T H E McGRAW-HILL 36-Hour Course REAL ESTATE INVESTING SECOND EDITION Other books in The McGraw-Hill 36-Hour Course series: The McGraw-Hill 36-Hour Course: Accounting The McGraw-Hill 36-Hour Course: Business Writing and Communication, 2E The McGraw-Hill 36-Hour Course: Finance for Nonfinancial Managers The McGraw-Hill 36-Hour Course: Operations Management The McGraw-Hill 36-Hour Course: Organizational Development The McGraw-Hill 36-Hour Course: Product Development The McGraw-Hill 36-Hour Course: Project Management, 2E The McGraw-Hill 36-Hour Course: Six Sigma T H E McGRAW-HILL 36-Hour Course REAL ESTATE INVESTING SECOND EDITION Jack Cummings New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2010 by Jack Cummings All rights reserved Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher ISBN: 978-0-07-174376-1 MHID: 0-07-174376-6 The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-174082-1, MHID: 0-07-174082-1 All trademarks are trademarks of their respective owners Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark Where such designations appear in this book, they have been printed with initial caps McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs To contact a representative please e-mail us at bulksales@mcgraw-hill.com This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, securities trading, or other professional services If legal advice or other expert assistance is required, the services of a competent professional person should be sought —From a Declaration of Principles Jointly Adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc (“McGrawHill”) and its licensors reserve all rights in and to the work Use of this work is subject to these terms Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill’s prior consent You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited Your right to use the work may be terminated if you fail to comply with these terms THE WORK IS PROVIDED “AS IS.” McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE McGraw-Hill and its licensors not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom McGraw-Hill has no responsibility for the content of any information accessed through the work Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise CONTENTS Acknowledgments Introduction xiii xv PART How to Begin Your Successful Real Estate Investment Career Chapter A Sound Investment Strategy Begins with a Goal-Oriented Plan Key Terms How to Build Self-Confidence and a Success-Oriented Attitude How Much Time Is Needed to Get Started in Real Estate Investing? How to Reduce Risk in Real Estate Investing The Importance of Meaningful Goals Fine-Tune Your Goals 11 Begin to Develop Your Comfort Zone 12 You Are on Your Way to Success 14 v vi Contents Chapter Fundamental Real Estate Terminology Made Easy Key Terms 17 Getting Started 19 Property Values 25 Finding the Best Property to Buy 27 Buying and Selling Techniques 29 Pitfalls in Real Estate Investing 33 17 Chapter Simplifying Real Estate Mathematics Key Terms 37 Effect of Debt Service on Return on Investment 40 Property Size and Price 43 Building Size 49 Financing 50 Yield 53 Other Benefits That Come with Real Estate 57 Case Study 59 37 Chapter How to Maximize Your Benefits Through Local Officials Key Terms 63 Building and Zoning Department 66 Elected Officials 66 Planning Department 67 Tax Assessment Office 68 How to Build a Working Relationship with VIPs 69 63 Chapter How to Become an “Insider” to Real Estate Investing Key Terms 76 Know the Public Players in Real Estate 80 Important Things to Look for in Public Meetings 83 75 Chapter Become a Real Estate Expert in Your Area Key Terms 87 How to Use Brokerage Methods to Your Advantage 94 What Investors Need from Their Broker or Salesperson 94 How to Interview Brokers and Salespeople 95 How to Get Maximum Benefits from a Real Estate Agent 96 Where Brokers and Agents Tend to Work Against Your Best Interests 97 87 Contents vii PART How to Maximize Property Value Chapter Why Real Estate Values Rise and Fall and How to Take Advantage of Trends Key Terms 102 Seven Reasons Why Property Values Go Up 104 Nine Reasons Why Property Values Go Down 110 101 Chapter The Phrase “Location, Location, Location” Is “Wrong, Wrong, Wrong” 119 Key Terms 120 How to Determine the Importance of Location 127 Chapter The Secret to Potential Increases in Value Is Zoning Key Terms 131 Use Rezoning to Increase Values and Limit Risk at the Same Time 134 The Investor’s Six Steps to Obtain a Zoning Change 135 How to Deal with the Rezoning Process 137 131 Chapter 10 Dealing with Building Codes and Restrictions Key Terms 141 Precontract Checklist 148 141 Chapter 11 Discover the Magic of Economic Conversion to Maximize Value Key Terms 152 When to Use Economic Conversion