As a landlord (or a prospective one), you need to protect yourself against the damages that can potentially occur to your properties and your overall financial health. Most likely, you won’t need all of the forms of insurance I’m going to describe in this article; however, you should know what each one can do for you in case you ever have need of them.

Generally speaking, I can’t stress enough the importance of having adequate insurance, especially if landlording is your entire livelihood. Compared to catastrophic losses (fire, floods, tornadoes, liability suits, etc.), insurance costs are definitely a bargain!

Insurance Types * Title insurance-this establishes who owns the title and prevents you from throwing away money on a property that might legally belong to someone else. * Fire insurance-always get maximum protection in this area! Recommendation: insure your properties for top value, or the insurance company may discount their payment. Here’s an example: If you paid $100,000 for a house and it’s worth $120,000, but you insure for only $100,000, then that hundred-thousand is all you’ll get. * Liability insurance-never be without this insurance. My recommendation: read the policy closely and note any exclusions! If necessary, pay the extra money to have specific exceptions included in the policy. If you do any building, remodeling, or painting, you may also want to get a separate contractor’s insurance policy * Extended coverage-this coverage is also called “comprehensive” coverage or a “package policy.” Often, it’s offered along with the standard fire insurance policy, and it’s an investment well worth the price. This type of coverage can protect you from damage caused by a variety of events–hail, windstorms, smoke, rioting, falling trees, vandalism, freezing temperatures, landslides, accidental water discharge from burst pipes, etc. Tailor the coverage to your particular geographic area. * Earthquake coverage-this is always a separate policy. If you live in an earthquake-prone area, you should never be without this policy. Nature’s might can destroy your property in a matter of seconds! * Flood insurance-insurers consider flood damage different from water damage caused by burst pipes and such. So, if you live in a flood-prone area, ensure you have this coverage. * Vandalism/malicious mischief-this is cheap insurance and worth the price. It can pay for repairs necessitated by vandals who damage or destroy your property. * Property improvements insurance-a standard building policy doesn’t cover damage to such items as swimming pools, fences, signs, parking lots, and other areas. Therefore, because weather can badly damage these items, it pays to have them covered as well. * Business interruption insurance-this is also called “loss of rent” coverage. Here’s an example: if a fire damages one of your properties, making it unlivable for a while, then you’ll lose rent until that damage is taken care of. In the meantime, fixed expenses keep piling up! With business interruption insurance, the insurance company compensates you for loss of rental income over a specified period. * Mortgage insurance-the aim of this insurance is pay off the balance of your outstanding mortgage if trouble strikes. Believe me, it’s well worth the price. Check with a lender for the type you need. * Boiler/machinery insurance-this is essential coverage to have with larger properties. Boiler explosions can have devastating results. Needless to say, claims can be large for these awful accidents, and you definitely don’t want to shoulder the expense. This insurance is also a good idea because the insurance company will inspect the equipment on a regular basis. In effect, the insurance company becomes your partner in maintenance and safety.

Other Forms of Insurance to Consider * Management insurance–if you manage properties, get management insurance so the insurance company handles any lawsuits for you. * Umbrella policy-this is called “umbrella” insurance because it’s designed to give liability protection above and beyond the limits of other insurance policies. That is, it kicks in when the liability on other polices has been exhausted. Depending on the insurance company, you can get an umbrella policy with an additional one to five million in liability protection. * Workers compensation insurance–a definite necessity if you have employees and/or contractors working for you. Where accidents are concerned, it’s better to be safe than sorry. This insurance also protects you against frivolous lawsuits. * Legal Protection–legal protection is a kind of insurance so it pays to have the services of an attorney for two reasons: to handle lawsuits and to handle insurance companies reluctant to pay in the event of covered damages. If you find a personal lawyer too expensive, an option is to use pre-paid legal services. They’re cheap, charging a monthly fee in the range of $10-30 a month. Check out the American Prepaid Legal Services Institute for a partial listing of plans and services. Or try Pre-Paid Legal Services, Inc. for coverage of civil cases or work-related criminal cases.

Key Idea: Don’t be “penny wise and pound foolish.” That is to say, never skimp on insurance coverage; your property investments are far too valuable to worry about saving a few bucks on premiums.

As a present landlord (or a future one), you need to protect yourself against the damages that can potentially occur to your properties and your overall financial health. It’s not likely that you’ll need all of the forms of insurance I’m going to describe in this article, but you should know what each one can do for you in the event you ever have need of them.

Generally speaking, I can’t stress enough the importance of having adequate insurance, especially if landlording is your entire livelihood. Compared to catastrophic losses (fire, floods, tornadoes, liability suits, etc.), insurance costs are definitely a bargain!

