REAL ESTATE INVESTING
info for seasoned investors
There are a lot of advanced strategies for real estate investors, realistically too many things to cover in one blog post. But let’s go over some of the most popular strategies together in general terms.
1. Short Sales
A short sale is when a buyer purchases a home for less than the seller owes on the mortgage AND gets the mortgage lender to write off the difference between what is owed and what is paid. These were more common in the aftermath of the housing crisis and are not commonly done now because most people have positive equity in their homes.
Short sales can be easy or very difficult depending on how organized the seller’s mortgage lender is. I’ve done one that went very smoothly, and I had another that we were never able to get done because of how borderline impossible it was to communicate with the seller’s lender. Even the easy one took close to three months to complete from start to finish, and there’s no guarantee that the lender will ever approve the sale, even if you spend all that time working through the process.
If you want to buy a home in a short sale, you will need to be able to respond quickly once you get approval to complete the sale, typically within two weeks. You’ll need to do these transactions in cash or with a lender that you know will be able to get the job done quickly once you get approval, and you’ll need to be patient. You’ll also want to work with an agent who knows how to navigate these things if you haven’t done one before.
Like short sales, foreclosure auctions are not as widespread as they used to be. In Chatham County we’ll usually see 10-30 houses at auction in the courthouse steps in a given month.
To buy a foreclosure on the courthouse steps, you’ll need to come in with straight cash. Well, cashiers checks. Literally – show up to the auction with cashiers checks in different denominations. They usually won’t give change.
You also typically won’t get to tour the house prior to the auction – you must buy sight unseen. You must also do a title search before bidding. You can do these in the courthouse, or you can pay an attorney to do one for you.
Some foreclosure auctions are done online and work generally the same way as on the courthouse steps.
3. Subject To
Sub-to means that you are taking ownership of a property “subject to” an existing mortgage. Like short sales and foreclosures, these also have somewhat fallen out of usefulness, especially as mortgage interest rates are at record lows.
The major risk with these is that most mortgages have a “due on sale” clause, meaning that the lender can call due the entire balance of the note if it is sold. In practice, this almost never happens as long as you continue to make timely payments. It is possible to purchase “due on sale” insurance, though I have never explored any of these policies.
4. Assignment Contracts/Wholesaling
Wholesalers are essentially real estate agents who operate without a license. It’s a bit of a seedy business that relies on the ignorance of sellers as to the true market value of their properties. But I’ll be honest – I’ve bought more than a few deals from wholesalers.
To buy a deal from a wholesaler, you’ll almost always need to use cash or a hard money loan. You typically won’t get the opportunity to conduct a typical home inspection, so you’ll need to be confident about estimating rehab budgets on the fly. If you’re not – team up with someone who is, like an experienced business partner or agent.
One key thing to remember about wholesalers is this – many of them are absolute amateurs, but the good ones will be damn good and are few and far between. In Savannah, two or three wholesalers control most of the deals that get done off-market. Do not back out of a deal with them if you go under contract, or you may never see another from them.
5. Multifamily (5+)
Investing in multifamily properties under 5 units is just like buying a house. The lending process is very similar. For 5+ units, or mixed-use buildings, you will need to get a commercial loan or a loan from a private lender. These loans typically take 60 days or more to close, and require more expensive commercial appraisals, environmental assessments, and other inspections.
6. Renovations (BRRR or Flip)
There can be a lot of risk involved in renovating a property, especially a house more than 30 or 40 years old. These renovations are typically done with hard money loans, which I will talk about later.
There are also conventional, VA, and FHA rehab loans that can be used. The process for getting one of these loans is more onerous than a regular mortgage, and many lenders do not offer these kinds of products.
7. Management Agreements/Novation
These are uncommon and you will need to find an attorney experienced with them. When selling a home with a management agreement, you will basically enter into a binding contract with the seller where the seller will give you power of attorney to do whatever you want with the property, in accordance with whatever you both agreed to when signing the management agreement.
Typically, management agreements are used to flip houses where the profit margin is too small for the flipper to actually close on a sale. I’ve only seen them once or twice, and typically the flipper agrees to put at least a certain amount of money in the seller’s pocket when selling the home, and profits in excess of that amount will be split in some way.
I would generally not recommend undertaking an extensive renovation with something like this, because if the relationship goes sour after you dump a bunch of money into a renovation, you might have to go through a nasty court battle while your money is tied up in a house you don’t technically own.
8. Direct to Seller Marketing
Direct to seller marketing is basically what wholesalers do to get deals off-market. You can send mailers, set up websites, market on google, facebook, and instagram, run radio ads, cold call, get billboards – the sky’s the limit.
Direct to seller marketing is hard to do right, and to do it right typically requires a large budget. The best wholesalers I know spend 10 to 20 thousand dollars monthly on marketing – but they routinely gross 100k in assignments. They also usually spend 40-60 hours a week making calls, following up with leads, and checking out properties.
You can direct to seller market as an investor too. I maintain a list of shitty houses that I want to buy and routinely send letters to these specific properties. I also occasionally make cold calls to owners. Propstream is a great resource for this.
9. Seller Financing
Seller financing is great in some circumstances. A seller will need to own a house free and clear in order to extend seller financing, or you will need to make a down payment to the seller large enough for the seller to pay off their existing mortgage.
