I wince to hear it put that way, given the many times I’ve sat there staring at a blinking cursor and trying to come up with something “new.” But yes, in a lot of ways, it’s true.

And really it’s nothing to be ashamed of. After all, we’re not talking about stealing other people’s copy. We’re talking about learning from other copywriters by studying what they’ve done in a way that can only be accomplished deeply through verbatim copying – over and over – of their best stuff.

It’s more or less that simple.

To do it right, you have to make sure you are starting with a winning direct-mail package and not a dud. Either something you’ve seen mailed over and over or something you know for a fact was a control.

Then, before you do anything else, read the copy.

You’re not going to do anything complicated. You’re just going to copy out the package page by page, word for word.

All of it.

If it’s too big to do in one sitting, I recommend you spread out the task over a few days, a week, whatever you need. As long as each copying session is at least 45 minutes to an hour long.

And to get the full effect, don’t let too much time go between sessions – or what you’ve learned from one day to the next will go stale before it gels together as a whole.

And, yes, you have to do this by hand. Typing it out just isn’t the same. Why? Slower is better. As you copy out words, you’re hoping to soak up lessons between the lines. You need time between syllables for discovery.

It’s tough on your elbow, but worth the pain.

And, hey, if you REALLY want to learn from this exercise, go back and do it again. As soon as you’ve finished. You won’t be sorry, once you see the results.

[Ed. Note: To get more of copywriting expert John Forde's wisdom and insights into marketing (and much more), sign up for his free e-letter, Copywriter's Roundtable, at www.copywritersroundtable.com. Or send an e-mail to signup@jackforde.com. Get a free report about 15 deadly copy mistakes and how to avoid them when you sign up today.

Good copywriting is just one aspect of running a successful business. For a full rundown on starting and running a work-at-home Internet business that could soon replace or exceed your current income, check out ETR's 5 Days in July business-building event. You'll discover how to set up a website, choose a product, write copy that sells, and much more - and you WILL walk away with your own Internet business. Learn more here.]

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The check will help me accomplish a number of goals at once, and boost my investments far beyond this one 14-unit building.

First, it decreases my interest rate (fixed, of course) and still allows the property to cash flow comfortably.

Second, it enables me to return a little more than half of my equity investors’ capital in short order. Meanwhile, they’ll still have valuable stakes in a cash-flow apartment building in an improving neighborhood that has operated at 97 percent economic occupancy for over a year now. (It was at 12 percent occupancy and in need of rehab when I bought it.)

Third, as I give back, I expect to receive. I expect that most, if not all, of my investors will reinvest that money – and more – with me since I am preparing a real estate opportunity fund to take advantage of the huge discounts now becoming available on cash-flow properties in promising areas.

Fourth, it is part of a track record that banks increasingly scrutinize. They can see I have a history of taking non-performing assets and turning them into money makers, creating value in the process. And that’s important for banks, because – despite all the doom and gloom you hear – they desperately want to lend money.

That’s right. Even in today’s environment – in fact, especially in today’s environment – banks want to lend money.

Become the Borrower of First Resort

Banks can’t keep their doors open if they do not lend money. Yes, they are now becoming choosier than ever. But if you happen to be an investor and borrower with a good track record, your options today are better than at any time in a generation. You may be one of the few buyers willing to buy deeply discounted cash-flow properties (while others are paralyzed with fear)… one of the few with the cash to do it… and one of the few who has the actual backing of banks and other lenders to be able to close the deal.

So how do you put yourself in this position?

It’s fairly simple. You partner with people who have that kind of track record.

Star Investors Want to Work With You

To find those people, just keep your eyes open for potential opportunities to work with someone who has already spent years successfully doing what you’re trying to do.

Some years ago, for example, when I was just getting my real estate investment business off the ground, I contacted the owner of a lakefront house – a retired developer who had made a fortune in real estate in Pennsylvania. The house had belonged to the famous lawyer F. Lee Bailey, and now the new owner was about to demolish it. I told him that I would take the house away for nothing – that I would move it off the property and save him the cost of demolition. He was open to the idea, but I wasn’t able to pull it off. It turned out that the water was too shallow for the barge and the private community had too many tight spots to take the house out by land.

Still, a valuable connection had been made.

Not long after that, the son started developing real estate in South Florida with his father’s guidance – and this opened up another opportunity for me. They were interested in having me act as a scout for them on some of their larger deals in exchange for equity.

This is just one of several such possibilities that I’ve come across in my career… the chance to earn and learn alongside experienced and serious real estate investors and build my own track record and portfolio with their help.

You can do the same thing – no matter how old you are, no matter your level of experience, your credit or cash situation. And when you do, you’ll be part of a team that has the financial wherewithal to act… and get the financing… to close deals in this opportunity-laden real estate market.

Here are a few guidelines for connecting with the right investor:

1. Identify the type of deals you want to do (small residential, apartment houses, commercial, etc.). Then look in the property tax records, sorting by name, and see if you can find owners of multiple properties. Especially if they’ve owned for a while (more than just a few years), these are potential partners.

2. Go to the right meetings for your type of property. Go to real estate investor groups for residential. Go to industry meetings or groups like your local Building owners and Managers Association (BOMA) if you’re interested in larger commercial deals.

3. Network with bankers, mortgage brokers, real estate lawyers, and title agents. They know who is closing the deals in today’s difficult market. A good word from them may help start a very profitable mutual relationship.

4. Advertise in the residential real estate section of the paper with an ad as simple as this: “Cash-flow homes, 30% below market value. Call xxx xxx xxxx.” Then have a packet of information to e-mail to people who respond, with the emphasis on working with qualified investors only, with proven track records and financial resources. If you’re interested in commercial deals, do the same thing. Just swap the words “commercial properties” for “homes” and put the ad in the commercial real estate section. You can also test various types of ads on heavily trafficked websites like CraigsList.

Another excellent alternative is to build up your bank of private lenders. But, private investors are as cautious with their money as banks are. And in today’s environment, if you don’t have much experience, that may be tough sledding. You’re more likely to be successful by developing the right strategic partnership with an experienced investor – a relationship that will help you become part of a rare qualified buying team during one of the best buyer’s markets in decades.

