What are the benefits of selling real estate “as-is”?

If you’re a real estate investor, you need to know what “as-is,” means. Having an “as-is” clause in a real estate contract could potentially save you from many litigation issues down the line. What are the benefits of this type of real estate deal? What are the drawbacks?

In this article, we’ll go over all of that and more, including:

• What it means when a property is being sold as-is.
• How as-is properties differ from houses on the traditional market.
• The pros and cons of selling real estate as-is.

What Does It Mean When a Property is Sold As-Is?

If you’ve ever shopped for homes online, chances are you’ve run into a property description that included the phrase “as-is.” Chances are that the house was significantly cheaper than the other houses in the area. Why is that? What does it mean when the owner is selling the property “as-is?”

Selling real estate "as-is" means that it’s being sold in its present condition, without any stipulations that the seller fix this or that. It doesn’t matter if the roof is caving in and the water isn’t running. As long as the seller follows the disclosure laws in his or her respective state, he or she doesn’t have to make any repairs to the home to get it in livable condition. It comes exactly as you see it, or “as-is.”

Here are some quick things you should know about buying and selling real estate as-is:

• As-is properties typically are in worse condition than other homes on the market. That’s why they’re usually less expensive than those other homes.
• If you’re selling a rental property (or any property, for that matter), including an as-is clause can save you from a litany of possible legal issues.
• Often as-is deals are 100% in cash.
• When you’re negotiating for an as-is property, it usually isn’t appropriate to try to get the seller to pay for certain repairs. If it’s included in the property description, the seller probably isn’t interested.
• These properties usually offer opportunities for value-add “fix and flips.” Investors buy a run-down property for less than its after-repair market value, fix it up, and attempt to sell it for a profit.

How does that differ from the traditional real estate sales process?

Selling Real Estate The Usual Way Goes Like This ...

Many traditional real estate contracts include inspection and appraisal contingencies. Since the deal isn’t 100% in cash, the bank wants to make sure it’s granting a loan on a reasonable investment. These contingencies can also give the buyer the right to back out of the contract if something unexpected pops up, or if the appraiser comes in at a value that’s higher than the sale price.

The biggest differences between selling real estate as-is and selling real estate on the retail market are:

• Sales price. Selling a property “as-is” typically has a lower sales price than listing a house in a more traditional manner.
• Time to close. It takes a traditional real estate transaction longer to close, since a third party (the lender) is usually involved.
• Realtor commission and other fees. Since lenders require inspections and appraisals, there are more fees associated with buying and selling traditionally.

Now that you have a general overview of what that means, let’s dive into who buys and sells these types of properties.

Why Would You Sell a House or Rental Property As-Is?

There are plenty of reasons why someone would sell a house or rental property as-is, but they all have one common denominator: they aren’t willing (and/or able) to make repairs to the property before closing.

With that said, here are some common reasons people sell properties as-is:

• They received the property as an inheritance following the death of a loved one, and they don’t have the money or time to fix the property up to the market’s standard.
• They received a notice of default from the bank and are attempting to sell the home as a short sale to avoid bankruptcy.
• They don’t want to haggle with buyers over certain repairs.

So, whether it’s through neglect, inheritance from a loved one, or some other reason, the seller doesn’t have the time, interest, or money to fix it up and list it to people who are looking to move in immediately.

Pros and Cons of Selling Real Estate As-Is

Let’s look at the pros and cons of selling real estate as-is.

Pros

• Quick sale. The average real estate transaction takes 30-45 days to close after being sold. Repairs are one of the biggest reasons it takes so long to close. When you’re selling as-is, you can probably avoid many of those repairs.
• Less hassle. If you sell as-is, you won’t have to haggle with buyers over minor -- or even major -- repairs.
• Including an as-is clause might save you from potential legal issues down the line.

Cons

• Your sale price will almost definitely take a hit. Since buyers are being dissuaded from negotiating repairs, they’ll have to make those repairs themselves. That will cost you some money.
• Selling real estate as-is doesn’t mean you can avoid an inspection. The buyer can still cancel the contract for any reason at any time, and they can still come back and ask for repairs.
• It doesn’t protect you from all potential legal issues, nor does it mean you can sidestep your state’s disclosure laws.

What You Need to Know if You’re Buying or Selling Real Estate As-Is

If you’re an investor, what are the big takeaways from this article? If you’re selling real estate as-is, then you can avoid a slew of potential litigation issues, particularly in the case of rental property, and you can close deals at a much quicker pace. However, in exchange, you’re sacrificing a higher sales price. Houses that are sold in a more traditional manner might have more fees, but they also typically sell at higher prices.

Photo by Webdexter Apeldoorn from Pexels

When you are selling real estate, you want to get the best possible price. 

Duh.

In a red-hot seller’s market, that’s usually not a problem. But what about when the market starts to cool down?

A bump clause is a way a seller can continue to market a property until the buyer satisfies a specific contingency, such as selling their current house first. With this type of transaction, a seller can “bump” the original buyer if a better offer comes in.

In this article, we’ll examine how a bump clause works and its advantages for both buyers and sellers.

How a Bump Clause Works

Unless it is their first home, most buyers need to sell their current home before purchasing a new one. In these cases, the buyer makes an offer with a contingency that they sell the other home first.

If the seller accepts the bid and enters into a contract without a bump clause, the seller has to take the home off the market. No other bids will be accepted during the contingency period. A typical contingency period typically lasts between 30 and 60 days.

With a bump clause, however, the home remains on the market. If another buyer makes a better offer, the seller must notify the original buyer. Then that buyer has only a few days to waive their contingency or increase their offer.

Otherwise, the original contract becomes void. The seller returns the earnest money to the original buyer and proceeds with the new offer.

What’s the best timing for a bump clause?

In a hot real estate market, homes often sell without contingencies. For example, in the pandemic-fueled housing market of 2020 and 2021, many homes across the country sold above their asking prices with no contingencies other than the home inspection.

However, hot markets eventually start to cool down. Bump clauses allow sellers to accept an offer that may be below their expectations along with a way out if a better deal comes along.

On the other hand, a buyer can present an offer with bump clauses as a way to encourage a seller to accept a bid with a contingency.

Typically there are two different time frames for real estate bump clauses: the 72-hour bump clause and the 48-hour bump clause. Sellers and their agents use the set time periods as a negotiating tool to encourage buyers to act quickly.

