Have you ever heard "You earn your first profit when you buy the property right, but you receive and enjoy that profit when you sell the property?" It took me a long time to fully understand that old real estate motto. I’m not sure who first said those important words, but they certainly are true.

Thanks to the rapid market value appreciation of most properties during the last five years, even if you didn’t get a bargain purchase price, or especially good purchase terms, when you sell a property that’s the time when you will realize you bought the property "right" after all by choosing a property which is well-located and which appreciated handsomely in market value.

BUY, BUT NEVER SELL, REAL ESTATE. I have several good friends who follow this real estate investment strategy. The result is they have enjoyed handsome increased equity both from the pay-down on their mortgages and the market value appreciation of their properties.

EXAMPLE: A good friend in St. Louis recently told me he has never sold even one property. Just between us, I think he is a bit old-fashioned (even though he’s only in his late thirties). Neither will he refinance his properties to take out tax-free cash. However, it’s hard to argue with his success. Today, he owns about 20 rental houses (many free and clear), plus his large personal residence which he enjoys with his wife and two children. He gets the money for his property purchase down payments (one or two each year) from the rental cash flow of his older properties. However, I have managed to convince him to take out home equity loans on his properties just in case he needs quick cash for an emergency or an investment opportunity. But he hates to pay those darn $50 annual fees for each home equity credit line!

There are so many ways to earn real estate profits, I think it’s best to use a combination of strategies. If you have been reading these special reports very long, we’ve discussed many methods of "buying right," such as purchasing foreclosures and distress properties at below-market prices. We’ve also talked about negotiation strategies to create up-front purchase profits. And we’ve discussed the pros and cons of "flipping" properties by purchasing a fixer-upper property, upgrading it, and then flipping it for fast cash flow profits. Of course, the major drawback of quick flip properties is the profits are taxed at ordinary income tax rates if the property isn’t owned at least 12 months.

To overcome that drawback, a few months ago in one of these special reports we delved into the pros and cons of buying a fixer-upper house, renovating while living in it, selling it as your principal residence after 24 months of ownership and occupancy, and then claiming up to $250,000 tax-free profits (up to $500,000 for a married couple filing joint tax returns). Then do it all over again, buying and selling your principal residence tax-free every 24 months, thanks to Internal Revenue Code 121. This is known as the tax-free "serial home seller" technique.

No matter what your favorite real estate profit strategy might be, whether you just want to buy your personal residence, or perhaps a vacation home, or you want to acquire many rental houses or commercial investment properties for long-term investment profits and cash flow, a major key to success is buying right. Emphasis in this special report is on how to buy real estate right for immediate profit. Then, although I don’t recommend it, if you have to sell within a few months, you should at least break even after paying the selling costs.

THE THREE PRIMARY SOURCES OF REAL ESTATE PROFITS. When you think about profits in a house, condo, or commercial property, there are three basic sources: (1) the profit earned at the time of purchase by buying a property with potential (such as an ugly run-down house in a good neighborhood), (2) the profit earned by maintaining and improving a property to add more market value than the renovations cost, and (3) the gradual market value appreciation which benefits most sound, well-located properties over the long term.

Please notice I did not include vacant land on the list of recommended property purchases. Most vacant land purchases are primarily speculations which cannot be recommended unless you enjoy taking huge risks. If you have ever invested in the stock market, you know the goal is "buy low, sell high." The same principle applies to real estate – especially high risk land speculation.

That reminds me of my first stock market purchase when I was a teenager. It was 100 shares of Campbell Soup stock. When I announced my purchase at the dinner table one Sunday afternoon, my Uncle George who was a CPA partner with a big firm said "Why would you want to buy that stuffy old company which keeps doing the same old thing (making canned soup) without much potential?" I told him I had studied the stock and I thought it was "underperforming" and would be a safe investment until new management saw the potential and woke up that sleeping giant (which eventually happened, by the way). Uncle George was shocked. Later, my dad told me he was proud of my explanation. A few years later I sold that stock at a handsome profit. Looking back, I shouldn’t have sold because the stock did even better in later years. But I learned about "buy low, sell high." That same principle applies to real estate, but with far greater investment safety when you buy right.

