This is number eight in our ongoing series on creating your own real estate investment business plan.
Teaming up with partners helps to reduce your initial investment and your ongoing maintenance because you and your partner can split the down payment and closing costs as well as the other carrying costs. You and your partner might want to form a formal partnership or a limited liability company to acquire your properties. If you each put down a 10% down payment, then you won’t deplete your cash, and you don’t have to have as much in reserve for maintenance and repairs.
You and your partner can share the costs and reap the rewards together to turn your business into a profitable venture. Or you may want a partner that puts up the majority of the money, and you do the work of finding and negotiating the deals and taking care of the renovation costs. There are many different ways to structure your partnership. The main point is having a partner means you don’t have to do everything yourself.
Finding a partner can be done in many different ways. If you do not have a friend or family member to go in partners with, then you may want to team up with an experienced investor.
Talk to everyone you know. Tell them you are an investor, and you are looking for a partner. Join an investment club, answer a newspaper ad or find a partner on the Internet. Just be careful to choose a partner you can trust and who is willing to do his or her share of the work. Be sure to put everything in writing to avoid any misunderstandings later.
Your time is another factor to consider. Time is money so you want to make sure you organize the time you spend finding a property, rehabbing it, maintaining it and selling it so that your investment is profitable and worthwhile. There may be occasions that you need to leave town or you may have a full-time job, live out of the area, or just don’t have enough time to manage your property. It might make more sense than to hire a professional management company to take care of your property. These are all factors that should be taken into account when making a business plan.
If you spend 10 hours a week finding and viewing properties, another 10 hours following up on leads, 10 hours managing and repairing the property and another 10 hours a week doing booking, your are working full time on your real estate business. But let’s say you already have a full-time job, then you would be working 80 hours a week. So obviously, you would need to hire an assistant, work with a Realtor and possibly hire a property manager or handyman to help you out. Put down everything on paper and calculate which way works better for you financially.
Maintaining your house and increasing its value benefits you and your neighbours. No one wants to live in a neighbourhood where the homes are run down and the yards are overgrown. Keeping your house in good condition inside and outside also adds value to your neighbor’s home and vice-a-versa. Statistics show that homes that are not well maintained lose as much as 10% of their value. Routine maintenance items should be a part of your budget when you own a home. Maintenance costs will run you on average 1% to 3% of the purchase price you paid for the home. Setting aside cash reserves for emergency repairs is also a great idea so you are prepared in case something unexpected breaks and needs to be fixed immediately.
Saving Money While Building House Value
Having a checklist is an easy way to keep up on all the various items that need attention. Routine maintenance will also save you money on expensive system repairs down the road. Your home’s heating and air conditioning systems should be on maintenance contracts. It is also a good idea to have a pest control contract. When you buy your home, you should either ask the seller to purchase a home warranty plan for you or buy one anyway. It’s like an insurance policy. For a simple service call fee, a repair person will come to your home and either repair your home’s systems and appliances or replace items covered under your warranty plan. Read the policy exclusions carefully though so you understand what items are excluded from coverage.
Getting in the habit of fixing minor leaks and caulking around your shower or tub can be done easily and inexpensively and save you money later on. Some homeowners pick certain projects each year like updating a kitchen or a bathroom or painting. Adding upgrades to your home, especially remodeling kitchens and bathrooms is a good way to add value to your house and recoup your investment later when you go to sell. Changing the flooring, getting new carpet, adding wood floors, changing hardware, getting new windows and installing a new roof, if needed, are also recommended improvements. According to real estate experts, even a minor kitchen remodel of approximately $20,000 can allow you to recoup about 78% of your costs. Improvements such as converting an attic space to another bedroom, may allow you to recoup up to 81% of your costs. Improvements and upgrades help you to receive your maximum sales price when you sell your home.
Other Green Improvements and Technology
Homeowners can add value by making their home high tech and green. In today’s technology driven world, having a high speed Internet access is mandatory. Wiring your house for audio, video, security, and communications is at the top of the list of smart improvements. Other improvements such as multi-zone heating and air conditioning systems and programmable thermostats are great ways of turning your home into a technology home. Replacing old appliances with new energy saving appliances and lighting will save you money on your electric bills and increase the value of your home. Making improvements that allow your home to use its natural light, open spaces, use of sustainable materials, using storm water for landscaping and irrigation and other resourceful ways of using water should be high on the list as well. They add value, help your home run efficiently and help the environment.