The 72-hour bump clause. With this clause, the seller will keep the property on the market, providing the original buyer with a 72-hour first-right-of-refusal notice if a better offer comes in.

The 48-hour bump clause. This clause allows the original buyer a period of 48 hours to waive the contingency or increase their bid on the property.

If the buyer does not meet the time frame stated on the contract, the seller is free to move on to a second offer.

Interested in learning more? Check out our article Real Estate Contingency Clause Examples: How Buyers Avoid Getting Burned.

Other bump clause terminology you need to know

Here are some other terms you need to know when dealing with bump clauses in real estate transactions.

The no-bump bump offer -- A no-bump contract is just like it sounds. If the seller accepts an agreement with this wording, they cannot back out if a better offer comes along. The seller must take the home off the market and proceed with the sale.

The active offer with bump – This wording on a property listing means that the seller has accepted an offer and has the right to accept another offer.

CTG – You also might see the abbreviation “CTG” for “Contingent” in a property listing. This status means that the property is on the market until the seller learns that buyer has either waived or satisfied a contingency.

Advantages of bump clauses for sellers

Many real estate experts describe a bump clause as a kind of security blanket for home sellers. The main advantage of a bump clause is that it allows a seller to continue listing the home throughout the contingency period. The seller may get a cash offer or one without any contingencies.

However, in a cooling housing market, a better bid may not materialize. So, a bump clause protects the seller from losing out on a perfectly good offer. 

Advantages of bump clauses for buyers

Most home buyers cannot secure financing for a second home prior to selling their current one. But waiting to shop for a new home until your current one sells can be awkward at best. The bump clause is a good solution in a cool seller’s market.

Also, a bump clause may help convince a seller with an unrealistic home listing price to accept a reasonable offer.

Are there any downsides to bump clauses?

Sellers with bump clauses should be careful about jumping into a second “better” offer. After all, bigger isn’t always better. Ensure that the second buyer has good credit and mortgage pre-approval, or else you could be bumping a solid buyer for a less-qualified one.

Another potential problem is that some qualified buyers will stay away from contracts with bump clauses. They may prefer not to take the risk of getting bumped when their current home is about to sell.

It’s always a good idea to evaluate your local real estate market, weighing the pros and cons carefully before including a bump clause.

Photo by Andrey Storn on Unsplash

Any experienced investor knows that diversifying real estate investments is key to long-term success.

Many real estate investors get started with single-family homes (SFH) because the market is more accessible than commercial real estate or multi-family properties. This is a natural first step, but it shouldn’t be the last.

Expanding your portfolio to include different asset types lowers your overall risk. 

Not only should you buy different assets, but also spread those investments out across different markets. Any number of factors could wipe out home or real estate values in an area -- and you want to guard against that volatility as much as you possibly can.

However, diversifying beyond single-family homes will not guarantee profits -- nor will it fully ensure you won’t have losses. But for high-net-worth investors, it’s definitely the best route to take. 

In this article, we explain why.

The Benefits of Investing in Single-Family Homes (SFHs)

First, there are a variety of benefits to investing in single-family homes versus multi-family homes and other properties:

• Lower cost 
• Easy financing
• Easy to sell (even during the current COVID-19 pandemic, demand for single family homes is rising)
• Higher appreciation
• Better tenants (Many SFH renters are families who want to stay in one place and take better care of the property)

All in all, these points fall under the same general category: Easier accessibility. It’s simply easier to get started with a SFH than any other real estate asset type. That’s why so many real estate investors begin with SFHs.

As with any investing approach, it’s smart to start small and work your way to bigger properties. Buying one SFH is less daunting for new real estate investors than buying a multi-family property. After all, taking care of one tenant (or one family) is much easier than taking care of two or more. 

Most Royal Legal Solutions clients initially invest in SFHs and eventually branch out into industrial real estate, multi-family housing, retail, medical, and self-storage. Why? Because they begin to realize that all of their eggs shouldn’t be in one basket.

Different assets have different risk factors -- and sometimes, in real estate, different properties are complementary. If the demand for SFHs collapses and property values plummet across the nation, then the slack has to be picked up by apartment and multi-family properties (because people have to live somewhere, after all).

In addition to diversifying across asset types, it’s just as important to diversify across markets.

Locations, Locations, Locations: Don’t Get Tied Down in One Area

There are advantages to having your investment property near where you live. If anything goes wrong—say, your tenant gets locked out of the building or the power goes out—you can be there to offer hands-on assistance.

But spreading out your investments across different real estate markets is also important.

Concentrating your holdings in a particular city or area makes your entire portfolio subject to the fluctuations of local supply and demand. Even in the best areas, there are a number of factors that could seriously hurt real estate market values:

• A natural disaster (hurricane, flood, earthquake, etc) destroys homes and buildings. (Even if you have insurance, entire communities don’t easily bounce back).
• A major business/employer shuts down or relocates.
• Crime waves hit the area.
• The school system takes a nose-dive.
• Mismanagement of local government funds leads to major infrastructure issues (poorly maintained roads, bridges, etc).

Even if you own a variety of real estate asset types in a single location, you still aren’t as diversified as you could be. If you lived and invested in New Orleans in 2005, it didn’t matter if you owned a single-family home, a condo, a four-plex, a self-storage facility, and a corner convenience store—Hurricane Katrina would’ve dealt a massive blow to your portfolio (unless you were amply insured and looking to cash out).

Experienced real estate investors avoid over-concentrating in one particular asset class or location. If, instead, your assets were spread out across the entire continental United States, your portfolio wouldn’t have been affected quite as much.

High-net-worth investors know that a real estate portfolio with a range of asset types, spread out across different locations, puts them in a better position to withstand economic downturns and events like the COVID-19 pandemic and natural disasters.

Why Different Asset Types are Key to Diversifying Your Investment Portfolio

Dwight Kay, founder of Kay Properties and Investments, a national 1031 exchange investment firm, outlined an example of how a hypothetical investor can diversify a $500,000 investment portfolio across commercial and multifamily real estate with the potential for income and appreciation. The funds would be equally spread among these assets:

• An industrial distribution facility
• A dialysis center
• A multifamily apartment community with 300 units in the Southeast
• A self-storage facility in the Midwest
• A debt-free multifamily property in Texas

Kay says this hypothetical investor “has diversified her portfolio by both asset type and geography.”

The hypothetical investor has also avoided highly cyclical and volatile markets, like senior housing and buildings involved in oil and gas production.