Real estate is very similar to the stock market. After college, my stock market investing soon switched to real estate. The primary reason I switched was real estate market values don’t plummet overnight like common stocks often do. Real estate investing is much safer and more predictable. With real estate, each owner can control their property whereas stock market investors have no control and are at the mercy of the market.

Look for "sleepy properties" in improving neighborhoods. There are lots of what I call "sleepy properties" in stagnant ho-hum neighborhoods which don’t look very exciting (just like that boring Campbell Soup stock). But then one homeowner fixes up their house, perhaps updating with new double-pane windows and painting the exterior. Next, another neighbor does the same, perhaps adding a white picket fence (my favorite improvement since it isn’t very expensive) and fresh landscaping. After a few years, virtually every house in the neighborhood has been upgraded. That’s a great time to buy an "unremodeled" house at a bargain price in that area because it has obvious profit potential by bringing it up to the standards of the other nearby houses which have already been upgraded. If you are in the remodeling field, you understand the potential.

Recently I talked with an investor who is doing that by buying houses at bargain prices from out-of-town absentee owners who often don’t know how their neighborhood is improving. Rather than phoning them, he repeatedly sends such owners post cards every other month which say "Do you know of any houses for sale in the ___ neighborhood? If you know someone who is thinking of selling, please ask them to call me as I would like to buy with no sales commission." He gets his wife and daughter to hand address those post cards to personalize them. Great idea! By the way, the same technique works well when trying to contact homeowners who are in foreclosure.

EVERY REAL ESTATE PURCHASE IS AN INVESTMENT. My barber is an immigrant from the Ukraine. A few weeks ago he went back to the "old country" to visit his relatives. He hadn’t been there for at least 10 years. When he returned, knowing I’m interested in real estate, he talked about why he was so thankful he bought the building where his barber shop is located because nobody can kick him out or raise his rent. He rents out the two adjacent shops which, he says, pay most of the expenses for his property. Although my barber didn’t look at his property purchase a few years ago from his landlord as an investment (he bought the building because it came up for sale and he liked the location), I think he is finally realizing what a great investment he made.

In the last few years, homeowners have also come to look at their purchases as both (a) a place to live and (b) a solid investment. For most homeowners, their residence is their BEST investment. That’s why many have come to realize that owning two, three or more houses can also be great investments.

At this point, perhaps it is worthwhile mentioning condominiums, especially because they have had a big popularity resurgence in the last few years. But I do not recommend condos as investment! Yes, I know many condos have proven to be great investments, but it’s often more a matter of luck than smart investing. My friend David Schumacher (author of the famous book The Buy and Hold Strategy) has made a fortune buying condos in southern California along the ocean. Personally, I own a condo which has more than doubled in market value. It’s a great vacation get-away personal residence and also a superb investment. Incidentally, it’s my first (and only) free and clear investment. As you’ll see later, I love leverage! With no mortgage, that condo makes me feel so uncomfortable, I think I’ll refinance it to take out some tax-free cash.

But the primary reason I don’t recommend condos as investments is they are subject to management by a board of directors which votes on how to spend your money (or not!).

EXAMPLE: Recently I received an urgent e-mail from a condo owner whose unit is suffering rain water leakage which the homeowner’s association refuses to repair. He obtained a repair estimate which is over $20,000. Although the repairs are clearly needed, and are the responsibility of the homeowner’s association because the water intrusion is coming through the walls which are part of the common area, this condo owner now has no alternative but to sue his owner’s association in court because they refuse to carry out their repair responsibility. He says he can’t sell his condo because the damp musty smell is very obvious (probably mold within the walls) and he may have to move out if it gets worse. Some condo association directors keep the monthly assessment fees so low they have inadequate reserves to pay for necessary repairs like this.

10 WAYS TO EARN YOUR FIRST PROFIT AT THE TIME OF BUYING REAL ESTATE. As I write this, mortgage interest rates are slowly rising and more houses and investment properties are coming on the market for sale. That should be very good for home buyers and investors who want to earn their first profit at the time of purchase. However, it’s always a good time to buy real estate if you purchase at the right price and right terms! Not all of these 10 methods will apply to every property purchase, but used alone, or in tandem, they can result in helping earn your first profit at the time of purchase.

1 – PURCHASE FROM A MOTIVATED "DON’T WANTER" SELLER. The easiest way to buy a property with a built-in up-front profit is to purchase from a highly-motivated "don’t wanter" seller. More specifically, buy from such a person who has owned their property a long time and who purchased for a price far below today’s market value.

