As any seasoned real estate investor knows, just because you acquire property that is cheap does not mean it won't become expensive. Things happen that are not conducive to our investment timetable or budget, and often they are beyond our control.
Sometimes rehabbing a home takes longer than anticipated. Or the cost of materials and labor can rise unexpectedly, local ordinances can change, or other scenarios can come into play to make a project run longer than scheduled or over budget - or both. And many of the circumstances dictating how things unfold may be impossible to foresee. Weather can play a critical role, for instance, especially if you are doing roof repairs, concrete work, or exterior painting and need the help of sunny skies. When hurricanes and other natural disasters strike, even on the other side of the country, construction materials can suddenly become more expensive - the price of plywood can jump 20 percent overnight.
Many projects are now on hold simply because of a rise in gasoline prices, which adds to the cost of all materials delivered by truck to the local lumberyard or home improvement store. It can even add to labor costs, because if your contractors are commuting, they expect to be compensated for the cost of getting to and from the job site. If you are working on a slender margin, a few cents per gallon at the gas pump can be enough to erase your potential profits while you work to rehab and "flip" a property.
And any delay in a real estate project leaves the investors open to vulnerability from shifting economic factors. If the housing market cools off and interest rates spike before you get your house on the market and sold, for instance, you can be left holding the bag through the downturn, with expenses like mortgage payments, insurance premiums, and property tax added to your balance sheet.
To find an alternative way to invest in real estate - without the day-to-day logistical headaches - many investors turn to paper investment, either as a way to supplement their portfolio or as a full-time business in lieu of actual physical ownership of properties. By buying the debt that finances real estate, they participate without having to roll up their sleeves and deal with the nitty-gritty details of rehab work. And without financing, you aren't a buyer, you're just a browsing looker, so those who invest in the loans that fuel projects will always be in demand, as long as there is a market for buying and selling property.
Especially in times like these - when the real estate market is challenged by steadily rising interest rates - mortgage note investors can earn substantial yields, taking advantage of the higher rates. And those who have prior experience as real estate investors can use their knowledge of property to help choose sound, secure, credit-worthy investments. If the building that serves as collateral on the note is valuable, then the debt carries less risk, and those who are accustomed to rehabbing property usually have an eye for what constitutes solid and problem-free construction.
As with any debt instrument, when investing in real estate mortgages there are different rates of return, yields, timetables to maturity, and degrees of risk versus potential reward. To learn more about investing in mortgage notes, contact a broker who specializes in them. They can explain how it works and how it can serve as a practical alternative to rehab projects to help you stay invested in real estate, during both bull and bear markets.
Troy Fullwood, self made millionaire, nationally known investor, real estate guru, speaker and coach; would like to share with you creative ways to building your own "Money Tree." In 1997, Troy founded a company called Pinnacle Investments. The main focus is buying first lien performing and non-performing commercial and residential real estate notes.
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