Back to Basics; Real Estate Investing 101

There is a word that is used in investing that I think a lot of “real estate investors” had forgotten over the years. The word is eval·u·a·tion. Webster defines evaluation as:
1 : to determine or fix the value of
2 : to determine the significance, worth, or condition of usually by careful appraisal and study

The current market can make it more difficult to evaluate investment properties. The determined sale price at the beginning of renovations can be 5% or 10% less at the end of renovations. Not to mention you have to account for marketing expenses, carrying costs, tax implications and even have a Plan B.

Its very important that real estate investors align themselves with competent advisor’s that can advise them how to properly structure and progress the transaction. This includes a Certified Mortgage Planner, CPA, Realtor, Property Manager and Appraiser. There are many DIY’s “speculators” out there getting absolutely hosed and even foreclosed.

Its essential that you spend a large amount of time of due diligence when considering an investment property to purchase. Initially this may take some time to develop your specific goal but properly structuring a consistent standard upfront will save much time down the road and allow you to move quickly as investment opportunities arise. A very brief overview of considerations are below:

Marketability: One of the first things to look at is marketability. How marketable will the home be once I finish? How are the schools? How is the lot? How many rentals are in the neighborhood? What are the average rents for the area? How is the lot location? Meaning power lines, railroad tracks, proximity to the main road, creeks, etc. What type of home buyer am I attracting? Do not confuse a first time home buyer price range as attracting just a young adult or young couple. There are single mothers, empty nester’s and widowers that all would be considering that price range and each one would have a specific concern.

Liquidity: I can not stress the importatance of liquidity enough. If times get tight and turn times get slow you need to convert this investment to cash and get your initial investment back. The number one reason investors loose money is because they get over extended. You absolutely need to maintain high levels of liquidity to weather the storm and / or take advantage of stagnation and dips in the real estate market.

Leverage: It is my practice and thought that I put down the absolute least amount as a down payment with a less regard to my mortgage payment and cash flow. Its is essential that you maximize the amount of borrowed funds and OPM “other peoples money.” If you can not fully leverage the property and be within a tight range for cash flow and mortgage payment do not buy the property.

Property Management- I wrote a short piece on property management last month, so I will not spend a lot of time on this. But property management is essential to the profitability of your investment so only use a professional property manager.

Tax Implications: Tax consequences can have a very positive affect on your investment decisions or a very negative one. You need to determine your after tax and before tax return on real estate investments. The main tax considerations would be:

• Passive, Active and Portfolio income
• Tax Credits, Deductions and Deferments
• Capital Gains

Diversification: This is just the very basic of any investing. If you had 250,000 to invest in the stock market and your broker called you to invest in a stock would you invest all $250,000? Of course not. Just as important not to do it with real estate. Not all real estate performs the same in all markets. There are commercial properties, multi units and multiple single families in varying neighborhoods. Do not put all your money in one home or one neighborhood or one section of town or one property classification.

The bottom line is you need to have a pre written system and set of goals. To advance in any endeavor whether Investments, Life or Business without a written system or goal is to advance on hope.

(Image Courtesy of www.fbi.gov)

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