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Ways to Generate Profits From Investment Properties

by Guest on May 19, 2012 Investing 475 Views

Determining which properties will generate positive cash flow has been an ongoing challenge for investors. Prior to the recession, investors often bought distressed residential homes for the purpose of house flipping. Today, that practice is nearly nonexistent.

Many investors focus on buying properties that can generate profit through rental income or offered for sale using owner will carry financing. The abundance of foreclosures has left a void in the market which investors can capitalize on.

Once homeowners enter into foreclosure they cannot obtain another home loan for at least 2 to 3 years. This forces them to become tenants of rental homes. Investors can tap into this market by providing seller financing options such lease purchase options or seller carry back mortgages.

Rental properties do not generate cash flow as quickly as house flipping, but entering into seller financing contracts can increase return on investment. Several options exist for foreclosed property owners and bad credit buyers to purchase real estate from investors. Popular options include lease options, seller carry back trust deeds, subject-to, and take over payments.

Lease options allow buyers to reside in the house while working toward the purchase. Laws surrounding lease purchase agreements vary by state, so it is best to obtain legal counsel prior to entering into a contract.

In most instances, buyers remit option money to secure the home. A portion of each rental payment is contributed toward the purchase price. Lease options typically last for 1 to 2 years to grant buyers time to restore credit ratings.

Buyers take out a home loan once they qualify for bank financing. Investors can either lock-in the purchase price when the lease option is executed or require buyers to pay market value when financing is obtained.

When investors offer seller carry back trust deeds they act as the lender for all or part of the purchase price. A common practice is to carryback partial financing of 30-percent or less and buyers obtain bank financing for the balance. Some investors do engage in full financing for limited periods of time. Either financing option can be used with residential or commercial properties.

When investors carryback partial financing they become the second lienholder, while the bank holds claim to the first mortgage. If buyers default on bank loans the real estate can be at risk for foreclosure, so careful consideration should be given when offering this option.

Subject-to contracts involve assuming investors' loan payments until the balance is paid in full or the loan balance refinanced by the buyer. Subject-to transfers property rights to the buyer, but these rights are 'subject to' contract fulfillment.

Take over payments is very similar to subject-to. However, when assumable mortgages are available buyers can take over payments without incurring closing costs. This strategy can be difficult to implement because most mortgage notes include 'payment on demand' clauses which require property owners to pay off the loan when sold or transferred.

Assumable mortgages were frequently used prior to 1990. The majority were underwritten by the FHA and VA. Buyers should conduct due diligence before assuming payments of existing mortgages to ensure they are not in violation of state laws.

Real estate investors can generate positive cash flow by offering creative financing strategies, but should always obtain legal counsel. Owner will carry contracts should be executed by a lawyer to ensure compliance with state laws, as well as offer protection to all parties involved.

Investors unfamiliar with seller-financing options may find it advantageous to network with other investors. Joining local real estate clubs can help investors learn how to minimize risks while maximizing profits with a variety of investment properties.

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