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Building Wealth

Wealth Building Through Real Estate

No other investment vehicle has the potential that real estate offers. Tim joins us to discuss his experiences with county auctions and REOs.

Reasons for Real Estate Investment

  • Cash Flow
  • Appreciation
  • Mortgage (Death of Debt)
  • Tax Avoidance

Four Ways to Make Money in Real Estate Investing

  • Wholesaling
  • Flipping
  • Buy and Hold
  • Delayed Hold Flip

Wholesaling is the practice of putting homes under contract at significant savings, then selling rights to the contract to another investor with a premium. That premium is the income to the original investor. Most wholesalers have very little experience in estimating costs and after repair value so do your due diligence prior to contracting a property through a wholesaler.

Flipping is the business of buying distressed, estate, or foreclosure properties, rehabbing them, and then selling for a profit. Many flippers use cash or hard money to purchase, in some cases building rehab costs into the loan, then sell and pay off those loans. By default, all gains on flipped properties are subject to capital gains taxes.

Both of these first two strategies are cash flow jobs, not true investment. Once the work stops, the income stops and there are no tax benefits for flipping homes.

Buy and Hold investments strategies include long term rentals, mid term rentals and short term rentals (AirBNB’s). The process for each is the same, but the outcomes can give investors several methods for income. As an added benefit, owners can perform a cash-out refinance to get up to 80% of their equity back out of the property tax free. Those funds can then be used to go buy another investment property.

Delayed Hold Flip is a hybrid combination of flipping and the buy and hold strategy. In this case, an investor will buy the property, rehab it, then hold it for up to five years and flip it when the market appreciates to offer higher sales prices.

Tim’s 9 Steps to Getting Started

  • Save six months of income in a bank account.
  • Check with you significant other about their financial thermostat.
  • Don’t assume everyone in your family wants to play this game.
  • Own your own home, preferably paid off or at the very least, very comfortably.
  • Have a monthly financial summit with your partner.
  • Discuss finances in their totality, with a focus on your net worth.
  • Most important consideration for residential investing: SCHOOLS.
  • In a two income home, live off one income, invest with the other.
  • The only thing NOT going up in value right now is CASH.

Building an Investment Team

  • Contractors
  • Title Company
  • Banker

Open a line of credit to run your business. $100,000 deposit into their bank for a $300,000 line of credit. You only pay interest on the credit when it’s in use. Typically 1 point higher than average mortgage interest rates. Know your banker personally, and save your money!

If you’re looking for a general partner, you’re looking for someone who’s already done it at least 5 – 10 times.

Auctions

Tim mentioned a website to find auction information. It can be found at www.foreclosehouston.com/ and used to find a list of home auctions.

Tips for Auction Success:

  • Auctions are on the first Tuesday of each month.
  • Winning bidders must pay for the property with a cashiers check the day of auction. It’s a good idea to bring multiple cashiers checks of different values to pay.
  • Select and stick to specific criteria when gauging homes to investigate. Location, schools, beds, baths, stories, neighborhoods, pool, etc. should be considered when defining your buy box.
  • Investigate 20 – 30 properties prior to auction, and understand that its possible that as few as 5 may actually be auctioned; in some case even none of them.
  • Be sure to check if those properties have tax liens. Bank foreclosures wipe out all other liens EXCEPT tax liens. Any property purchased that has a tax lien means you will be responsible for paying it off.
  • YOU protect YOU.
  • Investigations should include comping all properties, creating a spreadsheet with all pertinent information, then give each property a grade of how badly you want it.
  • Learn who all of the auctioneers are, and get to know them, their mannerisms, and how they hold their individual auctions. There can be anywhere from 12 – 30 different auctioneers on auction day.
  • Games people play : Partners work in tandem to run up the price to the point where competition bows out and walks away. The ‘winning’ bidder then conveniently realizes that he didn’t bring his money, and a partner waiting in wings then snatches it up at a discount since they’re the only one left.
  • Be prepared to be the bad guy, and get comfortable with the process of evicting the former homeowners. Learn about cash-for-keys.
  • True pros will get the auction lists, and approach the homeowners directly, offering to buy on the spot and offering cash for keys for quick closing / quick move out. This is not for the faint of heart.

Tax Foreclosures

In Texas, homeowners who are foreclosed on as the result of tax liens have a ‘right of redemption’ for a period of two years if the property is a homestead or is used for agricultural purposes. Otherwise the redemption period is for 6 months.

That means you really can’t do anything with the property during the redemption period – you can’t sell it, and you can’t execute a long term lease on it. If the former property owner does ‘redeem’ themselves to reclaim the property, they also have to pay back the new owners their costs, or in other words make them whole, including any livability repairs but not a full rehabs.

Tax foreclosures are usually vacant land. Be prepared – nobody knows ALL of the rules, so tax liens are literally the wild, wild west.

HOA Foreclosures

HOA foreclosures are not common, and are junior to bank and tax foreclosures. You are very unlikely to make any money from HOA foreclosures.

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Tim Sojka
Tim Sojka
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