By routinely maintaining your home each year and putting away cash reserves for emergency repairs, you will be able to keep your home in good working condition and enjoy the upgrades and improvements at the same time. You will also be adding to your house value. So when you do decide to sell your home, you will be able to recoup your investment because your home will have appreciated in value and you won’t be faced with having to make expensive and major repairs. Buyers will appreciate the care you took to maintain the home, and you will be able to overcome buyer objections making it easier for you to sell your home quicker and help you receive top dollar for your home whether home prices are appreciating or falling.
This is number seven in our series on formulating a real estate investment business plan.
Deciding on how you are going to pay for your property is absolutely crucial. You will need to decide whether you will be using your own money or other people’s money to investment in your mobile home community. Keep in mind if you are obtaining financing you will probably need a minimum 25% down payment for investment property. So if you are purchasing a $500,000 property, then you will need a $125,000 down payment. The question is where are you going to get the money? The following are common financing sources that you can use to purchase your assets:
Private money lenders such as friends, family, acquaintances or other investors
Traditional financial and lending institutions.
Conduit loans. These are pool of loans on similar type properties that are sold to investors. They are regulated by securities laws, and it is difficult to change deal terms once they have been negotiated. There are substantial penalties for early pay-offs too.
Equity line of credit
The ins and outs of financing
Most new investors do not have cash so they are relying on using other people’s money. Either they must borrower from a private investor such as a friend, family member or a hard money lender. Using other people’s money is a strategy that investors like because they can purchase an investment property with someone else’s money. This is referred to as leveraging. The thing about leveraging is that it can get you in trouble if you leverage too much and find you cannot repay the money quick enough because your property has not generated enough cash flow. So be careful when you borrow that you have a repayment schedule that makes sense and it a realistic one that you can meet.
When you pay back money you borrow, it is generally amortized over a certain period of time. This means a portion of the payment goes towards interest and a portion towards principal. By making your payments, you reduce the principal over time until you have paid off the property. If you are paying interest only, you won’t get the property paid off. This might be okay if you decide to sell it and it has appreciated, but if you intend to hold on to it for awhile, then avoid paying interest only. Caution and minimum risk is the best advice.
Private money lenders may lend you money quickly at a slightly higher rate if you need to rehab the property and turn around and sell it for a profit. They can do so because they do not have to adhere to lending laws like traditional lenders do. They are more interested in whether the property is priced right and when they can receive their return on their investment.
So let’s say in our example above you purchase the home for $200,000, borrow $10,000 to rehab it at 6.5% interest from a private money lender, and then turn around and sell it for $300,000. You still made a profit even though you leveraged the rehab costs. Another example might be that you purchase a distressed property with your line of credit from your personal residence. The property value goes up on your personal residence and our new property. When you go to sell, you make a profit of $25,000 on the new property and you pay off your line of credit.
Now you can take that $25,000 and put it on a down payment on a distressed property that you bought for $100,000 that you plan on keeping and renting out. You obtain a mortgage for $75,000, and you make a positive cash flow of approximately $250.00 a month on your rental income. You leveraged the money you made on the new purchase and were able to buy another property with positive cash flow for under market value. You repeat the pattern and purchase five more homes, you see where there is going. You have acquired more property with equity and positive cash flow.
Careful when leveraging
But again, caution is the word when you decide to leverage. Do not over extend yourself, because if property values plunge, you will end up upside down on your mortgages and risk losing your properties to foreclosure if you cannot afford the monthly mortgage payments.
Qualifying for traditional financing has gotten tougher these days. Lenders want perfect credit scores from their borrowers and larger cash down payments. You will need at least 20% -25% down payment or more to get a mortgage on your investment property and good credit score. Always line up your financing first before you make an offer. The lender or mortgage broker will pre-qualify you and give you a letter to present to the seller or their real estate agent. Shop around for rates.
Working with a mortgage broker allows is a good idea because the mortgage broker does the work for you. Mortgage brokers work with many different lenders and can find you better rates and terms than if you try and do it on your own. You might want to establish a relationship with a couple banks as well. When rates are going up, lock in your rate as soon as you can.
This is number six in our series on building a real estate investment business plan.
