We have now looked at a business approach to real estate investing. There were no “get rich quick” schemes. It was all simple common sense. It requires work on your part and the rewards can be huge.

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After securing your own position in life, you may want to provide for your children and grandchildren. We all want the best for our children and try to provide for their basic needs including housing, clothing, food and education. When you are affluent, perhaps you will want to provide even more.

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What do you want? Do you really want to retire? What is your target date? Now is the time to set your goals and establish your plan for achieving them.

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Let’s look at retirement. In the chapter on taxes I mentioned moving into a rental property, when you retire, to avoid taxes on the income when selling. However, another approach is to let the renter pay off the house and use the rent as retirement income.

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Many people ask about buying foreclosed properties. If you watch the classified section of your local newspaper, you will see listings of properties which will be sold at auction. You can also find properties by asking your agent. Can you make any money? Yes. However, once again, remember there may be higher risk.

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When I was a kid, we called them “trailer houses,” however, manufactured homes have come a long way since those days. Today’s manufactured homes have various choices of siding and shingles and a wide variety of floor plans. Some homes will even have cathedral ceilings, and a double or triple wide home can give a very spacious feeling.

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New construction is the ultimate fixer upper. You are taking vacant land and fixing it up with a new building. There are many advantages to this approach.

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So, you bought a house, fixed it up and now have a nice positive balance sheet. The problem with a big impressive balance sheet is that you can’t eat it. If you don’t have the income you need to meet your desires of life, you may be looking to convert your equity into cash.

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Keep in mind that tax laws are constantly changing. Before you go hog wild on any project, talk with your accountant and determine the tax consequences. Remember, it’s not how much money you make on a project that is important – it’s how much money you keep.

If you have owned a house and lived in it for two of the last five years, you don’t pay federal income tax on the profit up to $250,000 ($500,000 for a married couple). Just for simplicity sake, let’s say you make a profit of $100,000 and your tax bracket is 37%. You save $37,000. If you could do that every five years, the tax saving alone would be more than many people make in a year.

Isn’t that an interesting thought? Imagine improving the value of your personal residence by $100,000 every five years. You would make $20,000 per year after tax. That is a pretty good second job! (Remember tax laws are constantly changing.)

Keep good records. You will need receipts for all purchases of materials and labor. These are your expenses and can be added to the purchase price of the property (check with your accountant.) The purchase price of the property plus the cost of the improvements becomes your basis for tax purposes. You will determine your profit by taking the sales price and subtracting the cost of the sale and the basis.

Also remember that interest on your personal residence may be deductible from your income for tax purposes. So once again, if you are in a 30% tax bracket and you pay $10,000 in interest, you save 30% or $3,000 in taxes. Property tax on your personal residence may also be deductible.

Interest on investment property is an expense of the business. Other expenses of business property can include advertising, depreciation, maintenance, property management fees, property taxes, and professional fees (legal and accounting.) Have your accountant create a list of expenses which you can track and report to her at the end of the year.

Ask your accountant about depreciation expense on your rental house. The house may be going up in value, but for tax purposes it may be depreciating. Depreciation considers that the house deteriorates over time. At some point it will need paint, a new roof, plumbing, etc. Keep in mind that as you claim depreciation the value of the property, for tax purposes, goes down.

For example, if a house is worth $200,000 and it depreciates by $10,000 per year, then after one year it is worth $190,000. If you sell it for what you paid for it, you will think you didn’t make any money. However, for tax purposes you will have made $10,000. You got back your depreciation expense. It simply means that this year you will pay the taxes you did not pay last year.

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Buying raw land is a lot trickier than buying a home. Instead of an inspection contingency, you will want a feasibility contingency. You will be doing research to determine if it is feasible to develop the land.

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Ready to start? Many young people are sharing homes. They go together and rent a house with each person getting a bedroom.

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I was considering a building for my office. The owner was showing it. After I had seen everything, he looked me in the eyes and said, “Bob, I want to sell you this building.”

I told him I’d think about it. I didn’t have a down payment. I knew nothing about real estate. I couldn’t think of an offer I could give him. A couple of weeks later I called him.

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The art of negotiation can be learned. In fact, I offer a course on negotiation. There are some good books and tapes which can help you learn to be a better negotiator. However, to be a good negotiator takes practice. If you are going to make money in real estate, you MUST put together deals. If you aren’t a savvy negotiator, then you better start practicing, and find a real estate professional who can help you.

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Lenders reduce their risk by having multiple ways of getting paid. They will also want your property for security and demand that you have hazard insurance on the property. In addition, they will require title insurance.

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When a lender loans money using property as security (collateral) for the loan, the lender will want a document stating the terms of your agreement known as a lien. Liens for purchase of property are of two main forms: mortgage and a deed of trust.

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Property is legally conveyed from one owner to another through a document known as a deed. Generally speaking, a valid deed: 1) must be in writing, 2) state who owns the property (the grantor) and 3) who is receiving title to the property (the grantee), 4) be signed by a grantor who is legally competent (the grantor must be of legal age and of sound mind), the 5) grantee must be living (property can’t be transferred to a grantee that doesn’t exist), 6) contain a clause containing words which state the intention of the grantor to transfer the ownership to the grantee, and 7) include a legal description of the property.

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There are three major credit reporting bureaus: Equifax, Experian and TransUnion. They keep track of everyone’s credit history and report the history to lenders.

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When most people think of financing their real estate purchase, the first thought is a bank. Banks have a variety of different plans to help people get the money they want for real estate purchases. However, a key fact to know about banks is that they are looking for at least two ways to recoup their money.

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Bankers are in business to make money. They want to loan to people who are likely to make the payments plus interest. If your assets are higher than your liabilities, a banker knows that if something happens you could sell some assets and still make your payments.

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Of course, there is more to becoming wealthy than buying a house, swishing some paint on it and selling it. I would be remiss if I did not cover some business basics to help you succeed.

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