Author: Wendy Patton Blog

As soon you show interest in real estate investing, you’ll be introduced to the strategy of rehabbing and flipping houses. It’s such a powerful strategy that many investors start this way. It doesn’t take long to learn the basics such as buying distressed houses for about 70% of the after repaired value (ARV). There’s plenty of general information out there.

Here, I’m sharing details about how to rehab or flip a house with the WOW factors that insiders use to create a pipeline full of houses that reliably deliver high profits. Beginners use these techniques to building your first pipeline. Experienced flippers create WOW to consistently deliver big profits from the pipeline. Even if you only flip one or two houses a year, these are secrets for maximizing your efforts.

Getting to WOW is About the Dollars

You’re in it for the dollars so watch the dollars from beginning to end. It begins by fully understanding the ARV. Only when you know the after repaired value can you determine how much to offer for the house and how much can be invested in rehabbing. If you know the neighborhood and have plenty of experience, you can accurately estimate the ARV yourself. But most investors benefit from help.

Wholesaler leads come with some information because he or she must know the basics of how to rehab or flip a house. The information is biased but they will have researched the property and you can use it as a starting point. Not the final answer.

Another valuable piece of information often available is the comparative market analysis (CMA). When it comes from a listing agent it won’t anticipate the improvements you will make. But it will be at the high end of the before repairs value. You’re better off with your own agent estimating the ARV.

Another technique is the broker price opinion (BPO). This is similar to the CMA but the broker is independent from the transaction. Since the broker won’t earn a commission, you have to pay a nominal fee. BPOs are either an exterior or interior assessment. You want an interior BPO (which includes the exterior). Brokers doing BPOs are among the most experienced in the field. His or her opinion of the ARV should be one of the most trusted conclusions you receive.

A last resort can be a professional before and after appraisal. This is probably your most expensive option. You want both the “as-is” and “after-repaired” values. Ultimately, you need to take all of these into account and arrive at your own proforma conclusion. A final step for first time rehabbers is sharing your conclusion and the supporting numbers with a mentor.

How to Rehab or Flip a House Means Spot-on Repair Estimating

After the purchase cost, the rehab costs are your next largest expense. How to rehab or flip a house includes a reliable estimating process to determine the Maximum Allowable Offer (MAO) for the house. Develop a cheat sheet specific to your investing circumstances. Use this only as an example.

• $325 per dumpster for demolished materials.
• $215 per window replacement.
• $200 for every 100 square feet of replaced roof (more if old roofs need to be ripped off).
• $200 per 100 square feet of siding.
• $2.25 per linear foot of gutter.
• $450 per exterior door (includes new locks and storm door).
• $6.65 per square foot of ceramic tile.
• $2.00 per square foot of refinished hardwood floor or $5.25 per new square foot.
• $3,000 for 3 new kitchen cabinets.
• $40 per square foot of granite kitchen counter (includes backsplash).
• $2,600 for stainless steel stove, dishwasher, microwave, and fridge.

You’ll almost certainly have unique requirements such as replacing a garage door or rebuilding a porch to improve curb appeal. It’s a good rule of thumb to add at least 10% to your estimate to avoid cost overruns. You’ll be making this calculation frequently because rehabbers typically have 12 offers rejected for every 1 accepted.

Features that POP for Buyers

Having your costs under control is critically important in how to rehab and flip a house. Adding few finishing touches takes the WOW factor over the top to entice multiple high offers from retail buyers. Include features appealing to mom, dad, and even the kids to out shine what others offer in the neighborhood. You’ll have everything covered from top to bottom – from re-finished hardwood floors to new light fixtures on the ceiling. Here are some finishing WOW factors:

• Matching Stainless Steel Appliances give mom her dream kitchen. Study after study shows quality kitchens to be money well spent for adding the biggest WOW factor.
• Feature a Free 46” flat screen TV on the wall with a small sign reading, “With an accepted offer, you get this free TV.” The cost is only $320 but is a WOW factor you won’t find anywhere else.
• A Free Home Warranty adds a great deal of comfort and confidence in the buyer’s mind. The $300-$375 cost is a huge selling feature.
• 100% Ready means vacuumed, cleaned, spotless, and move in ready. Bring in a professional house cleaning company to bring it up to spec. The perfect-condition home makes an amazing first impression.
• Mats/Sign: Begin the impression your homes are “first-class” with quality doormats and a sign reading, “Please take off your shoes.”

