Here are several things that, if not understood, examined, and carefully dealt with by real estate investors who buy or sell property, can easily turn a dream real estate opportunity into a real estate nightmare.

1. Accrued Interest: This represents unpaid interest, either in agreement or in default. When buying real estate investment property obtain an estoppel letter from the lender that indicates the status of the mortgage and shows the outstanding principal and any unpaid interest or other charges.
2. Adverse Possession: A claim someone else might have to the property resulting from actual, hostile, notorious, exclusive, continuous, and under claim of right such as building locations and possible encroachments from neighbors. The claim is difficult to impose, but absentee owners have been known to be oblivious and have had it surface.
3. Cloud on Title: This results from an unsatisfied lien or improperly executed document from a prior sale, mortgage satisfaction, or other legal action in the chain of title (or history of ownership). These items represent a cloud (or title defect) that you should remedy prior to taking title. This generally will appear on a title report.
4. Due on Sale Clause: Lenders insert this clause into a mortgage when they want the seller to pay off the loan in the event of a sale. Unless the lender agrees to some other circumstance, as a buyer assuming the obligations of that loan, you must satisfy the lender’s requirements.
5. Grandfather Clauses: Changes in local rules and regulations cause some properties to become nonconforming but allowed as a grandfather right. Always discuss the use and zoning of a prospective property with the local planning department. If a grandfather clause affects the property under consideration, be sure you understand what the restrictions are, especially in the event of a fire. Know whether you can rebuild and use the property for the purpose you desire.

It’s not a complete list, but it does represent some basic elements about property exchange that any prudent real estate investor should be acquainted with and understand. You might want to see our real estate glossary of terms…

If you’re new to real estate investing, about to become a real estate investor, a real estate agent interested in selling rental property and just want more information concerning the nuances of investing in real estate, then you probably wonder how real estate investing works.

In that case, this article’s for you.

Three Basic Elements

Here are three basic elements crucial to investing in rental properties and important if you’re going to invest in real estate successfully.

1. Develop the Correct Attitude Strike the thought that investing in rental properties is like buying a home and develop the attitude that real estate investing is business. Look beyond curb appeal, exciting amenities, and desirable floor plans and focus in on the numbers.
2. Develop Meaningful Objectives Have a plan with stated goals that frames your investment strategy. It is one of the most important elements of successful investing. How much cash are you willing to invest comfortably, for instance, and what rate of return are you hoping to generate?
3. Research Your Market Always learn as much as possible about rental property values, rents, and occupancy rates in your local area before you make any investment in real estate investment property. You can turn to a qualified real estate professional or the county tax assessor to help you.

Start Investing

Yes, you ultimately do have to get started. Sometimes, of course, that’s the must difficult part for real estate investing beginners. Hopefully these insights about real estate investing help, and I truly believe that if you take them to heart and add a dash of common sense, you’ll do just fine. Here’s to your investing success.

When an income property doesn’t generate enough income to cover operating expenses, it results in a negative cash flow. A problem real estate investors want to avoid with investment property because it would require the real estate investor to feed the property.

Here’s a technique to help you avoid purchasing a rental property with negative cash flow. A formula you can use to conclude how much you can afford to pay and still break even. It’s not difficult to calculate provided you make the computation one-step at a time.

1. Compute gross operating income Gross scheduled income – Vacancy allowance = Gross operating income.
2. Determine net operating income Gross operating income – Operating expenses = Net operating income.
3. Figure net income percentage (NIP) Net operating income / Gross operating income = Net income percentage.
4. Compute down payment percentage (DPP) In this case, you’ll need to know the average gross rent multiplier in your area (GRM) and the current market interest rate (I) to make this computation: 1 – (Net income percentage / GRM x I) = Down payment percentage.
5. Determine maximum purchase price Available down payment / Down payment percentage = Maximum purchase price.

Let’s consider an example. Say you have $75,000 to invest and do not want to purchase an investment property with a negative cash flow you would have to feed. You would do the following two steps to establish the maximum purchase price you can pay for the investment property and avoid having a negative cash flow.

First, compute the down payment percentage. If the net income percentage (NIP) is 75%, the average gross rent multiplier (GRM) in your area is 10, and the current market interest rate (I) is 6%, compute the down payment percentage as such:

1 – (.75 / 10 x .06) = .25

Secondly, plug in the down payment percentage and compute the maximum purchase price:

$75,000 / .25 = $300,000

In other words, with a down payment of $75,000 at the parameters used in our example above, you can avoid a negative cash as long as you don’t pay more than $300,000 for the real estate property. Of course, plug in your own variables to determine the results matching your particular situation. But as you can see, it’s not difficult and well worth the effort. It really does incorporate a break-even point and therein quickly helps you resolve how much real estate you can afford without dipping into your pocket and feeding a negative cash flow.

Here’s to your real estate investing success.