deal has its own nuances.

Question #5: Do I want to own this property?

It has to be one that you would be proud to own. After all, your name will be on the deed. Is it a property that you want to call your own?

These properties are the ugly ducklings—the ones that have been neglected and need plenty of tender loving care. Or they may simply be an underuse or a misuse of the land.

The ugly ducklings are easy to spot—their yards and lawns are poorly maintained. Landscaping is shoddy or overgrown. There is no mulch. They have been neglected so long that they may have even become eyesores. The property is in need of paint. Debris, clutter, litter, and junk may be everywhere. There could be an abandoned car or other large items on the property. Windows may be boarded up.

These are properties that need someone like you to get in there, throw stuff away, and clean. You update the yard and exterior, fix broken doors and windows, add some fresh paint, and turn an old dog into a winning breed of property. It’s amazing what some old fashioned elbow grease, a dumpster, and a little imagination can do.

Properties that fall into disrepair and are in need of basic maintenance can be great investment opportunities. Many times these properties are not listed for sale. They may have been rented, and now sit empty when the last renter vanished, perhaps having skipped out in the middle of the night to avoid paying rent. Because the owner has let the property fall into its current ugly state, there is little chance of renting or selling it.

Every real estate agent’s office has at least one neglected property for sale. If you let them know you might be interested in such properties, you can be certain they will show them to you.

The underutilized or misused properties are easier to miss. The property may look just fine, or even be in a pristine condition. But the property is not all that it could be. As you learned before, maybe a tiny home is wasting a beautiful large lot that could either accommodate two or more homes or one larger, more luxurious home. Perhaps the property is a four-unit apartment on a busy street that has trouble staying rented because of the traffic noise. This property may command higher rent and be more likely to stay full if converted to office use.

Another example is an apartment building with a waiting list of renters waiting to get into the building. Any building with a waiting list is a building with rents that are too low. Maybe the building can be purchased based on a price that reflects those current low rents.

Look for properties with unusual architectural features. David has purchased at least two buildings that would fit this description. The drawback to these buildings is that it will be difficult to discern the potential for rent because no rent comparables will be available owing to the unique nature of the real estate. However, if the property in question has a waiting list or an exceptional history of strong occupancy, you may be able to conclude the property is under-rented. You may never know just how much the property can command in rent until you own the property and start testing new and higher rents in the marketplace. But you may be pleasantly surprised by the answers.

When researching these underutilized, poorly maintained ducklings, it may take some work to find out who the owner is. When you spot such a property, one that has some investment potential, and has no “for rent” or “for sale” sign, ask a neighbor who owns the property. You can also find out who the owner is by visiting the county courthouse. Property ownership is a matter of public record. You might find the information at the Recorder or Register of Deeds office, tax assessor’s office, or some other office—it all depends on your jurisdiction. But the ownership information is easily determined somewhere within the courthouse or municipal government. Many of these agencies even offer this information online.

Making friends with a title agent will pay dividends here. Title companies are researching properties all the time. Today, many jurisdictions have put real estate records on computer files. Some of those files are available to the public, but if they are not, it is a safe bet your title company is accessing them somehow. Your title agent may be able to coach you on how to access public records.

Once you know the owner, call them and ask if they might be interested in selling. Many times, you will not be able to persuade the owner to sell. Do not be discouraged. Keep a record of the conversation and check back with the owner in a few months. They may change their mind. David has purchased properties from individuals who he kept in contact with for five years or longer before they decided to sell. But it was worth the wait. While you are waiting, keep looking for other properties and other owners to call on. You will not have to wait five years to find a good deal.

Determine what the property would be worth if it were cleaned up and well-maintained. Also figure out what it would cost the owner to pay someone to do all the work that is needed (not necessarily what it will cost you). With those two numbers in mind, you can start with an offer below the potential market value.

For example, suppose the property would be worth $100,000 if it were cleaned up and in good repair. And let’s assume it would cost $10,000 to clean it up. Here is how you might structure your offer: $100,000 less 20% discount = $80,000 minus $10,000 in repairs = an offer of $70,000. (Of course, the owner may want more, but this may be a good place to begin negotiations.)

Let’s say the owner agrees to a $70,000 price. You take possession and start the cleanup. Because you are able to do cleanup without the need of professionals, you can turn the property around for $6,000 (rather than $10,000). You then sell the property for the $100,000, what it is worth.

Roughly speaking, your work netted this profit:

Property Cost: $70,000

Repairs/Cleanup: $6,000

Total: $76,000

Sale Price: $100,000

Gross Profit: $24,000

Of course, there are probably other expenses (such as transfer taxes, closing costs, etc.). Nevertheless, you can see there is still some substantial profit available by investing in neglected properties. Even if you paid $75,000 or $77,500 for the property, you could still make a reasonable profit in just a few months with some wise improvements. These kinds of deals are not easy to find, but they are out there.

The Least You Need To Know