Is there such a thing as a “quick question?” Am I being hoodwinked when my students ask for “a second of my time?” Moms, Dads, and other teachers understand what I mean http://welcomehomeabq.com. In Part 1 of “Fact & Fiction of Investment Real Estate,” we explored several of your questions having to do with common real estate myths. We talked about how profitability is determined not by “location, location, location” but by cash flow or equity. We unveiled the benefits of a “buy low, sell low” philosophy. We also replaced the idea of “the real estate market” with an understanding that there are dozens of markets which can be lucrative at any given time. In the following article, I will enjoy answering more of your frequently asked real estate investment questions.

You need control (not money)

Q: “There’s money in real estate. But they say ‘you need money to make money.’ I’d like to buy and sell some, but I don’t have that much cash on hand. How can I profit without a large investment?”

A: Even if you have no job, no credit, no money, no friends and a face for radio-Ouch! You might have it hard, but you can still create income in real estate. Pardon my enthusiasm, but isn’t it exciting!? The old saying, “You need money to make money” is absolutely false. Creating profit in real estate is a realistic goal for everyone.
A common misconception is that one needs to buy property to make money. Instead of buying, think in terms of control: control of capital, control of possession, control of resale, control of income, control of ownership. Using some creative ideas, locate a motivated owner and negotiate a discounted price. Instead of buying the property for later resale, control the property and resell it before closing. Real estate entrepreneurs call it “wholesaling.”

The technical side of wholesaling involves contract clauses. After you identify an attractive real estate opportunity, write a contract so that you, the buyer, have the right to market the property (to find a buyer), the right to enter the property (to show it to prospective buyers), the right to assign the contract (to convey your interest as buyer), and an escape clause (to release you from the contract should you fail to resell the property). With a little enthusiasm and an investor-friendly title company, you should be able to create $25,000, $50,000 or more every 30 days.

Fun, fair, flipping

Q: “I’m interested in creating real estate income, but I don’t want to get into trouble. There’s been a lot of talk recently about ‘flipping.’ How can I avoid getting into trouble?”

A: Real estate investors use the term flipping to describe contracting to buy a property, then recasting (reselling) the property before or at settlement, even with no improvements to the property. Flipping is not exclusive to real estate, grocery stores might buy oranges for five cents and “flip” them for twenty-five. The mall is full of shopkeepers who flip garments, furniture, jewelry, etc. Flipping is legal. The media commonly-mistakenly-uses the buzzword “flipping” to describe the illegal acts of fraud. Fraud is the misrepresentation of material facts which cause victims financial hardship. Falsifying pay stubs to show greater income, bogus or inflated appraisals, phony documentation are all examples. It is important to feel comfortable with the idea of creating wealth. Making a profit is okay; being prosperous is not only an American value, it’s good business. When one’s financial gain follows moral and ethical guidelines such as honesty and fair-dealing, all parties to a transaction can prosper together. When we create wealth together, we increase our ability to contribute to the community. Besides, it’s flippin’ fun!

Strategic forms of real estate ownership

Q: “There are so many ways of taking ownership of a property; which do you think is best? Why?”

A: Forms of ownership is a complex topic involving both law and taxation. Luckily, if you plan to recast (resell) the property, you do not need to think about ownership. Instead, assign (sell) your contract prior to closing.

On the other hand, if you plan to hold real estate then your three most important considerations about ownership are 1) limited liability, 2) optimum tax benefits, and 3) lowest administrative cost.

To determine your form of real estate ownership, first consider limited liability. It is best to limit your liability to the loss of a property or two and prevent a lawsuit from jeopardizing your personal assets. To do so, you can purchase costly liability insurance, or simply buy the property in the name of a company such as an LLC (limited liability company.) Incorporation allows you control over the property and limits your risk to the assets of the company. Note: If you plan to secure bank financing for the property, be aware that the bank may ask you to sign personally (become personally liable) for the loan because your newly formed company might lack an established credit history.

Also consider tax benefits. In most cases a “limited liability company” (LLC) is best for real estate ownership for many reasons. Unlike Sub-Chapter C or Sub-Chapter S Corporations, LLCs “flow through” your personal tax return and allow losses to be taken personally, they are inexpensive to set up and maintain, they have a low risk of audit, can fully take advantage of 1031 exchanges to avoid capital gains, and are protected from double taxation on contributions and distributions.

Finally, consider wealth preservation. To take full advantage of estate tax savings, land trusts are ideal. Although land trusts do not limit liability directly, they can do so by taking ownership of an LLC which in turn owns the real estate. Therefore, you can protect your property from estate tax AND limit liability by using the land trust/LLC combo. Additionally, land trusts contribute to asset privacy because the beneficiary’s contact information remains secret from the public record.