My husband and I have built a multimillion-dollar real estate portfolio in eight years, in our spare time. We’d have done even better if it weren’t for a few very big mistakes – which we now spend a lot of time helping other beginner investors avoid.

The properties that have given us enormous appreciation and excellent returns are the ones we bought in areas that we’d been watching for at least six months, sometimes even for years.

When you get to know an area intimately, you can spot deals and snap up a property before anyone else. We bought our current home for $20,000 under market in a time of bidding wars by buying it two days before it was listed.

Here’s how to find hot deals like that:

1. To see what’s on the market, go to open houses on a regular basis for all kinds of properties. (These are usually scheduled from 2:00 – 4:00 p.m. on Saturdays and/or Sundays.)
2. Get a sense of asking prices by looking at local listings in the newspaper or online (MLS.ca for Canadian investors, Realtor.com for U.S. investors to find properties for sale by a realtor). 
3. Drive by – or, better yet, go for walks along – the streets you’re interested in. Chat with the people you meet. Find out what they like and don’t like about their neighborhood. Look for signs of change. (People who are cleaning up their yards and painting may be getting ready to sell.)
4. Ask questions of the agents at the open houses to find out what other houses are selling for in the area. Ask them about the places they think are the real gems.

Over time, you’ll develop a keen sense for what various types of property should sell for in the area. You may even get wind of one that is going to be on the market before it gets listed (like we did). It’s worth the extra effort, because then you will be more likely to make money on your property the day you buy. 

[Ed. Note: Julie Broad is a real estate investor and a member of ETR's Internet Money Club. In eight years, Julie and her husband have built a multimillion-dollar real estate portfolio in their spare time with minimal cash resources. They publish a free monthly newsletter to help other rookie real estate investors achieve their investment goals. Check it out here.]

As real estate prices fall, the income you get per dollar invested rises. This means greater cash flow and the ability to deliver bigger dividends to your investors.

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.]

"My ex-wife and I co-own a house just north of Tampa, FL. We purchased it 2 years ago for $260K, and have just unexpectedly lost our tenant. This leaves us in a $2,000/month hole. Both the rental and the sales markets are slow down there, with a glut of empty houses providing a big challenge to our fiscal serenity.

"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.]

If you spend five minutes driving down any residential street, chances are you’ll pass several homes in foreclosure. It’s no secret that foreclosures are everywhere, and there’s no shortage of information about how to buy them. You may be aware that there are some great deals on "pre-foreclosures" – homes still in the process of being foreclosed. But you probably don’t realize how time intensive finding and purchasing the right deal can be – especially if you’ve never done this type of investing in the past.

You’ve probably read some excellent ideas in ETR on how to stand out from the crowd of investors competing for the same properties, as well as some nifty little tricks on how to mail letters of interest to sellers that will get opened and read.

I’ve been investing in real estate for 20 years, and I’ve been able to make millions using many of those strategies to find potential deals. I’ve also used time-tested techniques borrowed from direct marketing. However, when I saw the current down market coming, I knew I had to figure out a new way to sift, sort, and screen through the imminent flood of thousands of foreclosures.

What I decided to do was throw out conventional "investor" thinking and take a strict marketing approach. In other words, if I were trying to market a product to a targeted group of people, how would I do it – and how could I automate it?

What I came up with was a method of attracting pre-foreclosures that has revolutionized the way investors can find and profit from them. I call it the Automated Foreclosure Finder.

It completely reverses what every other investor is doing. Instead of making "cold" contacts with people in foreclosure, you use my finder strategies – and then sit back and let them contact you before they go into foreclosure.

This not only gives you a jump on investors who rely on public records or paid listing services, it also eliminates the grunt work. It sifts, sorts, and screens out the bad deals, so you wind up spending your time only on the best deals… deals that are delivered to you automatically.

Here’s how it works.

Finder Strategies

I use direct-response marketing methods to create "finder strategies" – ads that drive qualified prospects to me. I use classifieds, business cards, flyers, mailers, yard signs, and even Google AdWords.

Like all good direct-response advertising, these finder ads:

1. Have a compelling headline to capture my prospects’ attention
2. Make a big promise to create interest.
3. Ignite a desire to find out more.
4. Tell my prospects exactly what action to take

The key to making these ads work is to make sure they offer helpful information to people facing foreclosure. People facing foreclosure experience a wide range of emotions. They can be angry, afraid, depressed – even ashamed. Most of them will be looking for ways to stop the foreclosure and save their homes. They want a solution to their problem… and they want it fast. The only thing they’re interested in is ending their pain. The finder ad should do that for them.

Remove Psychological Barriers

To automate the prospect-finding process, all of my finder ads direct prospects to a 24-hour information line. This is a technique that smart marketers have used for years. Your finder ad should clearly state that they are calling a free recorded information line. This makes calling a non-threatening action for the prospect to take. They know they don’t have to talk to anyone when they call. They don’t have to be afraid of being "pressured" into anything. It’s risk-free, so anyone who is even slightly interested will make the call.

The message they hear when they call, again, follows tried-and-true direct-response guidelines. My message, written by a professional copywriter, is empathetic to their situation. It gives my callers seven options they can take to stop their foreclosure. It also gives them specific actions to take, depending on where they are in the foreclosure process. Then it qualifies those prospects for me.

After presenting all the options for preventing a foreclosure, I offer them one more. The option that if none of the solutions I have suggested work for them, "I may be able to buy your property" and prevent the foreclosure. Then my message states the questions I need answered before I can consider purchasing their home. Questions like:

• How much is owed on your mortgage, and how many missed or overdue payments are there?
• What is the location of your home – as well as its age, square footage, and the number of bedrooms?
• What is the condition of the home?
• Do you have an appraisal for the home?
• Has a "Notice for a Sheriff’s Sale " been sent?
• Has the bank sent a list of additional expenses owed to them for the foreclosure process?

The first thing this message does is give them an understanding of the reality of their situation. The second and most important thing it does is help gain their trust. It also helps to screen out the deals that would not work, or that I don’t want, and leaves me with the best of the best to choose from and pursue. I would rather talk to 20 qualified prospects than 100 prospects I have no insight into.

Position Yourself as an Advocate

Although the finder ad is designed to attract people long before they show up on any foreclosure lists, some of the people who respond to you will have had some kind of run-in with another investor. That investor may have left a bad impression – the impression of being solely interested in taking the property for profit. That’s why it’s important to position yourself as an advocate, not as an "opportunistic" investor, in your finder ads and recorded message.

By providing your prospect with a number of potential, step-by-step solutions for them to stop their foreclosure – and only briefly mentioning the possibility that you might be able to buy their home – you are 99 percent more likely to be perceived as being on their side.

Putting It All Together

A sample finder strategy used in a classified ad might look like this:

Free Foreclosure Help
Learn What to Do If You Are at Risk
FREE RECORDED MESSAGE
Call anytime, 24 hours a day, xxx-xxx-xxxx

An ad like this drives people to your recorded message. The recorded message educates them, screens them, and provides a way for them to contact you or request you to contact them. The ones you ultimately do contact are highly qualified. You can get as specific as you want with your message. The beauty of it is that this method will sift, sort, and screen the best possible deals for you, every day, 24 hours a day, seven days a week.

Don’t Forget the Internet

Another thing I do is drive prospects to a website that contains the same helpful info as my recorded message. From the website, I can capture their e-mail addresses. Then I send them a series of automated messages that drip out professionally written e-mails that repeat the helpful information and also remind them that I am here to help.

This method saves so many wasted hours that, in itself, that would be enough for any investor to be excited about it. But the fact that it drives deals to your door before other investors can even get wind of them makes it unique… and highly profitable.

[Ed Note: Dean Graziosi is a real estate investing expert, teacher, and author who began investing at 18. His first best-seller, Totally Fulfilled, explains his unique "core" approach to optimal results, success, and fulfillment in all areas of life. His second book, Be a Real Estate Millionaire, has already appeared on best-seller lists of The New York Times, The Wall Street Journal, Amazon.com, and USA Today. For an ETR-reader-only special on this book, go here.

Would you like to know how to create equity out of thin air?

Would you like a guaranteed method to "recession proof" your income?

If you are a property owner who’s been hit by the falling real estate market, how’d you like a way to climb back on top?

