Sell Your Investment Property in Bad Economy,10 Simple Strategies

Real estate investors have made a big discovery. America is on sale. It is the perfect time to purchase good investment properties at bargain prices. Many new investors are considering this the perfect time to enter into the investment arena by purchasing properties hoping they can sell quickly and make a profit.

For investors purchasing with the intent to remodel there is an abundance of available homes in need of various stages of TLC can be purchased for deep discounts as REO properties and motivated sellers continue to increase everyday.

Selling real estate in a slow market is challenging. Everyone from President Obama to the person standing in line beside you at the local Wal-Mart is talking about the decline of real estate values and the difficulty people are experiencing selling their homes. Even with Michael Jackson dominating the news the conversations usually turn back to the housing market, job loss, and the economy, all which have a direct impact on the ability to sell real estate.

If we look at an overview of the real estate market across the United States, we find that many areas have experienced massive property devaluation, high foreclosure rates and poor home sales. Other areas have only seen a modest decline in values and sluggish home sales.

Recent housing reports hint at a glimmer of hope for a slight increase in home sales in some areas. The reality is that the sale of new and existing homes may show slightly improved sales in areas with more stable markets while others are continue to experience stagnated home sales.

Investors purchasing existing homes and remodeling to sell face challenges as they add their properties to a market overflowing with MLS listings and FSBOs.

The big question is this. If we locate a good investment property, purchase it at a deep discount and invest money to remodel it, can we sell it in todays market?

The answer is "yes."  You can stimulate your real estate investment property sales even in a slow economy if you educate yourself on the local real estate market before you buy, target desirable areas with increasing populations and stable or increasing home sales and invest in properties that have features appealing to a buyer. This process starts from the first moment you look at the property.

Follow these 10 simple strategies for selling your investment properties and you will increase your odds for success even in a slow real estate market.

1. Buyers today are searching for homes offering extra features, high value, reasonable price, and available first time home buyer financing or other financing programs. Ask your Realtor to provide current information on what type properties are creating the highest number of sales in the area. What is the sale price? Purchase properties that you can market in these price ranges or a small percentage below. Target homes in areas where USDA, FHA and first time homebuyer financing is available to attract first time home buyers. First time home buyers tax credit and other programs will offer you a pool of available buyers.

2. When you are considering an investment property, identify the qualities the home has that will appeal to a wide range of buyers. Choose homes that offer additional square footage, garages, large lots, fenced yards, maintenance free exteriors and other features. Determine the age range of your potential buyer and identify what features they will look for in a home. Enhance or create these features during your remodel and use them as a marketing tool when you list the property for sale. Tour new home open houses to get the latest ideas on what builders are offering then apply these ideas to your home.

3 Women usually make the final decision about purchasing a home, but don't discount the things that appeal to men. While women may fall in love with the spacious kitchen, stainless steel appliances or the master bath, men are looking for other things. Create a workshop area and a space for the John Deere Mower and yard equipment. A nice patio perfect for a family cookout will make the man of the house feel right at home.

4. Choose interior and exterior paint colors that create warmth in the home but at the same time are appealing to buyers in general. Avoid using multiple colors on the interior of the house since it will make the home look smaller. Have a professional to advise you on colors that are neutral but still add soft color to enhance the appearance of the home. Sherwin Williams, Home Depot or Lowe's offers professional information on choosing and coordinating colors.

5. Offer the little extras like book nooks, all season rooms, extra storage, special kid friendly spaces and family areas. The addition of motion sensor lights will offer the buyer a sense of security. Consider installing a home security system and paying the fees for the first year is a big bonus to a buyer.

6. Create a series of "wow's" from the time the buyer pulls into the driveway. A fantastic first impression can be made even if you are on a tight budget. Landscaping, a neatly manicured yard, fresh paint and sparkling clean windows make the home inviting. Coordinate your colors and style inside so that everything from the light fixtures to the floor coverings complement each other to create a total put together look. Pay specific attention to the details when remodeling older homes so everything blends in with the architectural style of the home. With older homes the key is to make everything look like it has always been there.

7. Think green. Install Energy Star appliances and other energy saving features. Even a few energy saving changes in an older home can be appealing to an energy conscious buyer. Your local power company, Home Depot or Lowe's will have information on how to make your remodel more Energy efficient and still stay on budget.