Types of Insurance * Title insurance-this establishes who owns the title and prevents you from throwing away money on a property that might legally belong to someone else. * Fire insurance-definitely don’t skimp on protection in this area! Recommendation: insure your properties for top value, or the insurance company may discount their payment. For example, if you paid $100,000 for a house and it’s worth $120,000, but you insure for only $100,000, then that hundred-thousand is all you’ll get. * Liability insurance-be sure to have this insurance. Recommendation: read the policy carefully and note any exclusions! If necessary, pay the extra money to have specific exceptions included in the policy. If you do any building, remodeling, or painting, you may also want to get a separate contractor’s insurance policy * Extended coverage-this is also called “comprehensive” coverage or a “package policy.” It’s often offered along with the standard fire insurance policy, and it’s an investment well worth paying for. This type of coverage can protect you from damage caused by a variety of phenomena–hail, windstorms, smoke, rioting, falling trees, vandalism, freezing temperatures, landslides, accidental water discharge from burst pipes, and so forth. Tailor the coverage to your particular geographic area. * Earthquake coverage-always a separate policy. If you live in an earthquake-prone area, you should definitely have this policy. Nature’s power can destroy your property in a matter of seconds! * Flood insurance-insurers consider flood damage different from water damage caused by burst pipes and such. So, if you live in a flood-prone area, be sure to have this coverage. * Vandalism/malicious mischief-cheap insurance and worth the price. It can pay for repairs caused by vandals who damage or destroy your property. * Property improvements insurance-a standard building policy doesn’t cover damage to such items as swimming pools, fences, signs, parking lots, and other areas. So, because weather can badly damage these items, it pays to have them covered as well. * Business interruption insurance-basically, this is “loss of rent” coverage. Here’s an example: if a fire damages one of your properties, making it unlivable for a while, then you’ll lose rent until that damage is repaired. In the meantime, fixed expenses keep piling up! With business interruption insurance, the insurance company compensates you for loss of rental income over a specified period. * Mortgage insurance-the purpose of this insurance is pay off the balance of your outstanding mortgage if trouble strikes. Believe me, it’s well worth the price. Check with a lender for the type you need. * Boiler/machinery insurance-this is wise coverage to have with larger properties. Boiler explosions can have horrible results. Needless to say, claims can be large for these terrible accidents, and you definitely don’t want to shoulder the expense. This insurance is also a good idea because the insurance company will inspect the equipment on a regular basis. In effect, the insurance company becomes your partner in maintenance and safety.

Other Forms of Insurance to Consider * Management insurance–if you manage properties, get management insurance so the insurance company handles any lawsuits for you. * Umbrella policy-this is called “umbrella” insurance because it’s designed to give liability protection above and beyond the limits of other insurance policies. That is, it kicks in when the liability on other polices has been exhausted. Depending on the insurance company, you can get an umbrella policy with an additional one to five million in liability protection. * Workers compensation insurance–a definite must if you have employees and/or contractors working for you. As far as accidents are concerned, it’s better to be safe than sorry. This insurance also protects you against frivolous lawsuits. * Legal Protection–legal protection is a kind of insurance so it pays to have the services of an attorney for two reasons: to handle lawsuits and to handle insurance companies reluctant to pay in the event of covered damages. If you find a personal lawyer too expensive, an alternative is to use pre-paid legal services. They’re relatively inexpensive, charging a monthly fee in the range of $10-30 a month. Check out the American Prepaid Legal Services Institute for a partial listing of plans and services. Or try Pre-Paid Legal Services, Inc. for coverage of civil cases or work-related criminal cases.

Key Point: Don’t be “penny wise and pound foolish.” In other words, never skimp on insurance; your property investments are too valuable to worry about saving a few dollars on premiums.

A short sale is the sale of a house in which the proceeds fall short of what the owner still owes on the mortgage.

I’d like to make you familiar with the hardship tests required to qualify a home owner for a short sale. This information will help you understand the market better as an investor and aid you in zeroing in on the best deals.

It goes without saying that lenders are unhappy with short sales because, like anyone else, they hate losing money! This means they consider a short sale a last resort, and they’re going to make sure the defaulting owner meets their hardship tests before anything else occurs. In this article, I describe the typical tests that must be met before a property qualifies for a short sale:

Poor or Bad Health Chronic or catastrophic health issues can overwhelm a family and its finances. With today’s rapidly rising medical costs, it doesn’t take long to empty a family’s bank account. When this occurs, debts mount quickly, and soon the borrower is unable to meet the mortgage payment.

Death A spouse’s death, especially if they were the primary bread winner, can create havoc with a family’s finances, especially if they bought too much house to begin with.

Divorce Divorce can be expensive. In some cases, when income drops dramatically, this requires that a jointly-owned home be sold.

Military Call Ups When soldiers are called up, their income can take significant hit, especially if they’re required to endure long tours of duty. Note: Lenders consider this a true hardship since it’s out of the control of the borrower and in service of the country.

Job Transfer In some cases, an employer transfers a borrower to another area and his or salary drops instead of increasing. If the owner isn’t able to sell or rent the property, then the hardship test is met.

Disability When a borrower suffers an injury or disease severe enough to cripple or end income, then, obviously, he or she can’t meet the mortgage payments, and the property is taken back.

Job Loss In many cases, when borrowers lose their jobs due to downsizing, company closings, or other factors, they aren’t able to meet mortgage payments because most haven’t saved enough to cover expenses.

Other Factors Beyond the hardship test listed above, there are sometimes other factors involved in producing short sales.

One is that a property was bought at an inflated price. In the meantime, the market has dropped dramatically due to various economic conditions.

A second factor is that a property has been refinanced at, say, 125% of value, and that value was based on an over-inflated property appraisal report. Then, the area in which the home is located takes a severe economic blow, drastically dropping property values.

A third factor happens when due to economic conditions (local or national) beyond the owner’s control, the home’s value drops to a value below the loan balance.