Out of chaos comes opportunity. If you have been paying attention to the real estate market (and, really, how could you not?), you know that in most parts of the country foreclosures are through the roof. But don’t be scared off by other people’s real estate failures. I have found a way for everyone to win. Even you. And even if you are not currently involved in real estate. Let me explain…

I have been in the real estate business – both residential and commercial – for over 25 years. I am a licensed real estate broker in Florida, just outside of Orlando. And I can tell you from experience that when the market is cranking along and credit is easy to get, you could just about train a chimp to make money with real estate. But when times get tough, you need to try an unconventional approach. The one I recommend is learning how to work "short sales."

Buying Short Sale Homes
The short sale has been around for many years. It’s nothing more than the lender/bank agreeing to take less than what is currently owed on the property. They do it because they are not in the business of owning real estate. They just want to get the property sold and off their books before they have to go through foreclosure.

Here’s how it works: A property owner, real estate agent, or investor informs the lender that they would like to short sale the property they are involved with. After they submit the appropriate paperwork, the lender’s Loss Mitigation Department (a department that can actually help the property owner) will negotiate an acceptable price lower than the current mortgage balance.

Many times, the Loss Mitigation Department will use their own internal formula to determine the discount they will take. But when the market is so slow that most houses are selling below asking price and even below "market" price – like right now – lenders will often agree to take bigger discounts.

The short sale enables property owners to get out from under properties that have either declined in value or were simply overleveraged to begin with. And it enables investors to make below-market deals on properties that they can quickly turn around for a profit. Everybody wins!

As an investor, the lower you can negotiate the debt, the greater your potential profit upon re-sale. And it’s even easier if there are multiple mortgages on the property.

Here’s what I mean…

Let’s say you start doing research, and one fine day you find a soon-to-be foreclosed property with an 80 percent first mortgage held by Acme Primary Bank and a 20 percent second mortgage held by Secondary Lender Corp. You have struck gold!

While Acme Primary Bank may not be interested in discounting the balance of their 80 percent first mortgage a whole lot, you will probably be able to get it down somewhat. Meanwhile, Secondary Lender Corp. will almost certainly be willing to discount their 20 percent second mortgage. You see, when a first mortgage is foreclosed, the second mortgage is usually wiped out along with any other junior liens on the property. So the only way for Secondary Lender Corp. to get anything out of the property is to work the short sale and accept a much smaller amount for their payoff.

When you are dealing with properties in the $500,000 range, a 20 percent second mortgage is $100,000. This is where equity is created out of thin air for the short sale investor.

I keep my eyes peeled for this type of situation. If I know the second mortgage holder will discount their loan to mere pennies on the dollar, then I know I can walk into the property with equity. In most cases, the first mortgage holder will discount their loan to some degree. Combined with a major reduction in the second mortgage… that’s a windfall for the savvy short sale investor.

There are many reasons to invest in short sale properties:

• There are currently so darn many of them to choose from.
• You can create equity in properties where none existed before.
• You can work these deals in the comfort of your home. No office necessary.
• You don’t need money to profit from short sale deals.
• If you buy them right, you don’t need credit either.
• Short sales will be a hot market for at least the next 18-24 months.

Here’s one example of how I used a short sale to turn a profit…

I found a property with an "asking" price of $105,000. This included the $74,000 first mortgage and a $28,000 second mortgage, plus late fees and costs. The owners could not sell it for that price because of the condition it was in. It needed some rehab work, but they didn’t have the money to do it. Using my short sale techniques, I successfully negotiated a purchase price of under $50,000 and immediately sold it for $78,000. That netted me a profit of over $28,000.

My buyer bought the property from me the same day I bought it. I didn’t bring a dime to the closing table, because the money to fund my agreement with the bank came from my buyer. The deals were closed simultaneously… and here is the result:

In another recent deal, the asking price on the property was the total debt balance plus commission/closing costs of $253,000. In this case, the property had a true market value of just over $212,000. I was able to get the first mortgage balance of $162,000 down to just $145,000. The second mortgage of $74,000 was negotiated down to just $3,000. I ended up buying the property for $148,000 and selling it the same day for $210,000 – making a $62,000 profit on the deal.

Another deal had just one mortgage. The property had a true market value of just over $190,000. But in order for the property owners to pay off their $203,000 mortgage balance, their back payments, and their commissions/closing costs, they had to list it at $234,800. And there was no way they could sell it for that. I negotiated the debt down to under $155,000 and sold the property for about $180,000 – a $25,000 profit.

Even if a property is 100 percent financed, the lender will usually discount the payoff amount to around 82 percent of what’s called the "Broker Price Opinion" (BPO) – an estimated value, determined by a real estate broker or other qualified appraiser – that is frequently below market value. That makes doing everything you can to influence the BPO one of the most critical aspects of successful short sale investing. And when banks/lenders contract with a licensed appraiser to come up with the BPO, you have just one opportunity to do that.

That’s why I always insist on being present during the BPO inspection. I then produce comparables that reinforce and justify my contract price. I "help" the appraiser by handing him information on other properties for sale in the neighborhood. If repairs are needed, I hand him a copy of all the repair estimates. I also research the average number of days properties in that area are on the market, according to the local Multiple Listing Service, and hand that to him.

I do all this for one reason and one reason only: to legally and ethically influence the property’s BPO. This estimate becomes the starting point for negotiations with the bank/lender. So the lower, the better. If the bank/lender knows that the house may need some repairs and has copies of my repair estimates, it will affect their decision. If the bank/lender knows that the days on the market (DOM) for this property is reaching – or exceeding – the average, they know there’s a good chance they will have additional holding costs to pay before they can sell the property. All this information is designed to get the bank/lender to accept my offer and not take the property through the full foreclosure process.

All indications are that we are in for another two years or so of a soft real estate market. Learning about – and knowing how to make money with – short sales will get you through it.

[Ed. Note: Clyde R. Goulet is a real estate broker and author of The Survival Guide to Foreclosure. Clyde, a member of ETR's Internet Money Club, is offering a FREE download of his "Short Sale Manifesto" at www.nobsshortsales.com.]

Tens of thousands of amateur investors bought into the "spec-home" hysteria during the heyday of the real estate boom and built huge luxury homes. Building a house "on spec" ("spec" is short for "speculation") means that you purchase a piece of property and build a house on it that you believe will sell quickly… at a huge profit.

A friend of mine built such a house (and acted as the general contractor) on an oceanfront lot not far from where I live. He worked on the house for about a year and a half. One problem he encountered was finding reliable, quality-conscious workers. He hired as many freelance carpenters as he could get his hands on. His house was finally finished… but it’s been on the market for almost two years!

Though there may be some exceptions (in Vienna, VA, Orlando, FL, or Las Vegas, for example), building spec homes is a fool’s game in today’s market. You could easily be left holding the bag.

There’s an old adage in the financial markets: "The trend is your friend." Well, the same holds true with real estate.

One recent trend is toward smaller homes and apartments in the "new exurbs" – and that’s where your real estate money should be invested.

What the Heck Are the New Exurbs?

* The new exurbs are typically three to four hours (or more) from major metro areas. They have access to clean water and dependable utilities. The new exurbs are typically not an easy commute to a big city. The new exurbs are not the suburbs!

• The new exurbs have an educated population that is generally tech-literate. There is typically a concentration of ex-corporate professionals and entrepreneurs.
• The new exurbs tend to have quality restaurants, small museums, and entertainment (but obviously on a smaller scale than in the big cities). And in the best-case scenario, there will be a private or municipal airport nearby.
• The new exurbs are almost always clean, quiet, and scenic, and often border national or state parks.

Some examples of the new exurbs in the U.S. :

• Telluride, CO
• Laconia, NH
• Coeur d’Alene, ID
• Sedona, AZ
• Hilton Head Island
• Jackson Hole, WY
• Marshalltown, IA

In Canada :

• Mission, British Columbia
• King City, Ontario
• Airdrie, Alberta
• Carleton Place, Ontario
• Leduc, Alberta
• Vancouver Island

I’m not talking, here, about developing spec homes in those places. As I said, that’s a fool’s game. I’m talking about buying existing properties in the new exurbs that you sell or rent to the people who are flocking there.

The idea is to find small (two- or three-bedroom) homes, apartment buildings, or lots that are not overvalued.