Conclusion: Diversifying Your Real Estate Investments

When it comes to real estate investing, it’s easiest to get started with a single-family home. The cost is lower, the financing options are plentiful, and the tenants typically care more about general upkeep than a multi-family or apartment building. Naturally, that’s where many investors start.

However, as time goes on, it’s smart to diversify across different asset types. That includes:

• Multi-family buildings
• Self-storage facilities
• Distribution centers
• Convenience stores
• Medical centers

Not only is it a good idea to invest in different asset types, it’s also a good idea to spread those investments out across different markets. A number of factors could wipe out real estate values in any given market, and they aren’t always within your control (nor are all of them easily insured against).

Avoid cyclical, highly volatile asset classes, including senior housing and long-term senior care facilities, hotels, and real estate used in the production of oil and gas.  

Focus on diversifying your portfolio by buying different assets in different markets. Don’t get too caught up in solely buyings single-family homes in one market. Remember: the demand could disappear in just a few short years.

Photo by Anete Lusina from Pexels

In this article, we’ll teach you how to calculate cash-on-cash return—and why it’s one of the most important calculations for real estate investors.

Much of the real estate industry, including investors and agents, use this formula (sometimes called the equity dividend rate) as a quick way to analyze an investment’s cash flow.

More specifically, it calculates a percentage value based on how much money you’re making (or going to make) divided by how much money it takes to acquire the property.

We’ll go over what the metric tells you, as well as what it doesn’t tell you. It’s just as important to know when not to use this metric, because you don’t want it to influence you to make a deal that, upon more extensive review, actually isn’t that great. And, the next time a realtor tries to sell you on a property that has a “fantastic” cash-on-cash return, you’ll be better equipped to determine whether or not it’s as good as it sounds.

This should be one tool in a toolbox of other important metrics and formulas that you consider when looking at a deal. It shouldn’t be the only tool.

With that said, let’s get started.

How to Calculate Cash-on-Cash Return

Cash-on-cash is a simple formula: income earned divided by cash invested. It’s a pre-tax figure that takes place over the course of a year.

The easiest way to explain it is probably through an example. 

Let’s say you buy a single-family rental property for $300,000. You put $60,000 down and the seller covers closing costs. The property has a tenant inside who’s renting the place for $2550/month. After factoring in all of your expenses (mortgage, maintenance, insurance, etc), you find out the property generates about $300 per month in positive cash flow. 

You also need to factor in vacancies and subtract that from the total cash flow. For the purposes of this short example, let’s assume that this property is located in an in-demand area and the tenant has no plans on leaving any time soon. For reference, though, the average vacancy rate is about 6.8%. It’s up to you to know what it is in your market area. 

So, to find out the cash-on-cash return, you’d take the income earned, $3600* and divide it by the cash invested, $60,000.

The result is 0.06, or 6%. You could also use a cash-on-cash return calculator, to make it easy.

All in all, the formula (or formulas, for each variable)  looks like this: Annual Pre-Tax Cash Flow / Total Cash Invested

Annual Pre-Tax Cash Flow = (Gross Rent + Other Income (think parking spaces, pet fees)) - (Expenses + Vacancies + Mortgage Payments)

*It’s a yearly figure. The property generates $300/month, so you multiply $300 by 12 to get $3600.

What Does Cash-on-Cash Return Tell You?

So, what does 6% even mean, then? Is it good or bad? Should you invest or skip out?

Compare Different Investments

Cash-on-cash returns give you a fairly easy way to compare different investments, as long as you know how much income they generate and how much they cost to maintain. For example, let’s say you find another tenant-occupied property that’s selling for $190,000 and generates $205/month in cash flow. On the surface, it doesn’t seem like it would be very easy to compare the two. Your gut might tell you that the less expensive property is the better investment, or your gut might tell you that the property that generates the most income is the best investment.

What’s worse is that, in the real world, there are more than just two properties that look like this (and a lot of them don’t cash flow).

So, let’s calculate the return of the second property. In order to purchase the rental, you put 20% down. In this case, that’s $38,000. After closing costs, you end up paying $42,000.

The result is .058, or 5.8%. That means this property, according to this formula, is a slightly worse investment than our first example.

Play Around with Leverage

But what if you only had to put 10% down? And let’s imagine you get a good deal on private mortgage insurance so it only costs $50/month. Your annual pre-tax cash flow is $155/month or $1,860/year. After closing costs, you spend $23,000 to acquire the property.

So, annual pre-tax cash flow ($1,860) divided by total cash invested ($23,000) gives you 0.08, or 8%. Using leverage, you completely changed the numbers.

This way, you can easily compare different investments -- even if changing one factor might change a lot of factors. Maybe you’re looking at investing in a REIT that’s projected to grow at 10% annually -- you might skip out on the rental property entirely.

What Does Cash-on-Cash Return NOT Tell You?

No Equity

One thing you may have noticed, though, is that in our examples above, the tenant covered 100% of the mortgage payments. This formula ignores the fact that every time you make a mortgage payment you’re building equity. Instead, we’re only looking at how much money you have in your hands at the end of twelve months.

If we go back to our first example, with the tenant paying off a $300k property, the equity alone is desirable for many real estate investors.

No Taxes

Furthermore, taxes can completely throw off a deal. What if the taxes for the $300k property are the same as the taxes for the $190k property? If you’re just looking at this one metric, you’ll completely ignore that important variable.

No Risk Adjustment (Leverage Looks Great)

Finally, what if you could buy a $200k property that generates $1,000 in annual cash flow by only putting 3.5% down (with the seller covering closing costs)? Total cash invested is a whopping $7,000, and your cash-on-cash return is 14.2%.

Buy, buy, buy! Right?

What if you got such a great deal on that property because it’s a waterfront that’s expected to be literally underwater in five years?

This formula makes leverage look fantastic. You might as well go out and scoop up as many rental properties as you can for as little money down as possible—but anyone who has watched some investors’ entire fortunes get wiped away by a downturn or some other unexpected event knows otherwise.

Conclusion

Cash-on-cash return, or equity dividend rate, is pre-tax cash flow divided by total cash invested. It tells you how much money you have in your hands at the end of the year.

It’s an easy way to compare different investments, particularly different rental properties and commercial real estate investments—and even stocks and bonds.

It isn’t perfect, though. The formula ignores equity, doesn’t take taxes into account, and makes leverage look greater than it is.