A fourth reason relates to the “as-is condition of the property. Sometimes, properties deteriorate almost beyond repair, making it impossible for the lender to put it back into resale condition.

A final factor causing a short sale happens when the purchase price of the home is more than the lender is able to sell the property for after foreclosure.

To conclude, short sales are an unhappy time for anyone for obvious reasons–except the knowledgeable investor. However, remember that short sale opportunities don’t occur all that often when compared to other types of investments. Yes, you can pick up some wonderful bargains, but you will definitely have to invest more “sweat equity” in terms of time and patience than, for example, foreclosures, rehabs, and other forms of deals.

Key Idea: Be completely familiar with the entire short sale process before engaging in this market.

A short sale has a simple definition: it’s the sale of a house in which the proceeds fall short of what the owner still owes on the mortgage. Here’s a typical example of short sale situation:

Let’s assume that a home owner, Mary, has debt on a house that’s greater than the amount for which the property can be sold. In fact, Mary has an unpaid loan balance of $160,000; however, the property will only sell for $140,000.

Naturally, this isn’t a great situation for Mary, but it isn’t good for the lenders, either. They’re losing money! So, the lenders are reluctantly willing to accept less than the total amount due in order to minimize their loss.

So, in this state of affairs, the lender accepts that $140,000 as full payment from an investor or other buyer. This amount is clearly “short” of the full $160,000 payment, thus the term “short sale.”

At this point, you may be wondering, “Why in the world would a lender consider a short sale?” Well, there are many reasons often related to “hardship cases”; e.g., the homeowner has permanent injuries; financial insolvency; convictions; job layoffs; military call ups, etc. In such cases, lenders are willing to consider a short sale as part of their “loss mitigation” policy.

However, lenders don’t go into business to lose money, so they consider short sales a last resort! Foreclosures can be a better option for them. So, as an investor, should you consider short sales as a money-making opportunity?

The answer is “Yes,” if you’re an investor with a lot of experience. If you’re a novice, stay away from short sales until you’ve gained enough knowledge to work successfully with lenders. If possible, find a mentor to guide you through short sale deals.

Good deals are available in this market, but short sales are definitely not the ticket to “instant wealth” as some gurus noisily proclaim. Also, these gurus usually forget to mention that short sale transactions can be very difficult to execute (compared to conventional deals). I describe some of the complications you have to deal with below.

The Complications of Short Sales Several factors are involved in short sale transactions, and that increases the complications you have to master in order to be successful in this market.

The first factor is the particular loan mitigation policy of the lender and third-party investors. These policies (and the attitudes of the lenders) aren’t always easy to deal with. As an investor, you have to both master the details of the policies and master the “politics” of dealing with lenders in the loss mitigation department.

Factor 2: the property’s as-is value compared with the as-repaired expenses. You have to do full due diligence to make sure a short sale purchase will make a profit after the expense of “rehabbing” it.

The third factor concerns approval for short sale. It needs to come from the investor who’s actually the owner of the loan. This can lead to more complications as you may need to work with several people involved in the sale of the property.

Fourth, depending on economic conditions, investors can flood into the market, increasing competition.

So, how can you determine if a short sale is worth pursuing? Here are the general steps to follow in order to make that determination

General Steps to Follow In Short Sales The following steps take place in most short sale transactions. They may vary, depending on your area.

Step 1 Identify potential short sale properties (e.g., contact a listing agent, check the public records, etc.).

Step 2 Understand the lender’s loss mitigation policy. For example, if they deal with short sales on a fairly regular basis, they’re a good choice. If, on the other hand, they seldom or never accept short sale offers, don’t waste your time.

Step 3 Determine the number of liens recorded against the property and the total amount of money in those liens.

Step 4 Determine the borrower’s present financial condition.

Step 5 Analyze the type of loan that’s in default and its current status.

Step 6 Determine both the property’s as-is market value and its as-repaired value.

Step 7 Analyze current real estate market conditions.

Specific Steps To Follow In Short Sales Once you find that a short sale is worth pursuing, then you’ll need to take additional steps.

* Contact the homeowner and analyze their financial condition. * Complete due diligence on the property’s condition. * If due diligence determines that both the financial and property condition are suitable, request that the homeowner give you written authorization to contact the lender’s loan loss mitigation department. * Contact the decision-maker in the loan loss-mitigation department of the lender and give them a copy of the authorization signed by the homeowner. * Discuss the short sale and ask them to send the appropriate short-sale documents to the homeowner. * Instruct the homeowner to gather all documentation in order to prove financial hardship. * Obtain repair cost estimates from a minimum of three licensed home improvement contractors. * Determine the value of three similar neighborhood properties sold in the last six months (a comparable value study). * Return the short sale proposal to the lender’s decision-maker. It should include a signed purchase agreement for a percentage less than the amount owed to the lender; e.g., 20%, 30% less, etc. * At this point, the lender’s decision-maker reviews your proposal and orders a BPO (”broker’s price opinion”) to determine the property’s as-is and as-repaired values. The BPO is normally a realtor giving his or her opinion on the property. You’ll want to meet with this realtor and influence his or her opinion as much as possible. It’s perhaps the most critical aspect of getting a short sale offer accepted and closing the deal! * The decision-maker accepts your proposal or rejects it. * If the decision-maker believes a short sale is appropriate, they make a counteroffer. * You accept or reject the counteroffer. * In the event you accept the counteroffer, you close on the transaction within 30 days.