As the buyer, when you focus on a property you want to purchase, ask your buyer’s agent " How much did the seller pay for this property?" Your buyer’s agent, or the listing agent, can usually obtain this information quickly either from a local title company or online property data records service. This valuable information will show you how much negotiation room the seller has.

Next, ask "How much does the seller owe on the mortgages?" The reason this information might indicate the seller’s true motivation is a small equity shows the seller probably recently purchased or refinanced and has little negotiation room whereas a small or zero mortgage indicates lots of room for creative finance negotiation with the seller.

Unfortunately, most real estate listings don’t show the current mortgage balances or the seller’s reason for selling. That’s why smart buyers always ask " Why is the seller selling?" Reasons indicating a high motivation include divorce, pending foreclosure, job transfer, illness, birth or death in the family, unemployment, alcohol and drug problems, financial difficulty, troublesome tenants, partnership disputes, undesirable neighbors, and rental property negative cash flow. Shockingly, the listing agent often doesn’t know why the seller is selling! The reason property buyers need to know the seller’s motivation is to tailor a purchase offer which will meet the seller’s (and buyer’s) needs.

Another signal of a probably motivated seller is a vacant house or commercial property. When a seller has a vacant property, most sellers become highly motivated to sell, especially if there are large mortgage payments to be made, or if the property has been listed for sale many months. Probing to determine the degree of seller motivation is probably the best way to determine how to make a profitable purchase.

2 – BUY A SOUND, WELL-LOCATED PROPERTY. Buying a property in a bad neighborhood with a high crime rate is rarely a smart purchase even if you can purchase at an incredible bargain purchase price. The grief and high-risk isn’t worthwhile unless the neighborhood shows definite signs of turning around quickly for the better.

EXAMPLE: In the early 1990s, I bought a foreclosed REO (real estate owned) boarded-up former "drug house" for 10% down payment and a 90% mortgage from the foreclosing lender. It was an incredible leveraged bargain. But after fixing it up, I had trouble finding decent tenants who would live in that neighborhood (I was afraid to go there after dark!). Then I installed a five-foot high chain-link fence with a gate, fixed up the front lawn, and fenced-in the side yard and carport with a six-foot high wooden fence. Still no tenants! Then I got lucky! I decided to accept a Section 8 government-subsidized tenant who lived in the neighborhood but whose run-down nearby rental house a few blocks away was in very bad condition. She had seen my "for rent" sign on her way to the nearby convenience market. To her, my fixed-up four-bedroom, two-bathroom house was a big improvement. The local housing authority approved the rent I was asking, so I accepted her. But the week she moved in, there was a murder just outside the chain-link fence! Fortunately, my tenant didn’t move out. She stayed for 14 years until her four children were grown and either working or in college. By then, the neighborhood had greatly improved. I sold that house at a handsome profit to two young investors who "bought right" from me and fixed up the house further and earned even more profit!

However, I probably would have done much better, with less grief, if I had bought a rental house in a safer neighborhood. But it was a valuable "learning experience" which turned out very well.

3 – BUY THE LEAST EXPENSIVE (WORST HOUSE OR INVESTMENT) PROPERTY IN A GOOD NEIGHBORHOOD BECAUSE IT OFFERS THE BEST PROFIT POTENTIAL.If you want to earn your first profit at the time of purchase, it doesn’t pay to buy a property in near-perfect condition. That’s the way to SELL property profitably, but not the right way to buy. The reason is such a property in excellent condition doesn’t have much immediate profit potential, except from possible future appreciation in market value.

EXAMPLE: When I bought my current residence, it was vacant, had been listed for sale about six months, and the yard grass was dried out with no maintenance for months. But it was surrounded by well-maintained houses. It was definitely the worst house in an excellent neighborhood. Unfortunately, the wealthy sellers weren’t very motivated to sell and it took several weeks of negotiations, especially since I was short of cash and had to buy with a lease-option. Like many home buyers, I bought a more expensive house than I really could afford at the time – but I am so thankful I stretched my budget. However, three days after the sellers were finally worn down by my tenacious buyer’s agent, I moved in! My special report on "How to Profitably Use a Lease-Option to Buy or Sell Your Home or Investment Property" has more details on lease-options benefits of "buying right."