Make sure that, when you’re using this formula, it isn’t the only formula you’re relying upon.

One of the best ways to build wealth is with rental properties. And one of the first things new real estate investors need to learn about is how to calculate rental property cash flow. Running a profitable investing business depends on it.

In fact, I can spot a new investor a mile away. These guys think cash flow is simply “income after expenses.”

They'll say something like "My mortgage is $1,500 per month and the rent is $1,100, so I'm going to be making $400 every month.” 

Sadly, this investor is about to lose money. There are a lot of unforeseen expenses they aren’t thinking about.

Let’s take a closer look.

What is Cash Flow, Exactly?

Cash flow is used to figure out just how much income rental real estate such as apartments, duplexes, or commercial buildings can generate. A property can have either positive cash flow or negative cash flow. Positive cash flow, in case you haven’t guessed, comes with more income than expenses. That’s what we want.

Boosting the cash flow of a property could make your business sustainable in the long term. You want a strong return on investment (ROI), but is that the same thing? Not really: Cash flow measures how much cash an investment property will actually generate, whereas ROI measures total value over time.

Ok. So why do so many investors get the cash flow forecasts for their properties wrong?

4 Factors That Make Up The Flow

Long-term expenses make up the true cash flow return, and these expenses differ based on the property type. They aren’t the same every week and every month and every year. That’s why it’s important that you can calculate the average.

To calculate what it will cost your company to maintain a specific property, you need an accurate, long-term record of what has been spent on repairs, vacancy rates, property management services, and property insurance.

Repairs. In one month you may not have any repair costs. Does that mean your repair costs over three years will be zero? Of course not. You have to budget for those inevitable nuisances like broken circuit breakers or crappy old toilets. 

Don't go "low flow" with your "cash flow."

Vacancy Rates. What’s the worst thing about a great tenant? They can’t live there forever, that’s what! When they vacate your rental, you need to make some changes to keep it attractive for new tenants. It may take time for you to market the property for prospective new renters. This process includes making repairs, screening tenants, and getting them signed. For a normal market, your vacancy rate can sit at 8 percent.

Property Management. Even if you claim to be a jack of all trades, managing your property all by yourself may be difficult. Budget for property management. Property managers charge for screening and signing a lease agreement with new tenants. However, you should pay yourself if you insist on managing your property yourself. Saving money is an admirable goal, but remember—this job is a lot harder than looks.

Property Insurance. Connect with an insurance company to rates for properties in your market. There are all kinds of ways to insure your rental units; for example, "rent default insurance” is used to protect against late rent. If your tenant stops, insurance pays for it. That’s a great example of optional insurance that will affect your cash flow forecast.

Using the “50 Percent Rule.” The “50 Percent Rule” says that landlords should expect operating expenses to be 50 percent of gross income. This rule can help you figure out how profitable your rental property will be. NOTE: Mortgage or loan payments are not part of these expenses; they come out of the other half. (See how you can get in trouble by not estimating your costs up front?) 

Get Organized!

Learn how to accurately forecast both your expenses and your revenue before you get into the rentals game and you'll save yourself a lot of headaches. The best way to monitor cash flow is to prepare a cash flow report. 

With this report, you are able to see the cash you received and cash paid out at the end of every month. Tracking on a weekly or daily basis may be a good idea depending on the size of your portfolio (assuming you have a knack for spreadsheets!). If you’re buying a property, try to get this information—in as much detail as possible—from the previous owner.

In fact, if they CAN’T provide it, that’s a red flag.

Proper cash flow forecasting matters for every rental property investor. You should know how to measure the rate of return for your property. Investing in properties with positive cash flow is the key to your success as an investor.

Ready to learn more? Check out The Rental Property Asset Protection Checklist.

Anyone who is interested in commercial real estate investing should have at least a rudimentary understanding of how the real estate sponsorship process works. Before you invest in a development project, it’s vital that you properly vet the sponsor to make sure they have the necessary experience to lead a successful commercial real estate project.

Fortunately for the rookie real estate investor, we’ve put together a crash course on getting started with real estate sponsorships. While we can’t make you an expert with one article, we can explain the basics and give you some valuable tips on how to decide if a sponsorship opportunity is a good investment. 

What Is A Real Estate Sponsor?

In commercial real estate jargon, the term “sponsor” refers to the person or business that essentially runs the show on a commercial real estate project. 

A sponsor manages every aspect of the transaction from conception through completion, which usually includes taking on the following responsibilities:

• Finding the deal
• Negotiating the terms of the acquisition
• Preparing investor marketing materials
• Aggregating capital and financing
• Conducting due diligence
• Signing loan documents
• Handling all ongoing operations
• Overseeing renovations, leasing and maintenance
• Managing project finances

General and Limited Partners

The sponsor is often referred to as the syndicator or the General Partner (GP), while the other equity investors are called Limited Partners or LPs. LPs usually have a more hands-off role in the management of the real estate project, so you might also hear an LP referred to as a “passive” or “silent” partner. 

Because of their limited involvement, silent partners also have limited liability. This means that if the project goes belly up, LPs can’t lose more than the amount they’ve invested. 

Check out our article, How Real Estate Syndicators Protect Assets & Avoid Taxes.

How To Vet A Sponsor

As a novice real estate investor, you might think you have to take whatever sponsorship you can get. However, nothing could be further from the truth. Savvy investors know they can’t afford to throw away their hard-earned money on failed projects, and getting a return on your investments is particularly crucial if you’re just getting started in the commercial real estate game. Since some sponsors have much stronger qualifications than others, you need to find a sponsor you can trust. 

Here are a few things you should consider when evaluating a real estate sponsor for a potential investment:

The Sponsor’s Successes

You should evaluate the sponsor’s prior success— not just with real estate developments in general, but in the particular location and asset class of the potential investment. For example, you probably don’t want to partner with a sponsor who has only worked on apartment buildings on a retail property development project. Instead, look for a sponsor with experience working with the type of asset involved in the investment project.

The Sponsor’s Failures

The sponsor’s track record when it comes to failures is just as important— if not more important—  than their successes. While most experienced sponsors will have a few black marks on their record, it’s essential that you understand what went wrong and how the sponsor handled it. It’s a major red flag if a sponsor has a history of keeping silent partners in the dark when things get tricky.