If you can find properties below market value that can be easily updated – that’s even better.

Another strategy would be to buy modular homes or apartment buildings that could be used as long- or short-term vacation rentals.

Where Do You Find These Gems?

The trend toward investing in real estate in the new exurbs is still young. But it will pick up steam as people continue to exit the large metro areas and suburbs.

Properties that can be bought below market value will usually be bank-owned or have highly motivated private sellers. They won’t be easy to find. But, generally speaking, you’ll have the most success if you look within a few miles of the center of town.

Start by investigating the new exurb areas that are most appealing to you. A great "instant properties check" tool is Intelius.com (a fee-based service). Trulia.com is another hot tool.

Once you’ve targeted a few neighborhoods, set your New Exurb Real Estate Strategy – and go! The new exurbs will prove to be the next big thing in real estate.

[Ed. Note: Marc Charles, "The King of Business Opportunities," has launched more than 40 profitable businesses in the last 25 years. If you're looking for more ways to earn extra income, Marc's weekly Profit Center Dispatch service reveals some of the hottest business opportunities around and how you can get started. Marc also includes insider tips to accelerate your success.

To learn more about wealth-building strategies - including investing advice, entrepreneurship opportunities, and real estate investing techniques - check out ETR's "Profits in Paradise" Wealth Building Summit this April. For more information, click here.]

Many banks and other lenders have overreacted to the sub-prime mortgage scare. As a result, it’s tougher than ever for people to get conventional loans. Even investors with spotless credit have to face new roadblocks that can ruin a great real estate opportunity.

Over the years, I’ve learned that it pays to become your own bank by tapping into the potentially unlimited funds offered by private lenders. Not only can you bypass credit checks and other delays that prevent you from getting the cash you need, you can also make bigger profits by getting the fastest jump on the best deals. At the same time, your private lenders get a better return for their investing dollar in less time than they could with, for example, bank CDs. It’s a winning situation for everyone – except the bankers who get cut out of the middle.

In my last article for ETR, I revealed how you can get private money lenders to trust you. Put those techniques into practice, and you should have potential lenders lining up to give you their cash. But once the money hits your hands, how do you handle it? Here are three basic guidelines.

Touching the Money

When people hear the kind of interest I pay, they sometimes get so excited about loaning me money that they want to hand me a big check right on the spot. This is not the way to do it. For your protection, and the protection of your private lender, that check should be sent to your attorney.

This is the procedure: Go over your disclosure document with the private lender. The disclosure statement spells out the full facts of the investment and your business. Once you have a meeting of the minds, have the private lender send the check to your attorney… to be used for the closing on a specific property. This way, you’ll have a nice, neat paper trail and a well-informed lender.

Co-Mingling Funds

Sometimes you will have two lenders who each have a small amount to loan. With the combined amount, you have enough for a particular property. But you cannot simply put the money together and let them share the first mortgage.

In this type of situation, give one lender the first mortgage. If you need additional funds, give another lender a second mortgage – after explaining that the first mortgage holds a stronger position.

However, if you’re willing to form a new business entity – such as an S-Corporation or LLC – it’s possible to put funds together from two or more private lenders. Laws and regulations vary from state to state, but all states have similar paperwork that needs to be filed.

When Do the Payments Start and End?

Proper handling of private funds doesn’t end when you buy a property. You also need to pay your lenders back in a professional way that encourages them to invest with you again.

The best way to structure payments is to start paying your lenders interest at the time of closing. So if, for example, you’re rehabbing a property, this means you have to make repairs and get the place lease-optioned as quickly as possible so it is producing income to cover the interest payments you’ll be making.

I continue paying interest to my lenders as long as their money is in a property. When the property sells, they get a check at closing for their principal and interest.

I ask them if they want to loan their money on another property. Nearly all will say yes, and their interest payments start again at the next closing table. So they earn interest while the money is loaned – from purchase to sale.

I pay a minimum of 90 days’ interest on all private money real estate loans – even if I wholesale the property and have the lender’s money for less than 90 days. I just want to be fair.

The lesson here is to avoid the temptation to grab those checks and cash them. Run a professional operation, have your business rules in place, and follow them. You’ll be much better off in the long run.

[Ed Note: Alan Cowgill has bought or sold more than 200 investment properties using funds from private investors rather than banks or hard-money lenders. His Private Lending Made Easy training program is the only one on the market dedicated to private money. To learn more about how you can grow your wealth with private funds, click here.

This April at ETR's Profits in Paradise Wealth Building Summit, Alan will reveal how he created his own "private bank" of over $2,000,000 in ready capital. Get the details here.]

A married couple I know recently decided to separate. So the husband needed a place to live. Ideally, he wanted a house in the same neighborhood to make visits easy for their teenage children. He also wanted a lease of just four or five months, since he and his wife might reconcile. And if they didn’t reconcile, it would still give him enough time to figure out what to do for lodging on a more permanent basis.

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 my last article for Early to Rise, I revealed 14 ways that private lenders can help you take your real estate business to an incredible level of success.

Today, I’ll show you how to take the next step: building trust between you and the people who can fund your deals.

When I decided to work with private lenders, I knew the individuals I wanted to reach were financially savvy and could appreciate the generous interest rate I offer. But people with ample finances get tons of requests for their money. So my biggest challenge – and a challenge you’re sure to face when finding private lenders – was finding private money lenders that would trust me enough to do business with me.

I named my company "Integrity Home Buyers" because the word integrity has meaning for me. It is the way I run my business and my life. The people around me know this, but when I decided to seek out private lenders outside my own circle of friends, they simply didn’t know me. And I was asking those people to give me large sums of money and trust me to do what I said I’d do. So I had to convey my philosophy to them.

You can build trust in dozens of ways. But there are four trust-builders that have helped me find more than enough private lenders to fund all the real estate deals I want to do.

Trust Builder #1: Reach Out to the Right People.

When I started looking for potential lenders, I first determined common denominators among my target group that would help me reach them effectively.

I found that I could get an extremely targeted list of names of potential lenders from a list broker. (You can find a list broker in the phone book or on the Internet.) The list can be tailored almost any way you want, so I requested the names, addresses, and phone numbers of people who met the following criteria:

1. They owned their own home.
2. They bought items through the mail.
3. They owned bank Certificates of Deposit (CDs).
4. They were located in our county.

Here’s the logic behind my choices:

1. They owned their own home.

People who own their own home are probably already aware of what a great investment real estate can be.

2. They bought items through the mail.

If they buy things through the mail, I figure they will take time to read things that I send to them through the mail. (One of my primary marketing tools at the time was a postcard.)

3. They owned bank Certificates of Deposit (CDs).

These people obviously have available money. With the banks paying a pathetically low rate on CDs, my program is that much more attractive. (That was true when I got into the business – and CD rates are even lower today.)

4. They were located in our county.

This criterion is crucial to building trust and credibility. I focus on my local market, because it is likely that they already know about me from my other marketing efforts. They’ve seen my "I Buy Houses" signs for years. I sponsor Little League teams, so they may have seen the T-shirts with "I Buy Houses" and my phone number. And they may have read newspaper articles the local paper has done about my company.

In short, I believed from the start that lenders would be comfortable loaning to one of their neighbors. Plus, since they’d already seen my ads and heard about me in the community, they’d believe I was the real deal. And I figured they’d enjoy being able to drive by the house on which they held the mortgage while my crew was doing the work. (This turned out to be another huge trust builder. It made them feel safe, seeing exactly where their money was.)

Trust Builder #2: Crush Your Prospects with Credibility.

Once I received my list of targeted names, I mailed postcards inviting them to a luncheon. I didn’t have a tremendous crowd, but I didn’t need one. The number of guests didn’t matter as much as the number of guests in my targeted market who could take advantage of my program.

One of the best ways to establish your integrity is to create a "credibility kit" that you can hand out to potential lenders. Mine is a 30-page, spiral-bound book. On the cover are color pictures of more than a dozen houses I’ve bought and rehabbed. Before they even open the book, they see before-and-after pictures that show I have a seasoned real estate business… evidence of my work that they can drive by to see in person.

Inside the book, you want to include information that sends a strong message that you are a trustworthy person who knows his or her business. My book includes a brief history of my investing career, my company philosophy, pages of testimonials, certificates from training I have completed, and information-packed special reports.