8. Choose properties with family friendly neighborhoods where buyers feel safe. Consult with the local police department for crime rates in the area. Neighborhoods where the majority of the homes are single family and owner occupied are the most desirable. Ask if there is a neighborhood park, pool or other amenities. Some areas have an active neighborhood association which plan family events and have active websites promoting their neighborhood. These neighborhood perks are excellent marketing tools to attract buyers.

9. Consider the surrounding area and the convenience it offers the buyer. Is it convenient to shopping, schools, parks, etc? Is the property on a quiet street or one with high traffic? What does the community have to offer the buyer?

10. Always strive to create a quality product. Nothing will sell your house faster than a home that has been remodeled correctly. Investors who are remodeling homes to sell are competing against large numbers of MLS listings and FSBO's in the same neighborhoods. Many of these will be newer homes. Your attention to quality and detail will set your home apart from other homes on the market. Adding some simple interior and exterior staging will enhance the appearance of the home, highlight desirable features and will offer visual suggestions for use of the space for the buyer.

Investors who take the time to properly evaluate properties, research the market for current home values and sales, consider the availability of financing programs for first time home buyers and who are selecting good properties in desirable areas can be successful even in a sluggish market, creating a good return on their investments.

New investors should contact their area Real Estate Investor's Association and find a qualified mentor who can advise and guide them through their first purchase and rehab. You can visit the website for the National Real Estate Investor's Association to locate groups in your area. Taking the time to learn will avoid mistakes and bad investment decisions that will be very costly.

Delivering more than your buyer expects and offering the home at a price just a little under value will give the buyer a reason to choose your homes over a competitor.

Summary

As real estate investors we are aware that America is on sale. It is the perfect time to purchase good investment properties at bargain prices. Many new investors are considering purchasing properties that they can remodel and sell quickly. For rehabbers there is an abundance of available homes in need of various stages of TLC can be purchased for deep discounts as REO properties and motivated sellers continue to increase everyday. But the question is this...Can we sell in a slow real estate market?

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Tax Shelter Benefits You With Investment Property

Thanks to the tax shelter benefits provided by the tax code, a real estate investment can shelter some of its own income from taxation and occasionally shelter income received from other investment sources as well.

There are two allowable deductions for real estate investment properties that provide tax shelter.

The first of these deductions is for mortgage interest. The IRS allows you to deduct the interest you pay on the mortgage you obtained to acquire the income property. The benefit to real estate investors is that interest is really a cost associated with acquisition of property rather than operating it, and the argument can be made that tenants really pay the mortgage interest for the real estate investor.

The second source of tax shelter is through depreciation deduction, which the tax code now calls cost recovery, but we'll continue to call depreciation for our purposes. In this case, the IRS allows you to assume that the buildings (not the land) are wearing out over time and becoming less valuable, and as such permit you to take a deduction for that presumed decline in the value of your asset.

Okay, now here's what's great about real estate depreciation.

Depreciation is a non-cash tax shelter deduction. In full compliance with the tax code, you get a deduction that is not an operating expense and therefore does not affect your cash flow. Moreover, depreciation can shield some or all of your property's year-to-year income from taxation and in some cases when the depreciation deduction is large enough, it can even exceed the amount needed to shelter the property's own income and provide tax shelter for other investment income as well.

Though you won't find a simple formula for the tax shelter component of a real estate investment, here's the idea.

Income less Operating Expenses = Net Operating Income

Net Operating Income less Mortgage Interest less Depreciation (Cost Recovery) = Taxable Income

Example: Let's say you own an income-producing property that generates rental income of $48,000 and operating expenses of $19,200, leaving a net operating income of $28,800.

To calculate your taxable income, you would then deduct your mortgage interest and allowable depreciation from the net operating income.

Unless you have an interest-only loan, your mortgage payments are made up of both interest and principal. Only the interest portion is deductible, which we will say is $17,559.

The amount of depreciation depends on several factors: The useful life of the buildings as specified in the tax code, which is currently 27.5 years for residential property and 39 years for nonresidential property, and the percent of the investment real estate allocated to buildings and land. Only buildings can be depreciated, and for our purposes, we'll say that the deductible amount for depreciation is $10,037.

Here's the calculation: $28,800 - 17,559 - 10,037 = $1,204

In other words, you must pay Federal income tax on a taxable income of $1,204.

There are other components to tax shelter. For instance, you can typically depreciate capital additions over the same useful life, starting when they are placed in service. You are allowed to amortize closing costs associated with the acquisition of an investment property over the same useful life. And you can amortize loan points over the number of months of the loan term and write them off.