Appreciation is the increase in the value of your property over time from when you purchase the property until you sell it. Economic factors control whether a property goes up or down. Unfortunately, real estate investors have no control over economic factors. So it is a mistake to think about buying a property solely for the appreciation factor.
However, you can buy a property at or below market value and fix it up to market standards or above to increase the value of the property. Since this forced appreciation is something you do have considerable control over, looking for a property that is undervalued makes sense because you know that you have a built in equity and appreciation after you purchase and rehab it.
Building property values
You know can increase the value of your property by making improvements that are cost effective and give you a higher rate of return like updating kitchens and baths, adding a new roof, replacing flooring, painting and landscaping. Try not to make too improvements that are too costly because you won’t be able to recoup what you spent when you go to sell the property. The smaller less costly improvements tend you pay off better. In a seller’s market when there is less inventory and high demand, prices appreciate. When there is a too much inventory and it is considered a buyer’s market, prices go down. Real estate goes in cycles.
Demand influenced by economic conditions such as employment, types of jobs, interest rates, availability of land, and proximity to transportation, public services, shopping, restaurants entertainment, population growth, desirability, crime and property tax rates is cyclical. Unfortunately, investors and buyers have no control over economic factors, but there are indicators when interest rates change, unemployment rates go up or inflation occurs. Savvy investors keep an eye on economic conditions when there are indications that there may be change one way or the other. For instance, the past few years, investors have been investing in distressed properties because there has been a huge influx of foreclosures and short sales constantly flooding the market.
So if you purchase a distressed property at or below market value at least 20% to 60% below the retail price, if the property appreciates, you have a nice big property when you go to sell it. For instance in our example above, the distressed property you purchased for $200,000, rehabbed for $10,000 and then sold for $250,000, gives you a nice profit on the appreciated value of your upgrades that only cost $10,000.
Property values and price fluctuations
However, let’s say you keep the property five years, but the value keeps going down due to economic factors, so you rent it out during that five year time. You find that the property is now worth less than you paid. You would still get the benefits of property ownership and the positive cash flow even if the property depreciated. If you keep it for another five years, the market values may appreciate back up to what you paid for it or a little higher.
As long as you are getting a positive cash flow, you are still benefitting from owning the property. Unless you are experiencing a financial hardship, you probably don’t need to sell the property and can hold on to it until property appreciates again.
This is number five in our ongoing series on creating your own real estate investment business plan.
Today we’ll run through how buying a distressed property actually works in a nutshell. So here is what you can expect when you find a distressed property and you want to make an offer. To purchase a foreclosure auction home, you need cash. Realtors are not involved in foreclosure auctions because no one pays a commission to the Realtor. If you are new at bidding at foreclosure auctions, you might want to bring someone experienced with you such as another investor.
Auctions are generally for more seasoned investors who understand the risks associated with them such as no warranties, not being able to purchase title insurance and having to pay off liens and evict former tenants or owners. Foreclosure auctions are open to the public. The auctions are generally conducted by the sheriff or an auction company at the courthouse steps in the county where the property is located, at the property or at another designation. Check the notice of sale to find out the time and place. It is generally posted at the courthouse or on the property.
Bids often come thick and fast, be prepared
The lender sets the opening bid price, which is typically the amount that is owed on the loan or market value. The highest bidder is typically awarded the property. Bidding goes quickly. You need to register, bring a cashier’s check generally for 10% of your bid price and a cashier’s check to pay for the home. Other people may be bidding on the home so you should set a maximum price you are willing to pay for the home before you bid so you don’t get caught up in the excitement of the bidding process and end up paying more for the home than you intended.
Many times the lender purchases the home back and it becomes a REO. Making an offer on a REO is similar to making an offer on a resale property owned by an individual owner except that with a REO, you must make the offer through a Realtor and the seller is the bank who owns the home. It may take a little longer to get a response. Sometimes the bank will pay your closing costs up to 3% or maximum 6% if you write it in your offer. You don’t need cash to purchase a REO.
Although making cash offer on a REO gives you an edge over other buyers as well as minimizing the number of contingencies in your offer. Have your financing set up and deliver a pre-qual or pre-approved letter with your offer so the seller knows you are qualified to buy the property. The closer to the asking price you offer and the least amount of contingencies as well as a quick closing are negotiating points that will win you the acceptance of your REO offer. Banks like quick clean deals.
