Profit Angles in Real Estate Investing: Pyramiding, Cash-Flow, Flips, Speculation, Subdivision, Development
Rey Villar (GMail)
www.DignityMortgage.com The FREE Online Resource Center for Beginning R.E. Investors
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Collateral (Pyramiding)
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Income stream (Cash Flow)
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Purchase and quick resale (Flips)
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Value appreciation (Speculating)
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Subdivision
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Development & Rehab
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Tax shelters
These tactics are discussed in more detail below. Not all tactics are applicable to all properties. Properties that may work for some tactics will not work for other approaches. On the flip side, tactics that may work for some properties will not work with other properties. Some properties use several tactics at once to generate profits for the investor. The choice of tactics always depends on the subject property. The savvy investor will be the one who can look at a piece of property and understand what its profit potential is—and which tactics will unlock that potential.
Actually, allow me to briefly correct myself. For the disciplined investor, the choice of tactic and strategy will come first. The choice of property will follow from the choice of tactic.
1. Collateral
A common, but often overlooked, reason for investing in real estate is to build collateral for future investments. This is sometimes called pyramiding. The value of real estate is widely recognized and accepted by the market. Lenders are more lenient and generous to borrowers with real estate holdings, because real estate is considered a highly useful and liquid form of collateral.
For most Americans, the chief purpose of their only real estate holding is to provide a home for their families. Our homes actually offer much more. In fact, Americans who own real estate have a multitude of opportunities available to them that are not available to typical renters. The reason is that real estate provides the owner with a collateral instrument—even if the property is mortgaged to the hilt, it can still be used as collateral for more debt.
Real estate is a hard, illiquid asset. Nevertheless, the real estate market has developed a mortgage financing system that does offer real estate some liquidity. Through this dynamic mortgage industry, the hard asset of real estate equity is no longer so illiquid. Mortgage loans are now more readily available and can be obtained more quickly.
Such loans depend on the use the property as collateral or security for the funds. Many commercial and small-business banks are often more willing to lend money to borderline enterprises, if the business owners agree to use their real estate properties as collateral for the loan.
Real estate can still be used as collateral for a loan, even if it has no equity available. The value of real estate goes beyond its resale or appraised value. Consider that the property's income stream is also a valuable asset that is often included in the use of real estate as collateral. For example, Fred takes out a mortgage loan on a piece of farmland that he rents out to a local farmer; if he ever defaults, his mortgage allows the bank to start collecting the rental income to offset the unpaid loan payments.
When property is being used for or considered as collateral, the investor's primary responsibility will be maintaining that collateral's value. This task obviously begins with basic maintenance. The property's value, however, is affected more by its locale and location. The investor must therefore stay attuned with developments in the neighborhood and market area. Crime prevention, street improvements, zoning, new developments and tax issues will all affect the property's value; and property investors must remain aware, if not involved, to make sure that their properties are not hurt.
Indeed, most mortgage notes contain clauses that prohibit the property owner from committing waste, a legal term for actions or negligence by the owner that decrease the property’s value.
This may be a good time to introduce a real estate investment principle in which I firmly believe. Never sell your real estate investment unless (1) you absolutely must sell or (2) that sale is part of your bigger plan.
A properly maintained rental property can be a long-term cash cow. The beautiful thing about real estate is that you don’t have to sell it to raise cash.
Some people may counter that you would then have to repay the loan with monthly payments and interest charges. That’s not quite true. There are payments, but you don’t make them. Your property, or better yet your business, makes those payments. This goes back to our earlier discussion of approaching investment property as an investment and business. It is not your home. Eventually, those loans will be paid off and you can start the whole process all over again.
Meanwhile, you can use the tax-free loan proceeds to acquire even more real estate investments. Yes, you heard that correctly. The loan proceeds are tax-free: since they must be paid back, they cannot be considered income!
For the rest of this article, please go to: http://www.dignitymortgage.com/Investing/Guide04a-ProfitAngles.htm
www.DignityMortgage.com The FREE Online Resource Center for Beginning R.E. Investors