Real Estate Investment Amateurs Just Look At The Numbers, The Savvy See More
As the story is told in Infomercial-land, just about anyone can make serious profits in the real estate business. That, of course, simply isn’t true. Financial success in investment real estate requires skill and knowledge. A superficial understanding of the business just isn’t going to bring in the types of returns on investments that are hoped for. This is especially true when evaluating the potentials of properties – real estate investment amateurs often make the mistake of focusing primarily on the numbers and how they shake down, while the savvy investor also considers many additional factors.
Numbers are important, make no mistake about that. But, numbers tend to fall into clear cut categories of black and white… or red. And, as we all know, there’s plenty of gray in real life and, presumably, your investment properties will include people living their real lives and will be surrounded by others doing the same. Successful real investors realize there is more to investment decisions than merely running the numbers.
In addition to looking at the numbers, it is important to determine whether or not the property under consideration fits into your overall investment plan. Hopefully your investment strategy is more sophisticated than just amassing properties, if not, you may to address this issue with an investment consultant before buying any further investment real estate. Seek professional help if necessary, but get yourself a plan. Having an investment plan is essential to the type of organization that separates amateur level money from professional profits.
Part of determining whether or not a particular property fits your investment plan is looking at such factors as – yes, the old adage is about to appear – location. However, today’s real estate investor has a bit of a different strategy on real estate’s most ancient adage, and that strategy is emerging markets. Developing the skill to take advantage of the potentials of emerging markets is a significant distinction between the real estate dabbler and the successful investor.
Emerging markets have the potential to offer a strong return on investment, as these are not the already discovered desirable locations. These markets are on the cusp of a shift in rate of growth. Some are even almost bad areas about to go good. When investment properties are bought by future thinking investors, investors that are selective in their tenants and careful in their property upkeep, they contribute to the overall value of a particular market segment and can be a valuable part of the growth process. Experience, research, and familiarity with local growth trends and patterns can position an investor to be able to step into a given market at the right moment and maximize profit potentials.
Other factors to consider when thinking about location and tenant quality are what is in the local area – colleges, employment opportunities, etc. – and how that is going to affect the demand for rental units and the vacancy rate potentials, as well as how those factors will influence the type of people seeking those units. The set up of the building, its age, and its structural integrity are going to affect the amount that will have to be spent on maintenance and remodeling, and should also factor into the decision making process.
These are things that can be difficult to assign a specific number value to and can influence numbers in ways that are hard to predict, but they are essential considerations to savvy investment real estate decision-making. Numbers should serve as a foundation to the decision on whether or not to buy a particular investment property, but should not be the only consideration. After all, a building can have a strong foundation, and still have a leaky roof that unexpectedly caves in and sucks the profit right out.
Cash Flow — Or Else!
I was flipping through the radio stations while driving yesterday and landed on a hip hop station that was playing a song called “Cash Flow”. My first thought was “Cool, a song about real estate investing!” Upon further review the song was NOT about real estate investing. After listening to it for a few minutes it became clear to me the song was actually about drug dealing. The hook to the song made me think that this hypothetical drug dealer and the investment real estate owner actually have a few things in common.
What do you do if you don’t get paid on time? Well, let’s see the approach this “drug dealer” takes by listening to the lyrics of the hook.
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I’ll tell ya one thang dont play about mine
i be bangin on your front door wit da nine
ima come see ya (see ya)
ima come see ya (see ya)
i need all my dough not a dolla short
and if u dont have it then u gotta go
ima come see ya(see ya) hey hey we put our hands
in da sky let em know that we bout that
cash flow..i need it on time im
talkin bank roll my money my money my money
cash flow…i need it
on time im talkin bank roll my money my money my money…
As a law abiding citizen you shouldn’t be “bangin on your front door wit da nine” (nine = 9mm gun reference), at least I hope not. So how can you, the investment property owner , ensure that you receive your “cash flow”, “bank roll”, “rent check” or whatever you want to call it on time?
