IN "Real Estate Debt Can Make You Rich," author Steve Dexter proposes that there is money to be made in real estate and that the way to make it is to use someone else's -- the bank's -- money.
A radical idea? Not exactly. The popularity of real estate as an investment has helped fuel the recent surge in housing prices. And most people don't need to be convinced that buying a home can be a smart financial move.
But Dexter, a Laguna Beach-based real estate investor, is seemingly well-qualified to offer advice on how to buy and profit from real estate: He is a mortgage broker who has funded $500 million in loans, teaches courses on real estate investing and publishes an online newsletter on real estate finance.
His personal investing strategy is to look for three-bedroom, two-bath single-family homes in sought-after middle-class neighborhoods. These are the properties risk-averse lenders prefer, he writes, are the easiest to rent and to sell, have the most loan programs available and maintain their value in down markets.
He holds on to his properties for the most part, renting them out and managing them himself, then reinvests in additional properties as his cash flow increases.
Dexter says that by putting down 10% of the purchase price and letting the bank finance the rest, investors see a much greater return than they would on assets bought with 100% of their own money.
It's not really that simple, of course. And good luck these days finding homes where the rents would cover the mortgage payments, another one of his strategies. Nevertheless, real estate investing will always have a place, and this book offers advice on how to maximize profit and avoid the pitfalls.
He starts with the financials, giving insider tips on how to navigate the loan process. He talks about how lenders evaluate buyers and calculate rates, what paperwork buyers should be prepared to share and what they need to know about debt-to-income ratios and FICO scores.
Dexter describes how the secondary loan market has created an explosion in home loan products. He discusses the pros and cons of each type of loan and the best times to use each one. And he explains in almost numbing detail the workings of adjustable-rate mortgages (whose allure is fading as short- and long-term interest rates move closer together, he says).
The book could also be titled "How Not to Let Real Estate Debt Make You Poor." Dexter warns that interest-only loans can be a "powder keg" because of the jump in payments. He says to think twice about 100% financing (the higher interest rate can be a negative unless it's the only way to get into the market) and talks about the importance of not taking on too much debt.
Part 2 of the book describes the top 16 mistakes real estate investors make -- including not having adequate cash reserves and not thoroughly screening tenants -- and how to avoid them. Dexter's tenant-screening checklist includes more than 30 items, including finding out the reason for the move and talking with previous landlords. (The current landlord may give a good reference just to get rid of a bad tenant.)
He advises setting the tone with tenants in the first 30 to 60 days. "Tenants need to know that you are their boss, and they are valued employees." They have four jobs, he writes: Pay the rent on time, be a good steward of the asset, get along with the neighbors and leave you alone.
And don't just check out the tenants. He recommends verifying sellers' numbers about prospective rents and investigating the neighborhood by checking out job data and police call reports before you buy.
Investors also need to keep track of income and expenses, make tough decisions, decide on goals and educate themselves about the field. For readers who want to learn more, he lists 122 websites that offer foreclosure information, free sales comparables, market data, rental listings, government grant details and investor discussions.
This may not be a book you want to read cover to cover. It suffers from a muddled beginning and awkward transitions. Chapter 1, for example, starts with a segment about tax deductions, segues into an explanation of the secondary loan market and then launches into a confusing discussion of interest rates.
And it's never really clear who the intended audience for this book is. The early pages seem geared for the first-time buyer, but detailed calculations and number-crunching discussions later on will be too complex for those without some financial acumen.
But keep reading, or just go directly to the sections that hold the greatest interest. There is good advice to be had.