Trust Builder #3: Become a Household Name.

The credibility kit is a great start, but you can’t stop there. To grow your business, you want your name out there. You want the prospective lender to say, "Hey, I’ve heard of you." Or "I’ve seen the T-shirts on the Little League team you sponsor." Or "You’re the ‘I Buy Houses’ guy." Familiarity makes an impact, and recognition conveys credibility.

For example, about a year ago I was able to add something new to my credibility kit: a copy of an interview with my local newspaper. They did a long article with lots of great information about my company and my lender program. Then, recently, the reporter came back and did an article focusing on the lender program – which, of course, I am now adding to my packet.

Talk about credibility! That’s the kind of publicity money can’t buy.

Trust Builder #4: Join the BBB.

Another credibility-building tool is to join the Better Business Bureau. It’s a great way to let people know that you consider yourself a serious, responsible businessperson. It also authorizes you to use their logo on your materials, which further conveys credibility.

People frequently check with the BBB before making a major financial decision. With good reason. To be a member of the BBB, you have to agree to "follow the highest principles of business ethics and voluntary self-regulation" and "have a proven record of marketplace honesty and integrity."

Early in my career, all of the above strategies combined to take my real estate investing to new heights. I had targeted my market correctly, won the trust of several private lenders, and had awesome results. After just two luncheons, I had $1 million to buy houses with… without having to hassle with a bank.

[Ed note: Alan Cowgill has bought or sold more than 200 investment properties using funds from private investors rather than banks or hard-money lenders. His Private Lending Made Easy is the only training program on the market dedicated to private money. To learn more about how you can grow your wealth with private funds, click here.]

Many real estate developers and investors use a simple formula to calculate net income when evaluating the viability of an investment property. And there’s nothing wrong with that formula.

Example: Let’s say you are going to purchase a single-family home for $250,000 with the intention of making it a rental property. The monthly costs to maintain the property are $800 (principal, interest, taxes, insurance, and maintenance). The property rents for $1,500. This leaves you with a net income of $700 ($1,500 – $800).

But my friend and mentor PS taught me another way to analyze a real estate investment. The best part of his formula is that it can open up your eyes to possibilities you never even considered.

PS made two fortunes in real estate. He made his first fortune the way many others did – by acquiring homes, medical office buildings, strip malls, and apartment buildings at deep discounts and then selling them for a profit. He made his second fortune in a more unusual real estate market: self-storage.

Now many investors discount offbeat real estate investments like self-storage. But when you apply PS’s formula, you can see how much money you can stand to make from them.

His formula figures out the actual revenue per square foot of an investment property. It doesn’t sound particularly special. But when he showed me how to apply it to a variety of real estate investments, I was shocked when I saw the numbers.

The Actual-Revenue-Per-Square-Foot Formula is calculated as follows:

(A) The total revenue of a real estate investment divided by (B) the total square footage of the investment equals (C) the actual revenue per square foot that is generated.

For example, a typical 1,500-square-foot single-family home in Chicago, IL generates $2,000 per month in rental revenue.

Doesn’t sound too shabby. But once you apply PS’s formula, you find that you’re making only $1.33 per square foot. ($2,000 divided by 1,500 square feet).

A typical 10-unit medical/professional office building in Cambridge, MA rents for $1,200 per unit (725 square feet each). Ten office units x $1,200 per unit equals $12,000 per month in rental revenue. $12,000 divided by 7,250 square feet (10 units x 725 sq ft) = $1.65 actual revenue per square foot.

Of course, this example assumes 100 percent occupancy, which is rarely the case. Lower occupancy would reduce the actual revenue per square foot. Still, you get the idea.

Let’s do some more calculations using the Actual-Revenue-Per-Square-Foot Formula:

Strip Mall (10 units)

$15,000 in total rental revenues per month. $15,000 divided by 12,500 total square feet = $1.20 actual revenue per square foot.

Apartment Building (8 units)

$7,800 in total rental revenues per month. $7,800 divided by 6,600 total square feet = $1.18 actual revenue per square foot.

Duplex (2 rental units)

$2,500 in total rental revenues per month. $2,500 divided by 1,900 total square feet = $1.31 actual revenue per square foot.

Marina (35 boat slips)

$22,750 in total boat slip rental revenues per month. $22,750 divided by 19,000 total square feet (the entire property) = $1.20 actual revenue per square foot.

Vacation Home

$2,500 in total rental revenues per month. $2,500 per month divided by 2,100 total square feet = $1.19 actual revenue per square foot.

Multi-Use Building (4 residential apartments/ 3 retail spaces)

$9,500 in total rental revenues per month. $9,500 per month divided by 6,500 total square feet = $1.46 actual revenue per square foot.

Mobile Home Park (45 spaces)

$32,625 in total space rental revenues per month. $32,625 divided by 87,120 total square feet (the entire property) = $.38 actual revenue per square foot.

As you can see, the Actual-Revenue-Per-Square-Foot Formula paints an interesting picture for just about any real estate investment.

Depending on the property, there could be variables that will affect the formula – like occupancy rates and revenues in addition to rentals that the property might bring in. For example, in my Marina and Mobile Home Park examples, there could be additional revenues from selling supplies, gas, and so on.

But, generally speaking, the Actual-Revenue-Per-Square-Foot Formula will tell you how much money you are receiving per square foot. And that will help you maximize the money-making potential of any real estate investment.

As I said earlier, this formula can also help you take a fresh look at some types of real estate that you might not have considered before. For instance, let’s look at private mailbox rental services. Pak Mail and The UPS Store are two of the most popular names here.

A typical Pak Mail location has about 650 total square feet of space and about 175 private mailbox units measuring 6" wide by 12" deep (about half a square foot). The average monthly rental fee for one of those mailboxes is about $25. Here’s the calculation:

$4,375 in total mailbox rental revenues per month (175 units x $25 each) divided by 650 square feet = $6.73 actual revenue per square foot! Far more profitable than any of my other examples. And this doesn’t even include revenue from packing supplies and other products that these stores sell.

Of course, you have to consider more than just actual revenue per square foot. On a financial spreadsheet, you would want to figure in not only additional revenues that a property might bring in, but also such things as operating expenses, property taxes, maintenance, and payroll (including employee benefits). And in the case of mailbox rental services, you have to consider the fact that these places are franchise operations. Maybe not the kind of investment you want to be involved in.

An unconventional real estate investment that I like better than mailbox rental services is self-storage. Not only are operating costs practically nil, but you don’t have to deal with tenants or customers. Plus, the typical 225-unit self-storage operation comes out ahead of many conventional real estate investments in terms of revenue per square foot. Here’s the math:

$33,750 in total rental revenues per month (225 units x an average of $150 per unit). $33,750 divided by 23,500 total square feet = $1.44 actual revenue per square foot.

Test the Average-Cost-Per-Square-Foot Formula on any real estate investment you’re considering – especially if you’re trying to decide between two likely opportunities. It will help you decide which one is the better candidate.

It can also help you make sense out of possibilities for increasing the actual revenue per square foot of properties you already own or are thinking of buying. For example – if zoning ordinances allow it – you might be able to add self-storage units to an office building, multi-use building, or strip mall.

[Ed. Note: Marc Charles, "The King of Business Opportunities," has launched more than 40 profitable businesses in the last 25 years. To learn more about how Marc is tapping into the multibillion-dollar self-storage industry, click here.

For more wealth-building strategies - including investing advice, entrepreneurship opportunities, and real estate investing techniques - check out ETR's "Profits in Paradise " Wealth Building Summit this April. For more information, click here.]

One of the best ways to create massive, passive income is to invest in real estate. Even today, when real estate is in trouble in much of the country, you can still make a steady living as a real estate investor. But before you jump in, remember that – as with any business – you’ll want to set up your real estate business in way that not only maximizes your financial reward but also minimizes your risk.

Real estate requires you to deal with tenants, sellers, partners, investors, lenders, management companies, independent contractors, employees, and others. The more parties you deal with, the more likely it is that something may not go as planned.

The first step to protecting yourself is to learn how to run your business in a fair and careful manner, so you reduce the chances of getting sued. But it’s also essential to protect your personal assets by doing business as a corporation, limited liability company (LLC), or limited partnership.

