Stupid Ways to Spend Your Money #14 -... | Gather

by Jeff S.

Member since:
August 16, 2008

Stupid Ways to Spend Your Money #14

Investments in real estate and flipping

..Some products, services, and investments that are highly advertised (even here on gather.com) are simply bad and expensive products, things with many fine prints, and some are simply run as scams and fraudulent schemes.? This post covers tax refund loan which appears every tax season.

In Wikipedia, Investment in real estate and flipping in U.S. is described this way:

Real estate investing (or investment properties) involves the purchase, ownership, management, rental and/or sale of real estate for profit. Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development. Real estate is an asset form with limited liquidity relative to other investments, it is also capital intensive (although capital may be gained through mortgage leverage) and is highly cash flow dependent. If these factors are not well understood and managed by the investor, real estate becomes a risky investment. The primary cause of investment failure for real estate is that the investor goes into negative cash flow for a period of time that is not sustainable, often forcing them to resell the property at a loss or go into insolvency. A similar practice known as flipping is another reason for failure as the nature of the investment is often associated with short term profit with less effort.

Flipping - is a term used primarily in the United States to describe purchasing a revenue-generating asset and quickly reselling (or "flipping") it for profit. Though flipping can apply to any asset, the term is most often applied to real estate and initial public offerings.? The term "flipping" is frequently used both as a descriptive term for schemes involving market manipulation and other illegal conduct and as a derogatory term for legal real estate investing strategies that are perceived by some to be unethical or socially destructive. The latter usage is typically contested by those who believe the strategies in question are ethical and socially beneficial or neutral. In the United Kingdom the term is used to describe a technique whereby Members of Parliament were found to be switching their second home between several houses, which had the effect of allowing them to maximize their taxpayer funded allowances.

There are several ways to get started in real estate investing, and here are some descriptions of how to do it and with the pros and cons listed.

Foreclosures - Purchase the property at a courthouse auction, hopefully for less than it's worth. Fix it up, sell it or rent it out.

• Pros: This is a common sense approach to getting started in real estate investing. If you can get the property for a wholesale price and then rent it out for less than your mortgage, you're on your way to building wealth one month at a time.
• Cons: You get into the property and find out it has major problems costing a lot more than you'll ever recover. Ever heard of concrete being flushed down the drain (usually out of spite from the former owner)? It means having to remove all the sewage drains. Hidden defects can run costs up and give you a red ink bath before it's done. Since the bank/note holder is selling the property as is, there's not much recourse.

Fixer-upper - Purchase a property that needs repairs. This is not a property that just needs paint and carpet. This type of property usually has rot, flooring, roofing, basement and just overall problems. But that's what makes it so enticing.

• Pros: For investors with their repair ducks lined up in a row, this can be a good money maker. The key here is to hammer on the seller early in the negotiating process. Get the house for as low as possible and know what your bottom line really is.
• Cons: For those wanting to flip the property, if you can't make $30K -- $50K on the projected profit, then you may want to pass. Why? An unseen defect can run into the tens of thousands of dollars really quickly.

Retail investment ? Look for under-priced properties in an area where rentals are brisk. This would be a house that really does just need paint and new carpet. Be sure you know what the rents are before going into the property. A positive cash flow before you even walk into the property is the goal.

• Pros: A house that is in good shape can rent for years without any major expenses if it was taken care of early on.
• Cons: Good rental properties (say, in a college town or near a military base) don't come on the market often, so you could be waiting a while before you find one. If you lose your tenant, and can't find another, or find a bad one that doesn't pay, you will have a negative cash flow.

Paper real estate - This one is where you invest in the mortgages of real estate instead of the real estate itself -- financing second trusts, purchasing mortgages at a discount, wraparound mortgages, etc.

• Pros: For those who have cash, this one can give major returns on your money. For example, if you can pick up a $20K note at 12% for $15K, your return on the note jumps to 16%. This is not going to fluctuate like the stock market is sure to do.
• Cons: Your mortgagee (the borrower) could skip town, leaving you to foreclose -- right behind the first-trust note holder who usually gets paid first in a foreclosure.

Remedy

In all these real estate investment methods outlined, several common threads become obvious:

• An investor must possess high level of understanding in minute details of the real property. Even then a major unforeseen defect or event could undermine one?s investment strategy.
• These investments are volatile, speculative, and carry high level of risk at times. Remember the housing boom and bust of the last 5 years.
• You can multiply your investment losses if you borrow with no money down, and end up with a bad investment.
• Most novice investors lose big sooner or later, and most have small capital to invest. When a rich partner comes into the picture, you could lose most of the control to run the investment portfolio.
• Most novice investors buy too high and sell too low during panic times

My advice is: if you don?t understand it, avoid investing in these speculative investments, unless you have plenty of capital and years of experience in making profits

Save up emergency fund, and use debit card. Save up and pay cash for purchases. If you don't have the money, you can't afford it.? And most of all, spend less than you earn.

Next post will discuss Real estate / rental properties / flips

If I missed any topic that you want me to bring up, drop me a suggestion

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