to Create Value 153 Nine Steps to Maximize the Effect of Economic Conversion 155 Avoid Two Common Problems with Economic Conversion 157 Making Economic Conversion Work 158 151 Chapter 12 Easy and Inexpensive Ways to Increase Property Values Key Terms 160 Upgrade the Land 162 Enhance the Landscaping 163 Clean, Fix, and Paint the Improvements 165 Make the Entrance Appealing 167 Give Care to the Interiors 168 Establish Your Own New Value and Publish It 171 159 viii Contents PART Finding the Best Property for You and How to Purchase It Right Chapter 13 Seven Types of Real Estate You Should Consider Owning Key Terms 175 Farmland 177 Land Speculation 179 Single-Family Homes 180 Multifamily Properties 182 Commercial and Industrial Properties 184 Retail Shops and Shopping Centers 186 Lodging 188 Chapter 14 Develop Your Own Investment Comfort Zone to Ensure Success in Real Estate Investing Key Terms 192 Establish a Geographic Territory 194 Become the Expert of That Territory 196 Document What You Investigate 197 Build the Investment Techniques Required 198 Act on Opportunities 198 175 191 Chapter 15 Secrets to Getting the Inside Track to Real Estate Values and Trends 201 Key Terms 202 Compiling Trend Information Using the Real Estate Investor’s VIP List 204 Public Sources of Real Estate Trend Information 205 Read the Daily Newspaper Announcements 213 Chapter 16 How to Evaluate a Property Before You Buy It Key Terms 216 Factors in Choosing an Evaluator 218 Income Approach 218 Market Value Approach 222 Replacement Value Approach 224 Seven Key Steps in Accurate Property Evaluations 224 215 Contents ix PART How You Buy Establishes How You Profit in Real Estate Investing Chapter 17 Four Creative Buying Techniques Key Terms 231 The Option 232 Sweat Equity 235 Lease/Purchase 236 Secondary Seller-Held Financing 237 231 Chapter 18 Discover the Tax-Free Benefit of a 1031 Exchange Key Terms 239 Five Reasons Real Estate Exchanges Work 245 Making the Offer to Exchange 252 239 Chapter 19 Making Offers and Counteroffers Key Terms 259 Doing Homework Before the Offer 264 Structuring the Offer 265 Negotiating the Offer and the Counteroffer 266 Pitfalls in Offer and Counteroffer Negotiations 267 259 Chapter 20 How to Find the Best Source of Financing for Your Investment Key Terms 269 269 Chapter 21 Tips on Surviving Real Estate Problem Areas AC and Heating 278 Accounting and Fees 278 Air-Conditioning and Heating Expenses 278 Answers 279 Approved Uses 279 Assessments 279 Authority to Make Contract 280 Banks 280 Clear Contractual Understanding 281 Code Violations 281 Comfort Zone Visits 281 Control Over the Property 282 277 The Real Estate Investor’s VIP List 94 Property insurance company Name of company: Name of contact: Phone number: Address: Notes: 95 Title insurance company Name of contact: Phone number: Address: Notes: 96 Barter company Phone number: Address: Business hours: 97 Real estate exchange clubs Phone number: Address: Business hours: 333 334 The Real Estate Investor’s VIP List UTILITIES 98 Local power and light company Phone number: Address: Business hours: 99 Local water and sewer Phone number: Address: Business hours: 100 City garbage pickup Phone number: Address: Business hours: Day of normal pickup: Day of bulk pickup: The Real Estate Investor’s VIP List 101 Local telephone company Phone number: Address: Business hours: Notes: 335 This page intentionally left blank INDEX Access (visual and actual), 121, 122 Accommodation move, 249–50 Accounting and fees, 278 Accrued interest, 33 Acre, 19–20 Acreage and square footage, 46–47 Ad valorem tax, 25 Addendum, 29 Adjustable rate mortgage (ARM), 29, 269, 270 Adverse effects of infrastructure change, 110, 112 Adverse possession, 33, 210 Affordable properties, 195 Agreement in principle, 263 Air conditioning and heating expenses, 160– 61, 278–79 Airports, 85, 111–12, 205, 206 All Item Index, 34 Amortization, 269, 270–74 Annual cap, 29 Apparent opportunity, 4, Appointments with VIPs, 70–71 Appraised value, 25 Appreciation, 57, 58–59 Approvals and location, 121, 125–26 Approved uses, 279 Asbestos, 168, 285 Assessments, 279–80 Assumable mortgages, 259, 260–61 Attainable goals, 10 Attainable opportunity, 4, 5–6 Authority to make contract, 280 Balloon mortgages, 30, 269, 272, 274 Banks, 205, 207, 280–81 Basis, property, 25, 240, 244–45 Basis records, 245 Benefits of real estate investment appreciation, 57, 58–59 equity buildup, 57, 58 list of possible, 57 Blanket mortgage, 30, 269, 274–75 Boot, 240 Bottom line, increased, 104, 107 Broker versus realtor, 27 Brokerage firms, real estate description of, 94 six services from, 94–95 Brokers buyer’s broker, 259, 261 interviewing, 95–96 your best interests and, 97 Builder-developer, 28 Building and zoning department, 66, 207–8 See