Calculating Your Investment Property Monthly Rent

There are a number of things that factor into determine how much rent to charge. First you have to look at the supply and demand within the real estate market. There may be other real estate properties similar to yours, but do you know how many there are?

You may have a tough time if you find out that there are plenty of vacancies for the taking. For you, that also means that you will be facing steep competition from others who are trying to do the same thing. When you're trying to come up with a price, that can have a negative effect. You may have to consult with experienced real estate professionals to assist you with this.

If you have property in an area where it is booming or have more people moving out. You will be able to provide good rental prices if the area is stable and on the upswing.

Depending on what will benefit you, you may choose lower rental prices over higher ones, and vice versa. One thing that you will need to do is to check out other properties and find out what they are renting for. Get a real estate agent to assist you. They have the tools where they can get information on the prices of home in nearby neighborhoods.

If you see some "For Rent" signs, then you may want to call the number to inquire about how much the property is being rented for. Search online for tools that can help you get comparable rental prices for similar properties in the area. Don't forget about the MLS system.

Once you have come up with a price for the rent and put it in place, you will have to work on maintaining a profit. Initially, you may not see much, but as different things happen, such as inflation and the like, you will have more expenses and your taxes will increase.

However, you can counter that by raising the rent. After the end of the current term is when the rent increase would take place and start with the new term. You want to keep the tenants that you have so that the cash flow will continue to come in. In order to do that, you must keep the lines of communication open with them. Once you cut it off, they will be more tempted to leave.

Commercial Real Estate Clubs is Really Helpful

Many investors are turning to commercial real estate clubs. These clubs bring together investors from the entire spectrum of the industry for investment, learning and networking purposes.

Commercial property clubs first gained popularity in the early days of the real estate boom. Modeled after stock investment clubs, commercial property clubs have formed all around the country to bring investors and other members of the commercial investment community together. Some clubs function as meeting places for networking and learning more about the local market and industry in general. Others pool their money together and invest in property to increase their returns.

Many investment clubs of this nature bring together novice and expert investors. The novices understand the power of commercial property but maybe don't have the time, patient, knowledge or contacts to make a deal work for them. Many of these types of investors are looking for passive income from their investments and find a perfect source in commercial investment clubs.

Passive income is any money you are not actively working for. By putting your money in the pool and helping finance a deal you reap the monetary benefits but don't have to root the deal out yourself. Plus, if you get involved in an investment club with commercial real estate professionals, you get their years of experience and get to sit back and collect the benefits. In addition you have the added benefit of sitting back and seeing what kinds of deals they do on a regular basis. In a sense, you're paying yourself to learn!

Investment clubs of all sorts have their ups and downs. You want to make sure you joining one that fits your goals, comfort level and ideas about investing. Some charge dues to be able to afford to host seminars or bring in guest speakers, so try them out for a couple of meetings to see if you're getting what you pay for.

Even if you aren't looking for a silent partnership, commercial real estate clubs are great ways to network with commercial real estate members. One of the best ways to get your feet wet in real estate investment without risking tons of cash and endless hours of frustration is finding a mentor to guide you. Finding a professional who can steer you through rookie mistakes is one of the benefits of investment clubs. You can benefit from someone else's years of experience and hard work in the field, and build a valuable friendship and professional contact in the process.

Evaluate Investment Property Price with Net Present Value (NPV)

Net present value is a property investing measure widely used by investors in an investment property analysis for a specific purpose: Net present value tells the investor whether a property will achieve his or her target rate of return and therefore should attract the investor's capital into that investment.

Here's the technical interpretation.

The net present value model is based on a decision rule that states if the discounted present value of future benefits is equal to or greater than the cost of those benefits it is a profitable opportunity. Whereas, if the present value of the future benefits is less than the cost for those benefits, the rate of return will not be achieved and chances are good that the investor should take another look.

When you place your money into a savings account you expect it to earn interest.The bank dictates the return and you are either willing or unwilling to tie up your capital based upon your acceptance of that return. For example, whereas you might deposit $10,000 to earn 3.8% interest, you might not make the investment to earn 1.2% interest.

But suppose that the bank doesn't quote an interest rate. Only what amount of money you'll be able to collect in the future. Only that next year you will collect $10,300 with a deposit of $10,000 today. If there were no mention of an interest rate, how would you know what yield your investment is earning?