The Proposed Payout Structure

Obviously, getting paid is the reason you’re looking for a sponsorship in the first place. With that in mind, make sure you review the payout structure and understand how you and the sponsor will make money from the investment. Be wary of structures that are overly favorable to the sponsor, and make sure the proposed payout aligns with everyone’s interests. 

Project Management And Investment Strategy

Make sure to thoroughly evaluate the systems and processes the sponsor uses to make sure the project is appropriately managed. Look for a sponsor that has a coherent and consistent plan in place. The sponsor should also be able to confidently articulate a clear investment strategy for the project and explain how it will make income.

Don’t Settle For A Bad Sponsor

Just because you’re a new real estate investor doesn’t mean you have to settle for a sub-par sponsor. Investing in a commercial real estate development project with a sponsor you can’t trust to manage it well will not only cost you a lot of headaches, but more likely than not, it will also cost you cold hard cash. 

Whether you’re a brand new investor or you’ve been doing this for years, you should never forget that you always have the power to walk away from a bad sponsor. If you can exercise the patience and wisdom to wait for the right deal, you’ll end up with a much better investment opportunity. 

One of my favorite things about real estate investing is that there are so many different ways you can do it.

As one of the most accessible types of investments for the average Joe (or Jolene), real estate investing offers a variety of exciting strategies to explore. If you take the time to learn about your options, you can find a strategy that suits your financial situation, the level of risk you can tolerate and the amount of time you have to spend nurturing your investments.

To help you along on your real estate investing journey, we’ve put together a list of seven common real estate investment strategies that everyday people can use to make real money from real estate. This list is just a starting point, but it will give you some background information on some of the most popular types of real estate investments.

Strategy #1 — Buy And Hold

The buy-and-hold strategy is one of the most common types of real estate investing, and it is also one of the simplest. Essentially, you purchase a property and rent it out for a period of time. Depending on the deal you got at purchase, you can make income from the rent, or you can simply use the rent to cover the mortgage and let the property appreciate. There are many variations on the buy-and-hold method to explore, but the key to successfully investing using this strategy is to understand property valuation and find good deals. 

Strategy #2 — Invest In Rental Properties

Investing in rental properties can make you money in the same ways that the buy-and-hold strategy does— income from rent and appreciation in the value of the property. While dealing with tenants may not be everyone’s cup of tea, investing in apartment complexes or other multi-unit rental properties can generate substantial cash flow, particularly with market rental prices rising in many cities across the country. 

Strategy  #3 — Flip Houses

House flipping is one of the most well-known real estate investment strategies, and it continues to grow in popularity thanks to the handful of TV shows that spotlight house flippers. For those of you who haven’t seen these shows, flipping houses involves buying a property at a discount, remodeling, repairing and improving it and selling it for a profit. 

While there is a fair amount of risk associated with flipping houses, especially for new investors who don’t have the best grasp of the costs associated with repairs, many flippers learn from their mistakes and develop the skills they need to make substantial profits in a short period of time. 

Strategy #4 — Real Estate Investment Trusts 

Real Estate Investment Trusts (REITs) are companies that own, manage or finance real estate investment projects. REITs are modeled after mutual funds, where numerous investors pool their capital to make an investment. This model allows individual investors to profit off real estate without having to purchase, operate or fully finance a single property. 

Because of the way they are structured, REITs are much more focused on earnings from generated income, and most REIT investors make very little money from appreciation. Some REITs will have a required minimum investment for you to get involved. Still, as long as you have the funds needed to satisfy this requirement,  REITs are a straightforward and hands-off method of investing in real estate projects that would otherwise be cost-prohibitive for the average investor. 

Strategy #5 — Pre-Construction Real Estate Investment

Pre-construction real estate investment is one of the riskiest real estate investment strategies, but it also can earn you serious, serious profits. (Think millions of bucks!)  Pre-construction investing is just what it sounds like: before ground is broken on a development project, you purchase an “option” on the property. This allows you to buy real estate at a fraction of the value of a fully-developed property. 

Pre-construction investments are the most successful in high-demand areas that often experience housing shortages. In these locations, prices can rise quickly, and new units can even be sold before they are completed. In some neighborhoods, your investment can appreciate in value before the project is finished. However, when things don’t work out, you could be facing substantial losses.

Strategy #6 — Wholesaling Real Estate

The process of wholesaling real estate is relatively straightforward: you find an excellent real estate deal, write a contract to acquire the property and sell the contract to another buyer for a fee. In other words, you’re not purchasing real estate; you’re a deal-hunting middleman. The fee you receive, called an assignment fee, usually ranges from $500 to $5,000 per property, but larger deals can come with an even higher payout.

Some wholesalers will sell contracts to retail buyers, but most of the wholesaling market is other real estate investors, commonly house flippers. These types of investors are usually cash buyers, which means the wholesaler can get paid their assignment fee within days or weeks. Wholesaling is an excellent strategy for new investors who don’t have a lot of capital but want to get started in the real estate investment world. Since you never have to actually purchase the property or pay to repair and manage it, you can get started in wholesaling with very little financial investment.

Strategy #7 — Crowdfunding Real Estate

Crowdfunding real estate is a fairly recent development in the real estate investing world. While crowdfunding, in general, is well-known due to platforms such as GoFundMe, the concept of crowdfunding real estate is just starting to grow in popularity.  

Crowdfunding can allow investors who don’t have the capital to purchase property on their own to pool their resources to invest in real estate. If you can't raise the funds you need through traditional methods, you can try crowdfunding your purchase through a real estate crowdfunding website, social media or another online platform. 

For what it's worth, Investopedia lists its top crowdfunded real estate investing platforms as follows:

• Best Overall: CrowdStreet
• Best REIT Option: DiversyFund
• Best for Institutional Commercial Real Estate: EquityMultiple
• Best for Beginners: Fundrise
• Best for Investing in Loans: PeerStreet
• Best Property Research: RealtyMogul

Keep Learning

These seven strategies are only a few of the many ways you can make money investing in real estate. There really is a niche for everyone, so if the seven strategies discussed in this article aren’t what you’re looking for, don’t give up. There are plenty of other options out there! 

Check out our article How To Build Your Real Estate Empire to learn even more real estate investment strategies. 

It’s a common cliché among investors that we are our own worst enemies.

While it’s true that some investors shoot themselves in the foot by jumping on a bandwagon that’s headed for a cliff, another cliché to keep in mind is to never put all your real estate investment eggs in one basket.