Seller financing can be beneficial to a seller because it allows them to extend their capital gains tax burden over a period of many years instead of taking a large gain all in the same year.
It can be beneficial to you for a few reasons: maybe you can negotiate a great interest rate, maybe you can negotiate interest only payments for a period of time, a much lower down payment, or maybe your credit sucks and nobody else will extend you a loan.
10. Mobile Homes
The thing that makes buying a mobile home interesting is that the mobile home may be on a vehicle title instead of a real estate title. If it’s on a vehicle title, you won’t be able to get a standard mortgage on it, but it is possible to turn a mobile home into “real” property during the closing process.
Mobile home parks are a different beast, which I will not touch on in this blog.
11. Land Investing
Land investing basically means buying a piece of land and hoping it’ll be worth a lot more later. This is a rich person’s game, and also a game you play when you’re connected and know where development will be moving. I do not recommend buying anything and hoping for appreciation unless both of these apply to you.
12. Short-Term Vacation Rentals
Everyone and their mother wants to buy AirBNBs. They’re really not the money printing machines that everyone thinks they are unless you are prepared to WORK for them, or hire an AWESOME property manager. Additionally, it’s damn near impossible to get a permit to operate one in Savannah. There are a few exceptions, like if you are planning on running a STVR outside of city limits, or plan to owner-occupy a duplex.
13. Executive Rentals
Executive rentals are like AirBNBs, but with terms of 30 days or more. I like these a lot in Savannah because you don’t need a permit and the demand is pretty high. There are a lot of traveling nurses and movie industry folks who rent these for 2-5 months at a time and they pay good money for them. The management is less intense than a STVR, but it will still take up much more of your time than a long term rental.
14. Historic Tax Credits
There are federal and state tax credits that you can take advantage of. To use them in Savannah, typically you will need to be doing work in one of the historic districts and/or your building will have to be designated as a “contributing” structure, basically meaning that it is itself historic in some way. There are over a thousand contributing structures in Savannah.
Actually using these credits can be a real pain in the ass. They’re probably not worth it unless you are spending a TON of money on the rehab. Many people actually hire consultants to help them navigate the process of using these credits.
15. 1031 Exchanges
1031 Exchanges are super cool because they allow you to defer paying capital gains when you sell a property as long as you buy a new, more expensive property within a certain amount of time after selling the old one. You will need to hire a lawyer who specializes as a 1031 intermediary to do these, and typically you can expect to spend about $2k on the exchange portion of the transaction.
There’s a lot more to a 1031 than this, but now you know enough to know that this program exists. Give us a shout for more details and recommendations to some good intermediaries!
16. Federal Opportunity Zones
Investing on o-zones is a rich person’s game. The overhead and legal costs involved in running one of these funds means that the fund realistically needs to be more than $10M. You can invest in a fund as a limited partner, but to do that you’ll almost certainly need to be an “accredited investor”, meaning that your net worth needs to be over $1M excluding your primary residence, or you need to be making $200k+ a year.
17. City of Savannah Tax Advantaged Zones
The city of Savannah also has tax advantaged zones. You’ll need to be taking on a major development and to qualify for the tax credits you’ll need to increase the tax assessment more than 5x. More info at this post.
18. Tax Auctions
Tax auctions work a lot like foreclosure auctions, except the property being auctioned is delinquent on property taxes instead of a mortgage. Here in Georgia, you’ll buy the house and then cannot touch it for a year, during which time the former owner can get the property if they pay you what you paid for it. After a year, you can undertake a process called quiet title, which means that you pay an attorney a few grand to get you a legitimate deed to the property that you can then sell to someone else.
19. Hard Money
A hard money lender is basically a lender who falls outside the traditional mortgage lending system. They typically lend their own money or money from a small pool of individual investors, and usually do 12-month loans for rehab projects. But there are a thousand different ways to structure a hard money loan, and there are a thousand different hard money lenders.
Typically the process of getting a HM loan is easier than a regular mortgage. With my preferred lender, I basically send him a quick summary of the deal by email, maybe a couple comps, and a rehab budget and he tells me yes or no and some terms. That’s about it. Most are not quite this easy and, especially starting out, you’ll probably need to jump through a lot more hoops.
A good hard money lender should be able to close in two weeks, though you should budget for a month until you get to know them.
Typically, a rookie investor will pay 10-13% and 2-4 points on the money they borrow, and will probably need to put down 10% of the purchase price. The lender should fund the rehab budget. As you get more experienced, your rates should come down and you may be able to get 100% financing.
20. Note Investing
Note investing is when you buy a mortgage loan that is probably in default (the borrower stopped paying). This isn’t so common anymore, but back in the housing crisis days folks were buying these things for 10 cents on the dollar or less (meaning that if the borrower owed $100k, investors could buy their mortgage for $10k). Then, once you own this note, you can restructure with the borrower to get them back on track with their payments. Once they’re back on track, you can sell the note for much more than you bought it, or you can just hold onto the note and keep collecting checks.
21. REO/Hud Houses
REO means a house that a bank foreclosed on. Sometimes these get auctioned, sometimes they just get listed on the open market by a real estate agent. Bidding on these can be a pain in the ass because the bank is going to want things on their own contracts, they may stipulate that owner/occupants have a period of time to bid before investors, etc.
As with all other types of distressed property investing, REO is not so common anymore. In 2010, REO was a ton of the houses for sale.