Buying a short sale property
A short sale is a whole different game. The short sale is still owned by the seller, but they are upside down on their mortgage. This means they owe their lender more than the home is worth if they were to go and sell it on the retail market. The short sale may be listed with a Realtor or for sale by the owner. You will make your offer with a Realtor if the seller has the property listed with a Realtor. If not, then you can negotiate directly with the seller or the seller’s attorney.
Before you make an offer, be sure to ask the seller if they have spoken to their lender to make sure the property qualifies for a short sale so you are not wasting your time making an offer on a property that does not qualify. The seller has certain obligations that they must take care of such as providing the lender with their financial documentation to prove their financial distress. If the seller has assets, the lender may not approve the short sale and may require the seller to sell the assets to pay off their mortgage. If the seller does meet the lender’s financial hardship guidelines, the transaction will fall apart. The seller should also negotiate that the short sale process satisfies their mortgage debt so that the lender cannot go after them later for a deficiency judgment.
A short sale is contingent upon the seller’s lender approving the transaction because they are going to have to write off the loss between the sale proceeds and what the owner owes them on the loan. If the seller is not willing to provide their financial information or documentation that the lender requires, the whole deal can blow up. So the seller needs to be committed to the process as well. It is best if the seller is working with their attorney in negotiating the short sale because short sales are very complex.
Learn the ins and outs of short sales before bidding
Be sure to ask the seller or their Realtor if there is a short sale negotiator or attorney handling the short sale. This is important because most sellers do not know how to negotiate a short sale with their lender. If you are not familiar with the process, the chance of the short sale being successful is less. So if there is a short sale expert involved who knows how to handle the transaction, your offer has a better chance of getting accepted.
Lenders take short sale transactions more seriously if there is real estate professional or attorney involved. Otherwise, they tend to take advantage of the fact that the seller is not sophisticated about the process or the seller may omit an important piece of information, and the short sale might get rejected because of that.
Also it is recommended that you also do some research and educate yourself about the short sale process in case you have to end up negotiating the short sale if there is no attorney or negotiator. But again, in that situation, it might be smart for you to hire an attorney to help you if the seller cannot afford one or is not willing. You would need to get the seller’s permission to negotiate with their lender by having them sign an authorization letter.
With a short sale, you should also have a cash offer or have your funds lined up because the seller and the lender want to know that you are able to close the transaction quickly should the lender approve it. Again, the least amount of contingencies and a quick closing after the lender has approved the transaction are your best bet of getting the property. Be sure to negotiate that the short sale is contingent upon the approval of the seller’s lender and negotiate an out clause so you can get out of the contract if it takes too long to get a response from the seller’s lender.
Usually a 45 day out clause is sufficient. Keep your initial deposit small such as $1,000 because the contingencies do not start until the lender approves the transaction and you don’t want to tie up a large sum of money in an escrow account. You can always negotiate an additional deposit after the inspection contingency has been removed. Remember, all your contract contingencies start running after the seller’s lender has given their approval in writing. You may have to counter back and forth a few times with the lender until they accept the offer. Also be prepared that they might not accept the terms, and you might have to move on to another deal.
Buying a property – an example of how it’s done
To determine if the distressed property is a good deal, you want to run the numbers. Let’s say you find a three bedroom two bath distressed property in a hot neighborhood with good schools, and the asking price is $200,000.
You have a local Realtor provide you with a comparable market analysis and you discover that similar homes that are in better condition and are not distressed properties are selling for $250,000- $300,000. You know that the home will cost you approximately $10,000 to fix up and rehab. Taxes are approximately $4,000 a year and insurance is $1,200 a year and you pay away an extra $500 a month for repairs which is approximately $6,000. You already know that you have built in equity and appreciation, and the home is a good deal if you decide to rehab and turn around and sell it. Figure another 2% to 4% for your closing costs, and you are still ahead.
Income stream is also important. Having a regular income stream and cash flow keeps you in the black and out of the red. Cash flow is the difference between the income generated by the property and the property expenses. What the property will generate in steady cash flow is actually more important for investors than appreciation. Although having said that, appreciation is also a factor to consider.
Take for instance the above example. You can check market rental rates on our own or by asking your Realtor or a local property management company to provide you with a rental market analysis. So let’s say that you can rent out the above home for $1,500-$1,800 a month. You will generate rental income of approximately $18,000 at $1,500 a month.