[Ed. Note: Real estate money-making opportunities still abound - even in today's market. In fact, one real estate niche allows you to siphon cash out of lucrative crack in the system. Secure your seat on the "money train" to financial freedom right here. 

Once you discover how to find the best real estate deals in the best markets, you can make an absolute fortune - for yourself and your investors. Real estate expert Justin Ford can show you exactly how to do that, no matter what condition your local market is in.]

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A statement like that can seem profound, but it’s useless. Yet it is the mantra of many investors in all fields. In bull markets, the sellers say it. In bear markets, the buyers say it. But it is about as helpful as saying, “Wherever the sun shines, there it is daytime.” So what?

It tells you nothing about why the sun is shining or, more important, when the sun may stop shining… and how long it will likely be before it shines again.

Intelligent investing is all about the why and how. It takes some thinking… not cheap aphorisms.

And so we turn our thinking to real estate investing and we ask the questions everyone has been asking…

“How low can the real estate market go? When will it bottom?”
 

Here’s the short answer: I don’t know. Here’s the longer answer: I don’t know but…

I’m still finding some excellent opportunities. And, regardless of where the market heads the next few years, I can buy at prices today that assure me of respectable returns over the long run… and could well provide exceptional returns in the near to medium term.

It all boils down to understanding what is art and what is science in your investing… and paying due respect to each.

The Art of Judgment: How Not-So-Dumb Luck Can Help You Succeed in Real Estate

I’ve made the bulk of my real estate profits because of a force I cannot control: market appreciation. You buy under market in the sweet spot of the appreciation curve and – thanks to leverage – you can grow your investment five or 10 times or more in the space of a few years.

I have six key criteria for identifying good value and growth markets. I’ve written about them in ETR several times. Using those criteria, I’ve chosen markets I thought were undervalued and that were experiencing growing demand.

It turns out I was right. So I enjoyed much more than the standard 3 percent to 4 percent appreciation a year on my properties. I bought where the markets ended up appreciating 10 percent to 15 percent a year. And, because of leverage, I made many times that. And I even did this while some markets were imploding!

Understand that not all value and growth markets that you identify and buy into are going to go straight up. They can stay flat or fall for quite a while before they recover. And yet, even when that happened, I was able to make a decent return on my investment

That’s because choosing a market or a neighborhood to invest in is an art. You base your buying decisions on your best reading of the facts. But, ultimately, it’s a judgment call. You can get very good at it, but you can’t force it. Your reasoning may be perfect, but the market could suddenly refuse to accommodate you.

That’s why you have to pay even greater attention to the science of real estate investing.

The Science: Crunching the Numbers and Doing Rigorous Due Diligence

By “the science of real estate investing,” I mean all the measurable numbers and criteria that can help assure your success. In other words, before you buy an investment property, you have to know the answers to all of the following questions…

* How strong is the rental market? Okay, you just saw a couple of two-bedroom apartments in the area rent for $750. But you’re looking to buy a 20-unit building with all two-bedroom apartments. Is there enough demand? Can you rent them all out at $750?

* Will the property cash flow at market rent? Will it cash flow at a 15 percent to 20 percent discount to market rent (in case the market softens or you have to lower your rents to remain competitive)?

* Are you fixing your interest rates? By doing so, you don’t become hostage to another economic factor over which you have no control.

* Are you buying at a discount to the average $/square foot for that type of property in that area? When you buy at a discount to start, you have that much greater a margin of safety going forward.

* Have you thoroughly investigated what your operating costs will be? Don’t take the seller’s numbers at face value. They often understate costs – especially real estate taxes. (Your taxes may rise significantly if you’re paying a lot more than what he paid years ago.) The key point is: You must know your costs well in order to have a reliable idea of what your net operating income and cash flow will be.

* Have you considered deferred maintenance and any major expenditures that will be yours in the next few years? From a new roof to repaving a parking lot, significant expenditures of this sort can eat up cash flow and even cause a property that is not sufficiently capitalized to go into the red.

* Do you have honest and competent management set up for the property? Properties that look good on paper can quickly turn bad when you have poor management.

* Are you buying near or below replacement cost? This is especially important in a bear market.

These are all factors over which you have significant control. And when you get good at doing this kind of due diligence, you can scoop up bargains in a bear market – without caring that you may not be buying at the absolute bottom.

How to Make Money Even When You Make a Mistake

After all, if you have a fixed-rate amortizing loan on a cash-flow property, you’ll eventually own the property free and clear, regardless of price fluctuations in between. Buy a $1 million property with $200,000 down and you’ll eventually pick up $800,000 just from using the rents to pay off the debt.

In the meantime, you’ll also pocket net rents (the money left over after paying operating costs, the mortgage, and leaving a little something for reserves). So in a very bad case scenario – where the market goes nowhere for the next 20 years – you could end up making over a million dollars from a $200,000 investment. And, of course, if the market soon bottoms and improves, you could end up making a million or even millions much sooner.

So in a bear market, focus on buying cash-flow properties at below market value in areas that you believe are promising and where you are confident you can put in good management. At the same time, for added bear market protection, buy near or below replacement cost whenever possible. Here’s what that means…

Replacement Cost: A Great Reality Check for Real Estate

Let’s say that 20-unit building is 15,000 square feet, and to build that structure brand-new would cost $100/square foot – or $1.5 million. But, of course, the building isn’t new. If you were to bring it up to the standards of new construction (for its class), let’s say it would cost you $500,000. So that means, to stay below replacement cost, you’d want to buy it for less than $1 million.

In other words, if you spent $1 million on the property and $500,000 to upgrade it to brand-new status, you’d be spending no more than anyone else who was willing to construct a brand-new competitive building in the area. In fact, your cost would still be under theirs, as you would have gotten the land along with your purchase of the building.

Staying near or below replacement cost isn’t always possible – especially in increasingly popular, higher-end neighborhoods. But in today’s bear market, it is becoming easier in every kind of neighborhood.

