People who invest in the real estate market are a unique breed. Some are risk-averse, preferring to leave their money in term deposits and GICs. Others are willing to take on a bit more risk by investing in mutual funds, stocks, and bonds. But real estate investors are of a special mindset. They fervently believe in the “no risk, no gain” philosophy, are eager to build equity, and aim to realize quick returns, all while anchoring their future in real estate investments.
There’s no such thing as investing in the real estate market in general. Those who choose this investment route typically specialize in one or two areas of real estate that they are comfortable with and excited about.
For example, some real estate investors become foreclosure experts, others focus on fixer-uppers, and some choose to invest in Real Estate Investment Trusts (REITs), which is a popular option among savvy investors who prefer not to get their hands dirty with property management or renovating homes.
Real estate is a vast and open field. The more you know about different aspects of the market, the better you become at negotiating and closing deals. Your progress is measured by the profits you make, the leads that land on your desk, your ability to find people with available cash to spare, and the size of your networking circle.
Investing in the real estate market does not bring success overnight. The truth is, it’s a long and winding road filled with obstacles and barriers. Much of your success depends on how hard you’re willing to work, your understanding of contractual documents, and your ability to hone your negotiation skills. The risks are real, not imagined, but when you learn to circumvent these risks and turn them into opportunities, you’ll be well ahead of the game.
As Donald Trump once said, “Since you’re thinking, you might as well think big.”
Let’s look at a few channels that people eager to invest in the real estate market can explore:
Have the Appetite for Foreclosures?
When people investing in the real estate market experience success with foreclosures, they decide it’s the path for them because they’ve mastered the rules of the game. Like addicted gamblers, they spend their time looking through court records and watching for default notices to add to their list of people to call. Some even sit on the steps of the courthouse to ensure they don’t miss any potential foreclosure deals.
The general idea behind foreclosures is to contact homeowners to offer them a price for their house before their homes are foreclosed. In the United States, a foreclosure process typically takes between two to three months. It may be the same in Canada. Here’s how it works:
A homeowner fails to make a payment on their mortgage loan. The lending institution notifies the homeowner and tries to get them to pay the missed mortgage payment. If the homeowner still fails to pay after a certain period, the lending institution refers the matter to its attorneys.
The attorneys then contact the homeowner and explain that if they don’t make payment, they will receive a Notice of Default. Many homeowners mistakenly believe that receiving a Notice of Default means they have already lost their house.
Not quite.
Only when homeowners receive a Notice of Trustee Sale does the lending institution and the lawyers prepare to auction off the property, and the homeowner’s dispossession becomes imminent.
Some things to keep in mind when investing in the real estate market, particularly foreclosures:
- Banks don’t want foreclosed properties on their books and would rather sell them to interested parties;
- Real estate experts say the best profits are made before and after a foreclosure, not during the auction or bidding process;
- When contacting homeowners who have received a Notice of Default, diplomacy is crucial. Remember, you’re dealing with a very nervous homeowner who is terrified of losing their most valuable asset. Your negotiating skills will be most effective if they’re tempered with diplomacy and compassion.
We haven’t covered everything you need to know about foreclosures. If you’re serious about investing in the real estate market, you should make an effort to join a real estate club or attend seminars. The more you read about foreclosures, the better, because in this business, you’ll need more knowledge, not less. As some say, “A little knowledge is a dangerous thing.”
Intrigued by Notes?
Notes are another way of investing in the real estate market. Not many people delve into notes because they aren’t fully understood by everyone.
A real estate note is a document (some call it a “contract”) entered into by two parties that stipulates a promise to pay after a specified period of time. These parties are usually the seller and buyer of a property.
When you hear the terms trust deed, debt instrument, discounted mortgages, or cash flow, these refer to real estate notes. Notes are financial instruments that encompass mortgages, deeds, tax lien certificates, leases, credit card charge-offs, and more. This isn’t a complete list, but suffice it to say that notes are negotiated across various industries. The key things to remember are the “promise to pay” and the “specified agreed-upon time.”
Anyone—whether you or I—can buy notes either to add to our personal portfolios or sell them on the market. To maximize your investment, real estate advisor Robert Allen encourages investors to hold “healthy” notes. By “healthy,” he means notes that don’t require collateral, carry an attractive rate of interest, have terms agreeable to both parties, and require little or no monthly payments.
Investing in the Real Estate Market: A Few Rules
Those who have dabbled in real estate investing and tasted success often become overconfident, ignoring the perils involved. It’s especially hard to warn people of these dangers when there’s a real estate boom and investments are at fever pitch.
Like any industry, however, real estate is subject to market whims and the basic principles of supply and demand. The state of the economy and the job market also directly affect real estate (when people lose their jobs, they can’t afford mortgage payments).
- Know the cardinal rules and educate yourself through literature, networking, seminars, and by mastering the vocabulary of real estate. Some of these rules include:
- Patience. Real estate is both an art and a science and must not be taken lightly. You may hear about quick returns achieved by some investors, but these are usually the result of years of study and keeping an ear to the ground, regardless of market cycles;
- Negotiating skills. Ask real estate gurus about negotiation rules—there are plenty of them. Mastering and applying each rule is crucial. You want to gain the upper hand in any transaction;
- A genuine liking for people. Building a solid networking circle is key;
- Hard work. Real estate is not a 9-to-5 job. It’s 24/7, and you’ll often have to forgo happy hour with friends in favor of pounding the pavement;
- Master the lingo. Know not just real estate, but also banking, taxation, and legal terms;
- Know when to walk away from a bad deal.