That's the dilemma real estate investors face when analyzing income property. There's a projection for both an investment amount and future benefit, but there's no mention of yield. The investor has no idea what rate of return is achieved based upon that data alone, and therefore no way to compare it to other potential investment opportunities adequately.

This is where net present value comes in.

NPV lets you plug in a target yield for a property and then informs you whether the future benefits generated by that property will be enough to achieve that yield on your capital investment or not.

How It Works

NPV discounts all future cash flows by the desired rate of return to arrive at a present value of those future cash flows and deducts that amount from the initial equity. The result is a dollar amount that will always be either negative, zero, or positive.

How to Interpret

1) Negative dollar amount - This means that the present value of future benefits is less than the amount invested and that the specified rate of return is not met. In other words, you might want to move on to another property.

2) Zero dollar amount - This signifies that the present value of future benefits equals the amount of the investment and that the desired yield is perfectly met. In other words, the property will achieve the return you want but with no room to spare.

3) Positive dollar amount - This reveals that the desired rate of return is met with room to spare. In other words, you might have come across a keeper.

Net present value is certainly worth knowing, and when properly used can help you evaluate your next real estate investment opportunity. But bear in mind that it is just one aspect of real estate investing analysis, should not dictate an investment decision, and is not without its shortcomings.

NPV will provide you the opportunity to evaluate projects using the same rate of return requirements, but it will not provide any useful information concerning one project over another from a risk standpoint.

Knowing Market Cycles in Real Estate

In order to be successful in the real estate business, it is vital to become familiar with the current market trends. Knowing the market cycles, you as a potential buyer, can make a smart investment decision by developing a strong market strategy. This strategy can help you to weigh out the potential risks and rewards to investing at any point in the market cycle, and it imperative to making profit in the area of real estate.

The first advantage is the ability to know when you are getting a good deal, and when you are not when looking to purchase a property. Many times people will tend to but overpriced pieces of property based on the belief that the property will appreciate and go up in value. This, many times does not occur and the buyers are left let down and without the profit they had once expected. If you study the market, and know you are in a current down cycle, it is important to know you are buying a property for a good deal. A deal that allows you to hold on to the property during the down time, with the possibility of still making profit.

And, if you are aware that a down cycle is going to occur, you want to make sure that you have the freedom to gather up your resources in order to take advantage of the new buying opportunities that you may have. As a buyer, you can find a great deal in the down market because of all of the sellers who are looking to get rid of their properties. Being ready in a situation like this can set you up for some money saving properties that will bring you a great deal of profit later on.

Knowing the market cycle can help you design a proper exit strategy for selling your existing properties. If you buy a property for a certain price, the odds are you want to sell that property at an even higher price in order to make the profit that you are looking for. In order to make the most for your property, it is imperative, that you as owner try to sell your property at the top of the market cycle, or in the so called "boom phase". In this phase of the cycle, you have the opportunity to bid up the price of your property due to short supply. This cycle is relatively short, however, and only tends to last between six and 12 months, which leaves many unprepared investors with a missed opportunity.

Investing for an entire property cycle, or for around five to ten years, can give you a clear picture of the market cycle from boom to bust. It is important to get a long-term view in order to be most advantageous at exploiting every possible marketing opportunity. It is important to remember that while there are ideal times to buy and sell a property in a market cycle, a savvy investor can make money in any phase of the cycle by simply becoming familiar with each phase and identifying the characteristics, knowing and researching the best strategies for each phase, and by having the ability to recognize when the next phase is about to begin.

During a contraction, a smart investor who knows the market cycle may only look to buy properties that are largely discounted, ensuring a large cash flow. During a recession, it is important to remember to buy properties that are below market value. A smart investor will know that buying a property at this point in the cycle should only occur if you are planning on holding that property for a long period of time. As the market begins to recover, it is vital to invest your money into properties that have taken the largest fall in price, as it is these properties that will gain their value back at the fastest pace. As the market begins to expand, it is important to recognize that you may not be getting deals below the market value. You want to put your money in to areas that are in high demand, ensuring that you will get good cash flow.

Estimate Investment Property Market Value

There are three basic methods used by appraisers to determine the fair market value of income producing property that property investors might find helpful when buying investment property.

1. Income Approach 

You use the return you desire from your cash investment and then capitalize that percentage by the net operating income being produced by the property.

For example, you desire a 8.5 percent return on your investment and you estimate the net operating income for the subject apartment to be $38,500. Here's the computation:

$38,500 / 8.5 = $452,940

You would be willing to pay $452,940 for the apartment complex based upon its income stream and your desired return on investment.