What you need to do now is TAKE ACTION!

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

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What did you think of this article? Please leave a comment below.

The Tax Cuts and Jobs Act (TCJA) took affect the first of the year (2018) and is the biggest tax reform legislation since the Tax Reform Act of 1986. It has caused confusion in the real estate sector because it changes some tax deductions for homeowners. These should not be confused with the gains small real estate investors obtained.

For instance, although mortgage interest and property tax deductions were reduced for homeowners, these changes do not apply to interest and property taxes on income property (investors). It’s speculated that the reduced reductions for homeowners will result in fewer purchases of primary residences. However, this will be offset by an increase in investor purchases. The overall impact will be a healthy residential real estate market for at least several more years. People always need a place to call home.

Pass-through Entities

The investor in a 25-unit apartment complex and the investor in a single-family rental home are both small business owners. Every business entity, except C-corporations (large publically traded corporations), will benefit from tax changes that now apply to pass-through entities. These include sole proprietors, partnerships, LLCs, and S Corporations.

As with almost all tax code, the section HR1 titled “Deduction for qualified business income of pass-thru entities” is complicated with restrictions and conditions affecting specific businesses. You should always work with a tax professional to maximize the benefits for your specific situation. Here I highlight how tax laws affect smaller real estate investors to increase after tax pass-through income.

This change potentially offers a relatively large tax break that smaller real estate investors will benefit from. There is nothing new about you being able to pass through income from your investment business to your personal income tax return. Pass-through entities pay no business tax. However, previously you paid personal taxes on 100% of the pass-through income. The tax law change allows you to deduct up to 20% of your real estate pass-through income from your personal tax return. This deduction is subject to certain limits that are determined by your specific circumstances. Some of which you may be able to change to maximize your benefits under the new tax laws.

Pass-through Limits

The most notable limit is income above $157,500 (single) or $315,000 (married filing jointly). But it’s not that simple. People whose income is above those limits and from certain professions have additional restrictions. Those with additional restrictions probably include real estate agents and some investors working primarily in other specific professions. But not real estate investors directly.

The restrictions apply to a “specified service trade or business.” These specified trades and businesses include: accounting, actuarial science, athletics, brokerage services, consulting, financial, health, law, performing arts, and other businesses where the principal asset “is the reputation or skill” of one or more employees. The restriction should not apply to real estate investors with property as a principal asset rather than their skill.

Those with an income from a “specified service trade or business” will have their deduction phased out. For single people the phase out range is between $157,500 and $207,500. For married couples (filing jointly) the range is between $315,000 and $415,000. Incomes above the phase out ranges will not receive a deduction.

Another limit applies to everyone and is based on total taxable income. This restriction says your real estate pass-through income deduction cannot be more than 20% of your total taxable household income (excluding capital gains and the pass-through deduction itself).

There is one more complicated limit that applies if you are not a service professional (meaning many investors). This one applies if your income exceeds the $157,500/$315,000 (single/married) threshold. If it does, your pass-through deduction can’t exceed the greater of either 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the “unadjusted basis” of depreciable assets. Meaning the amount you paid for the assets (improvements) less the value of the land. An example follows.

Keep in mind that all of this only applies if you have net income from your real estate investments. Many investors show a net loss based on depreciation, interest, repairs, and other expenses. None of this applies if you show a net loss from your real estate investments.