Each of these structures creates a special legal relationship between the business owner(s) and the state and federal government. The idea behind them is to promote commerce by limiting an owner’s liability to the amount of money he invests in his business – and, thus, limiting his risk. And they have been around for centuries, some pre-dating the founding of this country.

In England during the colonial period, creating a corporation required a grant from the King or the Queen. It’s easier to form a corporation today, but it’s good to remember that this liability protection is still a privilege.

A corporation, LLC, or limited partnership is not an excuse to act in a careless or negligent manner. You need to be fair when dealing with all parties. You need to outline agreements with partners, vendors, contractors, etc. And you need to respond to tenants’ complaints. 

These are good business practices – what I call Lawsuit Avoidance 101, because they reduce your risk of getting sued.

But keep in mind that in your dealings with tenants, sellers, partners, investors, lenders, management companies, independent contractors, etc., you may occasionally need to take someone to court because your rights have been violated, a contract has been broken, or money has not been paid to you. 

And that’s where the protection of doing business as a corporate entity comes in.

When you assert your rights, it’s not uncommon to be sued in return by the other party. This is called a cross claim. Usually it happens because the other party’s attorney believes they have a claim or will be in a better position by using a cross claim – and it could put every asset available to your company at risk. But with the protection of a corporation, LLC, or limited partnership, your potential personal losses are limited to your investment in the business. Without that protection, you could lose your home, your car, your retirement savings, and anything else of value that you own.

So which of these business structures is right for you? Your individual situation will determine what works best, so be sure to consult with legal and financial advisors before you make a decision. But most real estate investors tend to fall into one of two categories:

• Short-term buyers and sellers ("flippers")
• Long-term investors in rental properties – what I call "buy-and-hold" investors

Short-term buyers and sellers will benefit most from an LLC taxed under Subchapter S of the IRS tax code. This structure allows you to minimize the self-employment taxes you’ll owe from active income (such as buying and selling properties) by re-classifying some of it as passive distributions that are taxed at a lower rate. Both a corporation and an LLC will protect you personally from business liabilities, but the LLC can protect your business from your personal liabilities as well.

Long-term buy-and-hold investors make most of their money from passive income (such as rents), so the self-employment tax isn’t as much of a burden. For them, a Subchapter K LLC usually has the most tax benefits. The primary benefit here is that many real estate investors borrow money to purchase rental property. The savvy investor wants to ensure that any debt or remaining balance owed on the property can be used to reduce other reportable income earned outside of the business. The S election does not allow this.

A business that operates under Subchapter K can usually choose between an LLC and a limited partnership. The LLC is simpler to run, cheaper, and costs less to set up.

Many new investors balk at the time and expense of setting up a corporate entity, but over the long term, the costs of not doing it are usually much higher. A properly structured business faces far less risk of an IRS audit, protects your personal assets, and can dramatically reduce your annual taxes. You owe it to yourself and your investing business to use these entities to your best advantage.

When done right, foreclosure investing can be one of the most lucrative ways to build your real estate portfolio. And with foreclosures soaring, there’s rarely been a better opportunity to buy quality properties at steep discounts – and have owners thank you for getting them off the hook.

You can’t just show up at the door with a handful of cash and expect to be welcomed with open arms. But by using three proven – and cost-effective – techniques, you can get your foot in the door with foreclosure owners, convince them that you’re the best solution to their financial woes, and make sure you’re spending your time on the best prospects.

1. Distinguish yourself from your competition.

The moment a lender files foreclosure papers with the court, the information is a matter of public record. Anyone can get their hands on it. In fact, some people organize this information and sell it to the many investors who are trying to find motivated sellers.

Within days of the foreclosure filing, the homeowner will be deluged with mail from would-be buyers. People will be pounding on the homeowner’s door, too, calling her on the phone, leaving notes in her mailbox. Buyers would contact homeowners via smoke signals if they thought it would work.

Problem is, the letters from these buyers are all pretty much the same. Most of them ask the homeowner to make a call right away to get a quick offer. Often, the homeowner hasn’t yet decided if that’s what they want to do. This is one reason these letters get a poor response.

But you don’t want to be wasting money on ineffective marketing. To make sure you get your message noticed in the sea of other offers, you must be different.

Don’t send your letter in an ordinary envelope. Capture the homeowner’s attention by using a different-sized envelope, a colored envelope, a postcard with a compelling headline, an audio CD. The possibilities are endless. We have even sent letters in brown paper lunch bags. The point is, you want the homeowner to pick up your letter and read it – not toss it in the trash with a dozen similar letters.

2. Educate your prospect and establish credibility.

Most people facing foreclosure haven’t been in this position before. They don’t know what to do, and they are mistrustful of everyone. So if you hope to get them to contact you, you must establish your credibility.

A good way to establish credibility is to educate the homeowner about his situation. In particular, make sure he fully understands all his options. In your letter, explain that he could file for bankruptcy, refinance the property, or deed the property to the lender. You also want to explain why selling the property to you is in his best interest. (For more details on these options, see my ETR article "2 Investing Secrets That Quadrupled My Real Estate Income.")

Then lead the homeowner to your website to get more information. On my website, sellers see testimonials from people I have helped. I then ask them to fill out a form to see if I can help them too. By first educating them about their options, I get many more leads than my competition.

Here’s a perfect example of how this strategy works…

Steven and Pam were in a tough financial situation – and a few weeks away from losing their house. Since they’d entered foreclosure, they’d been bombarded with mail from investors offering to "help." They contacted some of those investors, but were disappointed.

I sent them a letter that was not only educational, it outlined a precise "remedy" for their situation. I even offered them some guidance on steps they could take to help themselves.

Now even the best letter with a perfect message is worthless unless it gets opened. That is why I mailed the letter in an unusual-looking envelope, addressed it by hand, and added a personal return label. When Steven and Pam saw something that stood out from the other mail they were getting… and read the useful information inside… they could not resist calling me.

The very afternoon that they called, we put a deal together that helped them avoid foreclosure, save their credit, and get paid for part of their equity. I ended up with a nice house that had over $60,000 in equity – and with a 30-year fixed loan at a low six percent interest rate. (I used the existing loan that had been originated by Steven and Pam, and I brought the loan current by paying the late fees.)

3. Pursue only the best leads.

Whether you hire an assistant, set up a lead-tracking database, or automate common clerical tasks, leveraging your personal time will free you up to focus on the activities that maximize your potential to make money. People without systems trust their memories. (A terrible mistake!) So they never really know what they are doing from day to day, don’t know if their marketing is effective, and, consequently, don’t do well in this (or any) business.

I have automated systems for my marketing, and automated systems that sort and sift my leads. For example, my computer sends faxes while I sleep. When I get a response, I know I’ve found a motivated seller. I never waste time where there is no chance of a deal. I spend my time ONLY when the situation matches my search criteria and I have a high probability of success.

The name of the game for me is to lead a self-directed life, with lots of time for family and friends, travel, and other things that interest me. You can do this too if you systemize your business and leverage your time.

Don’t spend another dime on advertising and marketing until you memorize the above three rules. Foreclosures are at an all-time high, and the opportunity to make good money is here. Take advantage of it.

[Ed. Note: Marko Rubel is a real estate investor working and living in Southern California. He is the publisher of the free Wealth Minute video newsletter, and specializes in Foreclosure Investing, Subject-To Investing, and Owner Financing strategies such as Lease Options and Wrap Mortgages. To learn more about the automated systems Marko uses to take the "grunt work" out of foreclosure investing, click here.]

There are a lot of high-energy terms in real estate: flip, leverage, cash out, cash in, boom, bubble, and bust. Then there’s the sensible sister: amortization. Very few investors talk about it. Most don’t understand it. Yet it is the one aspect of property investment that can guarantee to make you substantial money over time.

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.

Former Fed Chairman Alan Greenspan has gone from genius to goat in recent months. Pundits wonder whether his ultra-easy-money policies were responsible for the meltdown in sub-prime mortgages and the collapse of formerly hot real estate markets.

The answer is yes, he is responsible. But he’s not alone.

Greenspan kept the bar open, but Americans drank themselves silly. They ran negative personal savings rates, turned the equity in their homes into ATM machines, borrowed on all sorts of "time-bomb" terms – from adjustable to negative-amortization, interest-only, short balloons, and more.

