I’ve posted recently on the importance of real-estate to your portfolio …
… only ‘important’ of course, if you intend to retire on more than the Pauper’s Million 😉 Well, at least important enough that you probably need to find a good reason NOT to invest in it (e.g. can’t stand the stuff; market is too crappy; can’t find a deposit; etc.)
So, how do you tell a good real-estate investment from a bad one? There are so many variables:
1. Purchase Price – This varies by type of property and area
2. Deposit Required – This varies by type of property and Lender
3. Mortgage Repayments – This varies by type of property and Lender
4. Comparable Returns – What would other investments produce?
5. Comparable Risks – How risky is this investment v. other uses that you put your money to?
For the new real-estate investor, these factors are almost impossible to accurately assess, so investing in real-estate usually comes down to:
(i) What kind of real-estate appeals to me as an investor? Residential – Houses; Residential – Condos; Residential – Multifamily; Commercial – Apartments; Commercial – Offices; Commercial – Retail; Vacant Land; and the list goes on
(ii) What area/s am I interested in? For most real-estate ‘noobs’, that means their local neighbourhood, town, city, or possibly state.
(iii) What price range can I invest in? For most this is dictated by Type of Property, Deposit Available, Income available to service the loan, and the Lender’s Rules
Which is all well and good, but here is how most real-estate investors ACTUALLY invest:
They see something that they like and can afford, and:
a) They buy if they are not too chicken, or
b) They pass if they are … well, you know … cluck, cluck cluck.
Since, I am usually scratching in the yard myself, please don’t consider this an insult 🙂 I actually think that this is a perfectly reasonable way to buy real-estate IF you first (more bullet-points!) ask the $7million Questions:
A. Is the market off its high?
B. Do you at least understand the type of property that you are looking at – and, the area – and consider it a reasonable buy (i.e. you don’t think you are paying ‘top dollar’ to get in)?
C. Are Interest rates off their highs?
D. Can you can afford the payments?
E. Ideally: Will the property be cash-flow positive (or very close to it)?
F. Can you (will you!) hold on to the property for a very, very long time?
Here is the basic principle:
Certain types of real-estate (certainly the entry-level types that most beginners would look at) are virtual commodities … you can pretty easily assess their value (and, potential rents) by looking up a few databases (Zillow, RealtyTrac, Loopnet, Rent.com) and/or newspapers.
There are more intelligent people than you and I out there who actually know how to assess this type of stuff … just trust a ‘commodity market’ to price reasonably accurately and you can’t buy too wrong.
One of my first acquisitions was a simple little condo … the market had been low but was starting to appreciate (how did I know, my 20 year-old nephews told me … they had just bought two condo’s in the same area!).
I didn’t know very much about the values, but I found a condo that was going to auction (actually, the most common way that condo’s were sold in this particular location) and the real-estate agency was from out of town, so I figured that they would attract fewer buyers than an well-advertised local agent would.
The only other keen buyer appeared to be a young builder: I could tell by his overalls, ass sticking out, and his trusty tape measure in hand.
So, what did I do? I just bid at the auction until it came down to just him and I … and, I kept bidding slightly more than him, until he stopped bidding!
I figured that HE knew how to do his sums and HE would not overpay … so, the max. I could overpay is by the amount over his bid that I would have to bid. Risky: you betch’a! Did it work: you betch’a!
His advantage: any rehab would be ‘at builder’s cost’ (I at least knew this would relatively minor … kitchen / bathroom / carpet / paint / lights / knobs). My advantage: Time … I could afford to hold.
In fact, we still own this condo and it has done very nicely thanks … it’s the only single condo left in our portfolio.
But, you could do even better: if you are prepared to do what most other (lazy) people won’t do – which is turn over a lot of rocks and put in a lot of low-ball offers before one is accepted – then you might actually out-smart the so-called ‘smart investors’.
So, how and when to get started?
For those who are following along, you will realize that the current market satisfies $7m Questions A. and C. … a bit of work will help you decide on $7m Question B. … and, your Lender will pretty quickly sort you out on $7m Question D.
$7m Question E. is the one that will give you the most difficulty … as you may not know how to estimate the costs (loss of rental; utilities; Repairs and Maintenance; etc. etc. … if that’s the case, don’t worry TOO much:
TIME (which is why you hold for a long, long time) will cure most ills … and, my $7m Questions … will protect you from disaster.
Oh, and do JUST ONE ONE MORE THING:
Lock in the current low interest rate for as long as the lender will let you!
That will help TIME help the MARKET do its thing … which is get the property/s to appreciate and the rents to rise 🙂
Now, if you can do the analysis that a ‘seasoned’ real-estate investor can do … well, go do it … you will make more money / faster, if you do.
But don’t let fear and ‘paralysis by analysis’ stop you … just use the $7 Million Dollar Questions, and …