Additional Points Keep in mind that all short sales are cash transactions. This means you’ll need to have cash on hand and verifiable proof that you have that money. Otherwise, the lender will not do business with you.

Also, short sales can’t be made to relatives, family members, or close friends of the homeowner. If a lender finds out after the sale that, say, the homeowner’s sister bought the property, then that lender can sue to have the sale overturned.

Key Point: Short sale transactions are not for amateurs; be fully knowledgeable, experienced, and professional before approaching the loss-mitigation departments of lenders in this market.

Your credit or “FICO” score is critical to your real estate investment career. The simple fact is that the higher your credit score, the greater the chances of your obtaining loans and getting them at a lower interest rate. It keeps valuable money in your pocket!

Remember this primary fact: lenders are in the business of loaning money and loaning it at the lowest risk possible so they’re going to look long and hard at your credit score before pulling cash out of their own accounts. This information tells you that you should understand how credit scores are calculated and what you can do to raise your own credit score if it’s low. This article provides you with that fundamental information

A Brief History of Credit Scoring Credit ratings are arrived at by a formula used by lenders and others to give them an objective method to predict how likely it is that you will repay a new loan. A credit score is the result of complicated formulas for determining your credit worthiness.

You’ll often hear a credit score referred to as a “FICO” score. This term comes from two men named Fair and Isaac. In 1955, they founded a company called Fair Isaac Corporation. Over the years, the name got shortened to “FICO.” Fair, Isaac is a for-profit company, traded on the New York Stock Exchange (NYSE: FI). Their exact formula for calculating credit scores is proprietary; that is, it’s secret.

Each of the major American credit reporting agencies (CRAs) has a business relationship with Fair Isaac. The three major CRAs are: Experian, Equifax, and TransUnion.

Now, you’d think that each credit reporting agency would have the same score for each person, but they have different models for determining your credit score so your score may vary from one CRA to the other!

On the whole, they’re still referred to collectively as “FICO” scores. Each model is based on experience with millions of consumers. With each model, the higher your score, the better your credit rating.

Calculation of Credit Scores A credit score depends on the credit scoring model used by the CRAs. In general, FICO models analyze these items in your history: * Past delinquencies * Derogatory payment behavior * Current debt level * Length of credit history * Types of credit * Number of inquiries by lenders and others into credit history.

Although the models vary as I stated above, the general formula looks like this:

* 35 percent on a borrower’s payment history. * 30 percent on debt. * 15 percent on how long the applicant has had credit. * 10 percent on new credit * Another 10 percent on types of credit.

There is a range of FICO scores. Within that range, the higher the score, the better your credit rating is. For example, a perfect score is 850 (only 1% of the U.S. population). Eleven percent (11%) of the population has a score of 800. In the above two instances, the borrower likely will get a lower interest rate and have the loan closed within days.

The average individual has a FICO score of 720. The interest rate will be higher, and it’ll take days or weeks to close the loan.

In the event your FICO score is less than 600, it’s likely that you’re going to have trouble getting money from conventional lenders. That’s because they calculate you’ll default on that loan better than 50% of the time. Naturally, it doesn’t make good business sense to lend money in that situation. Or, if they do loan the money, it will be at a significantly higher interest rate in hopes of covering the risk. Lenders examine your records closely for “red flags” to decide whether or not to give loans to individuals with low credit scores. Red flags include: missed payments, late payments, unpaid debts, bankruptcies, etc.

Common-sense Guidelines for Raising Your Credit Score The first guideline is to pay your bills on time-all the time. The second guideline is to not open unneeded credit card accounts to increase available credit. That raises red flags for lenders. The third guideline is to budget to figure out where you’re currently at financially. The fourth guideline is to reduce unnecessary expenditures so you can apply that saved money to your debt and improve your credit score.

If you’re unsure about the state of your current financial situation, you can analyze it using the debt to income ratio formula. It’s a simple method of measuring your net monthly income against your debt.

Here’s an example: Assume your net monthly income is $2000, and your monthly debt payments are $500. Now, divide $500 by $2000, and you’ve calculated your debt to income ratio: 5002000 =.25 (25%).

It’s generally agreed that debt expenses should be 25% or less of your income. A ratio of 10% or less is great. Anything above 25% is a red flag for you and may be for lenders. If it’s 25% or more, you definitely need to reduce or eliminate debt!

To calculate your current debt to income ratio, take the following steps: * Look at last month’s bills and total up all the fixed expense items (rent, mortgage, car payments, child support, loan payments, etc.). * Then, check your credit card bills and add up the minimum payments owed on each card. * Figure out your monthly take-home pay (net salary). * Divide monthly fixed expenses by monthly income.

Key Point: A good credit score is vital for your real estate investment career! If it’s low, do everything you can to raise it.

The most basic of real estate strategies is “flipping.” It’s basic because it involves the simple process of buying a property, fixing it up, waiting for a short time, and then re-selling it for a fast profit. This is called “rehabbing.” A variation is to “wholesale” the property. In other words, you buy only the contract and then immediately sell it to another investor without getting involved in any rehabbing.