also Local officials Building and zoning rules, 13 See also Building codes; Zoning ordinances Building code violations defined, 28 “do-it-yourself” work and, 20 encroachments into setback areas, 146 fire protection and, 144 grandfather provisions, 35, 131, 132–33 height restrictions and, 142–43 older properties and, 141 337 338 reviewing possible, 149 as time bombs, 141 Building codes See also Zoning ordinances construction and, 113, 142, 208 defined, 20, 113 importance of, 141 key terms related to, 141–48 precontract checklist and, 148–50 setbacks, 113, 142, 146 Building department, 141, 142 Building heights, 141, 142–43 Building inspection checklist, 150 Building permits, 20–21, 64, 66 Building plans, original, 167 Building size, 49–50 Buyer broker agreement, 97 Buyer’s broker, 259, 261 Buyer’s market, 25 Buying and selling techniques (terminology), 29–33 Buying techniques, creative key terms related to, 231–32 lease/purchase agreement, 236–37 the option, 232–34 secondary seller-held financing, 237–38 sweat equity, 235–36 Capital gain, 244 Capital improvements, 104, 107–8 Carpet and floors, 168 Cash flow debt service and, 40–42, 53 defined, 25–26, 40, 216 net, 40, 42 property evaluation and, 216–17 property values and, 25–26 real estate mathematics and, 38, 40, 53 total, 40 Centers of employment, 121 Centers of entertainment, education, and recreation, 121, 122 Chamber of commerce, 209 Changes in permitted use, 104, 110 Checklist, precontract, 148–50 City manager, 63, 64–65 Cleaning-fixing-painting routine for boosting property value, 165–66 four pitfalls in, 166–67 Cleanup codes, local, 160, 162 Clear contractual understanding, 281 Index Clearly defined goals, 11 Closing, 30 Closing costs, 34 Cloud on title or title defect, 34 Code of ethics for realtors, 94 Code violations, building defined, 28 “do-it-yourself” work and, 20 encroachments into setback areas, 146 fire protection and, 144 grandfather provisions, 35, 131, 132–33 height restrictions and, 142–43 importance of, 141, 281 older properties and, 141 reviewing possible, 149 as time bombs, 141 Codes, building See also Zoning ordinances construction and, 142, 208 defined, 20, 113 importance of, 141 key terms related to, 141–48 precontract checklist and, 148–50 COLA (cost of living adjustments), 34 Collateral, 262 Comfort zone, investment defined, 4, documentation of, 197–98 five steps for establishing, 191 geographic territory for, 194–96 key terms related to, 192–94 opportunities and, 198–200 pitfalls in building, 199 twenty facts about, 196–97 Comfort zone plan, 8, 12–14 Comfort zone visits, 281–82 Commercial and industrial properties advantages of, 185 as category of real estate, 175, 184–85 disadvantages of, 186 Compatible use, 142, 147 Competitive properties, rent of, 224, 227 Concurrency, 102 Condominium assessments, 279–80 maintenance and reserves, 294–95 Consent agenda, 76–77 Constant Annual Rate Table, 51, 55, 272 Constant rates, using, 52–53 Contact development, long-range, 72–73 Contingency clause, 21 Index Control over the property, 282 Conversion, economic defined, 26, 106 increased property values and, 104, 106–7 key to success with, 158 key terms related to, 152–53 nine steps for using, 155–57 two common problems with, 157–58 when to use, 153–55 Corners, 121, 122–24 Cost of living (COL), 34 Cost versus income produced, 127, 128–29 Counteroffers See Offer and counteroffer negotiations County deed records, 47 See also Deed search; Deed transfer information County recorded documents, 209–11 County tax assessor’s office, 13, 14, 68–69, 197, 302 Creative buying techniques key terms related to, 231–32 lease/purchase agreement, 236–37 the option, 232–34 secondary seller-held financing, 237–38 sweat equity, 235–36 Creative financing, 42 See Creative buying techniques; Mortgages Credit check, 282 Crime, 121, 124–25, 282–83 Curb cut, 123, 124 Current listings, 223 Debt service, 40–43 Deck timbers, rotted, 301 Decline of neighborhoods, 110, 111–12 Deed restrictions, 142, 146, 149 Deed search, 87, 88–90, 202, 210, 211 Deed transfer information, 210, 214, 223 Deficit payment mortgages, 273–74 Delivery promise, 283 Demised premises, 21 Demographics, 121, 125 Density, 131, 132 Department of transportation (DOT), 64, 65, 114, 123, 124, 211 Depreciation, 57 Desired return, 216, 217 Dock, rotted, 301 Downside risk, 175, 176 Drive-through, 283 339 Drop of income, 110, 117 Due diligence, 17, 18–19, 283–84 Duplex, 21 Earnest money deposit, 259, 262 Easements, 45, 142, 148 Easy ways to boost property values appealing entrance, 167–68 appealing interiors, 168–71 cleaning-fixing-painting routine, 165–67 key terms related to, 160–62 landscaping, 163–65 publishing new value, 171 six ideas, 159 upgrading vacant land, 162–63 Economic conversion defined, 