We tend to let our emotions guide us. Investment bubbles are said, for instance, to be the product of a certain kind of “euphoria” that manages to trump all caution and reason. Millions are lost and depression soon follows.

Such is the nature of mania.

The question then becomes: how do we, as investors, manage these emotions that seem to guide us down blind alleys?

Top investors follow two guiding principles:

#1 Successful Investors Don’t Chase Performance

Too many investors get caught up in the frenzy of recent strong performance. Take, for instance, the cryptocurrency rush. Millions of unskilled investors rushed to jump on a bandwagon that made major headlines all across the globe. True, many of them got rich. 

They got lucky.

There’s nothing necessarily wrong with investing in cryptocurrencies, but rushing into an investment simply because there’s been buzz around it is not likely to yield good results.

Here, the feeling that you’re missing out on something major (fear) is guiding the decision. But you can only know one thing for certain: you should have invested in Bitcoin when it was under $1,000. Once there’s a major buzz around it, it's time to sell to someone who is themselves chasing performance.

#2 Successful Investors Execute a Master Plan

Investors that go in without a plan are playing a dangerous game. Investment is not analogous to gambling merely because both involve risk. Risk can be managed intelligently in an investment portfolio. A wise investment plan should address the following:

• • • Establish benchmarks. There are a number of ways to determine the success of a portfolio. All will depend on your individual investment goals. Establish a benchmark and adapt accordingly.
    • Identify risks to your portfolio. You’re going to want to understand what risks are involved with your portfolio. For instance, volatility can be a risk in the short term, inflation can be a risk in the long term. Depending on what your portfolio is for, both must be accounted for.
    • Establish reachable goals and objectives. Saving for a child’s college or saving for your own retirement are sound reachable goals.
    • Allocate assets. You’ll want to make a decision on what percentage of your investments will be allocated to any given market. This is especially true for those planning for retirement. For example, it might make sense to invest in US equities alongside high-yield bonds, foreign stocks, or even real estate and cryptocurrencies. All of this should be designed to meet your goals while addressing risks.
    • Diversify! Diversifying by investing in various asset classes is the first step. You’re also going to want to diversify within asset classes. Diversification manages potential risk while allowing you to take bigger risks with higher rewards.

The Bottom Line

Top investors successfully manage the highs and lows. They do not make choices based on emotions. They do not chase the latest trends. They are not caught up in investment frenzies. They do not become overconfident. Instead, they build a solid investment foundation from which they can take calculated risks. Interested in how solid your foundation is? Contact one of our professionals today.

A rental property appraisal will tell you exactly how much the property is worth to the average buyer or investor in the current market.

In part one of this article, we talked about why rental property owners need an appraisal, how much an appraisal typically costs, and what the appraiser looks for when they’re on your property.

In part two, we'll talk about how to handle a tenant who won't cooperate with an appraisal (due to coronavirus or some other reason). We'll also drop some helpful hints for landlords who want to get the maximum appraisal value for their property.

Let's get started!

Can a Tenant Reject an Appraisal?

What should you do if the tenant won’t let an appraiser inspect the property?

If the tenant refuses to let an appraiser come in and look at the property, review the lease agreement with them. Typically the lease agreement has a section specifically on what to do about this, but usually you only need to give the tenant 24 hours notice before you send in an appraiser. In that case, all you have to do is send them a “notice of intent to enter” and you’re all good.

Given that there’s currently a pandemic, though, you might not want to force outside contact on an at-risk tenant. You don’t want to create an unsafe scenario for either the tenant or the appraiser, and forcing contact without a lease provision and reasonable notice is begging for legal trouble.

Tell your lender about the scenario, and they’ll work out possible solutions with you. As we’ve mentioned before, there are appraisal options for some loan types that are exterior-only.

How to Get Maximum Value for Your Rental Property Appraisal: 4 Tips To Remember

And, finally, the section that could possibly help your bottom line the most: How do you get the highest possible appraisal for your property? Is there anything you can say or do that’s actually going to help the value? Or is it all out of your hands?

Here are our four best tips, in order from most-impactful to least-impactful on the value:

Provide the appraiser with a list of improvements

This is the biggest one. It’s not immediately clear to the naked eye where and when any improvements have taken place—particularly if the house is a bit of a mess, which we’ll talk about soon—but if the bathroom, kitchen, and roof have all been replaced in the past five years, you can expect that to seriously help your value.

On the other hand, if the appraiser doesn’t have any information on improvements, they might miss a couple, which could lower the quality and condition of your house, forcing the appraiser to pull up comparable sales that don’t reflect the renovations or remodels.

Fix up anything that’s in serious need of fixing up

If you’re working with a “well-lived-in” property, make sure that there aren’t any glaring maintenance issues. Again, you can use your common sense here: if you think it would bother a typical buyer, it’s probably something that the appraiser is going to note in the 1004.

Keep the property clean on the inside and out

The appraiser doesn’t care about whether or not there’s clutter around the house, and they don’t care about interior design. They likely see hundreds, if not thousands, of houses per year, so nothing is really all that surprising. However, if you want the best possible appraisal, you want to create the best possible environment for the appraiser. For the best possible appraisal, pretend you’re staging an open house.

Be on time to let the appraiser in to the property, and be respectful

This one should be a no-brainer, but do your best to be kind and respectful to the appraiser. This person, after all, is in charge of determining the value of your property, and oftentimes it can make or break your deal. If the appraiser knows that you need an appraisal completed by Thursday in order for a loan to clear, but you showed up 45 minutes late to the inspection, they might prioritize some other reports before finishing yours. If, on the other hand, you’re professional, helpful, and kind, they’re going to do everything they can to help you out.

Conclusion: Handling Appraisals the Right Way

In conclusion, let’s summarize all of the topics we listed in the beginning:

Why do you need an appraisal?

You need a rental property appraisal because 1) interest rates are incredibly low and it’s going to help your bottom line, and 2) it’s required by most major lenders, as well as the federal government.

How much does an appraisal cost?

The typical appraisal is going to cost anywhere from $300-500, but a good rule of thumb is about $400.

What do appraisers look for when they look at your property?

The floor plan (including overall square footage), building materials and surfaces, and the quality and condition.

What do you do if the tenant refuses the appraisal?

Review the lease agreement with your tenant. There’s typically a section about this exact situation. If they’re an at-risk member of the population during the pandemic, then review options with your lender.