At its heart, flipping is a speculative strategy. Investors bet that the market value of a property will rise to the point at which they can make a quick profit before they close on the deal.

There’s the potential for big profits, but there’s also the potential for big losses. Let’s look at the pros and cons in turn so you have both sides of the picture.

The Upsides The first–and primary–upside is investing a very small amount of money for substantial gains. Here’s a rehabbing example to illustrate this point: * Let’s assume you put down $12,500 (5%) on a $250,000 house. * Then, you spend $5,000 and 60 days fixing it up and another $3,500 in payments. * So, your cash investment equals $21,000. * If you then sell the house for an $80,000 profit, the return on your investment is a great one. For that investment and two months’ worth of time and money, you’ve made $59,000.

A second advantage of this approach is that you can do flipping full-time or part time. The part-time option can be a good way to work your way into real estate investment because you learn the rules as you go along.

As I mentioned earlier, flipping is the most basic of all real estate strategies; therefore, it’s the easiest to learn. This leads to the third advantage: You don’t have to be a “rocket scientist” to get started in the field. Flipping is the simplest strategy to master.

The Cons of Flipping To be blunt, the risks of flipping can be considerable. First, if you don’t stay on top of things, the cost of renovations, mortgages and time can exceed your profit margin. You can lose money instead of making it!

Second, there’s the chance that too many speculators can get into the market. If that happens, prices can drop very quickly, and there goes your profit!

Third, if you fail to do thorough due diligence, it can cost you a lot of money. Hidden property problems can turn what appeared to be a good deal into a nightmare. Leaky plumbing, faulty wiring, roof problems, termite damage, etc.-they can all cost you dearly.

The fourth downside is that if you don’t flip a property fast enough, a tax audit may result By that, I mean that if the money made off the flip doesn’t immediately roll into a similar investment (another house flip), then the profit may be subject to a capital gains tax.

Finally, in some cases, you be required to pay a realtor’s commission.

Types of Flippers There are three basic types of flippers:

Bird dogs or “scouts” This is often a strategy beginning investors follow to get into the real estate business. As the name indicates, the bird dog’s job is to scout for potential deals and then sell information on those deals to investors. Investors pay bird dogs a fee for each deal that’s closed. These fees can range from $250 to $1,000 or more, depending on the price of the property and its potential. The downside of being a scout is that you make the least amount of money in comparison to dealers and retailers.

Dealers These investors are also called “wholesalers.” Their strategy is to find bargain properties, get control of the contract, and then do one of two things. They can close on the property and sell it outright. Or, they can simply sell the contract to another investor. For dealers, there’s great profit potential, no hassle with tenants, and no improvement costs.

Rehabbers Another name for these investors is “retailers.” They buy a property at a wholesale price, improve it, and then sell it for full retail price to buyers. This option has the greatest profit potential, but also the big risks I mentioned earlier.

Guidelines for Successful Flipping Guideline 1: Know thy market There are several simple but effective methods you can use to learn your market. One is to drive the neighborhoods you’re interested in to find out what types of homes are selling well. Nothing beats seeing properties with your own eyes to get a true sense of value. Additionally, you can work with a realtor, if necessary, to find out the comparable worth of your targeted properties. But, be sure to dig deeper to find out everything you can about a market–property taxes, crime rates, quality of the school systems, etc. Knowledge is definitely power in the real estate business; the more you know, the better prepared you’ll be to spot good flipping deals because your radar will be well-tuned.

Guideline 2: Plan-don’t enter the market haphazardly Diving into the flipping market without a plan is like trying to swim the ocean without a life jacket; it’s a recipe for drowning financially. A better idea is to learn the basics and study the market carefully before dipping your toe in the water. In other words, prepare yourself for success. Once you enter the market, evaluate each property carefully and objectively to see how much work it needs in order to make it a great value for you and for any potential buyer.

Guideline 3: Assemble an informal team Unless you have to ability to clone yourself, you can’t be everywhere at once, and you can’t know everything. That’s why you need an informal team to support your investment efforts. The team can supply the knowledge and experience you lack. Think of it as multiplying yourself in order to achieve maximum profits. So, it’s essential to build an informal support team of realtors, property inspectors, contractors, tax accountants, attorneys, etc. And be sure to choose the best possible people for your team. You want advice from experienced and reliable people, not amateurs or incompetents.

Guideline 4: Prepare for problems to occur It’s a guarantee that, sooner or later, you’ll encounter problems when dealing with the flipping of properties. You can’t always prevent these problems, but you can prepare to handle them in the best way possible. That means setting up a financial reserve. So, be sure to save up enough money to absorb the expense of unexpected problems.

Guideline 5: Think long range There may come a day when you acquire a property and then find you can’t flip it right away. If that’s the case, remember the basic principle that real estate investments perform well over time. So, if you can’t sell the property immediately, the options are to live in it yourself or rent it out to others.

The Flipping Process The process of flipping can vary from region to region within the country, but here’s a general description of the method so you can familiarize yourself with it:

Step 1: Determine the markets you’re interested in.

Step 2: Establish a clear goal. Know what type of flipper you want to be-a scout, a dealer, or a retailer.

Step 3: Put your informal team together.

Step 4: Identify investors and then seek out the properties they want to buy.