Then they used this cheap and seemingly endless supply of money to buy properties – pushing prices to points that simply no longer made any fundamental sense.

That’s what this article is about. The fundamentals. The kind that can save you a lot of pain and make you a lot of money – in any kind of real estate market.

There are simple rules of logic that can steer you away from trouble in bubble markets and toward profits in value and growth markets. Learn these, and you can spot the next bubbles as they develop. Better yet, you can use the same rules to identify some of the strongest investment opportunities in today’s real estate markets.

Even Kids Can Identify a Bubble

In testimony before Congress a few years ago, Greenspan said you can’t identify a bubble until after it bursts. Baloney!

Public companies typically sell for about one times sales and 15 times earnings. You might pay 30 to 40 percent more or less, depending on the industry, the company, how fast it’s growing, and where you are in the economic cycle. Yet, eight years ago, we had hundreds of companies sell for dozens, even hundreds of times sales… and hundreds and thousands of times earnings. Many of the fastest rising stocks, in fact, had negative earnings!

And behind it all, savings were falling while personal and corporate debt was skyrocketing. Cheap money was chasing tech and spec stocks, and pushing prices far beyond the economic fundamentals of sales and earnings.

That was a bubble. Stock prices no longer had any fundamental connection to sales or earnings.

In residential real estate, it’s even easier to identify a bubble. One big telltale sign is that homeowners can no longer afford to buy their own homes.

I know a mechanic, for instance, who bought his home for $150,000 10 years ago. Today, it’s worth $500,000. His house has gone up by 233 percent, yet his income is up only about 40 percent. He could not afford to buy the same house today.

In fact, even if he sold his house and went to buy another house for the same $500,000, he’d still have a tough time doing it because his new taxes and insurance would be based on $500,000 instead of being anchored to $150,000.

My friend is no longer a potential buyer for the same kind of home he bought 10 years ago. And most of his longtime neighbors are in the same boat.

Fact is, large groups of people are being priced out of their own neighborhoods. If, for example, you’re trying to sell a typical median-priced home in Los Angeles today, your market of potential buyers is 90 percent smaller than it was six years ago. In 2001, one out of every 2.4 households was a potential buyer for your home. Today, only 1 in 33 is.

You didn’t have to be a genius or have a crystal ball or wait till "after the bubble burst" to recognize that bubble. When the median-priced home is not even remotely affordable to the median-income household, something’s gotta give.

That something has been prices. And prices are likely to continue to give way in the bubble markets until properties or money or both become cheap enough that the median-priced home is once again affordable to people earning the median income.

Investors Can Get Priced Out of a Market Too

Another irrefutable sign of a bubble is when investors can’t find properties at prices that cash flow. When people pay $350,000 for triplexes that generate $25,000 a year in gross rents, they’re no longer "investing"… they’re speculating.

The rents are not enough to cover a traditional mortgage and expenses. The only reason people pay those prices is they expect someone else to come along and pay an even higher price. Why? Simply because… well, because that’s what’s been happening so far.

So you end up with a market where homeowners no longer provide buying support because they’ve been priced out. Investors no longer provide buying support because they’ve been priced out. And only a few last speculators, armed with self-detonating loans, push prices up the last few dollars until the cheap money stops. And "pop" goes the bubble!

The Flip Side of Bubble Markets: Great Opportunities in Value & Growth Markets

The same criteria used to identify bubble markets can be used to spot value markets. And to find strong investment opportunities, you only need to look for value markets that also are showing strong signs of growth.

First, let’s take a look at the value criteria…

For the last two years, I’ve had my research staff pull together data on over 130 U.S. metropolitan markets. I’ve used this research – plus travels throughout the U.S. – to identify value and growth markets.

I’ve formed limited partnerships and have invested in some of these markets myself. This has allowed us to continue to make significant profits even though many of my passive investors and I live in South Florida, perhaps the worst bubble market in the country.

For value, we consider how the typical house is priced relative to rents and relative to household income. Here are some examples:

In the U.S. right now, the typical house trades for about 21 times annual rents. That means if a house would rent out for $12,000 a year (or $1,000 a month), it’s selling for about 21 times that amount – or about $252,000. At these ratios, the rents won’t come close to covering your typical mortgage and expenses. In bubble markets, it’s even worse.

We’ve put together a Bubble Index that shows key value and growth criteria for some of the most overvalued markets – from Los Angeles to Miami to Boston. In these markets, the typical house sells for almost 29 times gross annual rents!

So, in most markets, to get cash flow in small residential properties, you have to (1) focus on special situations and find motivated sellers so you an buy deeply under value; (2) buy small multi-unit properties (2 to 4 units); (3) buy in a market outside your home area where properties do cash flow; or (4) some combination of these things.

Another key value criterion is the price of the typical house compared to the typical household income. Nationally, the median-priced home tends to sell for just over four times the median household income in the area. Historically, this is a little high, but still affordable. But not in the bubble markets…

In Los Angeles, the median-priced home is $586,500, while the median household income is just $56,200. That’s the kind of ridiculous situation that prices homeowners out of their own neighborhoods. In other words, at current prices there is almost no market for median-priced homes in LA.

By contrast, Houston has a higher median household income, at $60,900. And the median-priced home is just $148,600. That’s extremely affordable – which means you have a market for a home you’re selling in that city.

But don’t forget the growth factor. Value alone is not enough.

Growth Counts Too

If you just looked at value, you might conclude that Pittsburgh and Detroit are great buys right now. After all, their median-priced homes trade at only about two times household income and 10 and 13.6 times annual rent, respectively. Trouble is, their economies are struggling. Both these areas have had negative population growth in recent years. Pittsburgh has had anemic job growth and Detroit has been losing jobs as well as people.

So to look for the best investment opportunities, you want to look for value and growth. You also want to look at markets with diversified economies. They shouldn’t be overly dependent on one industry, as Detroit was with automobiles and Houston was with oil when they went through their major real estate crashes.

My favorite value and growth markets tend to have the following characteristics:

1. The median home is priced well relative to household income. (Typically three times or less.)
2. The median home is priced well relative to gross annual rents. (Typically 15 times or less.)
3. The market has experienced appreciation in the past few years, but at a sustainable pace, in line with the long-term average or slightly below it.
4. Population and jobs have been growing faster than the national average.
5. The economy is diversified. (One of my favorite markets has five strong sectors in the economy: a state capital, a major university, a tech corridor, music industry, and local industry.)
6. It has lively emerging or re-emerging downtown areas with a diversity of cultural activities.

Once you find your new target market, focus on buying undervalued, cash-flow properties in that market. Then fix your interest rate and make sure you have the right management in place.

Investing is a forward-looking process, and no one can claim to know the future. Yet you can get a pretty good look at the present. So don’t believe Alan Greenspan and bubble-boosting brokers. The fact is, yes, you can identify bubbles.

Likewise, you can identify value and growth markets. And when you consistently put your money to work in undervalued properties in these markets, you can make a fortune.

It ain’t rocket science. It’s common sense. But that’s a commodity that is rarer than cash flow in today’s marketplace.

[Ed. Note: Justin Ford is an active real estate investor, the author of Main Street Millionaire, and the editor of the recently updated Secret Value & Growth Cities: How to Make 6- and 7-Figure Profits From the Flood of Money Away From Overvalued Bubble Markets and Into America’s Best Priced Growth Cities. To learn more about the best real estate markets in the country, click here.]

Over the years, I’ve helped more than 200,000 entrepreneurs and investors develop the "financial fluency" they need to create, maintain, enjoy, and share great wealth. When it comes to real estate, a big part of that fluency is mastering the art of contract negotiation.

Just as math is the language of physics and money is the language of accounting, contracts are the language of real estate. The more fluently you speak that language, the more successful and profitable you’ll be. And the keys to becoming a native speaker can be summed up in seven contract essentials.

But before I reveal these fundamentals, I want to make something absolutely clear. I am not looking for you to act like your own attorney. Nor am I asking you to become a real estate law expert. In fact, you will need to have a sharp attorney look over and write up many of your real estate contracts. But it’s critical for you to understand the basics for two reasons:

• Many times, you’ll be ready to strike a deal and you won’t have your attorney with you. If you wait until your attorney can draw up the agreement, you might as well kiss the deal goodbye.