How do you get the maximum value for your property?

Provide the appraiser with a list of improvements in as much detail as possible, fix up anything inside or outside the house that’s in dire need of fixing up, keep the property reasonably clean, and be kind and respectful during the appraisal.

What are rental property appraisals and how do they affect your business?

A rental property appraisal is when a certified appraiser determines the exact market value of your rental property: how much the property is worth to the average buyer or investor in the current market.

In this article (and in part two, which you can find here), we’ll tell you everything you need to know about rental property appraisals, including:

• Why you need an appraisal in the first place (including the difference between value and price, so you can think like an appraiser).
• How much the typical appraisal costs.
• What appraisers look for when they inspect your property.
• What to do if your tenant doesn’t want an appraisal (due to coronavirus concerns or some other reason)
• And, most importantly, how to make sure you get the maximum value estimate from the appraiser.

Why Do You Need An Appraisal?

At the time of this writing, according to Freddie Mac, one of the biggest federally-backed home mortgage companies, mortgage rates are at an all-time low of 2.81% for a 30-year fixed-rate mortgage.

Naturally, that means appraisers are in high demand. Everyone is realizing that they can seriously lower their monthly bill (and, if you own rental property, maximizing your cash flow) by refinancing.

But why? Why can’t you just buy a house or refinance your mortgage without having an appraisal?

Because almost every major lender—as well as the federal government—demands that an appraisal is performed on the property prior to supplying a loan. Sometimes, in specific instances, these requirements are waived, but that doesn’t happen too often. Lenders need a way of verifying the house is actually worth what someone is willing to pay for it.

The Difference Between Value and Price

For that reason, appraisers are hired to find the market value of a property: how much the typical consumer would pay in the current market, because the market value is different from the sale price, which is how much someone did pay for that property.

Since home-buying is such an individual and emotional process, these two numbers can be wildly different. A particular buyer, for instance, might be enamored with a koi pond in the backyard of a property. He or she may be willing to pay an extra $30k for the property (let's just say they really, really like fish) but he or she isn’t representative of the typical buyer, because the typical buyer doesn’t really care about a koi pond (assuming it’s in a market area where koi ponds are atypical, which is much of the United States). Or the price might have been driven up by a bidding war, causing untold inflation.

If you’re a lender, you wouldn’t want to give out a half a million-dollar loan on a property that’s only worth $180k, even if the buyer is able and willing to repay the money. Anything can happen: the buyer could lose his or her job or come down with a terminal illness, making it impossible for him or her to repay the loan. In those instances, the bank needs to be able to sell the home in order to recoup whatever’s left of the mortgage.

If the borrower only paid off $40k of a $500k mortgage and the bank sells the house for the much-more-realistic $180k, they’re down $300k after closing costs.

So, to answer the question, “Why do you need an appraisal?” the simple answer is: because you have to. The more complicated answer is because, at scale, it saves the bank a lot of money—and, if you’re the unlucky buyer who is willing to pay more for a property than it’s worth, an appraiser might just save you money, too.

How Much Does A Rental Property Appraisal Cost?

The cost of your rental property appraisal will depend on a few factors, including where you live, the current supply and demand of appraisals, and the type of appraisal you need (which depends on the type of loan you’re taking out).

To give you a ballpark idea, most appraisals will cost anywhere from $300-500. The vast majority of those will be the standard 1004 Uniform Residential Appraisal Report (and if you’re really bored, you can take a look at it here), but since the start of the pandemic, some lenders are clearing exterior-only appraisals, which appraisers can complete faster because they don’t have to perform an interior inspection. And, if you’re lucky, you might even be able to get an appraisal waiver—so that there doesn’t need to be an appraisal at all.

However, most of the time you’re going to spend roughly $400 on a 1004, and the appraiser is going to have to perform an interior inspection. What does that mean for you?

What Does the Appraiser Look For When They’re In Your Property?

Every appraiser is different, but typically the appraiser is noting a few different things:

The floor plan

The appraiser will draw a sketch of your house, noting the exact square footage of the property, and the number and locations of rooms, bedrooms, and bathrooms (and sometimes windows, fireplaces, staircases, and other details) so that they can confirm that it lines up with the research they’ve done on your property using the MLS and public records. Also, with the sketch, the bank has an easy reference for what the house looks like on the inside, and whether or not there is any functional obsolescence—which is a fancy term for anything inside a house that doesn’t fit the market area.

For example, if there’s an additional bedroom that is only accessible through another person’s bedroom, it won’t really count as a bedroom, and it’s the appraisers job to make sure that they find accurate comparable sales in the market that are actually similar to the subject property.

Building materials and surfaces

If you look at the 1004, in the “Improvements” section, there are entries for exterior and interior materials and their conditions. The appraiser is also going to look at those and jot them down.

Quality and condition of the property

If there’s dampness in the basement, evidence of infestation, holes in the walls or ceilings, or dysfunctional plumbing, that’s going to seriously affect the value of the property. Depending on the lender and loan type (like FHA), the appraiser may or may not be required to check the plumbing. It’s best to make doubly sure it’s working before the appraisal.

Generally, though, a good rule of thumb is to use your common sense. Ask yourself, “Would the average buyer be okay with this?” If they wouldn’t be, it’s likely going to negatively affect the quality and condition of your home, and therefore the value. 

To continue reading, check out part two of this article, How Landlords Can Get Maximum Value From A Rental Property Appraisal, which covers how to handle a tenant who won't cooperate with an appraisal and how to get the maximum appraisal value for your property.

Real estate investing has long been a proven strategy for people looking to accumulate wealth. Whether it's building equity in your own home or saving up enough money for a second property, real estate is often a tangible investment that typically moves up and to the right. 

For those who can pull together the capital needed to get started, there are some important elements that need to be considered before taking the leap. 

In case REIT investment strategies are unfamiliar to you, this article will highlight how they work, how they can benefit you and what strategies the everyday investor can implement to get started.

Real Estate Investment Trusts (REIT): What Are They?

Real Estate Investment Trusts (or REITs) are companies that own or finance income-producing properties across a range of sectors. These sectors can include:

• multiplex buildings
• apartment buildings
• commercial buildings like box-store shopping centers
• self-storage facilities
• healthcare facilities
• large data centers

REITs pool together the collective capital of investors and they invest that capital in various real estate sectors like the ones mentioned above. The profits of these investments are then distributed back to investors.