Step 5: Do your research by: * Reading newspaper ads * Attending real estate investment club meetings * Attending foreclosure auctions, tax sales, trustee sales, etc. * Touring neighborhoods. * Looking within a 10 to 20 mile radius of your home. * Seeking out vacant houses, houses in need of fixing up, and houses with at least 50% equity. * Contacting owners, talking with neighbors. * Checking sources (county court house, tax offices, etc.) for code violations, divorces, probate, evictions, bankruptcy, criminal acts, out-of-state owners and liens or judgments for possible leads. * Keeping track of all opportunities through voice mail services, computer tracking software, etc. * Networking with other investors. * Understanding all agreements and contracts down to the last detail!

Key Point: Gather as much information and knowledge as you can before you entering into flipping deals; it’s a simple market, but not one for the uninformed!

When buying commercial properties, due diligence is even more important than it is with residential properties. That’s simply because there’s so much more money at stake.

In a worst-case scenario, unexpected repairs and expenses can empty your pockets in a heartbeat. At the other end of the spectrum, it can create a long-term, slow-motion drain on your finances that ends up with the same result-money gone and a white elephant on your hands.

I’m sure you can see my main point-never acquire a commercial or industrial property without closely examining its condition first. With close examination, you’ll secure an investment which can produce considerable profit and appreciation over the years. In this article, I’ll outline the basic due diligence required for the physical inspection of commercial and industrial buildings.

Who Should Inspect Commercial Buildings If you’re new to commercial investments, then definitely hire a professional to inspect the building you’re considering. The building structure and the HVAC, electrical and plumbing systems are much more complicated than those found in residential properties and require specialist inspectors.

For that reason, it’s a wise idea to hire an experienced contractor, architect, or other expert to do inspections for you. Verify references and get in touch with other investors to see what kind of job the specialists have done for them so you can hire the best.

When you work with specialists that do a great job at reasonable prices, treat them well and fairly. Remember, your reputation is everything, especially in the commercial or industrial market, so you want to guard it at all costs. Getting a bad reputation in the commercial market is a particularly deadly sin since it can dry up funding sources in a hurry, not to mention the fact that “movers and shakers” will not want to work with you.

Maintenance Types There are two types of maintenance in commercial and industrial investments. One is deferred maintenance. This refers to any major or minor defects in a building. Naturally, you want these defects exposed before you invest any money in a building. For example, one of the first things to have checked is the condition of the roof. The damage caused by water leaks to electronics and wiring can create some very expensive repair bills.

The other type of maintenance is routine. Just what it sounds like, this is such regular activity as cleaning, painting, servicing of HVAC, escalators, elevators, fire safety systems, etc.

Since laws require regular maintenance, examine all the building logs to make sure routine checkups have been completed, but don’t take the log entries for granted! Always consult the companies doing the maintenance to ensure the work was really done.

If you’ve already found that equipment hasn’t been kept in great shape, hire a different company to do inspections to ensure that you’re getting objective opinions.

Talk to the tenants as well about their views of the maintenance. This is not only a chance to get a realistic picture of the building, but it’s also a chance to build good relations with them should you decide to purchase the property.

Routine Items You Can Check Yourself Often, defects are obvious and don’t need the expert eye of a professional inspector. During a walk-through, you can check for the following items: * Ceilings-look for evidence of stains or broken tiles that indicate leaks from the roof. * Walls-check for significant cracks caused by uneven settlement of the foundation. * Floors-warping or cracks can indicate problems with the way they were laid or with the foundation. * Rest rooms-check out the condition of the plumbing to make sure it’s not leaking, rusted, or otherwise not performing property. * Security components-these should all be functioning properly; e.g. doors lock as they should, exit signs are illuminated, stairways are in good shape, etc. * Lighting-interior and exterior. All lights should be working. * Door hardware-by this, I mean automatic and/or hydraulic door openers and closers should be functioning well. * Paint-at points like common areas, check to see if the paint is in good shape and doesn’t show peeling, “alligatoring,” and the like. * Tenant spaces-check their condition very carefully. After all, if they’re not in great shape, the tenants will want you to fix them up once you take ownership of the building. Make a list of maintenance/repair items and get bids from contractors to see what the costs will be. * Grounds-check to see what kind of shape they’re in. This not only includes landscaping, but the condition of parking lots, curbs and the like.

Red Flags Don’t ever put your money into any property with one or more of the following problems: * Asbestos * Dry rot * Duct contamination * Hazardous waste pollution * Lead contamination * Mold, etc. If you find these problems, cancel the escrow and look elsewhere! You want to buy a profitable property, not a money pit.

Recommendation for the Purchase Agreement Always write a condition into the agreement that requires the seller to do one of two things before the close of escrow: * Correct all problems, or * Lower the price so you can do the repairs. The advantage of this strategy is that you can hire your own contractor to do the repairs, and you’ll know they’ll get done correctly.

What To Do Once You’ve Purchased the Commercial Building Naturally, once you’ve bought the building, you want to keep it in the best shape possible in a cost-effective way. For office buildings, your “foot soldiers” in the maintenance war are the maintenance staff. Make sure they understand their duties clearly and carry them out on a regular, scheduled basis.

If you have an industrial property, shopping center or similar property, then your manager should have the responsibility of overseeing the maintenance staff.

