...and have no regrets. I could have titled this: HOW NOT TO BUY REAL ESTATE.
Here's a synopsis of what occurred. I received a call from a gentleman who saw my number on a sign I had on a property I own. He told me he was from L.A. and wanted discuss investment property with me. He came by my office and the first thing I learned was he just closed a deal with another Realtor on a piece of commercial property.
He showed me a flyer his with a picture of the property just purchased, and told me he bought it for $225,000 cash and wanted to buy some more property in the area. The more we talked the more he opened up and it turned out that while he DID buy the property for cash, a substantial portion of the cash used to make the transaction came from an equity line on his primary residence.
I then asked him the question I would ask anyone who buys real estate as an investment: "So Mr. ________ 'WHY did you purchase this property'?"
His answer: He believed that one day he could develop it (at which time it would be a good investment) but until then he was going to rent it out. So I asked him how much he intended to rent it out for and he said he was hoping he could get $900-$1,000 per month.
It turned out that his payment on his credit line for the financed portion of the property is right around $1,000 per month. So here is what I laid out before him:
M. ______ if you put $225,000 cash in the bank at 5% interest you would collect approx $937.00 per month without doing anything: no risk, no hassles, no taxes, etc.
Every month that you hold this property you will have the following fixed costs:
- Taxes: $225.00
- Utilities: 60.00
- Insurance: 65.00
- Managment: 100.00 (unless he decides to manage it himself)
- Payment 1000.0
- Total $1450.00 PER MONTH
If you rent this property for $1000 per month it will cost approx $450.00 per month to carry it - not including deferred maintenance and vacancy factors.
SO - MY TWO QUESTIONS:
- 1) HOW IS THIS A GOOD INVESTMENT?
- 2) CAN YOU AFFORD TO PAY $450.00 PER MONTH TO HOLD ON TO IT UNTIL SUCH TIME AS YOU DEVELOP IT?
Believe it or not - he had never been asked these questions and I could tell his wheels were starting to seriously spin. He left my office and returned to L.A.. A couple of months later we met in my office again. He had contacted the City of Fresno and an architect to get an estimate of development cost (something he should have done BEFORE he bought the property) and from the information he gathered the cost to develop the property exceeded the potential income.
So now he asks me, "CAN YOU HELP ME?"
Conclusion: I found him a tenant that did a lease/option and the lease payment is close to break even for him, the option money put some cash in his pocket, the option price (if exercised) will give him a profit ---- HE'S HAPPY.
If you're going to buy real estate as an investment you need to know WHAT YOU'RE BUYING AND WHY YOU'RE BUYING IT. How simple is that? If its an investment then you need have numbers that show a reasonable RETURN ON INVESTMENT (ROI). The first thing you should ask your agent when he says that he has a good investment property is SHOW ME THE NUMBERS.
If you're interested in purchasing INVESTMENT PROPERTY in Fresno, don't hesitate to call me.
© 2007 Randy "Lazarus" McAtee - owner/Broker Lazarus Realty and Fresno's Foremost Blogging Broker.
Comments(3)