The Property Is Yours- Now What

Category: Finance, Real Estate.

Many average Americans are convinced that investing in real estate is beyond their financial means. And, this is certainly one way to invest in real estate.

Most people have the idea that real estate investing is simply the process of buying existing homes for their current value and holding on to them long enough to see them appreciate. However, this manner of investing often requires you to pay the full current value of the property you re purchasing, meaning that you may have to wait several years to see any appreciation in your investment. Preconstruction real estate investing is a unique way to get into brand new properties before they re even built, allowing you to control a high end real estate investment for a period of time with little cash out of your pocket. But, there s another way to invest in real estate that can help you see a return on your investment more quickly, without years of making monthly mortgage payments. Most of these investment opportunities exist at vacation destinations and are for condominium and other multi- unit properties. The reservation period is the first period in real estate development. Here s how it works: The Reservation Period.

The developer will put together a model and drawing of a proposed property to show potential investors approximately what the property will look like and approximately how much the property will cost. Developers pre- sell such properties to help them ensure that there s a market for their development. For a small deposit of around$ 5, 000- 10, 000, you can secure first right of refusal on a property in the development being designed. In exchange for securing the property so early in the development property, you ll gain a small purchase price discount over investors that come into the property at the following stages. The reservation period is a risk free period, and usually lasts approximately six months. So, your investment is likely to begin appreciating right away. Your initial investment is placed into an escrow account.

The Hard Contract Period. At any time during the reservation period, you can change your mind and get your investment returned to you. The next phase of preconstruction real estate purchasing is the hard contract period. Each state mandates the required length of this period, so it can vary, but in many states, the period is 15 days. Before you become committed to a contract on a property, the developer is required to offer a Right of Rescission period, during which you can opt out of your reservation, getting a refund on your reservation deposit. If you choose to stay in the investment after the Right of Rescission period, you ll actually sign a binding contract on the unit you reserved.

Following is an example of the cash required to purchase a$ 300, 000 condo unit on the beach. When you sign a contract, you ll get a firm price on the unit you re purchasing and you ll be required to put down 20% of the total purchase price of the unit. Your original deposit amount can be put toward your down payment. In order to obtain a letter of credit from a bank, they ll require that you have two times the amount you re requesting in assets. In addition, you can apply to obtain half of the 20% deposit from a bank through a letter of credit. Let s take a look, at the amount, then required to pre- purchase a$ 300, 000 condominium on the beach. $10, 000- reservation deposit. 20% down payment- $60, 000.

As long as you have$ 50, 000 in personal assets, you can get a letter of credit from the bank for half the down payment, or$ 25, 00So, at the time of contract, you would actually have to have$ 25, 000 in cash available. So, after deducting your reservation deposit, you ll need to have$ 50, 000 for a down payment. The down payment is the only money you re required to pay to have a contract during the construction period, which can last anywhere from one to two years. For an out of pocket financial investment of$ 35, 000, you are controlling an investment worth at least$ 300, 00The investment has likely appreciated during the six month investment period, and will likely continue to appreciate during the construction period. During this time, you ll make no mortgage payments, insurance payments or tax payments. Closing or Certificate of Occupancy.

A traditional closing will take place, at which time you ll finish paying for your unit. This is the final period of the transaction that occurs after construction is complete and when ownership of the units is passed to the buyers. You can either pay the balance in cash, or arrange financing of the remaining balance. You ll have to include the$ 25, 000 amount that was covered in the letter of credit as part of your final payment- this letter of credit was simply a security instrument to be used during the construction period. Going back to our previous example, when you go to close on your$ 300, you, 000 condominium ll owe$ 265, 000 in cash or you ll need to obtain a mortgage for this amount. Now that the construction period is over, you ll have to pay this amount as part of your purchase. Now that you own the property, you have several ways you can handle your investment.

The Property is Yours- Now What? Many people use such properties as vacation rentals. Vacation property in hot vacation spots is a great investment. To do this, you ll furnish the property and find a property manager to handle renting the unit out on a weekly basis. Even after paying the property management company their cut, you can often easily make enough in rental fees to cover your mortgage payments, insurance and maintenance, property taxes on the property. In addition to having income to make the mortgage payments and maintain the property over the years that you hold it, you ll realize profits from the appreciation of the property later when you sell it. As the property appreciates, you should begin to see a profit from your rental fees, and you re building equity, as well.

This is a great way for investors who can t really afford to pay two mortgages to own a second home. You can easily keep the property vacant for the weeks out of the year that your family wants to use it, and rent it out the rest of the year. They simply rent the property out as a vacation spot for most weeks of the year, so that the property essentially maintains itself. Over time, you re building equity and the property s value is appreciating, allowing you to realize profits when you sell. In many cases, the property appreciates between the time you sign the contract and the time that you close on it. Another option for your property is to resell it immediately.

When this happens, you can immediately put the property on the market for a price that is greater than what you have invested. Going back to our earlier example. When the property sells, you ve made a profit. We ve purchased a condominium for$ 300, 00Let s say the real estate market in the area where we ve purchased has appreciated by 20% . You may choose to make the property your primary residence or keep it as a vacation home. This means that we can expect to sell the condominium we paid$ 300, 000 to purchase for approximately$ 360, 00 The third option is to hold onto your new property without putting it into a rental program.

The property will likely go up in value during the time you re holding it, and you ll realize the profit down the road when you sell. The ability to leverage a valuable piece of property for a period of time without putting up a large investment puts one of the most important aspects of real estate investing on your side- time. So, as you can see, investing in preconstruction real estate is a way that investors can make a profit without having to put down the usual amount of cash required for a real estate purchase. You re holding a valuable piece of property that is likely getting more valuable with each passing day, but the property is costing you very little. With every increase in value the property sees, you re making money. This window of time during the reservation and construction phases of new properties gives early investors a great edge.

And your initial investment is small in proportion to the property s value and its potential value. These are areas of rapid real estate growth and high demand for new properties, particularly multi- unit properties that make great vacation rentals. Most of the preconstruction properties investors consider are located in popular resort areas throughout the country and in the Caribbean. By investing in these areas you can accomplish two popular goals: owning a second home for your vacations, and making a profitable long term investment. Other investors simply leverage the appreciation that the property sees during the preconstruction and construction periods, making a quick profit by selling soon after closing on the property. Many investors own several properties, using each occasionally and building a significant income from property rentals. Regardless of your real estate investment goals, investing in preconstruction real estate is a great way to make those dreams a reality.

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