All Forum Posts by: Jim Pellerin

 Hi Janet,

That's a pretty open questions. First I would do what Steve said. Secondly you need to figure out your tarting point? Do you have capital to invest? Do you know other people with capital to invest? Are you looking for short term deals such as fix and flip? Or are you more interested in long term holds such as Lease Options and Rentals. And what kind of skills do you have? Are you good at sales or online marketing? Maybe you good do joint ventures or even birddogging for other investors? 

There are lots of ways to get started in REI. But it all comes down to what you want and where you are starting. Are you looking for passive or more hands on investments.

Interesting question. Leverage means to use something to get better results. Think of the word "lever". 

In real estate investing you can increase your return by leveraging other peoples money.

e.g. If you were to buy a property for $100,000 cash and the property appreciated by $10,000, you realize a 10% return on your investment (ignoring cash on cash return and principal pay down for now). 

You could increase your return by leveraging other people's money (OPM) by borrowing from the bank, for example.

Using the same example, if you only put $20,000 and borrowed $80,000 and the property appreciated by $10,000, your return is now 50% on your investment of only $20,000. In this situation you would be highly leveraged.

The advantages of doing this is you can now invest in 5 highly leveraged properties with the same $100,000 and you will earn a much higher return. 

The problems with this is that you now have borrowing costs that you have to pay so you have to make sure you are still cash flowing.  Also this needs to be calculated in the overall return but generally, your return should be higher even after borrowing costs.

Cap Rate is something that people are always asking about. They think it represents a return on investment. It does not, unless of course the property was fully capitalized. Meaning you paid cash for it. The other problem is that it's often misrepresented.

In answer to your specific questions, I would add acquisition costs and rehab costs in the calculation. You should also look at expenses. They are usually underestimated when presented by sellers or realtors. My Cap Rate calculations always include management and maintenance costs as a percentage. Oh, and don't forget to include a vacancy allowance when calculating income.

Here is one of the best explanations of Cap Rate I have seen:

http://www.wikihow.com/Figure-Cap-Rate

The best assessment that you should use when determining if it's a good investment is a Cash on Cash return. How much money are you earning relative to how much money you have invested. If you invested $40,000 and you are earning $4,000 per year after all expenses, then your return is 10% per year. Of course this doesn't take into account any appreciation or mortgage pay down. But that's just extra profit. I don't over complicate things and just want my investment to have a positive cash flow with a good rate of return.

Yes there is a risk that the seller would change their mind but then you have reduced your risk of having a stronger commitment. You can always shoe them your blank contracts.

You need something to base your offer on. If you don't know what the inside property looks like, you need to ask the owner. The problem with making an offer on a house unseen is you set the base price fr your negotiations.  You might want to ask them what they think the property is worth and what is the lowest price they would take for it. Then ask how much would the repairs cost.

The other thing you could do to get started is try a different investment strategy. You could get into Lease Options with no money. You could Lease Option a property from a motivated seller. Or you could do Seller Financing.

First I get an agreement in principle based on a discussion. Once we agree on terms, I issue a letter of intent. I am looking for a buyer and they know that. Once I find a buyer the I issue all the formal contracts. I used to spend a lot of time drawing up contracts for sellers that would not be interested. This saved me a lot of time.

What investment strategy are you focusing on. That will determine your approach. Also, do you have any plans for online marketing.

An opening negotiation would be ... "Would you consider selling the property for what you owe on it?". That would at least start the negotiation. Focus on what the owners problem is and what you can do to solver their problem. Once you have a price then you can decide what you exit strategy might be. Are you going to fix and flip, fix and rent it out, wholesaling or Lease Option.

Sure. Maybe would could get together sometime.