26, 106 increased property values and, 104, 106–7 key to success with, 158 key terms related to, 152–53 nine steps for using, 155–57 two common problems with, 157–58 when to use, 153–55 Economic obsolescence, 102–3, 110, 115 Education, centers of, 122 Elected officials, 66–67 Electrical service, 284 Elevator service, 284 Emotion, 34 Employees and service contracts, 284 Employment, centers of, 121 Encroachments, 141, 143–44 Entryway, appealing, 167–68 Environmental history and tests, 113, 285 Equal annual payment, 51 Equity balance, 240–43 Equity buildup, 57, 58 Escrow deposit, 30 Estoppel letter, 32, 33, 285 Evaluation of property before you buy it factors in choosing an evaluator, 218 income approach, 218–22 key terms related to, 216–18 market value approach, 222–24 replacement value approach, 224 seven steps in, 224–27 three basic methods of, 215–16 Exchange program validity, 285–86 Exchanging for a future anything, 286 Exclusive listing, 87, 91 340 Exclusive right of sale, 87, 91 Expenses, disclosure of, 286–87 Failure, 199 Far corner, 123 Farmland advantages of buying, 178 as category of real estate, 175, 177–78 disadvantages of buying, 178–79 Feasibility study, 76, 77 Federal Housing Administration (FHA), 21 Federal National Mortgage Association (FNMA), 21 Fees, impact, 102, 121, 126, 289 Fees, legal, 293–94 Financing See also Four creative buying techniques; Mortgages adjustable rate mortgage (ARM), 29, 269, 270 amortization and, 269, 270–74 creative, 42 fixed rate mortgage, 31 inability to obtain, 111, 117–18 key terms related to, 269–76 mathematical calculations and, 50–53 wraparound mortgage, 269, 275–76 Fire codes, 113, 142, 144 First mortgage, 30 First right of refusal, 237 Fixed rate mortgage, 31 Flood hazard, 287 Floor and wall tiles, 287 Floors under carpet, 168 Foreclosure, 28, 287–88 Foreclosure notice of sale, 214 Four creative buying techniques key terms related to, 231–32 lease/purchase agreement, 236–37 the option, 232–34 secondary seller-held financing, 237–38 sweat equity, 235–36 Freestanding building, 50 Front footage price, 45 FSBO (For Sale by Owner), 28 “G” syndrome, 231, 232, 233, 235, 236 Geographic territory, establishing a, 194–96 GI Loan (VA Loan), 22 Goal orientation, 3–4, 192–93 Index Goal-oriented plan See also Comfort zone plan; Goals apparent opportunity, attainable opportunity, 4, 5–6 comfort zone, 4, defined, 4, key terms related to, positive failure alignment, 4, successful elasticity, 4, success-oriented attitude, 4–5, Goals fine-tuning, 11–12 meaningful, 9–11 mini-, 7–8, 10 Government planning offices, 211–12 Governmental controls and regulatory changes, 34, 110, 112–15 Graduated payment mortgage (GPM), 31 Grandfather provisions, 35, 131, 132–33 Greed, 232 Green area and landscaping requirements, 142, 144–45 “Greener grass” phenomenon, 231, 232 Gross area, 49–50 Gross revenue, 38–39 Hardwood floors, 168 “Havers” and “takers,” 240, 243 Health codes, 288 Heating and air conditioning expenses, 160– 61, 278–79 Height restrictions, 142–43 Hidden gems, 289 Highest and best use, 76, 77, 102, 103 Homeowners’ associations (HOAs) assessments, 280 description of, 76, 77, 289 restrictions and, 300 Homes, single-family advantages of, 181–82 as category of real estate, 175, 180 disadvantages of, 182 how to buy, 180–81 Homestead exemption, 76, 77–78, 300 Hotels and motels advantages of lodging investments, 189 as category of real estate, 175, 188–89 disadvantages of lodging investments, 190 Housing starts, 109 Index Impact fees, 102, 121, 126, 289 Impact windows, 290 Improper installations, 290 Income approach to property evaluation, 215, 216, 218–22 Incompatible tenant, 290 Indemnify, 76, 78 Industrial properties, 175, 184–86 Inflation, 104, 105 Infrastructure, changes in adverse effects of, 112 increased property values and, 104, 105–6 Inspected property file, 225 Inspection log, 225 Installment sale, 31 Institutional lender, 31 Insulation, R-factor, 160–61 Insulted sellers, 266, 267 Insurance, 291 Insurance, title, 26–27, 291, 304 Interest rates, rising, 36 Interest-only loan, 41, 270, 273 Interim goals, 11–12 Interiors, caring for checking under paint, 168–69 cleaning-fixing-painting routine, 165–67 hidden treasures and, 168 looking under carpet, 168 removing odors, 169–71 Internet service, 291–92 Interviewing brokers and salespeople, 95–96 Investment comfort zone documentation of, 197–98 five steps for establishing, 191 geographic territory for, 194–96 key terms related to, 192–94 opportunities and, 198–200 pitfalls in building, 199 twenty facts about, 196–97 Investment comfort zone plan, 8, 12–14 Investment comfort zone visits, 281–82 IRS and changes in tax laws, 198 IRS Section 1031 exchange key terms related to, 239–45 making offer to exchange, 252–58 reasons