And buying below replacement cost is not a guarantee of success. After all, if you buy into a neighborhood that’s in serious decline, you may find no one willing to build there in future years at almost any cost. However, that is an extreme case. And you’d certainly be worse off if the neighborhood went into serious decline after you had paid far more than replacement cost.

So at the very least, buying near or below replacement cost will greatly reduce your risk on every type of real estate purchase. That – and your insistence on buying at prices that cash flow with a good yield – will help you be a shrewd buyer in a bear market.

Your success will not hinge on your ability to guess the bottom. Go ahead and make that judgment call along with others – including the best markets and neighborhoods to invest in. But get the numbers right first and buy cash flow, undervalued on a $/square foot basis and on a replacement cost basis, and your rare mistakes can still make you money in the long run… while your more frequent successes can make you (and your investors) a fortune much more quickly.

[Ed. Note: Despite the gloom and doom surrounding the current real estate market, you can make money as a real estate investor. Apply Justin's 6 criteria for buying right, and you'll be on your way to earning extra income. For more strategies on growing your wealth, check out the DVD library from ETR's Profits in Paradise conference. You'll get some of the biggest wealth-building secrets from 14 experts in making money. Learn more here.

Once you discover how to find the best real estate deals in the best markets, you can make an absolute fortune - for yourself and your investors. Real estate expert Justin Ford can show you exactly how to do that, no matter what condition your local market is in.]

My goal is to keep that true whether I invest for another 10 years or another 50. So I work diligently to make sure my interests are aligned with those of my investors. That means structuring deals where the only way for me to make a profit is by making profits for them.

By putting your investors first when you structure your deals, you’ll never lack funds for the good deals you find – because your investors will think of you first whenever they look to put more of their money to work.

[Ed. Note: The economy stinks - but it's a buyer's market. And once you discover how to find the best deals in the best markets, you can make an absolute fortune - for yourself and your investors. Real estate expert Justin Ford can show you exactly how to do that, no matter what condition your local market is in.]

Properties aren’t moving; sales volume has plummeted. Foreclosures are up 48 percent from a year ago. Prices are down as much as 20 percent to 30 percent in markets ranging from Miami to Los Angeles.

So, of course, it’s becoming a remarkable buyer’s market.

But you need money to buy. If not yours, someone else’s. And therein lies the rub. Properties are getting cheaper, but financing is getting harder to find.

So today, we’ll look at the different types of investors you can pursue. And we’ll look at how to structure your offers so investors understand that (1) your interests are completely aligned with theirs, and (2) you’re offering them a good deal.

Are You Looking for Debt or Equity Investors… or Both?

Let’s say you’re looking at an apartment building selling for $800,000. It needs $150,000 in repairs. You’ll have $20,000 in closing costs and you want $30,000 in a dedicated bank account as reserves. Once you’ve rehabbed and leased up, the building will generate a net operating income of $120,000 a year.

So your total capital requirement is $1 million. And you have three people to whom you can go to get that money: Louie the Lender, Ed the Equity Investor, and Hal the Hybrid Investor.

Let’s go to Lou first. Keeping in mind that he is a debt investor, not an equity investor, here’s a simplified version of the kind of proposal that might appeal to him:

"Hey, Lou. I have a property under contract that will be worth $1.33 million once I rehab it and lease up. That’s what comparable properties in the neighborhood are selling for. I’d like you to lend me $1 million (75 percent of the after-repair value). In exchange, I will…

• Pay you a 9 percent interest rate

• Give you a first mortgage against the property

• Sign a personal recourse note (giving you recourse to all my personal assets if I should default)

• Make you the beneficiary on the title insurance

• Make you the beneficiary on the property insurance."

With a deal like this, even if the property doesn’t end up being profitable, you are making a commitment to pay Lou his interest and return his principal. And you are backing it up with your own assets.

Now my view on personal recourse contradicts what most real estate "gurus" teach. On the one hand, I agree that when dealing with institutions, if they don’t require a personal guarantee (and they often don’t for commercial deals), you should do a non-recourse loan. Hopefully, the institution is doing its homework and only lending up to the point where there is enough equity in the property to protect them. All the better for you.

However, when dealing with individuals, if you believe a deal merits their personal savings – then, at the very least, it merits your personal assets as collateral. What’s more, by willing to back up your promissory note and mortgage with your personal assets, you can get a better interest rate than if you only offer a non-recourse note.

Okay, let’s shift gears and see how you might approach Ed the Equity Investor…

"Ed! Have I got a deal for you! Pony up $360k and you get 50 percent of an undervalued, cash-flowing apartment building in an up-and-coming neighborhood."

You explain to Ed that the $360,000 is to cover the $160,000 down payment, $150,000 in repairs, $20,000 in closing costs, and $30,000 in reserves. He puts up the money. Once you’re done with renovations and leasing up, the property’s value has increased by $330,000 over your total investment. So Ed gains 50 percent of that increase, or $165,000. That’s a 46 percent return on his $360,000 investment in short order.

But wait, there’s the proverbial "more!"

Ed also will get 50 percent of the distributed cash flow on the property. As I said, the net operating income on this building is $10,000 a month. If you borrow $640,000 at 7 percent over 25 years, your monthly payment will be approximately $4,525 a month. That leaves $5,475 in free cash flow. Let $1,000 per month accumulate as added reserves, and you have $4,475 per month to distribute.

Ed’s half of that distribution is about $2,238 a month or $26,851 a year. Against his $360,000 investment, that works out to a dividend yield of 7.5 percent. And that’s on top of the 46 percent equity gain he made in the first year. Ed is doing great, especially on – what is for him – a totally passive investment!

You’ll find that debt investors (like Lou) are generally people who want safety first and would like income now – such as retirees and people late in their career who are in wealth-preservation mode, rather than wealth-accumulation mode.

Equity investors (like Ed), on the other hand, often don’t care about current yield. They have a good income from their job, so they don’t need passive income right now. Instead, they’re more interested in the maximum leveraged returns they can get on a property – without having to do any of the work or management themselves.

But there is a third class of investor that likes to choose from both menus. They want a higher total return if the risk can be mitigated or eliminated. I call these investors "hybrids," since they’ll be receptive to offerings that include the safety features of a bond and the leveraged, higher potential return of an equity stake.