You can see this gets rather convoluted. Only proceed if you have a net income from your real estate investment. Next, you must determine the source of your taxable income (asset or service/professional based). Then you figure out which of the limits apply. Then you do the math to figure out your deduction for up to 20% of your real estate pass-through income from your personal tax return. If you’re like most people, you’re going to need a tax professional.

Keep in mind that the discussed tax laws affect smaller real estate investors only. Big investors engaged in debt-financed real estate operations with more than $25 million in average annual gross revenue over the prior three years are subject to different regulations.

Two of Many Possible Examples

The new tax laws affecting smaller real estate investors aren’t always complicated. An example might be if you are single and earn $100,000 in retail sales (not a specified service trade or business). And you own two condos that contribute another $20,000 a year in net income. After other deductions your taxable income is $95,000.

Considering how tax laws affect smaller real estate investors, you would be able to take the full 20% deduction on the pass-through income. The math is: 20% of the $20,000 comes to $4,000. That $4,000 is less than 20% of your $95,000 taxable income (20% of $95,000 = $19,000).

Let’s hope your math situation is that simple.

However, if your income is $200,000 (exceeding the $157,500 threshold) the math is different. We use the same $20,000 a year in net income from the condos. Now it becomes based on the purchase cost of your real estate investment. The combined two condos cost $500,000 (if land is owned, that value is subtracted out). You now calculate 2.5% of the $500,000 unadjusted basis, which comes to $12,500. The 20% deduction on the pass-through income ($4,000) is below the $12,500. You still take the full 20% pass-through income deduction.

Temporary and New Depreciation Opportunities

This applies to qualified business property (generally machinery, equipment, and software) but not real property. For qualified property placed in service after Sept. 27, 2017 and before 2023, a 100% depreciation can be taken the year it is placed in service. Previously this was spread over multiple years. After 2022, the first year’s depreciation is incrementally decreased through 2026.

The definition of a qualified property has also loosened. It now includes new and used equipment as long as it isn’t purchased from a related party. Under Section 179, the purchase or financed cost of qualified equipment has also been increased. Previously the full deduction cap was a cost of $510,000. That has been increased to $1 million. The top end of the deduction phase-out has been increased from $2 million to $2.5 million. Another change is that after 2018, the limits will be indexed to inflation. These new limits may make it worthwhile to perform a cost audit to reclassify some business equipment that was previously categorized as real property for tax purposes.

Not Everything is Clear Yet

Major tax code changes come with multiple interpretations. Not even the lawmakers all agree on the meaning of the words they put into the legislation. And of course the IRS has to interpret it and convert it into instructions applying to every conceivable circumstance. You can believe there will be disagreement before it is all worked out.

One uncertainty about how new tax laws affect smaller real estate investors involves how the property is titled. Specifically, if it is titled in the investors name or that of an entity such as an LLC. The new language applies to a “qualified trade or business.” This brings up the question of whether individuals (or married couples) are able to claim the income pass-through deduction using IRS Schedule E. At the time this was written, there was no provision on Schedule E for the pass-through deduction. However, there is a congressional committee report supporting the use of Schedule E for the deduction.

Many people have other tax strategies that are comingled with how new tax laws affect smaller real estate investors. These include (but not limited to) interest income, carried tax credits, bad debt, as well as estate planning and gift exemptions.

Overall, real estate investing remains a great investment opportunity that is further enhanced by the changes in tax law. Most people agree that they are better off having enough money to warrant these tax complications rather than not having enough money. The bottom line is that the sooner you review your specific tax circumstances and consult with a tax professional, the sooner you will reap these new benefits available to small real estate investors. Or finally get into the real estate investing business because it only keeps getting better.

What you need to do now is TAKE ACTION!

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

For more exclusive content, please subscribe to my RSS Feed and YouTube Channel.

What did you think of this article? Please leave a comment below.

The rental market is booming and every landlord is winning! If you’re not winning as a landlord in this robust market, maybe this really isn’t your thing. If you are winning or want to win, now is the time to take it to the next level! If you’re a Mom and Pop business with 2 or 3 rental properties, this is the time to start thinking much bigger. You could be planning for 20, 30, or 50 rental properties.