Your expenses are approximately $4,000 for taxes, $6,000 for repairs, $1,200 for insurance and you might want to figure in a vacancy factor of two month’s rent so another $3,000. If you add all that up, you still have a positive cash flow for the year of approximately $3,800. If you buy at least 2-3 properties around the same price range, you can see how you can create quite a bit of positive cash flow with your rental properties.
This is article four in our ongoing series on formulating a real estate investment business plan
Short sales or pre-foreclosures are also considered distressed properties because the borrowers are about to default on their mortgages and the homes may be heading to foreclosure, or the owners may have already received a foreclosure notice from their lender. With a short sale, the owner must provide you with disclosures about anything that is considered materially and would influence your decision to purchase the home because they still are in possession of the property. However, they are under no obligation to make any repairs.
Short sales require the approval of the borrower’s lender before the transaction can close because the lender has to write off the difference from the sale proceeds and what the borrower owes the lender on their mortgage. Short sales may take a while to close because lenders typically don’t respond quickly. The average short sale transaction may take three to six months or even longer. Keep in mind there is no guarantee that the lender will even accept the offer. You could be waiting and miss other opportunities.
How to protect yourself when making an offer on a short sale
If you do decide to make an offer on a short sale, negotiate an out clause in case a better opportunity comes by and you want out get out of the deal. An example of an out clause might be that the offer is contingent upon your attorney’s approval or your partner’s approval. Give yourself a 45 day out clause so that if you have not heard anything in writing from the seller or their lender in 45 days from the time you and the seller negotiated the short sale contract, you have the right to cancel and get any initial deposit returned.
Short sales are not for everyone, especially if you are in a hurry to close. However, if you have the time, they are good investments because you can purchase them below market value. Many short sales are also in much better condition than foreclosure auction homes or REO’s because generally the owner or a tenant is living there maintaining the property. The home might only need cosmetic fixing or it could even be in move in condition. That is not to say that every auction property or REO is in poor condition because there are also a number of properties that only need cosmetic repairs or are also in move in condition.
Avoid short sales that need lots of work
REO’s and short sales offer less risk to the investor because the new buyer is not responsible for paying off any liens on the properties, title insurance can be obtained and there are no costs that the buyer has to incur for evicting former owners or tenants because the properties are always delivered vacant. However, auction properties can be bought at larger discounts.
You need to do your homework first before you buy a distressed property by checking out the comparable prices and conducting a physical inspection of the property so you know what you are getting for your money. All distressed properties are sold as is so what you see is what you get. Many distressed properties are in bad or poor condition so it is important to budget for repairs.
It’s smart to avoid distressed homes that need major systems replaced because that is expensive and cuts into your profit margins. Cosmetic fixers are better investments, especially if you are handy and can do the work yourself. Either that, or you’ll have members of your team that specialise in those areas and can make light work of it.
This is part one of our series on formulating a real estate investment business plan
I’m not going to tell you that there are complex strategies that only
professional investors and real estate agents know, because there aren’t. Real estate investment is all about finding properties that are able to be purchased for a price that is below their market value – for whatever reason.
There are strategies to keep in mind when making your business plan. The most important and crucial one is to remember that when you invest, you are looking to buy at a low price and sell at a high one. Look for properties that are at least 20% to 70% below market value. Whether you decide to rehab, flip or lease your properties, when you buy them at discounted prices, you know that you have built in equity.
When you are making these decisions, you need to choose wisely, do your due diligence and always ask questions. Not every deal will be the right one for you. Knowing when to say no is something that every successful real estate entrepreneur and investor learns quickly, because it is better to be sure than to make a huge mistake down the road that you might regret and end up paying for many years later.
Getting Started with Distressed Properties
Distressed properties are the dream come true for investors because they can be purchased at deep discounted prices. Many can be bought for as much as 40% to 50% or more below market value. Distressed properties are foreclosed homes, REO’s and pre-foreclosure short sales.
Distressed properties are considered distressed because the borrower is usually in some kind of financial distress and about to default on their mortgage or they have already defaulted and may be heading towards a foreclosure. There may be many reasons why the seller is in financial stress such as a job loss, illness in the family, one of the property owners died, divorce, job relocation or other reasons.
