The ten most important things to know about investing in real estate!
Having worked nearly thitry years in investment property and property management, we have managed thousands of investment properties and many property types. We have worked with hundreds of real estate investors from all over the world. The following is a summary of the important items in this small space.
We have witnessed some very dirty dealings in the real estate industry and there are many out there who would do all they can to con you and separate you from your money. Please let us evaluate your investment before you buy it!
Most real estate investment professionals own and invest in real estate. Many agents and property managers do also. Then they sell it to investors at a profit, but the catch is you are paying retail! There is no such thing as wholesale real estate. Real estate sells at market value.
I penned this article many years ago; many things have changed in real estate but these truths remain constant! The biggest change I have seen of late is the foreclosure mess. This has created an opportunity for single family real estate investors to purchase homes at far below market value. The rental rates for the first time in years are able to justify the mortgage.
Why is it bad if my property manager owns investment property?
Because they will direct the tenants to their vacant property not yours! Be it commercial space, office space, apartments or single family investment property, they are competing with you; their client!
1) Location, Location, Location. That is pretty simple and the most over-used quote in real estate history. We wish we had a patent on it!
2) Value is not based on current or past income, but income potential. We cannot stress this enough... DO NOT buy a property based on the current rent roll figures.
a) Were these figures consistent throughout the history of the property?
b) Are these figures realistic in the immediate future? Has the market changed?
c) Do you know the market, and does your agent know the market?
3) Do not believe the Pro-Forma!
Do Your Homework:
a) What are the local community, civic and economic forecast for this properties location? (Developments, TIF's, Improvements, Changes in the Neighborhood)
b) Are the expense histories based on real figures and current facts? i.e.: Did they just rent the entire property up, and now the utilities will be 40% higher than they were last year with a comparable vacancy rate?
c) How long has each tenant been there? This is vital!
4) Get professional help! If you do not know this market, ask someone who does? If you are represented by a buyers agent ask yourself... "Just who is this person working for?" If he is getting paid a percentage of what you spend... and the more you spend the more he makes.....? Think about it?
5) Inspections! If you don't know what to look for, get someone who does!
6) Maintenance: If the previous owner did some, or all of his own maintenance; you will likely find that your numbers will be nearly double the ones they provided if you cannot do the work yourself.
7) Agent: If you are buying an investment property, don't rely on a residential agent to represent you! Buying and selling investment property is a whole new ballgame! If you’re using a buyers agent and they don't request the deposits and pro-rated rents, guess what, the seller isn't going to volunteer to give them up. Residential agents sell pretty kitchens to soccer moms. We sell investment property!
8) Investment Scams: Are rampant! We have had many clients who were nearly bankrupted by mortgage scandals and scams.
If the same guy who is selling the house hooked you up with the appraiser and the inspector and the lender.... And you are getting anything guaranteed your screwed. There are no guarantees in this business.
9) Charity: If for some crazy reason you are buying property to 'give back to the community" or "help out the less fortunate" you will be bankrupt in a few months!
Seriously, give the money to Big Brothers or the Salvation Army, save yourself the headache!
If they say they are not making a dime, and all the money goes to some charity ...... RUN! People don't try to sell you real estate because they are looking out for your interests, they are trying to make money.
10) Cash Flow, NOI, CAP Rate... Know the terms! If you just finished reading Charlton’s book or stayed up last night watching late night TV. You have an unrealistic perspective! Distressed sellers are not selling cash-flow property no-money-down at 20-50% under market. Some of those schemes worked in the early 90's. That's when those guy’s wrote those books!
If it is a cash flowing property why are they a distressed seller? Those deals are not on the MLS! Don't waste my time and yours.
Cash flow is relative. If you buy a property that pays the mortgage and all of the overhead you have done very well! The cash flow is the equity you gain. The renters are paying the mortgage and you are building equity.
I get calls every day from "investors" looking for cash flow! Most expect it with no money down or seller carry back. The market has changed significantly and there are cash-flowing properties out there. There are also a lot of con-artists selling rehabbed houses in neighborhoods that won't bring the rent they claim.
Most of the figures you see are unrealistic and do not account for actual management costs, or realistic maintenance costs.
On the other hand I have investors who buy well, because they are local people who work hard to find foreclosures before they are foreclosed. They buy low, rehab and sell high! Go to auctions, watch the obituary columns, and talk to friends.
We have other investors who do well because they do not get emotional about a property. We run the numbers, do the math and make a sound offer. You must know the maximum price you are willing to pay for a property and do not exceed it. Do not be afraid to walk away!
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