The best way is to avoid being in this situation in the first place is by properly screening your potential tenants. They should know from the get-go that you will be charging late fees if they don’t pay on time, they should also know that you will start the eviction process as soon as the lease and local ordinances allow it. As a last resort….you can always flash your “nine”.
Green Real Estate Investing Proves Profitable For Some, But What About You?
Every where you turn these days somebody is touting the goodness of going “green”.The most aggressive real estate investor/speculator out there, Frank McKinney, is building a $29 million, 15k square foot “green” mansion in West Palm, FL.Some will argue how “green” is it to build such a large home, but he retorts with “The kind of people that buy my homes would have bought a similar sized home anyway, so why not build green?” I agree with him.
Toyota, JPMorgan Chase, IBM, and Goldman Sachs are among some of the large corporations that have made the switch into “green” buildings and Bank of America has plans to build a 52 story “green” skyscraper close to Times Square.
While these investments will pay off from Mr. McKinney once he finds a buyer and for these corporations through better corporate image, will it prove profitable for the average real estate investor to go green?
The exact cost of building “green” depends on how “green” you go.Many sources estimate it usually costs about 10% more than traditional building to go “green”, so you will usually pay a higher price for your real estate investment.The upside is you can usually command higher rent because “green” buildings average a savings of 10% in utility costs per year (tenants usually pay utility costs).
It’s been my experience that most investors usually “lose” a little cashflow by investing “green”, but they feel great about their new real estate investment.
So…yes, it can make prove profitable for you to invest green….if you have a conscience.
Data is Needed before Investing in a Property
Remember the lovable Johnny 5 from the movie Short Circuit? One of my favorite things he’d say is “Need Input! Need Input!” while reading a 500 page book every 10 seconds.
Investors, we should all take a cue from Johnny 5 while examining the next real estate market you invest in. I’d like to talk today about some of the crucial data (input) needed before investing in a property.
Timing is everything when it comes to real estate investing. You have to be able to determine the speed and direction of the market place, and the relationship between supply and demand. These factors will give you a fairly clear picture of whether it’s the right time to invest.
Your local real estate agent will likely not tell you this, but there are investments that you may want to avoid investing in. When you determine real estate supply and demand trends, you need to look at how many months worth of housing supply there is on the market. This supply of housing is the measure by which you need to test your real estate market. The prospect of overpaying is high if you don’t pay attention If the supply of housing continues to expand faster than the demand for new housing (supply is greater than demand), values will drop.
For instance, a market with a nine-month supply of housing reveals that there is an over-supply of houses on the market in a given area. It does not reveal whether it is a good time to make an investment - it only tells you the market status as of now. However, if we go back to housing supply trends in the past and compare them, we begin to get a better picture of what’s going on. For instance, if we were aware that there was a 10 month supply of housing last month, and an 11 month supply a month before that, and a 12 month supply the month before, this would be an indication that the housing over-supply is being absorbed. What this tells us is that this is a market on the rebound. So, while a housing supply of 9 months may not look that great, the additional information about past months trends provide a different angle from which to see the bigger picture.
To recap, look at the data before you making your real estate investment. Need Input!
Attention California and Florida Investors; Don’t Get Cut!
Many real estate investors that love Florida and California because of their long term prospects are licking their chops right now while looking for a great investment. While I do believe there are some good ones out there right now, my advice is to really be careful. You might be thinking “Jeremy, there is blood in the streets already! What more can happen?” To that I say “A lot!”.
Option ARMs taken in 2006 make up about $140 billion of the $350 billion of outstanding option ARMs and 45% to 50% of them are expected to default. The 2007 option ARMs, which were originated just as home prices began falling, are expected to perform badly also.
And get this, 70% of the Option Arms are concentrated in California and Florida.
While you may be able to pick up a “great deal” relative to peak values I say don’t catch a falling knife.