Whether you are a beginning landlord, have some experience, or a lot of experience, you can always run your business more smoothly and for more profit. Having systems and sticking to them are the basics of how to be a landlord. Here’s a quick refresher:

• Create a legal entity separate from yourself.
• Follow landlord – tenant laws.
• Establish and follow a tenant application process so you always have good tenants.
• Establish and follow your own landlord- tenant policies. Tips: always enforce late fees and keep business hours for nonemergency phone calls.
• Resolve conflicts promptly to avoid rent being withheld or tenants moving out without giving notice.
• Manage and maintain your investment properties to assure future success and attract quality tenants.

Determining Your Rent Price

An advanced tip for how to be a landlord means collecting the most rent that you can along with maximizing occupancy. This begins by investing in the right rental properties. Many investors get started by renting their previous home, inheriting a home, or coming upon a deal too good to pass up. But none of those will bring you up to a professional level controlling 30 or 50 rental units.

Landlords must know market rental rates and infrastructure. You need to match the property type to the location. That’s why there are zoning regulations. A condominium next to a high-rise office building can be a profitable rental. But a single-family home grandfathered in-between two skyscrapers isn’t a good investment decision. Neither is the most expensive home in the neighborhood. However, a well maintained home that is the least expensive in the neighborhood will appreciate in value and rent more than the most expensive homes in the same neighborhood.

You also want to know the tenants you are targeting and the infrastructure they desire. This means the schools, shopping, restaurants, entertainment, medical, transportation, etc. You’ll learn a lot of this just by driving and walking around. But doing a door-to-door survey is an advanced tip for how to be a landlord.

A survey is how you learn the “rent range” for the neighborhood. You can also learn about the people that rent in the neighborhood. You don’t need an expensive marketing/survey specialist. You just need to knock on doors and ask the right questions. You want to know what people are now paying and might be willing to pay for rents in the area. This means learning how long a person has been renting the same house. Long time renters are paying less. Those new to the neighborhood should be paying more. If the newbies are paying less, you’re in the wrong neighborhood.

Do the survey when people are expected to be home. In the evenings or Saturday mornings. Use this simple script:

“Hi, I’m an investor in the area and I’m looking to rent out a house nearby. I was wondering if you might be able to share with me how much folks in this neighborhood pay for rent? I’d also be interested in anything else you want to share about the neighborhood? Especially what you know about local businesses and amenities.”

Take notes about the condition and the approximate square footage. Ask about the number of baths and bedrooms. The standard MLS listing is a good example of information to collect.

Cash on Cash Calculation

This is another advanced tip for how to be a landlord. The cash on cash return calculates the return on investment of an income property. The cash on cash return only takes into account the actual cash invested in the property’s purchase (but accounts for debt service).

If you purchase a property using 80% borrowed money and 20% cash, the cash on cash return metric only uses the 20% cash as the denominator. The formula for calculating the cash on cash return is:

Cash on Cash Return = (Annual Pre-tax Cash Flow ÷ Actual Cash Invested) X 100

Calculating the Pre-tax cash flow:

Annual Gross Rents + Other Income – Vacancy – Operating Expenses – Debt Service

The total cash investment is all the cash that you pay out to make your rental property operational. It does not include borrowed money. Cash investment typically includes the amount of money paid to purchase it, closing costs, rehab costs, and loan fees. Be careful with loan fees. Include these if you paid them in cash. Exclude them if the fees were rolled into the loan. Your monthly mortgage cost is the debt service subtracted out of gross rent. This is a value based investing calculation. It doesn’t take into account asset appreciation.

Other rental analysis includes Rental Income and Cash Flow, Vacancy and Occupancy Rates, Cap Rate, and Comparative Market Analysis. You want to be familiar with all these advanced tips for how to be a landlord.

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

For more exclusive content, please subscribe to my RSS Feed and YouTube Channel.