Keep in mind that when you purchase a distressed property from a seller that is still in possession of the property that you are helping the seller so that they do not lose their home to foreclosure and ruin their credit. Be sure to stress this when you meet with them. Listen and be patient. It is a difficult choice for an owner to let go of their most valuable asset.
Buying yourself a home is a big decision, something full of choices you’d better carefully make before putting down several hundred thousand dollars in equity or handing a couple of decades of monthly payments to the bank. You need to consider a number of factors, like investment value, crime rates and accessibility to services, transport and shopping.
You also have to keep in mind what the local economy is like, how the weather can get and what kind of structural condition your house is in. As you can see, there are numerous factors to consider and only certain neighborhoods or cities are going to make the cut. Here is a list of several that have all the bases covered and make for excellent places to settle into, in no particular order.
Austin’s population of roughly 800,000 people will ensure that you don’t feel hemmed in by the big city, while providing you with all the amenities that any large city should have. Combine this with great weather, low crime rates, an excellent night life and a 14.2% job growth rate between 2000 and 2010 and you get a fantastic all around living experience. There are also over 2000 technology companies headquartered in Austin and the population keeps growing at a steady rate. These are the kind of indicators that also lean towards excellent investment value in purchasing your home. Current home prices, at a median of $120,000, are relatively cheap for the time being.
Ansley Park, Atlanta, Georgia
Rated in 2010 as one of America’s Top 10 neighborhoods by the American Planning Association, Ansley Park is designed in such a way so that not one of the homes on its 275 acre expanse is located more than a few minutes’ walk from any one of 14 parks. This safe and clean urban neighborhood is located close enough to Atlanta’s central business district to offer stunning skyline views. Median home prices are a bit steep at $226,000 but this is more than made up for by the access to excellent family friendly living and proximity to a major and growing metropolis with thriving technology industries.
Deerfield Beach, Florida
This small but bustling town of 75,000 residents, located in southern Florida, near both Miami and Fort Lauderdale, sits along beautiful coastline and boasts year-long warm weather. There are numerous beachfront properties on sale and at extraordinarily cheap prices. The median home cost in this town is about $89,000 and at an enormous discount from recent highs of $400,000 plus. This alone is a good indicator of increasing potential housing value in either the near or long term future, especially if you consider the city’s geographical location.
Paradise Palms, Las Vegas, Nevada
Paradise Palms is located only two and a half miles from the Las Vegas Strip and sits in between Las Vegas’ Boulevard indoor mall and the National Golf Course. This planned neighborhood was built during the 1960’s and expanded from there. Las Vegas may not be an ideal location for many types of homeowners, but the neighborhood of Paradise Palms, along with the whole city of Las Vegas, are at a state where home prices have hit rock bottom and stand a very good chance of going up at least part of the way to their boom prices. One promising trend is that Las Vegas has made strong efforts to turn back the dereliction tide and the quantities of owner occupied homes are steadily increasing.
Smaller 2000 sq foot homes can be founds for as little as 50 to $60,000 and even large vintage houses of the most sought after kind can be bought for between $200,000 and $400,000.
Broomfield County, Colorado
Broomfield isn’t a city or a neighborhood, but a whole county that’s located right in between Denver and Boulder. The area boasts a small population of only 55,000 residents and home prices average a somewhat stiff $239,000. However, the proximity to two major cities is only one of the benefits of buying real estate in Broomfield County. The scenery of the area is extraordinarily beautiful, plenty of nature is available for enjoyment and job growth in the area has shot upwards by more than 50% during the last 10 years. Homeowners with a University education, especially one in technical or computer science related fields can easily benefit from the closeness of several major technology corporations.
Broomfield County may not be the best option in terms of real estate investment planning, but as a career investment for certain types of professionals and their families, it could be an excellent choice for home buying.
Other Real Estate Investment Options
Five neighborhoods and cities represent only a tiny fraction of the numerous neighborhoods and regions across America that would be ideal for home investment and lifestyle improvement. There are probably hundreds of locations to choose from, and as long as you keep in mind key points about economic growth, crime, real estate prices and local ownership regulations in mind, deals can be found in surprising locations.
The old debate over whether cash flow or capital growth is better is, I think, silly. Let’s look at real estate as the investment vehicle of choice here for putting some money away in an investment, and you’ll see why I’m saying what I’m saying.
Let’s say (for a simple example), that you have $100,000 to invest. You need to decide is what to do with it, and the next question is – what do you want from your investment?