Imagine you’re meeting with the owner of a six-plex that you’d like to buy. Because he is highly motivated, he’s verbally agreed to sell you a $1.2 million property for $700,000. And you say, "Gee Mr. Seller, I’m glad we could come to an agreement on price and terms for a cash sale. I’ll go meet with my attorney to get the paperwork written up. It should take three or four days for me to get it back…"

What do you think would happen to your great deal in those three or four days? Hint: Look for another investor walking out the seller’s door with a silly grin on her face and a signed contract in her pocket.

You’ve got to know how to lock up the property on the spot. Then, later, you can have your attorney draft the more involved documents for the actual closing.

• Sometimes you’ll need an important written agreement immediately, and it will make sense for you to get it done on your own.

One goal of building your successful investing business is to have a file of "attorney-approved" documents. This will include lease agreements, purchase contracts, rent-to-own paperwork, and standard releases from contractors. And once your attorney has gone over these documents, you need to know how to use them in the day-to-day management of your properties.

Now you know why you need to know the basics. So here they are:

Contract Essential #1: Relax. A contract is just an agreement between two or more parties. One party makes an offer, the other party accepts the offer, and something of value changes hands.

Many contracts don’t need to be in writing to be enforceable. But a real estate contract typically does. Even if this isn’t the case, take my advice and always put your agreements in writing.

Contract Essential #2: Clearly and accurately identify all the parties to the agreement.

Now this may seem obvious, but you’d be surprised at the number of people I’ve seen write up a deal and use vague language as to who, exactly, is involved.

If you are the buyer, make sure you list the seller’s full name on the purchase contract exactly as it is on the deed. Did they use a middle initial? Or did they spell out their middle name? Do they hold title as the trustee on behalf of a revocable living trust? Make sure you get it right.

If you are leasing a property to a family, make sure you list all adults who are party to the lease as "tenants."

Are you requiring a co-signer for a loan agreement? If so, make sure you identify the co-signer and get his signature.

Are you selling a four-unit property to a corporation? If so, make sure you identify the legal name of the corporation and the state in which it is incorporated. And remember to get the title of the person doing the signing.

You can’t be too careful.

Contract Essential #3: If the contract uses an acronym or another shortcut to reference a proper noun, make sure the shortcut is clearly defined and consistently used.

This is just a fancy way of saying that if you use a label like "Closing Agent" in your agreement, make sure there’s a statement somewhere in the agreement that says, "The ‘Closing Agent’ shall be XYZ Title Company located at 2211 Main Street, Anytown, CA, 91960."

Contract Essential #4: Accurately describe the property.

You’re getting the idea. Half the battle is being crystal clear about who or what you are discussing in the agreement. When it comes to identifying the property, a street address can be enough for something like a lease agreement or a repair contract with a roofer. But for any document that will be legally recorded, make sure you use the "legal description" of the property.

Here’s an example of a legal property description:

"Lot 3, Block 24 of the High Hopes Subdivision as recorded on Map No. 322 recorded in the County Recorder’s Office on May 1st, 2006 in the County of Glorified, State of…"

You can find the legal description of a property in public records at the county courthouse. But you don’t have to make a special trip to get it. It will be on the Preliminary Title Report that you’ll get from the title company as part of your due diligence work. (If it’s a really long legal description, I just photocopy that section of the report and attach it to my document.)

You can also find the legal description on the loan docs the property owner has in her files… on an old copy of her title insurance policy… or on a copy of her deed, if she has any of that handy.

You probably won’t have the legal description when you meet with the motivated seller and make the deal. So use the property’s street address to fill out your purchase contract. And in the space where it asks for the "legal description," simply write, "To be provided later."

Contract Essential #5: Lay out, in plain language, what both parties are agreeing to.

In the event that there is a disagreement down the road, this will help a judge or other neutral third party interpret your agreement the way you intended it.

Contract Essential #6: Always be the one who drafts (or pays the attorney to draft) the agreement.

For every point you discuss and agree to orally, there will be two more that never come up during negotiations. And there is a subtle yet strong pressure to accept any written contract pretty much the way it is written. That’s why you want to be the one in control of the paperwork.

Let’s say you agreed to buy a house for $600,000 with a down payment of 10 percent ($60,000). You also agreed that the seller would carry back the balance at five percent interest.

This is a real deal I did on a house in San Diego a few years back. Because I volunteered to write up the paperwork, I was able to specify that the loan was for "interest only," which lowered my monthly payments considerably… that I had a "first right of refusal" to buy the note if the seller ever tried to sell it to a third party… and that I got the washer/dryer, drapes, yard furniture, refrigerator, and a few other items. Though I ended up paying the seller a few hundred dollars for the refrigerator, I got the rest because I had included them in the agreement.

What do you do if the other party insists on writing up the paperwork? Okay, let them do it. But don’t be lazy. Make the effort to draw up the agreement yourself too… the way you want it done. That way, you’ll have a contract that favors you to compare, side by side, to the other party’s document.

Contract Essential #7: If you use a fancy formula or hard-to-describe condition in your contract, give an example or two of how you want it interpreted.

Here’s an illustration of what I mean. I once bought a two-bedroom condo from a motivated seller who was in the military and had been transferred. To sweeten the deal for him, I agreed to an "equity split." In other words, a portion of the profits I earned when I resold the property would be paid back to him. To clarify how this split would work, I included something like this in the agreement: "For example, if the Buyer resells the property for $200,000 then the seller shall get paid the Option Price of $105,000 plus 12 percent of the amount over $130,000. In this case, the Seller would get $105,000 plus 12 percent of $70,000."

Again, the idea is to make it easy for a third party to understand how the deal works.

As I said at the beginning of this article, contracts are the language of real estate. Train your brain to get good at them by following this simple rule: A contract doesn’t need to use fancy words. You don’t have to sprinkle it with "whereases" and "ipso factos." Just clearly lay out who agrees to do what, by when, to what standard, with what consequences, with what warranties, and for what payment.

Mastering these seven basics won’t take much time or effort, but it can make a big difference in your income. You only need to save one deal to be glad you did.

"Business is easy," according to Sam Zell. "If you’ve got a low downside and a big upside, you do it. If you’ve got a big downside and a small upside, you run away."

That philosophy has stood Zell in good stead. He started out buying and renting out small properties to college students while he was an undergrad himself at the University of Michigan in the early ’60s. More recently, he sold one of his flagship Real Estate Investment Trusts to a leading hedge fund for $36 billion.

In real estate, the best way to keep your investment decisions "easy" – with low risk and a high potential for profits – is to act on values others can’t see. Often, that means going against the herd, especially against dominant ideas in the mainstream media.

Zell grew his portfolio rapidly from the ’60s through the ’80s. But he only leapfrogged into the league of billionaires in the early ’90s. He bought aggressively during the real estate recession of those years, while the headlines and public sentiment about real estate were at their worst.

I’ve tried to help you see beyond the mainstream hysteria. Go through the Early to Rise archives, and you’ll see that I’ve been warning you about bubble markets for about four years now.

I advised you not to get caught up in the hype. Instead, I recommended to be sure to buy below market value; buy cash-flow properties only; fix your interest rates; have a margin of safety in the form of ample cash reserves, cash flow, or both. And always have a Plan B. (If, for instance, you were planning to flip, to be prepared to rent, sell on terms, or do a lease option that would keep you in the black if the flip didn’t work out.)

That advice ran contrary to the headlines. It also cut against the advice of real estate gurus who figured the easiest way for them to make money was to sell you on the idea that real estate is a can’t-miss proposition.

The height of the "can’t-miss" mania was marked by the publication of Are You Missing the Real Estate Boom? It was written by David Lereah, former shill… er, "chief economist" of the National Association of Realtors. It came out in February 2005, just months before some of the hottest markets in the country peaked. For timing, it ranks right up there with James Glassman’s Dow 36,000, published in 1999, shortly before the second-worst stock market crash of the last century.

Different Headlines, Same Story

Today, the real estate headlines are all about doom and gloom. But, once again, there are tremendous opportunities out there. You just have to tune out the herd, focus on the facts, try to understand the true, larger trends, and look for values others can’t see.