real estate exchanges work, 245–52 Kicker, 31 KISS, 17, 18 341 Lag time, 109 Land, upgrading, 162–63 Land leases, 35, 102, 103, 185, 292 Land plan changes, 85–86 Land prices, 43–49 Land speculation advantages of, 179 as category of real estate, 175, 179 disadvantage of, 179–80 Land use regulation, 76, 78 Landscaping for boosting property value, 163–65 yard maintenance and, 306 Landscaping requirements and green area, 142, 144–45 Lawyers, 80, 292–93 Lease and lease-option, 31–32 Lease/purchase agreement, 236–37 Legal description, 202–3, 293 Legal fees, 293–94 Legally binding, 17 Legs, 240, 243–44 Letter of intent, 259, 263–64 Lettras, 281 Leverage, 152–53 Leverage, positive, 53–54, 222 Licensed broker, 88, 91–92 Lien status on property or borrower, 294 Liens, 22, 210 Like-kind property, 240, 244 Listing presentation, 223 Listings, current, 223 Listings, sold, 223 Loan assumption, 32 Loans See Financing; Mortgages Loan-to-value ratio, 26 Local cleanup codes, 160, 162 Local officials building and zoning dept officials, 66, 207–8 city manager, 63, 64–65 department of transportation (DOT), 64, 65, 114, 123, 124, 211 elected officials, 66–67 planning department, 67–68 public safety officials, 64–65 tax assessors, 68–69 working with VIPs, 69–73 342 Location intended use and, 119–20 key terms related to, 120–27 seven truths about, 120 three circumstances controlling importance of, 127–30 Lockbox, 88, 92 Locks and keys, 294 Lodging advantages of lodging investments, 189 as category of real estate, 175, 188–89 disadvantages of lodging investments, 190 Maintenance, lack of proper, 110, 117 Maintenance and reserves, 294–95 Management, 35 Management problems, 29, 295 Market analysis, 22, 88, 92–93 Market value approach to property evaluation, 215, 216, 222–24 Mathematic calculations used by investors appreciation, 57, 58–59 building size, 49–50 calculator for, 37 case study, 59–62 cash flow, 38, 40, 53, 216–17 debt service, 40–43 equity buildup, 57, 58 financing, 50–53 gross revenue, 38–39 net operating income (NOI), 38, 39–40, 216, 217–18 property size and price, 43–49 yield, 53–57 Measurable goals, 10 Medians and U-turns, 124 Meetings, public agenda items at, 83–86 eight steps for using, 81–83 people who attend, 80, 83 Memory aromas, 170–71 Metes and bounds, 22–23, 203 Mildew, preventing, 170 Millage, 25, 203 Mini-goals, 7–8 Mold or other environmental problems, 295–96 Moratoriums, 86 Mortgage satisfactions, 210, 211, 214 Index Mortgages adjustable rate mortgage (ARM), 29, 269, 270 assumable mortgage, 259, 260–61 avoiding problems with, 296 balloon mortgage, 30, 269, 272, 274 blanket mortgage, 30, 269, 274–75 first mortgage, 30 fixed rate mortgage, 31 graduated payment mortgage (GPM), 31 payment schedules for, 270–74 purchase money mortgage (PMM), 32 recording of, 210 second mortgage, 32 seller-held mortgage, 237–38 wraparound mortgage, 269, 275–76 Multifamily properties as category of real estate, 175 defined, 182 disadvantages of, 184 how to buy, 182–84 potential advantages of, 184 Multiple Listing Service (MLS), 88, 93 Multipurpose use, 176, 177 Name-dropping, 71 Names of property owners, 22 Natural disaster areas, 296 Near corner, 123 Neighborhoods decline of, 110, 111–12, 195 in high-crime areas, 121, 124–25, 282–83 Net cash flow, 40, 42 Net operating income (NOI) calculations, 38, 39–40, 216, 217–18 defined, 39, 217 Net rental area, 50 New construction projects, 85 “New is better” theory, 109 Newspaper announcements, 213–14 Nine reasons why property values go down, 110–18 Noisy neighbors, 297 Not universal, 17, 18 Obsolescence, economic, 102–3, 110, 115 Odd-shaped lots, size and price of, 47–49 Odors, removing, 169–71 Offer and counteroffer, 23 Index Offer and counteroffer negotiations homework before, 264–65 key terms related to, 259–64 pitfalls in, 267–68 scenario illustrating, 266–67 structuring offer, 265–66 Officials within local government building and zoning dept officials, 66, 207–8 city manager, 63, 64–65 department of transportation (DOT), 64, 65, 114, 123, 124, 211 elected officials, 66–67 planning department, 67–68 public safety officials, 64–65 tax assessors, 68–69 working with VIPs, 69–73 Oil storage tanks, underground, 295–96 Open houses, 93–94 Open listing, 88, 93 Opportunities, acting on, 198–200 Option, the description of, 232–34 five ideal times to use, 234 Ordinances, defined, 24–25 Ordinances, zoning approved uses and, 279 description of, 13, 29, 113, 306 economic conversion and, 155, 156, 158 grandfather provisions and, 35, 131, 132–33 green area, 113, 144–45 key terms related to, 131–34 “on-the-job” training for rezoning process, 137–40 parking codes, 113, 145 petition for zoning change, 133–34 site plan approval, 84, 113, 147, 208 six steps to obtain zoning change, 135–37 using