Maintenance Costs-How to Pay for Them Maintenance may seem expensive, but it’s a lot less expensive than having those income-producing tenants bail on you because you’ve let the building run down.

The tenants should pay for these costs through the lease. As long as the expense is reasonable, they’ll be happy to pay for maintenance and repairs since it directly affects their bottom lines.

Key Idea: Never, ever acquire a commercial property without checking its condition thoroughly first!

As investors, we all want to make the “highest and best use” of our property. In a technical real estate sense, this phrase refers to the use of a property that makes it the most valuable to a buyer or the market.

From a purely business point of view, it means one single use will result in maximum profitability through the best and most efficient use of the property. So, it definitely pays to know the various ways in which to change land use to get that maximum profitability. In this article, I’ll describe several methods for achieving this objective.

Method 1: Assemblage This is simply the combining of two or more adjoining lots into one larger tract to increase their total value (”plottage”). You can more efficiently develop the larger tract and increase its value through redevelopment. For example, you might buy several small tracts and combine them into one large lot in order to build a multi-unit apartment building or a commercial structure.

Method 2: Splitting of Lots This is the opposite strategy of assemblage. You take a large tract of land and divide it into several smaller tracts. The result is that you can receive a much larger income than you would if you kept the land as-is. One common technique is to split a large tract into several tracts and put small multi-unit (1-4) residential properties on each. This way, you get more favorable financing as well as income.

Method 3: Conversion of Use This is simply taking the use of a property and converting it to another use. An example is buying an old warehouse, renovating it, and then converting it into office space. In an ideal situation, you get the original property at a low price and gain the rewards of long-term income and appreciation.

Method 4: Zoning This can be a very profitable strategy in areas where there are expanding populations. For example, assume your city is growing outward toward agricultural land, and you’ve identified this land as being in the path of progress. This means the land becomes less productive in real estate terms; i.e., it now doesn’t have its highest and best use. So, you buy the farm land and then get it zoned for residential, commercial or industrial use. Since it’s in the path of progress, the land you purchased should leap upward in value, assuming you’ve done proper due diligence

Changing Land Use-The Negatives Sometimes, the biggest obstacle to changing land use is dealing with local government bodies (planning departments) and local communities. For example, you may run into communities where holding anti-development attitudes. If that’s the case, you could have a costly legal battle on your hands when seeking to change land use. The solution is to do your upfront research on the local conditions and attitudes. Find out if the planning commission and the community are pro-development or anti-development, and then make a decision as to whether or not to proceed.

Another potential disadvantage can be your own lack of knowledge. Assume, for example, that you buy a piece of land in order to attract commercial businesses and later find out it’s zoned strictly for residential use. The key is to do your research and do it carefully so you avoid this situation altogether.

To conclude, when you’re involved in commercial real estate investment, the changing of land use can be a valuable tool for increasing property value and income. The key is to take the temperature of planning commissions and communities in order to determine their attitudes toward development before you ever proceed with your plans. If the attitude is pro-development, then you’ll have relatively smooth sailing. If it’s anti-development, you’ll have to decide if it’s worth the time and expense to fight the battle that will likely ensue. As always, consider the situation in an objective manner.

Key Concept: Keep a keen eye out for changes in land use that can increase the value of your properties.

To be blunt, for most of my career as a private investor, I thought of Real Estate Agents an obstacle to success. Yet, here I am advocating in this article that you make them partners in your investment team. Why did I change my mind?

Well, one day I woke up. I realized that Real Estate Agents are not only a fact of life, but they’re best way to achieve investment success simply because of their knowledge and important place in the real estate community.

Of course, an absolute requirement for investment success is to work with real estate agents who know what they’re doing; otherwise, you’re wasting your time as an investor (not to mention that of the buyers and sellers).

In this article, I’ll give you seven guidelines for choosing the best real estate agents to work with in any investment situation.

Guideline #1: Choose Full-Time Professional Real Estate Agents Definitely avoid part-time real estate agents out there wanting commissions. Most of them are either mediocrities or amateurs who check in when the market is hot and check out when it slows. An effective way for weeding out these time-wasters is to ask for their experience, qualifications, sales, etc. Then, contact and work with the Real Estate Agents who have a demonstrated record of excellence over time.

Guideline #2: Always Choose Specialists There’s no doubt about it–you want a real estate agent who specializes in your particular area of investment. So, if you specialize in, say, the multi-unit market, seek out an agent who has considerable experience and expertise in that area. Do the same for any market-single family, commercial, retail, or the industrial sectors. A word of advice: don’t just accept a real estate agent’s word that they’re an expert in a particular market. Always ask for proof in terms of sales within your target market!

Guideline #3: Verify Those Credentials Good sources to check are your state online database and other appropriate resources. That way, you can make sure the agents are fully licensed and has no citations, disciplinary actions, etc. on their records. If real estate agents have ethics problems, you definitely don’t want them staining your reputation, even if it’s only by association.

Guideline #4: Ask For and Check References As with any business, the best proof of success lies in satisfied customers. So, ask the real estate agent for references from customers within your target market and geographical area. Contact those references to get a rounded picture of the real estate agent’s reputation and business practices. Naturally, you’ll want to develop a relationship with real estate agents with good to excellent reputations for honesty, fair dealing and patience. It’ll make the entire investment process a much smoother and more profitable one since you’ll be dealing with satisfied customers, not irate ones.