So what kind of offer can you construct for them? One that has guaranteed yield and a piece of capital gain… and maybe even some of the net cash flow. For example, here’s the proposal you might make to Hybrid Hal…

"Hal, baby! I got the best of all investment worlds for you."

You describe the property and explain why it will take $1 million to do the deal. But instead of offering Hal a 9 percent guaranteed yield or 50 percent equity, you offer him some of both. You might, for example, offer a 7 percent guaranteed yield plus 20 percent of the capital gain and 20 percent of the net cash flow after the payment of the note.

This is a great deal for Hal. He has the security of a bond. (You’ll collateralize it and structure it as such.) Yet he could end up making 12 percent to 15 percent a year with this kind of lower-risk investment. And it’s a great deal for you, since you end up with 80 percent of the capital gain and net cash flow.

(Of course, you wouldn’t really use language like "Hey, Lou!"… "Have I got a deal for you!"… or "Hal, baby!" in your proposals. That was strictly color.)

Structuring the Right Deal for Potential Investors

The key to making all three of these approaches work is to:

1. Recognize what most interests your potential investors: low-risk, collateralized income now… leveraged capital gains… or a combination of both.

2. Structure the offer in a way that gives your investors 100 percent confidence in it. That means you align your interests with theirs. When in doubt, you give them the benefit of that doubt. In other words, your first priority is the return of your investors’ capital. Then – and only then – do you start splitting profits.

Here’s what that means for every equity deal you put together…

• The only way you can make money as the general manager is if your investors make money. Period. No exceptions.

• You invest your personal money in all of your deals. It doesn’t matter if it amounts to only a minor stake of total equity capital. The point is, you have money to lose and you don’t get your money back until your investors get 100 percent of their money back. So you have no reason to enter the deal unless you believe it will be profitable.

• You get the bank financing. The investors are never on loan docs and never have any liability at all for the mortgage loan.

• You do NOT charge fees. This, again, is controversial. Some gurus advise you to charge fees on equity deals. But  - especially when you’re starting out – it’s important to make it clear to your investors that the only way you can make money is if they make money. Later, if you go into real estate investing full-time, you can charge fees to keep the office running. But even then, make sure your fees are fully disclosed and not a "surprise" or buried in fine print.

• Provide regular reporting to your investors, at least quarterly. The report should be a brief description of the market and the property – not to exceed one page for each – followed by financial statements, including income statement, balance sheet, and general ledger.

I’ve relied on these same basic principles time and again to fund my deals and make my investors healthy returns. As a result, investors become repeat investors, and they recommend me to friends and associates. And as a result of that, I always have more money available to me than I can put to work… so whenever an excellent deal arises, I’m prepared to act.

[Ed. Note: Now you know how to go after funding for your real estate investments. But if properties in your area are still over-inflated, you may need some guidance to find the investments themselves. Real estate expert Justin Ford knows how to locate the best real estate values in the country. Find out where you can make your real estate riches right here.]

But I succeeded because I wasn’t stuck in my local bubble market. Instead, I went after the best values in the best non-bubble markets I could find. And, thanks to that approach, I’ve been able to bank a few of these types of checks in recent months.

The property I just sold was in Texas. In fact, just a few miles away, another Texas four-unit resulted in a $137,000 cash dump in my bank account… after just 14 months of owning it.

Unfortunately, many people who bought properties in January 2006… when I bought the first of these Texas four-units… are now struggling with falling values and rising interest payments. But if you understand market cycles, and how to evaluate properties correctly, you can consistently make money no matter what the real estate market is doing.

Here are the five key steps:

1. Find a good market at the right point in its cycle.

2. Find a property in that market that’s an exceptional value.

3. Find the right loan and investors for the property.

4. Find the right management.

5. Bank six-figure checks.

Now let’s go over them, one by one.

Step 1: Find a good market.

A good market offers growth and value. Both are easy to define. A good level of growth is one that exceeds the long-term U.S. national average – both for population and jobs. A good value market is one that still makes fundamental sense. People could still afford to buy the homes they bought years ago. Investors can get cash flow with normal leverage (80 percent loan to value) on an average property.

You can find good markets (with value and growth) today in select areas of Texas, Georgia, North Florida, and the Carolinas, to name a few places.

Step 2: Find a property in that market that’s an exceptional value.

Ideally, you want a property that (1) can be acquired at a substantial discount compared to similar properties, and (2) will comfortably cash flow. For the discount, it should be undervalued both on a dollar-per-square-foot basis and on a cap-rate (rental yield) basis.

Step 3: Find the right loan and investors.

Why play Russian roulette with real estate? Always fix your interest rate for at least two years longer than you expect to own the property. (You never know.) If you use equity investors, make sure they have at least a three- to five-year window. And make sure your deals are well capitalized.

In other words, don’t just get funds from banks and investors to cover the buy and fix-up. Get money to back up the property once it’s been rehabbed and leased.

Step 4: Put the right management in place.

Bad management is a cancer that must be gotten rid of immediately. Good management is transparent, reports clearly every month, provides itemized bills and competitive quotes. You want integrity, competence, and experience – in that order.

Don’t lock yourself into agreements. The contract should stipulate that you can cancel without penalty if the manager does not meet certain objective criteria of economic occupancy and maintenance.

Step 5: Bank 6-figure checks.

Do Steps 1 through 4 correctly, and this one is easy. Plus, when you invest this way, you don’t have to do a million deals, running around like a chicken with its head cut off to make some money in residential real estate. Instead, you can make well over a million dollars with a manageable number of smart investments in the right types of properties in the right markets at the right times with the right financing.

[Ed. Note: Real estate headlines may be full of doom and gloom. But if you know where to look, you can find tremendous opportunities. Real estate expert Justin Ford can tell you how to "turn back time" and make it seem as though the national real estate boom is beginning all over again. Learn more here.]

Dividends (or distributed net income) are usually the main attraction for investors in real estate investment trusts (REITs), and they can be the key benefit you offer to equity investors in your next project.

Let’s see why you might want to shift your emphasis to distributed net income in today’s market.