rezoning to maximize property value, 134–35, Other people’s money (OPM), 182, 183, 184 Overbuilt market, 116 Paint color, 297 lead, 167, 169, 285 old, 167, 168–69 smell, 170 Painting and fixing up, 165, 166 343 Parking codes, 142, 145 Pattern of growth, 175, 176 Percolation or perk, 35–36 Performance bond, 76, 78 Permits, building, 20–21, 64, 66 Permitted use, changes in, 104, 110 Personal characteristics, seven important, Personal property that remains, 297–98 Pest control, 298 Pet smells, 169–70 Petition for zoning change, 133–34 Pitfalls in real estate investing, 33–36 PITI, 23 Planned unit development (PUD), 23 Planning department, 67–68 Plat, 23 Platting or site plan approvals, 84, 113, 142, 147, 208 Plot plan, 23 Plumbing, 298 Pool, cracked or leaking, 282 Pool service, 298 Population shift, 127 Positive failure alignment, 4, Positive leverage, 53–54, 222 Positive people, 200 Postdated checks, 280–81, 299 Preparation for real estate investing, Preview, 88, 93–94 Pride of ownership, 163 Prime rate, 23–24 Principal goals, 11 Priority of time, 192, 193 Promissory note, 260, 262 Property basis, 25, 240, 244–45 Property Basis Adjustment Checklist, 245 Property evaluation factors in choosing an evaluator, 218 income approach, 218–22 key terms related to, 216–18 market value approach, 222–24 replacement value approach, 224 seven steps in, 224–27 three basic methods of, 215–16 Property expert, 152 Property history, tracking, 225 Property inspection checklist for homes, 225, 226 Property setbacks, 113, 142, 146 344 Property size and price, 43–49 Property sold file, 225 Property tax, 203–4, 302–3 Property values key terms related to, 25–27, 102–4 nine reasons why property values go down, 110–18 seven reasons why property values go up, 104–10 Property values, boosting appealing entrance for, 167–68 appealing interiors for, 168–71 cleaning-fixing-painting routine for, 165–67 key terms related to, 160–62 landscaping for, 163–65 publishing new value, 171 six ideas for, 159 upgrading vacant land, 162–63 Public meetings agenda items at, 83–86 eight steps for using, 81–83 people who attend, 80, 83 Public safety officials, 64–65 Purchase money mortgage (PMM), 32 Purchase money second mortgage, 237 Purpose for investment, 127–28 Questions, tips on asking, 279, 299 Real estate agents definition of realtor, 88, 94 getting maximum benefit from, 96–97 interviewing, 95–96 realtor versus broker, 27 your best interests and, 97 Real estate categories farmland, 175, 177–79 industrial properties, 175, 184–86 land speculation, 175, 179–80 lodging, 175, 188–90 multifamily properties, 175, 182–84 retail shops and shopping centers, 175, 186–88 single-family homes, 175, 180–82 Real estate investment, benefits of appreciation, 57, 58–59 equity buildup, 57, 58 list of possible, 57 Index Real estate mathematics appreciation, 57, 58–59 building size, 49–50 calculator for, 37 case study, 59–62 cash flow, 38, 40, 53, 216–17 debt service, 40–43 equity buildup, 57, 58 financing, 50–53 gross revenue, 38–39 net operating income (NOI), 38, 39–40, 217–18 property size and price, 43–49 yield, 53–57 Real estate trend information daily newspaper announcements and, 213–14 demographics and, 125 four questions for compiling, 204–5 key terms related to, 202–4 public sources of, 205–13 Real estate values key terms related to, 102–4 nine reasons why property values go down, 110–18 seven reasons why property values go up, 104–10 Real estate values, boosting appealing entrance for, 167–68 appealing interiors for, 168–71 cleaning-fixing-painting routine for, 165–67 key terms related to, 160–62 landscaping for, 163–65 publishing new value, 171 six ideas for, 159 upgrading vacant land, 162–63 Realtor, defined, 88, 94 Realtor versus broker, 27 Realtors Code of Ethics, 94 Recreation leases, 299–300 Rendering, 76, 78–79 Rent for competitive properties, 227 Replacement value approach to property evaluation, 216, 224 Residency, 300 Restrictions See also Building codes deed, 142, 146, 149 defined, 300 of homeowners’ associations, 289 Index Rezoning process increasing values with, 134–35 “on-the-job” training for, 137–40 six stages of rezoning petition, 133–34 six steps for, 135–37 R-factor insulation, 160–61 Right-turn storage land, 123 Rising interest rates, 36 Risk in real estate investing, 3, 152, 153, 175, 176 Roof inspection and maintenance, 300–301 Search for the void, 192, 194 Seawalls, 301 Second mortgage, 32 Secondary seller-held financing advantages of, 237–38 defined, 237 important questions about, 238 Self-confidence five steps to building, 7–8 success-oriented attitude and, Self-image, 69 Sellers highly motivated, 118 insulted, 266, 267 Seller’s market, 26 Septic tanks, 35–36, 113, 143 Service contracts, 284 Setbacks, property, 113, 142, 146 