The primary reason for buying the worst house in a good neighborhood is such a property offers the best profit potential. But a secondary benefit is the market value appreciation of the better homes will pull up the market value of the least desirable nearby properties. This is very important – it’s not profitable to own the best house in the neighborhood (called an over-improvement) because the market values of the less desirable adjacent homes will pull down the value of the best house.

4 – BUY PROPERTY WITH "THE RIGHT THINGS WRONG." Another sure way to profit at the time of buying a house or investment building is to look for property in need of cosmetic (superficial) fix-up. I think it was either real estate author Bill Nickerson or Al Lowry who created the phrase "The right things wrong" as a way to describe a property’s need for profitable improvements.

This term means acquiring a property needing, for example, paint (the most profitable improvement of all!), new light fixtures, new carpets or flooring, cleaning, repairing, fresh landscaping, or other profitable fix-up work. The goal should be spending $1 on profitable improvements to get at least $2 of increased market value.

One of the most profitable improvements which meets this criteria, I learned, is adding a second bathroom to a one-bathroom house, especially if you can squeeze it in without adding extra square footage. The last time I added such a second bathroom occurred by using part of a closet and an unnecessary hallway. The cost was about $7,500, but the appraiser told me the second bathroom added at least $15,000 market value to that house.

However, avoid buying properties with "the wrong things wrong." That means a property obviously needs expensive fix-up work which won’t add even as much market value as the work costs. Examples of unprofitable (but often necessary) improvements include new roof, foundation repairs, plumbing or electrical work, and major overhauls. The popular ABC-TV show "Extreme Makeover, Home Edition" is a classic example of unprofitable home improvements (although I greatly enjoy watching that show).

Further examples of unprofitable work include room additions (such as adding a third bedroom with a new bathroom to a two-bedroom house). My experience with room additions (before I quit doing them) is they rarely added as much market value as they cost. Another unprofitable improvement is adding a swimming pool (unless your house is the only one in the neighborhood which doesn’t have one). In fact, swimming pools can be a costly liability because many prospective home buyers won’t even consider a home with a swimming pool, especially if they have small children.

5 – LEVERAGE YOUR PURCHASE BY MAKING AS SMALL A CASH DOWN PAYMENT AS POSSIBLE UNLESS YOU CAN OBTAIN A BIG PRICE REDUCTION OR SPECIAL TERMS FOR A HIGH-CASH PURCHASE OFFER. One of the easiest ways to increase profits per dollar invested is to make a small or even a no down payment purchase. If you are buying a house for owner-occupancy, you have a special advantage over investor buyers because owner-occupant mortgages are so easy to obtain if you have good income and good credit (with a FICO (Fair Isaac Corporation) credit score at least 700).

With the recent maximum Fannie Mae and Freddie Mac "conforming mortgage" increases from $359,650 in 2005 to $417,000 for 2006, this makes these attractive mortgages more easily available for higher-priced houses and condos. FHA also recently raised its maximum home loan to $362,790 in high cost communities. Fannie Mae, Freddie Mac, and FHA also offer higher maximum loan limits up to four units. Some lenders will now even approve owner-occupied loans up to 104% (to include the closing costs) of the purchase price for well-qualified applicants!

The reason it pays to highly leverage real estate purchases is the property owner benefits from 100% of the property’s market value appreciation whether there is a large or small mortgage balance.

EXAMPLE: Just in case you forgot the importance of real estate leverage, let me illustrate with a simple example. Suppose you buy a $100,000 residence with a $10,000 cash down payment and a 90% mortgage. If that house appreciates in market value 5% during the next 12 months, your $5,000 appreciated market value is a 50% return on your $10,000 cash investment. However, instead suppose you paid $100,000 cash for the same house which goes up 5% or $5,000 in market value in the next year. Now you only have a 5% return on the $100,000 you tied up in the property. Yes, I understand you would save the mortgage payments by paying all-cash, thus increasing your return, but the mortgage payments on a highly-leveraged home purchase are about what it would cost to rent equivalent housing.

Of course, please don’t over-leverage your real estate purchases. Always be sure you can afford the monthly mortgage payments. If you are buying income or rental property, be sure the rents will at least break-even to pay the mortgage, insurance, property taxes, and other out-of-pocket expenses so you won’t have a negative cash flow.