A Bird in the Hand

Will Rogers said it: "More important than the return on your capital is the return of your capital." During the bull and bubble market, the conservative approach reflected in that statement was very much out of fashion. In today’s market – where so many speculators have lost money – that sentiment is well received once again.

Often, when you pay a dividend (or distribute cash flow) to your equity investors, you are, in effect, returning a piece of their original investment. In fact, in private partnerships, early distributions are typically treated as return of investment capital. So you and your equity investors typically get to defer taxes on distributions for a while.

The investor in an income property gets…

• A lower risk investment, as he is buying into an investment that "pays for itself" and because pieces of his investment are returned sooner
• Possible tax advantages on early distributions
• Completely passive income
• The expectation of additional gains through amortization
• The potential for additional gains from leveraged appreciation

A steady stream of income and the possibility of capital appreciation later, with relatively low risk, is an attractive offer, especially in a marketplace that is otherwise highly volatile.

Key Terms for Evaluating Yield

When you consider income property, there are a few terms you should be familiar with: potential gross income (PGI), gross rent multiplier (GRM), net operating income (NOI), and the capitalization rate (or "cap rate").

Potential Gross Income is just as it sounds. Imagine you have a 10-unit building with market rents of $1,000 per unit. Your PGI is $10,000 a month or $120,000 a year. If you have laundry machines too, and you figure an average revenue from them of $25 per unit, your PGI is then $10,250 per month or $124,000 per year.

Gross Rent Multiplier is a ratio. It’s the purchase price of a property divided by the annual PGI. So if you pay $620,000 for the abovementioned property, you’re paying five times PGI. Your GRM is five.

Net Operating Income is the most important number in all of real estate. It’s your PGI minus vacancy and collection losses minus expenses. Period.

Capitalization Rate is the most quoted number in commercial real estate. It tells you how much income you are getting per dollar invested. Here’s the formula: NOI divided by purchase price equals the cap rate.

Now let’s look at a few key details about using these numbers correctly.

Base Your PGI on Current Numbers – Not Projected or Inflated Figures

When you’re a buyer, work with the lower of actual numbers or market numbers. Here’s what I mean.

Let’s say a seller has that 10-unit building we’re talking about. Two units are vacant. He says you can raise the market rent to $1,100 a month for all the units so that soon you’ll be getting $11,000 a month in rent, plus the $250 in laundry. So, according to him, you should base your offer on a PGI of $11,250 a month or $136,000 a year.

Don’t do it.

Base your offer on current numbers. If he can get $1,100 a month, why doesn’t he? When using the PGI, use the current rents per the owner’s current leases. The only time you wouldn’t do this is if he’s artificially inflated the rents.

For instance, say he has illegally turned the property into a boarding house, renting by the room. You have no intention of using the property that way. So, just because he’s getting $500 per room or $20,000 per month, don’t use those numbers unless you want to operate an illegal boarding house. Instead, use legit market numbers.

If the property would normally have a PGI of $124,000 and in this location you figure a GRM of five or less would be a good deal, then your max offer would be $620,000. If you accepted his numbers based on illegitimate usage, you’d be prepared to pay nearly twice that – even though you were using the same GRM.

Verify the NOI

In commercial property, cap rate is the most common way of determining value and justifying asking and offering prices. But a true cap rate depends on a true NOI – and NOIs are fudged more than government budgets in an election year! To get an accurate gauge of a property’s NOI, you must insist on getting proof from the seller for his numbers, and you must be prepared to do a little number crunching yourself.

Let’s say the seller of our 10-unit building claims he gets NOI of $100,000 a year. Right away, you’d have a strong suspicion he’s overstating the income. After all, you know the PGI is just $124,000. So to really end up with $100,000 in net, his lost rent from vacancy and his expenses would have to total no more than $24,000 – or about one-fifth of his PGI.

As a rule of thumb, you’ll find most apartment buildings have expenses in the neighborhood of 40 percent to 50 percent of the PGI. Add in rent losses due to vacancy of 5 percent to 10 percent of the PGI, and you usually have total expenses and vacancy totaling 50 percent to 60 percent of the PGI. That leaves the rest – 40 percent to 50 percent – for you as net operating income.

So if we assume expenses and vacancy to reach a total of 60 percent of PGI, your NOI would be the remaining 40 percent. Take 40 percent of $124,000 and your NOI is $49,600. If you insist on a minimum cap rate of 8 percent (8 cents in net income for each dollar you invest), then the maximum you would pay for this property would be $620,000.

You would have arrived at that number as follows: NOI/cap rate = maximum offer price… or $49,600/.08 = $620,000.

That can give you a good, quick estimate of what you might pay. But when you get to the offer stage, you’ll want to base it on the actual numbers.

Get Key Docs and Take All Expenses Into Account When Gauging NOI

Ask to see the last few years’ tax returns for the property (or the seller’s schedule E if he owns it in his personal name), bank statements, profit and loss statements, and general ledger. Request current leases and verify them. In your projections, use a conservative vacancy rate of 8 percent to 10 percent. Don’t accept overly cheerful projections of 3 or 4 or even 5 percent. That will just increase the estimated NOI and, hence, your offer price.

Request recent utility bills paid by the owner. Estimate what your property taxes will be based on your purchase price and local millage rate (a tax rate) when determining your NOI. Don’t use his tax rate, since yours will likely go up substantially if you’re buying the property at a higher price than he paid years earlier.

Make sure you account for all expenses you’re likely to incur. If the current owner cuts the lawn and shovels the sidewalks, budget to have someone do that for you. If he manages the property, budget to have someone manage it for you, including handling bookkeeping and taxes.

In other words, base your NOI on having a professionally managed property and not one where you have to do a lot of the maintenance, handyman work, and management.

There is a good deal more to look into when evaluating NOI. I’ll go into it further in future articles. But we’ve just looked at some major points that can help you gauge a true PGI and NOI. When you can do that, you can look for the best priced properties with the highest legitimate cap rates and lowest GRMs in any given area.

Then you can structure deals where you offer investors healthy current yields of 6, 7, 8 percent and more, as well as the prospects for capital gains though amortization and long-term appreciation.