What did you think of this article? Please leave a comment below.

There are TONS of buyers out there who can’t buy a house. And there are many ways for investors to make money. What’s not intuitive is that there are ways for investors to earn money helping buyers that are coming up a little short of being able to purchase a home. One of these ways is with Cooperative Lease Options (aka wholesaling).

The sandwich lease option is the most profitable and most preferred method for investors to connect tenant/buyers with a seller needing to sell outside of traditional channels. But there are times when cooperative lease options are a better choice for everyone involved. Three of those times are:

1. When you (the investor) are just getting started and could use a quick deal generating fast cash.
2. When you have maybe a dozen sandwich lease options under contract generating monthly rental income (let’s say $250 per house per month) but it will be several months before a tenant/buyer closes a purchase to generate a bigger payday for you.
3. You have a possible deal that will generate a decent lease option fee for you but there really isn’t much equity (big payday) for you to earn by holding the rental contract for a few years.

Here we look at the third scenario.

Cooperative Lease Options for the Option Fee

This version of the Cooperative Lease Option works well when the seller doesn’t leave much meat on the bone for you (the investor) to stay in a sandwich lease option for two or three years. Sorry to say but this could be a time when the seller is plain greedy. Or the seller might not have enough equity in the house to afford sharing with you in exchange your knowledge and expertise. Greed is greed and you should always be very cautious when working with a seller motivated by greed. But there are times when the seller needs to sell a house and just doesn’t own enough equity to be able to share.

Cooperative lease options are about finding a buyer that wants a lease option and connecting him or her with a seller wanting the same thing. You are the middleman flipping the lease option to the buyer for a fee. An example of a seller without enough equity to share is when the seller’s mortgage balance is equal to the sales value of the house. For some reason (divorce, job relocation, illness, etc.) they need to sell the house but will be stretched to pay off the mortgage at the current value of the home. This is a time the seller is motivated to make a creative sale because they probably can’t afford to pay a Realtor^® commission either.

That means the seller will put a tenant/buyer in place to generate rental income to make the mortgage payments until the tenant/buyer can qualify to complete the purchase. These tenant/buyer is also willing to pay top dollar for the house which helps the seller pay off the high mortgage. This is a win-win-win for the seller, you as the investor, and for the buyer.

What you are going to do in a cooperative lease option is bring the seller and tenant/buyer together for a lease option and collect an option fee from the tenant/buyer but then you step out of the deal. The seller and buyer must complete the sale before the end of the option period.

How to Structure Cooperative Lease Options (Wholesaling)

This might seem more complicated than it is. But it’s actually simple. This is nothing more than creative investing that most people don’t think about. First, you use one of the many methods I share to find a seller in a bit of a pickle that needs some help with this type of creative selling.

Then you explain in a general way how a lease with an option to purchase works. What’s important here is that you do gain some control over the property. You do this by signing a purchase option agreement between you and the seller for some “consideration”. When it comes to a cooperative lease option, you want the option fee you pay the seller to be very small. You probably want to start negotiating for as little as $1 to $10. This is important because your money comes from a much higher option fee that you collect from the tenant/buyer. If you pay too much to the seller, the tenant/buyer fee will only be reimbursing you rather than earning you a decent fee in exchange for your work and knowledge of how to put the deal together.

The purchase price you have under contract in a cooperative lease option is the same price you offer the tenant/buyer. What you want from the tenant/buyer is the full “traditional” option fee. A traditional option fee is between 2% and 5% of the purchase price. At 3% on a $200,000 purchase price, the option fee you collect is $6,000. Once you collect the traditional option fee, you “flip” your purchase option agreement (you paid $1) to the tenant/buyer. At this point, you step out of the deal.

It becomes the responsibility of the seller and the buyer to close the deal at some future date before the option period expiries.

Of course, what is great about creative investing is that there are variations to everything discussed here. The cooperative lease option is only one tool in your toolbox.

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

For more exclusive content, please subscribe to my RSS Feed and YouTube Channel.