2. Market Data Approach 

The market data approach makes use of a list of properties comparable to the subject property and determines a property value-price per unit. In this case, these comparable properties should be in similar areas, with similar apartment sizes, amenities, appearance and rent structures, and should all be buildings that have sold recently.

You would then divide the prices at which each building sold by the number of units in each apartment complex to determine an average price per apartment to use as a multiplier. The average price per unit is then applied to the subject income property.

For example, you create a list of six comparable apartment complexes in the local area and determined that they sold for an average of $60,000 per apartment. By multiplying the $60,000 average unit price times the number of units in the subject property, you arrive at market value of $420,000 based on the market value approach.

3. Cost Approach 

The cost approach method estimates what it would cost to replace the entire apartment complex.

First, you must determine the land value. If a study indicates comparable land is selling for $10 a square foot and the subject property is on a 100 x 200 foot lot or 20,000 square feet, then the land is worth $200,000.

Second, you must determine what it would cost to replace the site improvements such as the parking area, lawn, shrubs, trees, etc. 

You determine it would cost about $30,000 to replace them.

Finally, you must compute what it would cost to duplicate the building. If the subject apartment complex has seven one-bedroom apartments of 600 square feet each or a total of 4,200 square feet, and it would cost $60.00 a square foot to build, then the cost of a replacement structure will be $252,000.

The total cost of a new building is $200,000 + $30,000 + $252,000 or $482,000.

But the subject income property is several years old, so we must establish a comparable by figuring a depreciated value on the $252,000.

In this case, assume the subject income property has depreciated 20 percent or $50,400. This would leave a depreciated value for the building of $201,600. To this amount, add the $30,000 in site improvements and the $200,000 land value, giving a total market value using the cost approach of $431,600.

Estimate of Market Value 

1. Income Approach: NOI of $38,500 capitalized @ 8.5% = $ 452,940

2. Market Data Approach: 7 Units @ $60,000 per unit = $ 420,000

3. Cost Approach: Land of 20,000 square feet @ $10.00 square foot = $200,000 Site Improvements = 30,000 Duplicated Building (less 20% depreciated value) = $201,600 Cost of replacement = $431,600

4. Final Estimate of Market Value = $440,000

It should be noted that the final line on the analysis is an estimate of market value. How did we arrive at it? We correlated all three of the appraisal methods and simply made a judgment by putting a slightly heavier emphasis on the income approach. Other property investors might arrive at a different estimate of market value, but you get the idea.

The Management Software of Investment Property

Multitasking with so many projects requires plenty of management. First, each prospective property must be analyzed to find out if it is viable. Usually this involves a lot of computation and number crunching to determine the long-term profit margin of each holding.

Next, the firm has to keep track of all current assets and finances. Keeping up with these numbers creates an enormous workload for the firm. Relying strictly on paper methods can leave your calculations open to human error. Additionally, using computer software makes the task easier and quicker.

Investment property software is the perfect option for a real estate firm that wants to process investment activity quickly,efficiently, and easily. You can store all of your important information in a digital format, using computer programming to ensure that you arrive at the correct result.

Employing property analysis technology will also automate many tedious processes, such as calculating the modified internal rate of return. Instead of dealing with complex math, you can let a computer do it for you! Different software offers different features but there are certain things you can always look for in investment property software.

The software should offer an analysis tool that will compute the potential of a property. Typically, it will use the modified internal rate of return. It will require you to enter a few key figures regarding the profitability. Then it will create a profile for that investment, allowing you to quickly compare multiple choices.

When speculating in property, it is important to make your plan for the long term, so that you can have a good idea of where your money is going to be at any given time. Different software packages help you plan for the future of your real estate career.

Next, the software package should give you some way of keeping track of each real estate holding, and where all of your money is currently. The more investments you make, the more important it is to methodically keep track of them.

Granted, if you are good with spreadsheets you can store all of your information that way. However, specialized software will speed up the process, enabling you to keep track of your interest in specialized sheets with organizational abilities and computation analysis needed. When you add a new property, you can record how much you are spending on it, and how much you expect it to return. As your investment matures, you can create up-to-date records of its progress.

If you are making just a few small real estate ventures, you can probably manage your property with a simple method of keeping track of them. But when you start juggling multiple investments on a larger scale, you may not have the time to stay closely acquainted with all of your investments. Therefore, you should use investment property software to make sure that you know exactly what you are doing with all of your money.