Investing for capital growth
If you’re happy putting that money away by buying a property and then hoping for a price appreciation down the track so that when you sell you have increased your original figure, then that’s great – but be careful. Something I’ve noticed among real estate investors who buy for capital growth of their investment is that they fail to consider a couple of vital factors.
These are inflation and the Consumer Price Index (or CPI). These two things basically influence the value of your money. Simply put, if the value of the property doesn’t go up by the time you sell it, you haven’t broken even, you’ve lost money, because with the passage of time your $100,000 is no longer worth that much. That’s without considering all the fees and charges involved in buying and selling the property, which will also put a sizeable dent in that $100,000.
Investing for cash flow
So, looking at investing for cash flow now, you will have to consider the rental return on any property as well as a bunch of other factors like local vacancy rates, parks, schools, transport, shopping, sporting facilites and other infrastructure. These will influence what area you buy your investment property in. What you want is to maximise the return on your money (in rent received) while minimizing your exposure to risks (like having a vacant property, or one that needs a lot of maintenance expenditure).
What you want from a cash flow investment property is something in a reasonable condition in a decent area with high occupancy rates. Another consideration of course is whether you have obtained finance to fund your purchase. If you have, then you will need to consider the cost of repayments when calculating whether the purchase is financially viable.
Investing for both cash flow and appreciation is ideal
When you’re looking at a property, be sure to consider both the possible rental returns and cashflow, as well as the potential for capital growth into the future. The ideal investment property is one that delivers a decent cash flow to your pocket on a weekly basis, as well as capital growth as the property rises in value. Don’t put all your eggs in one basket.
Looking at the numbers alone, your property will have to increase in value by more than 2.7% to beat the increase in CPI (based on March 2012 data) and then you’ll have to calculate for inflation on top of that, and that’s before you can count on any profit at all. Can you really, honestly, look at the real estate market as say that your property can deliver such consistent results, year after year? I’m guessing your answer will be a big “no” – and that’s why cash flow should not be forgotten. It’s not everything, but it’s half the equation that I use when deciding whether an investment property is worth buying.
What about you? Do you like cash flow or appreciation better for your investments?
A wide variety of people find themselves in the offices of financial advisers these days, asking for direction. Something to be wary of though is that not all financial advisers are created equal – and not all will have your best interests at heart when they provide you with financial advice. The reason we’re talking about this today is that some real estate investors we have spoken to have received poor advice, which in retrospect only benefited the person providing that advice.
There are some glaring warning signs to look out for when you are sitting down with a financial adviser though – signs which you ignore at your peril:
You find that a particular product (or bunch of products) is being promoted or recommended excessively. This often occurs because they adviser is paid a great commission if they funnel buyers to a particular product. This applies to real estate as well as to insurance products and annuities.
You are offered a black box or no risk solution. These don’t exist. Investing is inherently a risky business – there is no way to get away from that. Sure there are ways to minimize the risk you are exposed to, but that’s about it.
You are offered the solution before you tell them the problem. An all too common scenario sees a lazy financial adviser apply a ‘one size fits all’ approach. No financial product or strategy will be suitable for everyone.
They promise to make you rich. Again – just not true. A decent financial adviser will never promise this, because there are no guarantees. Investing is a risky business, and financial cycles have ups and downs that we are all exposed to.
They talk more than you do. This is a scary prospect, especially during an initial appointment. The adviser should be listening to you, and learning all about our current financial position and resources, as well as your plans for the future.
Their recommended course of action is too simple or too complex. Your investment roadmap should be relatively easy to follow, but not too easy. A solid financial plan doesn’t need to be fancy either, as too many zigs and zags will inevitably lead to confusion and losses.
You can’t get a straight answer when you ask your adviser how they are paid. The trouble with a lot of financial advice is that it is skewed by commission payments received by those giving advice. I’m not saying that advisers who receive a commission are dishonest, but I am saying that your financial adviser should always be upfront about the fees that they receive.
Investors who are looking for financial advice need to be careful about who they take their advice from – and that it suits them in terms of where they are now, and where they want to be in the future. The most important thing about financial planning and investment is risk management – if you’re in any doubt, ask anyone who lost money when the real estate market collapsed during the GFC. By all means, get financial advice that is personally tailored to your own personal circumstances – but just make sure that it’s best for you, not best for the adviser.