That brings us to the interesting issue of whether investors should buy leveraged rental property which has a negative cash flow each month but which is rapidly appreciating in market value. As a long-time investor with properties which, from time to time, had negative cash flow, as long as those "negatives" were a modest one to two hundred dollars a month, and as long as the property was appreciating in market value and I could afford the negative payments from other income, I didn’t mind paying the negative cash flow because I was profiting from the appreciating market value (but you can’t spend market value appreciation until you refinance or sell the property!). Of course, if I wasn’t confident the market values would continue to appreciate, I would take steps to eliminate the negative cash flow.

6 – TO AVOID OVER-PAYING FOR YOUR HOME OR INVESTMENT PROPERTY, INSIST YOUR BUYER’S AGENT PREPARE A WRITTEN "COMPARATIVE MARKET ANALYSIS" (CMA). Before making a property purchase offer, be sure to understand the local market very thoroughly. The best place to start is on the Internet at www.realtor.com where most local home sale listings are shown. That’s also where over 70% of today’s home buyers start their quest. But these are just asking prices, not the usually lower actual sales prices. Ask your buyer’s agent to find out the actual sales price after a sale closes and is recorded.

With more properties coming on the market for sale, as the home sales market slows in many communities, expect homes to take longer to sell than in the last few years. This market change from a seller’s market to a buyer’s market in many areas will benefit buyers, especially those who know how to earn their first profit at the time of purchase.

In addition to checking recent actual sales prices of nearby comparable properties (preferably within the last three months), before purchase be sure to check out the school quality in the local school district. It’s usually worth paying more for a home in a top quality school district rather than buying a similar one in an adjacent lower quality district. The reason is top quality schools attract more home buyers at higher prices whereas average quality school districts aren’t a deciding factor for most home buyers. Look for school districts which have comparatively high test scores and which have well-maintained school buildings. If the local voters have approved school bond issues within the last few years, that is a big additional plus.

When you narrow your property purchase choice down to one or two specific acquisitions, before making a purchase offer ask your buyer’s agent to prepare a written comparative market analysis (CMA). This is the same valuable form the listing agent probably prepared for the home seller. However, several months may have passed since the listing was signed. Based on recent closed sales of comparable nearby homes since then, the local market may have appreciated, leveled off, or even dropped a bit.

The CMA for the residence you are considering buying should reflect this market change, if any, because the CMA form shows (a) recent sales prices of comparable neighborhood homes, (b) current asking prices of nearby homes, and even (c) asking prices of recently expired competitive listings. Also, look at the "days on market" for each house to determine the typical selling time in your town.

7 – BEFORE MAKING A WRITTEN PURCHASE OFFER, ANALYZE YOUR PERSONAL FINANCIAL SITUATION. Armed with your buyer’s agent CMA prepared for your use, it’s time to analyze if the property purchase at the offer price you are considering makes sense for you. If you are buying your personal residence, please be aware most home buyers stretch their personal budgets (just as I did when I bought my current home). But as the years go by, you will find it easier and easier to afford the monthly mortgage payments as your household income gradually increases.

However, if the property you are buying is a rental investment, then consider the factors already discussed, especially the pros and cons of negative cash flows. Although we have enjoyed tremendous market value appreciation in most communities since 2000, resulting in average home market value appreciation exceeding 50% in the last five years, don’t expect that to continue. "Normal" average annual home value appreciation nationwide has been 4% to 5%, according to the National Association of Realtors.

But please don’t make the mistake many beginner real estate investors make – they over-analyze and talk themselves out of buying a sound, well-located investment property which meets the criteria for creating a profit at the time of purchase. This is called "the paralysis of analysis." A good question to ask yourself is "If I had to sell this property within a year, after getting it into tip-top condition would I at least break-even after paying normal sales costs?" If the answer is "yes," you’re probably on the track of a profitable purchase.

8 – KEEP YOUR PURCHASE OFFER SIMPLE – DON’T STEAL IN SLOW MOTION. Buying and selling real estate becomes more complicated all the time, especially with all the seller disclosure forms which are now required by state and federal laws. However, as a property buyer, you want your purchase offer to be especially attractive and welcome from the seller’s viewpoint. Too many home buyers, and their lawyers, insist on preparing complicated purchase offers which are a turn-off if the seller (and the seller’s listing agent) doesn’t understand all the terms.