[Ed. Note: Justin Ford is the author of Main Street Millionaire, a value-focused real estate investment program. At ETR's recent Profits in Paradise Wealth-Building Summit, 14 of the world's experts in wealth - including real estate specialists Dave Lindahl, Marko Rubel, and Jim Fleck - divulged their biggest secrets to churning out cash. Take advantage of their proven money-making strategies with ETR's Profits in Paradise DVD Library. Get the details here.]

"We are currently working with realtors to either rent or sell the house. We owe $205K, and the comps are showing sales prices of $225K, $205K, $190K, and $175K in the past 6 months. If we found a buyer at the top of that range, we could pay the mortgage and the realtor fee, and walk away with nothing. Distressingly, that has been seeming the better option of late. We had a negative cash flow of $900/month before, and IF we could find another tenant, it would likely be higher.

"My question is the obvious one. What would you do?"

Tom B.

Leverett, MA

Dear Tom,

I’ve advocated buying only cash-flow properties using fixed rate, amortizing loans. But now that you’re in this situation, here are a few things to consider:

Option 1: Look into special-needs housing – connecting with organizations that provide furnished rooms for vets or the disabled or people in halfway houses.

As I said in my article "Creating Cash Flow Without Ownership," one of my houses is rented out to a guy who subleases on this basis. He pays me $1,450 a month. That covers my nut comfortably. Then he turns around and subleases to members of a substance abuse recovery program. He charges them $125 to $150 per week for a room, which includes utilities, Internet, and cable. If his utilities, Internet, cable, and other expenses are $650, he clears $1,500 a month.

Now I wouldn’t want to lease out the property on a room-by-room basis myself. It’s too management-intensive for me. But I could if I needed to. And if I did, I could increase my net by $1,500 or so a month. For you, this is very much worth looking into.

Option 2: Student housing – a version of the above.

Rent by the bed with "all bills paid." If there’s a school near your property that makes this possible, try to get the parents of the students to guarantee the leases and agree (in writing) to pay for any damages. Again, managing this yourself will be time-consuming – but you could end up (at least) doubling your rents.

Option 3: See if you can sell the house on terms.

You can usually get a somewhat higher price this way than if you require the buyer to come to the table with a down payment and a bank loan. Take five percent down (or even one percent or two percent if you have to), and hold a note for the rest. Now taxes and insurance are the buyer’s concern. You take the five percent monthly payments on your sale price and pay your underlying mortgage. This is called a wrap-around mortgage. You sell the property "subject to" the existing mortgage and create a mortgage for your buyer that wraps around your existing mortgage.

You’ll want a lawyer who has experience in this kind of transaction to handle it for you. It’s probably best to structure it as a land contract, where you don’t give the buyer the deed until they’ve paid off the note. You can try to make the note for one or two years, with the buyer getting third-party financing after that to pay off your mortgage.

Note: in all likelihood, your current mortgage has a "due on sale" clause. This clause typically says the bank could call the loan if they find out you sold the property. People who do this sort of thing say the bank’s not likely to call a loan if the payments are being made on it. But be aware that they could – in which case you’d have to pay all of it or forfeit the collateral property.

Option 4: Try a creative lease option.

Say you normally might be able to offer your house for $205K on a lease option. The other party pays $1,200 a month, and $200 of it goes to equity. Maybe you can offer it for $220K with a $1,250 monthly lease payment… but 100 percent goes to equity if they execute the option to buy! This is a unique offer. At the end of one year, if they execute, they have to come up with $205,000 – about what you owe. If they don’t execute, at least you’ve pulled in another $15K, reducing your negative cash flow.

Not ideal… but keep in mind that you’re trying to make the best of a bad situation.

Last, but not least, should you stay or should you go… and walk away with nothing?

I’m afraid I can’t tell you when your market is going to bottom. I’ve never had a crystal ball – only a healthy dose of financial fear and skepticism. That’s why I only buy cash-flow properties at or below market value, fixing rates for at least a few years longer than I intend to own them, using amortizing loans. If nothing else, one day… however far down the road… my tenants will eventually pay off my properties. And the chances that I’ll be forced to sell are greatly reduced.

I could wait for the right market or just hold until the loan is paid off. But I don’t know if you can or should wait. You’re losing about $24K a year, and stand to lose about $11K a year even if you get another tenant in there. And it looks like you may have negative equity right now. Try to increase income with the first two options I gave you above. Or lease-option, using Option 3. Or sell, using Option 4. Keep getting creative: Look for ways to boost your income and reduce your expenses on the property, while seeking buyers and lease optioners and being disposed to work with them on terms.

I wish you luck.

- Justin Ford

[Ed. Note: Justin Ford is the author of Main Street Millionaire, a value-focused real estate investment program. At ETR's recent Profits in Paradise Wealth-Building Summit, 14 of the world's experts in wealth - including real estate specialists Dave Lindahl, Marko Rubel, and Jim Fleck - divulged their biggest secrets to churning out cash. Take advantage of their proven money-making strategies with ETR's Profits in Paradise DVD Library. Get the details here.]

Send your questions to AskETR@ETRFeedback.com. Include your full name, your hometown and state, and the ETR team may answer you in an upcoming issue.]

What he was looking for turned out to be difficult to find. The few houses for rent nearby required one-year leases. The few seasonal properties had monthly rents twice his budget. So I suggested he try calling homes being offered for sale by the owners.

“But I’m not looking to buy,” he responded. “My wife and I might get back together. And even if we don’t, this housing market might be another year away from a bottom.”

“I understand,” I said. “But we’re in a housing bear market, and there’s a lot of inventory. Some of those homes have been vacant for months. The owners might welcome getting some monthly cash and having someone there who could show the home to potential buyers. It’s worth a few phone calls.”

He agreed to give it a shot. Not 10 minutes later, he struck pay dirt.

He’d found a 5,000-square-foot home that backed up to a lake. And it was only about a half-mile from his wife’s house. So he called the number on the for-sale sign and asked the owner if she would consider leasing the property until it sold. After a quick discussion, they both decided the house was bigger than he needed. So she offered him a short-term lease on a two-bedroom home she had just bought in the same neighborhood. (Her intention was to move into the smaller house after selling the large one.)