Seven categories of real estate farmland, 175, 177–179 industrial properties, 175, 184–86 land speculation, 175, 179–80 lodging, 175, 188–190 multifamily properties, 175, 182–84 retail shops and shopping centers, 175, 186–88 single-family homes, 175, 180–82 Seven important personal characteristics, Seven reasons why property values go up, 104–10 Seven truths about “location, use, and approval,” 120 Shadow law, 143 Shopping center and retail shops advantages of , 187–88 as category of real estate, 175, 186–87 disadvantages of, 188 345 Short sale, 27, 29, 87, 90–91 Single-family home investments advantages of, 181–82 as category of real estate, 175, 180 disadvantages of, 182 how to buy single-family homes, 180–81 Single-purpose use, 176, 176–77 Site plan, 23 Site plan approval, 84, 113, 142, 147, 208 Soil test, 301 Sold listings, 223 Sphere of reference, 192, 193–94, 212 Square foot, 24 Square footage price, 43–45 Square yard, 24 Subdivision, 24 Subject to, 33 Subordination, 36 Successful elasticity, 4, Success-oriented attitude, 4–5, Supply and demand, 104, 108–9, 110, 115–16 Survey, 142, 147–48 Survey, improper, 143 Survey lines, 22 Sweat equity examples, 235–36 pitfalls of, 236 Tanks, underground oil storage, 295–96 Tax assessment, 26, 202, 203–4, 302–3 Tax assessment office, 13, 14, 68–69, 197, 302 Tax liens, 36 Tax payments, 302–3 Tax shelter, 102, 104 Taxes, public meetings on, 85 Tax-exempt property, 76, 79 Tax-free exchanges under IRS Section 1031 code key terms related to, 239–45 making offer to exchange, 252–58 reasons real estate exchanges work, 245–52 Temporary use for land, 162–63 Tenant incompatible, 290 net or triple net, 185 remaining personal property of, 297–98 346 1031 exchange key terms related to, 239–45 making offer to exchange, 252–58 reasons real estate exchanges work, 245–52 Tight money, 116 Time, priority of, 192, 193 Time needed to get started, 8–9 Timeshares, 303 Timetable for goals, 10 Title defect, 34 Title insurance, 26–27, 291, 304 Total cash flow, 40 Townships, 46, 203 Traffic control or road work, 85 Traffic count, 121, 126–27 Trash pest control and, 298 removal, 162, 304 Trash pickup, municipal, 160, 161 Trees moving, 164–65 planting, 164 Trend information, real estate daily newspaper announcements and, 213–14 demographics and, 125 four questions for compiling, 204–5 key terms related to, 202–4 public sources of, 205–13 Triple net tenant, 185 Underground oil storage tanks, 295–96 Unincorporated area, 76, 79 Unit rental price, 38 Upgrading land, 162–63 Upside down, 27 Urgency to sell, 111, 118 Usable area, 43, 45 Utilities, 66 Utility and access easements, 45, 142, 148 Vacancy factor, 304 Variances, 76, 79, 84, 137 Index Vegetation removal, 304–5 Verifying title, 305 VIPs, working with first appointment, 70–71 follow-up, 72 identifying people to meet, 69 long-range contact development, 72–73 plan to meet list, 70 self-image and, 69 sphere of reference and, 192, 193–94, 212 Wallpaper, 305–6 Water retention, on-site, 145 Weekend workers, 290 Wholesale buying power, 160, 161 Windows, impact, 290 Wraparound mortgage, 269, 275–76 Yard maintenance, 306 Yield calculating, 54–57 defined, 53–54 Zero vacancy factor, 38 Zoning board, 76, 79–80, 131, 133–34 Zoning issues at public meetings, 84, 138 Zoning ordinances approved uses and, 279 description of, 13, 29, 113, 306 economic conversion and, 155, 156, 158 grandfather provisions and, 35, 131, 132–33 green area, 113, 144–45 key terms related to, 131–34 “on-the-job” training for rezoning process, 137–40 parking codes, 113, 145 petition for zoning change, 133–34 site plan approval, 113, 147, 208 six steps to obtain zoning change, 135–37 using rezoning to maximize property value, 134–35, 163 Zoning variance, 76, 79, 84, 137 ABOUT THE AUTHOR Jack Cummings is the author of numerous fiction and non-fiction books and is considered the most published contemporary author in the subject of Real Estate Investing His works on this subject include: The Complete Guide to Real Estate Financing, The Complete Handbook of How to Farm Real Estate Listings and Sales, Building Your Wealth Through Creative Real Estate Investing, Cashless Investing in Real Estate, The Business Traveler’s Survival Guide, The Real Estate Investor’s Answer Book, Investing in Real Estate with Other People’s Money, Buying Commercial Real Estate in 12 Easy Steps, Successful Real Estate Investing for the Single Person, The Real Estate Financing Manual, The Guide to Real Estate Exchanges, and $1,000 Down Can Make You Rich, The Tax-Free Exchange Loophole, The Real Estate Investor’s Guide to Cash Flow and Equity Management, The Real Estate Investment and Finance Handbook, 9th Edition Mr Cummings is a highly successful real estate investor, broker, and developer with more than forty years of hands-on experience An international speaker and lecturer, he has conducted programs around the world, has served with the International Executive Service Corp., and has been awarded five honorable commendations for his work in Egypt and Kyrgyzstan Mr Cummings has appeared on many television and radio programs nationally His books are easy to read and filled with money-making tips and checklists that guide the reader around pitfalls that can trap even the most knowledgeable investor This volume has been completely updated to help the reader to be successful in dealing with the modern problems of the greatest buyers market in the past sixty years [...]