Please remember the old negotiation motto "A confused mind says no." The easiest way to prevent seller (and buyer) confusion is to follow the KISS principle "Keep it simple, stupid." That’s why I recommend using a printed purchase form recommended by your buyer’s agent. If you are an experienced real estate investor, you probably already have your own printed offer form which you like.

However, I do not recommend hiring a real estate lawyer to prepare a complicated multi-page typewritten (on a word processor) form which is hard to understand (unless there is a unique situation involved). Just a few weeks ago, a friend faxed me a super-complicated purchase offer he received from a buyer. Neither one of us understood it! Maybe it was a good offer, but the financing was virtually impossible to understand so my friend didn’t even make a counteroffer.

Smart real estate buyers include only two key contingency clauses in their purchase offers: (a) a mortgage finance contingency clause making the purchase contingent on the lender’s satisfactory appraisal of the property, and (b) the buyer’s approval of a professional inspection report obtained at the buyer’s expense within 5 (or 10) business days after the seller’s acceptance of the purchase offer. Long-time subscribers know I recommend hiring a professional inspector who belongs to the American Society of Home Inspectors (ASHI). You can find local ASHI members at the www.ashi.com website or by calling 1-800-743-2744.

Incidentally, I just finished reading a great book about real estate negotiation strategies. It has a separate chapter explaining how smart buyers use their professional inspection report to open renegotiations if their inspector finds significant undisclosed defects. This highly recommended new book is Tips and Traps When Negotiating Real Estate, Second Edition by Robert Irwin (McGraw-Hill, New York, 2006, $16.95). It is available in stock or by special order at local bookstores, public libraries, and www.amazon.com.

9 – CONSIDER WHETHER THE PROPERTY WILL BE A "KEEPER" OR A "FLIPPER." Although this consideration will be in the back of your mind during the entire property purchase process, now is the time to decide whether you will keep the property as a long-term personal residence or investment property, or if you will quickly fix-it up and "flip" it for quick cash flow profits.

I’ve found it best to make this decision after taking title and owning the property for a while. Many properties turn out much better than expected! Other properties turn out to be unanticipated "money pits." By the way, if you haven’t seen the movie "The Money Pit" be sure to rent it for an enjoyable viewing evening. But please be aware it is a comedy and most investors never have encountered such a bad property. Speaking of rental movies, if you haven’t see the scary "Pacific Heights," every prospective landlord should be required to view it before buying a rental property, even a rental house.

Frankly, I do not recommend quickly flipping a property in less than 12 months. The primary reason is the federal long-term capital gains tax rate is a bargain 15% whereas if you sell in less than 12 months your profit will be taxed at your usually much higher ordinary income tax rate. Better yet, if you live in the house as your principal residence, as mentioned earlier, Internal Revenue Code 121 will give you up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return) tax-free profits after at least 24 months of ownership and occupancy during the 60 months before the sale.

10 – MAKE A WRITTEN PROFIT PLAN FOR THE PROPERTY. Presuming you successfully purchased either your home or an investment property "right" at a bargain purchase price, now it’s time to make a detailed profit plan to add to your initial purchase profit. Depending if you plan to keep the property a long time, or "flip" it for fast resale profits, this is the ideal time to take a critical financial look at what improvements you expect to make now and in the future to enhance the property’s market value. Profitable improvements are called "forced inflation" to increase the market value by adding valuable upgrades which will enhance resale value and marketability, regardless what happens due to local market value appreciation statistics and trends.

Personally, I don’t like to spend too much time planning future profits until I own the property. As you become experienced buying profitable properties, you will soon have a good idea of how to enhance just about every property’s market value. But don’t go overboard (unless it is to be your personal dream home!). To illustrate, instead of installing expensive brand new kitchen cabinets, I’ve often just resurfaced, repainted, or replaced the cabinet doors on rental houses, thus saving thousands of dollars.

CONCLUSION. Yes, the old real estate motto "You earn your first profit when you buy real estate right" definitely is true. But, as this special report shows, there is more involved than just negotiating a bargain purchase price. By following the techniques explained here, purchase profit opportunities are greatly enhanced by building in a purchase profit and increasing the probability of future profits from the property.