There are a number of requirements that must be met in order for a company to qualify as a REIT. One of the first requirements is fairly obvious: REITs must invest at least 75% of their capital in real estate related sources. REITs must also attain at least 75% of their income from real estate related sources. Most importantly, REITs are required by law to allocate at least 90% of their income back to their investors.

Depending on the REIT you are investing in, there may be a minimum investment requirement to get started. Even with that stipulation, REITs are a fairly simple way to invest in property that is typically out of reach for your average investor.

Interested in learning more? Check out our article How To Start Real Estate Investing In Your Thirties.

Benefits of Investing in a REIT

One of the biggest benefits of investing in a REIT is one that's already been hinted at. It's rare that an investor would have enough capital to single-handedly purchase an apartment complex or a large commercial property. REITs offer an easy on-ramp for everyday investors and often provide larger returns than an average stock and bond investment might.

REITs are often free of many of the hassles associated with direct ownership through your own LLC. The horror stories of direct ownership are seemingly endless. Unexpected property maintenance, difficult renters, not to mention all your capital tied up in a single asset. These realities don't have to be deal-breakers, but the benefit of a REIT is a diversified investment and efficient handling of all the behind-the-scenes details.

With all of this, real estate is known for how it appreciates in value over time. On top of the regular yields you receive through dividends, you also get a return on the appreciation of the asset you've invested in when you opt out.

Strategies for Investing in a REIT

How does one go about investing in a REIT? The good news is that many REITs are publicly traded on major stock exchanges. This represents a sense of validity and transparency in what you are investing in. That said, this path of investing in a REIT is also susceptible to the general ups and downs of the market as a whole.

Alternatively, there are exciting new crowdfunding platforms like Fundrise where the real estate investing market is entirely online and can even be managed from your phone. These online platforms often have a much lower initial investment requirement (as low as $500), making real estate investing more accessible for the average, everyday investor.

Finally, as mentioned above, the REIT market is incredibly diverse. Whether it's a residential home market, commercial market, healthcare or technology, the range of investment classes available to you is huge. Find something you are familiar with or passionate about, get connected and watch your money grow.

Interested in learning more? 7 Real Estate Investment Strategies That Made My Clients Wealthy.

Is A REIT Investment Strategy For You?

Whether you are considering investing in real estate for the first time or whether you have a few properties in your portfolio already, a REIT is worth looking into. Private ownership is a solid option if you are familiar with your local real estate market, and if you are financially savvy and able to deal with the renters and the inevitable repair and maintenance. But a REIT gives you the opportunity to remain hands-off while earning reasonable returns. Explore tapping into this proven strategy for wealth management and diversification.

Real estate one of the more promising long-term investments. One reason is the real estate market is generally less susceptible to the volatile ups and downs of high-risk stocks or emerging strategies like cryptocurrency. 

That said, it can be a little intimidating to jump into owning land, becoming a landlord or flipping houses, especially if you are part of a generation saddled with student debt and a shaky economy.

By looking at the challenges you need to overcome and the investment options at your disposal, there's lots of opportunity to build your investment portfolio. 

If you're in your 30s, interested in real estate investing in your 30s and aren't quite sure how to begin, this article is for you. 

Overcoming The Challenges Millennials Face

There's a lot going on for people in their 20s, but people in their 30s are experiencing a lot of change too. Some of the challenges to overcome in your 30s include:

Reducing Student Loan Debt

You likely spent at least some time in your 20s attending college. In your 30s, all the money you borrowed to pay for that expense is due. Reducing your debt load is a good and important thing to be doing, but it takes time.

Getting Married/Starting a Family

Many people in their 30s choose to get married and start a family. These are wonderful things, but also come at a cost. Weddings can be expensive, medical bills can add up and the cost of raising kids isn't going down either. Putting aside extra money for investment purposes on top of these normal expenses can be a challenge.

Getting Financial Experience

For some people, it can take until their 30s (or later) to develop good habits and awareness around tracking income and expenses. Most financial planners suggest building an emergency fund to cover unexpected expenses or a loss of income. These things take time to develop, too.

People in their 30s should get started on estate planning, signing off on life insurance and the like. All of these are good and necessary things and are definitely recommended before venturing into the real estate investment world. So before you get started, make sure you have these things covered first.

Ways Young Investors Can Get Started In Real Estate

Once you have these bases covered, there are several ways to get into real estate investing. Some ways are easier than others, but let's explore a few options.

#1 Subletting Your Own Space

By the time you are 30, you might have saved up enough money to buy your own home. One of the easiest ways to get involved in real estate investing is to find a roommate or renter. 

Whether you're sharing your entire home with a roommate, renting out your basement or even just a bedroom, this is easy money that can offset your mortgage expense. An extra perk here is that you don't need to hire a property manager because you're already on site.

#2 Flipping Properties

Another way to get involved in real estate investing is through flipping properties. You've probably seen how it's done on HGTV, but be assured, it's NOT as easy as it looks!

Flipping properties requires a good understanding of the housing market so you can find a property that might be undervalued. Flipping also requires handyman skills or access to a contractor who can do a good job for a reasonable price.

If you're pursuing this path, time is a precious commodity, as you'll be making mortgage payments while you're renovating. Try and get it done quickly.

#3 Short-Term Rentals

Depending on where you live, short-term rental properties can be a great investment opportunity. Tourists and vacationers are often on the hunt for weekend getaway accommodations. Making $500 a weekend on condo rentals is a great way to go. With this route toward real estate investing, Airbnb or Vrbo can be your investing partner by finding the tenants and handling the booking.

#4 Real Estate Investment Trusts (REITs)

Finally, real estate investment trusts (REITs) are a solid option for young investors just getting started without a huge nest eg. REITs offer the benefit of investing in property without the weight and management responsibilities of private ownership. 

Whether it's a collection of residential properties, commercial warehouses, apartment complexes or even large data centers, buying into a REIT gives you access to returns you might not see as an individual investor.

Interested in learning more? Check out our article REIT Investment Strategies: A Guide For The Everyday Investor .

The Takeaway

In the end, there are a few obstacles and precautions to take when it comes to real estate investing in your 30s. On the flip side though, there are some great ways to make it happen if you're willing to start slow and build up some equity.

The longer you own an investment property, the better investment it becomes. If you can take care of eliminating debt and prepare yourself for a worst case scenario, definitely try and get in the game early and watch your money work for you.