What did you think of this article? Please leave a comment below.

Subject to deals (aka get the deed), offer several creative ways to control more properties without investing money of your own. It’s a great way to invest using other people’s money. The financial rewards are huge and the risk is extremely small. I’d use subject to deals almost every time if I could.

Subject to Deals (aka Get the Deed) are a Type of Owner Financing

Subject to deals are a form of owner financing. The current owner already has financing in place. Instead of the investor going through the painstaking (and costly) task of applying and being approved for a new loan, the investor simply takes over the sellers existing loan. The seller can make a profit on the deal but that becomes a second mortgage owed by the investor (without a mortgage application).

Like most creative financing deals, there are several ways these deals can be put in place. The one thing that needs to happen is the terms of the original loan contract need to be adhered to. Here are three common ways that subject to deals (aka Get the Deed) are put together:

1. The investor obtains the original loan account number, mailing address, and due date to make the monthly payments. As long as the payments keep coming, the lender isn’t likely to call the “due on sale” clause (no matter whose name is on the check).
2. Another common scenario is for the investor to send the original loan amount plus the amount for any second mortgage directly to the seller. This is not a preferred way to write a subject to contract. Especially if the seller has a history of credit/finance problems.
3. The third common method is using a third party to distribute the money. The investor sends the money to a third party (essentially an escrow company) and that company sends one check to the original lender and another check to the seller for the second mortgage. This is the most secure but has the added cost of the third party.

From a Lease Options to Subject to Deals (aka Get the Deed)

The main reason more investors don’t use subject to deals (aka Get the Deed) is that it takes some trust on the part of the seller. After all, the seller is transferring ownership to you but their name (and responsibility) remains on the loan. This is why it’s extremely low risk to you but the seller still has some risk. The secret to making this happen is by building trust between you (the investor) and the seller.

A great way to build this trust is by starting with a lease option. A lease option doesn’t transfer ownership to you but does grant you control of the property. It also relieves the seller of the monthly mortgage burden.

A lease option does several things towards building trust to make the seller secure with transitioning to a Subject to Deal (aka Get the Deed). Besides no longer worrying about coming up with money for the mortgage payment, the seller is no longer responsible for maintenance and minor repairs. Additionally, you have a sales price agreed to via the lease option. All hassles of owning the property have become a distant memory for the seller. His or her only remaining concern is hoping you complete the purchase. After all, you still have the option to walk away.

There are several reasons the seller will agree to convert to a subject to deal. One of the most motivating is when you agree to complete the purchase well before the end of the option period. If the seller will pocket money from the sale, you may be able to finance this with installment payments (coming from your tenant/buyer). Or you may have to give them a balloon payment. There’s still room for negotiation when you convert the deal.

Why You Want Subject to Deals (aka Get the Deed)

There are good reasons that you want to have possession of the deed to the house. These sellers often have bad debt or other financial problems. These people are likely to be behind on the mortgage, have lost their job, acquired an illness, going through a divorce, etc. Although your risk is very low with a lease option, it becomes even lower when your name is on the deed and you make the payments.

In these situations, you want to get the deed with a Subject To Deal. Your main concern is that this type of seller will continue to have financial problems that could affect the title to “your” property if the deed is still in their name. For example, if this seller gets judgments from creditors, the creditor can attach to any real estate the seller owns.

This short article is not intended to provide all of the details for subject to deals. But rather to show when you should consider this investment technique.

By Wendy Patton

For more than 30 years, I’ve used the Sandwich Lease Option System to earn myself and my students millions of dollars. From my experience, I know there is plenty of room and opportunity in the real estate investment market for everyone wanting to participate to find profitable deals. It’s because of that fact and my personal success that I share the Sandwich Lease Option System with others.

If you found this information useful, please visit again soon at wendypatton.com.

For more exclusive content, please subscribe to my RSS Feed and YouTube Channel.

What did you think of this article? Please leave a comment below.