... effort, study, and determination The McGraw- Hill 36- Hour Course: Real Estate Investing will be your college education in real estate investing, and it will lead you to the self-confidence you need to be successful in real estate investing Real estate investing is, as you will discover, a study of history The history of why the real estate market goes up and down will give you the inside track on where your... fall of real estate values are relatively simple Most of the forces that affect the real estate market and control this rise and fall of values are evident for everyone to see and follow The key is to know where to look, how to read the signals, and what to do to take advantage of the situations and opportunities as they present themselves to you The idea of becoming an expert in the real estate market... season slip past you Today, sellers are the most motivated I have ever seen them be, and buyers who are prudent, patient, and persistent will be able to make the best investments they may ever see Are you new at the real estate game, or have you been investing in real estate for years? Either way, the time is right, and this book has been updated to provide you with the hottest tips and advice possible... of 36 hours, will give you the fundamentals you need to approach real estate investing as a knowledgeable insider In a unique way, once they are introduced, some of the trends, techniques, and concepts mentioned reappear in future chapters This is purposefully designed to show you these items from a different perspective When this happens the text reinforces the importance of these elements in the. .. them For example, instead of merely driving to work, change your route to get to know the neighborhood where you plan or hope to invest Look at properties on the market, jot down phone numbers from “for sale” or “for rent” signs, and so on Then follow up by calling the numbers and getting the details Implementation: Start Your Comfort Zone Plan Following completion of The McGraw- Hill 36- Hour Real Estate. .. date all the data you put there, including the file name for the photo you took Call the phone numbers on the “for rent” or “for sale” signs Get the data and make an appointment to inspect the property If a property is income producing, go over the income and expense figures Check out the tax assessor’s files on the properties (this is easy on the Internet) and look for anything critical Find the assessed... perseverance Each of these seven is easily attained All you have to do is to apply your best efforts toward each of these tasks This chapter also tackles the problem of risk in real estate investing and shows the keys to reducing that element in the investment portfolio The ultimate aim of this chapter is to show the reader the importance of establishing sound and meaningful goals and how they are applied... who have the confidence to prove it The idea is to look and think the part It takes both aspects to work Just thinking success is not enough You must look the part as well • Know that you can and will learn the tools needed to be a success in real estate investing Just as a novice pilot learns to fly, you will learn the keys and the insider techniques in real estate investing and you will be a success—if... buying and selling real property It is logical, then, that the first part of your plan to become a successful real estate investor should be to outline all the steps needed to obtain the necessary knowledge and tools of the trade Five Steps to Building Self-Confidence 1 Accept the fact that by the time you complete this 36- hour course you will have the basic foundation on which to select objectives that... more than three or four items at any given time Keep your timetable short No item should be on the list if you cannot complete it within six months You can 8 How to Begin Your Successful Real Estate Investment Career begin your mini-goal list with item 1: complete The McGraw- Hill 36- Hour Course: Real Estate Investing 5 Celebrate each intermediate step you attain Pat yourself on your own back and be proud