He drove over to the two-bedroom immediately. It was the right size and location. They agreed on a rent a few hundred dollars less than he had budgeted. Within 10 days, he had the keys and a five-month lease – with the understanding that either party could terminate the lease with 60 days notice after the first three months.

It’s a perfect arrangement for him and the owner. But it only happened because homeowners are more flexible in today’s market than they’ve been in years. And that can create opportunities for you to structure low-risk, high-return deals – and even create cash flow without ownership.

Here are a few examples of what I mean…

A Lessee Who’s Making More Than the Lessor

One of my favorite single-family homes is a four-bedroom on a corner lot that a partner and I bought nearly four years ago. It’s in an emerging neighborhood three blocks from a popular downtown. We bought it for $153,000, and it’s now worth more than twice that. So we’re happy with our return on equity of over 250 percent. Yet the big cash flow on this property isn’t being made by us. It’s being made by the guy who leases it from us.

Enrique pays us $1,450 a month to lease the house – and that kicks off a few hundred extra dollars for us every month. Meanwhile, we give him the right to sublease… and he turns around and probably clears about $1,500 a month.

Here’s how he does it…

Enrique specializes in “special needs housing.” He leases to members of a substance abuse recovery program on a per-bed “all bills paid” basis. He charges them $125 to $150 per week, which includes utilities, Internet, and cable. If he averages six beds for four weeks a month at $150 a bed, that’s $3,600 a month.

If his utilities, Internet, cable, and other expenses are $650, he clears $1,500 a month. And he does it without having to qualify for a loan or having to pay taxes or insurance or major repairs. He gets the cash flow without the ownership.

Enrique gives one of his tenants a discount for being “house manager” and handling small daily issues – from coordinating trash removal to changing light bulbs. So, after the initial set up, Enrique might have to put in just three or four hours a week of direct involvement for that kind of cash flow.

It’s a good deal for the tenants, too. They don’t have to worry about credit checks or coming up with sizeable rent or utility deposits or the money for furnishings. (We, the owners, provide the appliances. Enrique provides the bedroom set, sofa, dining room set, and patio furniture.) What’s more, the property is kept spotless, and the few tenants I’ve met are delighted to be in such a well-cared-for place.

My partner and I don’t have the time or inclination to be in the special needs housing business. But working with a qualified operator like Enrique, we have a lessee who takes care of the property and pays a fair rent on time.

Sub-Leasing Opportunities Abound

Enrique has had a master lease with us on that house for about a year and a half. (A “master lease” allows the master lessee – Enrique, in this case – to sublease the property.) Prior to that, we had another master lessee for two years.

The prior master lessee was a professional group that cared for people on psychotropic medication. Once again, our experience was positive. They took good care of their tenants and the property and paid us on time.

Many other groups could be interested in a master lease for your property – from organizations assisting veterans and the disabled to those catering to students. Yet you don’t need to work with an organization to benefit as a master lessee.

If you live in one of the country’s many deflating bubble markets, there are probably a lot of vacant properties in your area. Some of these might be owned by people in other states who bought on speculation during the boom and are now stuck with them.

Take a house with a rental value of $1,200. The owner might be open to signing a master lease with you for $500 or $600 a month. That would allow him to at least pay his insurance and taxes and a little toward his mortgage. And you could do a straight sublease to a single tenant – not on a per-bed basis – and net $500 or so in cash flow per month. Do a few of these and you could create a couple of thousand dollars in free monthly cash flow without buying.

If you’re near a university, you might be able to (at least) double your net rents by furnishing the house and leasing it on a per-bedroom basis. In that case, be sure to let the owner know that’s the group you intend to lease to… and that you will be responsible for any damage. (And make sure you get good deposits and guarantees from the students’ parents.)

If you find a vacant multi-family, that can be an even better opportunity. If a four-unit would normally pull in $2,400 a month, the owner might be glad to accept just $800 to $1,000 rather than have it continue to sit vacant and prey to potential vandalism and code-violation citations.

Here’s a valuable tip for you: Many counties have lists of vacant properties and properties owned by out-of-state people. They also have lists of single-family and multi-family properties. With a little cross-checking, you can home in on vacant, multi-family properties with out-of-state owners.

If you’re not ready to buy in your market because you think it’s still far from the bottom, you can use master leases to create cash flow in the meantime. Try to get purchase-options on those properties at the best possible price at the same time, and you could end up owning one or two of them when the time is right. (Purchase options give you the right – but not the obligation – to buy a specific property at a specified price within a certain time frame. They are often executed in tandem with leases.)

When lining up a master lease:

• Make the lease for as long a period of time as you can get. You might do it for a year, for instance, with the right to renew at a 3 percent or 4 percent annual increase for two or more years.
• Opt for properties that need little or no repairs. If a property needs, say, $1,500 in paint and clean-up, offer to cover the cost upfront and then deduct it from what you pay the owner over time. In this case, you’d do the work and then deduct $125 a month from your agreed rate for the first 12 months. If the owner is a little reluctant, you might offer to “split” the cost – with no out-of-pocket expense for him. In that case, you’d do the work, then deduct only $62.50 a month for 12 months.
• Have the master lease spell out respective responsibilities. Typically, the owner will remain responsible for taxes and insurance and capital expenditures. That means if the AC goes or the roof leaks, it’s his expense. But minor repairs – from broken windows to leaky faucets – would be your responsibility as the master lessee.
• Take care of the property as if it were your own. It’s the right thing to do. It will also help forge a good reputation for you that will be helpful when you pursue other master leases and purchase-option opportunities. Since you won’t be living there, only accept tenants that will care for the property – and be sure to inspect it periodically.

Imploding real estate markets are creating exceptional buying opportunities around the country. But if you’re not yet ready to buy, remember that those market conditions can create great opportunities for creative leasing as well.

[Ed. Note: Justin Ford is a successful real estate investor with properties in five cities and three states. To learn more about how he finds value markets and then targets undervalued deals in those markets, click here.]