For instance, I live in South Florida, one of the worst markets in the country. Prices are down. Volume is down. (The number of transactions is off 50-60 percent in many areas.) Insurance and real estate taxes have soared, and foreclosures are setting new records. Yet, I’ve continued to make good money in real estate.

That’s basically because I’ve followed my own advice. Over the last two years, I’ve been writing about exceptional values outside the bubble markets. And I’ve gone into these markets in search of undervalued properties.

In one western state, the first property I bought was a four-plex in an area where college students live. We bought it for $180,000 on a street where comparable properties were selling for $220,000. It produced just over $25,000 a year in gross revenue. So we bought it under value and it cash-flowed comfortably. We also fixed the interest rate.

Even though this was a market that offered great values and strong growth… and where sales volume remained (and remains) high… we followed the deep-value, low-risk/high-potential-reward formula I’ve always recommended. And it’s continued to work well.

Within six months, we got an unsolicited offer for $60,000 more than we paid. Since then, we’ve received two more offers for as much as $80,000 more than our purchase price. Not long after we bought this property, we bought another four-unit property not too far away. We ended up selling it for $129,000 more than we paid in just under 14 months.

In another market in another state, I closed on a 14-unit apartment building five months ago. The seller was asking $565,000 for this mostly vacant building. We ended up buying it for $397,500. Today, after about $68,000 in rehab, the property is fully leased (with a waiting list) and generates just over $7,000 a month in gross revenue. It also generates about $4,100 in net operating income (NOI – revenue minus expenses).

A conservative eight percent cap rate puts the current value of the building at about $615,000. That’s about $145,000 more than the roughly $470,000 we have into it, including purchase price, closing costs and repairs. (A cap rate is basically the yield you would get on an income-producing property if you bought it for all cash. It is arrived at by dividing the NOI by the purchase price.)

Even an ultra-conservative 8.5 percent cap rate would put the value of this property at about $579,000. That means we’ve been able to create – at a minimum – an additional $109,000 in equity on a cash-flow property in five months. And yet, the prospects going forward are even better.

It Pays to Invest in Value & Growth Cities

Right now, I’m looking at properties in one of the most affordable oceanside cities in America. It’s a major city that not only offers value, but strong growth as well. It’s the fastest growing city in its state. In fact, its population growth has been 75 percent greater than the national average over the last 15 years. Jobs have grown at nearly twice the national rate over the last two years.

The fact is, value cities like these are actually benefiting from the mayhem going on in the bubble cities. There is a huge flow of money moving from the bubble areas to the value areas – from homeowners, individual investors, institutional investors, and operating companies.

This will continue for years to come – even while the national headlines shout "sub-prime crisis" and "real estate meltdown."

Here is a quick overview of how to look beyond the headlines that everyone sees… so you can find the true opportunities that few can see.

• Tune out the noise: Get facts and figures from media outlets, professional associations, and government outlets. But draw your own conclusions. Look for the emergence of "value gaps" and the flow of money from overvalued to undervalued areas.
• Always buy cash flow: If you do this, you dramatically reduce your chances of seriously being hurt in any market. Even if you don’t want to be a landlord and you prefer to "flip" houses, why not flip them at prices where you could rent them out on a cash-flow-positive basis if you had to? If you like million-dollar deals, why should you deal with luxury homes when you can do million-dollar cash-flow apartment houses or offices or warehouses instead? If cash is king… cash-flow is the Holy Roman Emperor.
• Buy at or below market value: Know your target-market values cold, on a dollar-per-square-foot basis and on a price/rent basis. If you’re in a good value market that also has strong growth and where real estate sales are brisk, it may make sense to buy cash-flow properties close to, or even at, market value. But the more overvalued your market, the more undervalued a purchase should be. The greater the discount at which you buy, the more of a cash and equity cushion you’ll have if and when the market corrects.
• Fix your interest rates: This alone would have prevented half the foreclosures going on in the country right now. If you have to do some negative-amortization, adjustable, time-bomb mortgage to make a deal work… chances are it’s not a deal after all.
• Focus on value and growth cities: Remember, real estate is local, yet all markets are connected. Extreme overvalue in certain markets can create extremely attractive undervalued investment opportunities in other markets.

When you combine these criteria and buy undervalued properties in undervalued, growing markets… consistently making money in real estate almost becomes "easy," as Sam Zell says.

Have you ever met someone you immediately didn’t like, even though you couldn’t say why? At the time, you may have thought he just "rubbed you the wrong way."

What you didn’t like probably wasn’t the person himself. After all, you didn’t know anything about him when you first met. It’s more likely that he had poor communication skills.

Whether you’re a doctor, a real estate investor, or work in a fast-food restaurant, the way you communicate has a strong influence on people’s first impressions – good or bad. People who know how to communicate in a way that cultivates rapport make others feel comfortable – and that’s an important skill to master in today’s real estate market, especially when it comes to foreclosures.

According to The Wall Street Journal, foreclosures in August were more than double the number of last year’s. So this is an area where you may find most of your investment opportunities. If you want to succeed in this emotionally charged market, you must know how to deal with people who are going through stress – whether it’s a banker or a property owner. And that means you have to know how to build rapport with a potential seller instantly.

Build Rapport From the First Knock on the Door

I like to knock on doors when I’m looking for motivated sellers, because I’ve found that it’s the fastest way to get deals. If I knock on 20 doors over a weekend, I’ll have several contracts by Sunday afternoon. I don’t know about you, but I’d rather spend a day or two getting multiple deals instead of waiting for my phone to ring hoping for just one.

Over the years, I’ve learned some dos and don’ts for meeting homeowners in person:

• Don’t wear sunglasses or a baseball cap. If homeowners can’t see your eyes, they subconsciously become suspicious.
• Carry a clipboard to make sure that both of your hands are visible. If you stand with your hands in your pocket or behind you, homeowners may think you pose a physical threat and won’t hear what you’re saying.
• Never wear cologne or perfume. I know this one seems strange, but fragrances can evoke negative memories and associations as well as positive ones. There’s no reason to take that chance.
• Be aware of the color of your clothing. Studies have shown that green, for example, promotes trust, while red suggests dominance. I recommend colors like green, blue, pink, or brown. Stay away from reds and blacks.
• Dress casually, but professionally – no suits. You should also lose the jewelry when you’re going door to door. Homeowners who need to sell a home in a hurry don’t want to see you wearing a Rolex.
• Watch what you’re driving. If you drive a BMW, consider getting a middle-of-the-road car for meeting homeowners. While it’s true that looking successful can build confidence, distressed homeowners shouldn’t feel that you have become a millionaire from buying properties like theirs. You don’t want them to wonder if the reason you have so much stuff is because you’ve taken advantage of others.
• Be certain you are speaking to the right person. Instead of blurting out why you are there, first ask if this is Mrs. or Mr. So-and-So. When you are sure, continue with your conversation.
• Never use the "f" word (foreclosure). Instead, mention that you’ve been doing some research and see that they have a "pending problem" with their property. This puts the blame on the property, not the homeowner, and leaves them more open to your offer to help.

Good Communication Skills Can Also Help You Build Rapport Over the Phone

Here are a few telephone techniques that have led me to many successful deals:

• Speak as slowly – or as quickly – as the homeowner. People who speak fast think that people who speak slowly are stupid. Likewise, people who speak slowly think that fast talkers are slick and untrustworthy. Even if it isn’t true, it’s a subconscious assumption most people make without being aware of it. Matching the homeowner’s rate of speech can make you seem familiar. It encourages him to like you, even though he may not know why.
• Ask the homeowner to tell you a little about his current situation. Listen with respect and empathy. Once you feel that they are done "venting," begin to ask for details. Homeowners want to tell you what happened, because they want to justify their situation. No one grows up with the goal of being in foreclosure. Something in their life changed… and they’ll want to be certain you know what it is.
• Make an appointment to view the property, then call back later to confirm. During the second phone call, ask more questions. Be sure that everyone on the deed is going to be home and willing to put a deal together.
• Listen for objections. When you’re on the phone with a homeowner, listen for the kind of objections you’re likely to get when you meet in person. For example, "We don’t have to sign a deed, do we?" If they ask such questions on the phone, be ready to handle them in person.

Establishing rapport is an easy skill to master. Take the time to be approachable, honest, and trustworthy, and business will follow. Better yet, just be that way naturally… and you’ll reap what you sow.