Guideline #5: Require Good Communication Skills Clear communication is the key to success in any investment deal. Seek out Real Estate Agents who listen well to you and everyone else and who keep you informed and up-to-date on all transactions. And, remember that clear communication is your responsibility as well. Make sure the Real Estate Agents you choose clearly understand your investment goals so they don’t waste time bringing properties to you that have little or nothing to do with those goals.

Guideline #6: Look For Real Estate Agents with Strong People and Negotiating Skills A real estate agent can have all the experience in the world, but if he or she doesn’t relate well to people, they’re no help to your investment deals; they’re a hindrance! Make it a point to seek out agents who are great at making everyone happy while moving people toward a deal with sound negotiating skills. To find out about a real estate agent’s negotiating skills, ask former clients about how effectively the agent conducted bargaining sessions.

Guideline #7: Remember Your Responsibilities Once you form a relationship with a great Real Estate Agent, do your bit to keep them on your team. Bring them good deals, not “ghost” deals that never materialize. Remember, your reputation is on the line too, and you want it be a good one because it can help you build a long-term investing career. A Real Estate Agent who considers you a reliable and honest investor will bring you deals that never show up on the MLS listings or in the newspapers!

Key Concept: Find the best real estate agents for your area of investment and cultivate great relationships with them. You’ll both profit!

REO is a term that stands for “Real Estate Owned.” It refers to properties which have been foreclosed upon by banks or other lenders.

“Asset managers” are the personnel you’ll deal with in REO departments. Their job is to inspect the properties, see that needed repairs are done, and manage the properties until they’re sold.

You may be able to find great opportunities in this area if you’re willing to learn the ropes and deal with the often tough-minded REO departments of banks and other lenders. This article provides you the guidelines for doing just that.

Understand the Attitude of Lenders Toward REO Properties Naturally, lenders don’t like to have REO properties on their books. Instead of an asset, they have a liability. Equally naturally, they want to get rid of these properties, but they’re not willing to do it at a loss, if at all possible.

So, as an investor, you not only have to handle this attitude, but you also have to deal another fact: banks and lenders often don’t like to publicize the fact that they have REOs on their books. They have three reasons for this.

Reason One is that they don’t want federal regulators breathing over their shoulders, questioning their business practices or solvency.

Reason Two is that they don’t want their depositors knowing about REOs. Depositors want security above all and if, rightly or wrongly, they see REOs as evidence of questionable practices, they may pull their money out. Banks want to protect their image.

Reason Three is that when lenders have a large inventory of REOs, they don’t want the market at large to know about it. If the information leaks out, prices could drop dramatically.

So, how do you find out about REOs? That’s our next topic.

Guideline 2: Present a Professional Image to the REO Department REO asset managers don’t want to deal with amateur investors, so you need to approach them as a knowledgeable professional.

First, call the lender and ask for the REO department. Once in contact, explain that you’re an independent, professional investor and are interested in buying REO properties and would like an appointment with a decision-maker.

Second, use that appointment to advance your case and convince the decision-maker that you have the assets and experience of a committed professional. If you do your sales job right, then you can ask for a list of REO properties.

Note: Sometimes, REO departments handle the properties themselves; sometimes, they use a broker. So, you should be prepared to deal with both.

Guideline 3: Inspect the REO Properties It’s a fact that many of these foreclosed properties aren’t in great condition. The former owners aren’t happy campers so they may not take care of the property or even damage it to vent their anger. So, you’ll definitely need to do due diligence and inspect any properties under consideration.

In some cases, lenders will do cosmetic repairs to a property since they know a more attractive home will bring a higher price. To counter this possibility, I recommend that you try to show up as soon as the property is acquired and offer to take it “as-is” to get a lower price.

The Mechanics of Buying REO Properties There’s no secret to buying these properties; you buy them just as you would any property. First, you make an offer. The lender either accepts it, rejects it, or makes a counter-offer. In the case of a counter-offer, you negotiate.

In regard to payment, be aware that most lenders prefer cash because they want to be rid of these properties as quickly as possible. If this is the case, you’ll need to go to a different lender to get your financing. Just don’t expect a great deal; lenders may want 10% or more down plus closing costs. However, some REO departments are aware that they’ll get less from a cash offer, so they may offer you financing. The upside of this is that you may be able to pay a lower down payment, obtain easier terms, and also get some money for improvements. The downside is that you’ll pay more in interest and fees than you would on a strictly-cash basis.

Typical Problems As I stated above, many of these properties are in pretty bad condition and may not be worth the money, so inspect them carefully before you commit to a purchase.

Also, as I said before, these properties are sold “as-is.” This means there is no warranty of any kind. So, if you buy a property that later requires very expensive repairs, you’re stuck with that expense. The lesson-perform due diligence very carefully!

In the case of federally-chartered lenders, you may not get a disclosure statement (most states require these now). This means there’s the possibility you could end up stuck with a property that has severe and expensive problems (e.g., lead paint, etc.).

Finally, if as a result of a home inspection, you find repairs that need to be done, don’t expect the lender to pay for them. Their attitude: “It’s your problem to solve.”

Key Point: When approaching an REO department, be a fully-prepared professional.