In the short term, amortization won’t make you rich. Yet it can help ensure discipline in your investing. And that means it can help you avoid the costly, short-term mistakes that are so often caused by greed and impatience.

But its greatest value lies in the long term. In 10 to 15 years,it can make you a multimillionaire and create a six-figure passive income – even in a flat market! Let me show you how this overlooked wealth-building phenomenon works – and how even a single deal can help create a comfortable retirement.

Amortization: Kill That Debt

"Amortization" comes from the Latin mors, or "death." It literally means "kill off the debt." You do that by paying down the amount you owe on a loan (the principal). If more people had taken amortization into account during the bubble a few years ago, they would not have paid peak prices for cash-flow-negative properties. And now they could be killing off their debt… instead of being killed by it.

The reason amortization gets so little respect is that it works very slowly in traditional residential real estate loans. Take a 6 percent, 30-year, fixed-rate loan, for instance. On a $100,000 mortgage, your payment will be $600 a month. Yet only about $100 of your first payment goes to principal. A full $500 – or 83 percent of it – goes to interest.

So you accrue equity very slowly through amortization. In fact, in the first five years of this loan, you’d reduce your loan balance on average by only about $1,400 a year. It’s only after about 18 years that half your mortgage payment would be going to principal. And toward the end of the loan, say in years 26 and 27, over 80 percent of each payment would be going toward paying off the little principal that remained.

The debt is being paid off, however slowly. And every dollar reduction in debt is a dollar in equity creation for you. Over time, this can create substantial wealth.

How to Pocket Over a Quarter-Million Dollars a Year Through Amortization, Regardless of the Market

Take, for instance, the case of an investor who has amassed an $8 million property portfolio, with half comprised of equity and half comprised of mortgage debt. Let’s also assume that, on average, the mortgages are 10 years old, with an average interest rate of 7 percent and an average amortization period of 20 years.

This investor will now accrue $287,425 in the coming year just from amortization. And he’ll go on to gain over a quarter of a million dollars in equity every year for the next 10 years… regardless of whether the market is flat, falling, or rising. It all happens from the systematic and progressive reduction of his loan balance.

Here’s another example. This one shows how, thanks to amortization, you could retire a multimillionaire with a six-figure passive income from a single commercial property.

Let’s say you buy a $2 million income property with a 9 percent cap rate. The cap rate is the net operating income (NOI) of the property as a percentage of the purchase price. It is a figure that is calculated before and apart from any debt service or mortgage payments. In this case, the 9 percent cap rate means the property produces $180,000 in NOI.

It’s important to remember that NOI is defined as the income left over after paying all expenses and budgeting for vacancy and maintenance. So if you bought the property for all cash, that $180,000 would be mostly spendable income.

Of course, you don’t have $2 million in cash. In fact, let’s say you don’t have any money at all. So you bring in equity investors to fund the cash portion of the investment.

You arrange for 80 percent financing (a $1.6 million mortgage loan), and you get $500,000 from your equity investors. That’s $400,000 for the down payment and $100,000 for closing costs, reserves, and some minor fix-up work. In exchange for their investment, your equity investors will get half the profits from the deal.

So what happens?

Well, let’s say nothing happens. The market doesn’t go up in value by a single dollar. The property simply generates its income, pays its expenses, and pays the debt service and a little more. Well, in this case, you’d still become a millionaire and end up with a six-figure passive net income in 15 years… all from this one investment… and thanks in good part to amortization. Here’s how it could happen…

Making Millions in a Flat Market

Let’s say you get a 6.5 percent loan that amortizes in 15 years. Your annual debt service on $1.6 million for this kind of loan will be $167,277. That’s covered by your $180,000 in NOI. You don’t have a lot of cash flow, but you already budgeted for reserves, you have a little extra income, and net rents tend to rise over time. You’re not flush, but you’re okay.

And remember, in this example, the market is flat. Yet, after 15 years, you will have paid off the $1.6 million loan. So the equity is equal to the original $2 million purchase price. At this point, you could also easily have $100,000 in the property bank account from accumulated net rents, which tend to grow over time. So the total equity for the partnership is $2.1 million: $2 million in the property and $100,000 in cash.

That represents a $1.6 million equity gain. Half belongs to your partners. You have an $800,000 equity gain and your partners have their original $500,000 in equity plus an $800,000 gain. Not bad, considering this investment didn’t work out.(The market was flat.) Nonetheless, you each gained $800,000.

And now, you no longer have debt service to pay. So you can split the NOI.

The NOI was $180,000 when you started. If we assume it hasn’t risen at all, it’s still $90,000 apiece. If it’s gone up by just a 3 percent average inflation rate, the NOI is now just over $272,000, or more than $136,000 to each of you in passive income.

And if market values went up just by the long-term average of 5 percent a year, your $2 million property is now worth almost $4.2 million. Add in cash in the bank from accumulated net rents, and you could easily be at $4.3 million. Subtract the $500,000 original equity investment, and your gain is $3.8 million. That’s $1.9 million for your partners and $1.9 million for you. And that’s on top of the six figures in free cash flow each year.

Amortization plays a big part in making this possible, taking a long-term ho-hum investment and creating equity by using the rents to pay off the loan. And while its benefits are most apparent over the long term and with larger properties and larger portfolios… it can serve you well even in the short term and even with a single-family home or a triplex. Especially in a hot market.

If you insist on buying only cash-flow properties with fixed-rate amortizing loans, you’ll avoid the time-bomb, interest-only, adjustable, and often even negative-amortization loans that can create huge negative cash flows. By insisting on using amortizing loans for your long-term holds, you will automatically rule out a lot of speculatively priced properties that are affordable only temporarily by using the "creative financing" that is now exploding in so many investors’ faces.

Even on your flips – where you may be using higher-interest, short-term credit lines or private money – make sure the numbers work out so that, if you had to hold the property, it would cash flow if you put competitive-rate amortizing financing in place. That will help you be more selective, take less risk, and ultimately make more money with less worry.

Amortization: It’s not sexy. But with the right income-producing properties, it can become a sure and even significant source of wealth creation in an uncertain world.