Don Loyd, President
Oregon Association of Professional Real Estate Investors
Welcome to the world of real estate investing. There is no other single opportunity that offers the tremendous possibilities for creating wealth through safe, sound investments as this field does. Fortunes have been made and scores of people just like you have been catapulted to millionaire status through real estate investing.
However, you can also lose money in real estate - despite what the late night infomercial real estate gurus tell you. You have to do your homework and you must treat investing like a business.
I address real estate investing as a business, in part, in articles entitled, "Stepping Stones to Success" and "Dynamic Mindset to Real Estate Success,". These two articles list the steps to setting up a successful real estate business and share the secret to creating wealth and maintaining a positive cash flow.
The purpose of this article is to identify some of the fundamental concepts that is a must for investors. The following points are not in order of importance but should be included somewhere in the process you have developed or are in the process of developing.
Focus on Something You Know
There are plenty of opportunities for real estate investing. Why start by studying an out-of-area market? You can make money where you are. Later, as you become more grounded in the art of real estate investing, you can branch out into other locations, but to begin with, stay in your own back yard.
Also begin in a field that interests you such as starter homes, fixer-uppers, condos, apartments or low-down payment properties. Other possible interests might be in foreclosures or pre-foreclosures. You can greatly enhance your potential for profit and cash flow if you specialize in one market.
Remain within that area of interest until you've reduced it down to a "cookie cutter" process. In other words, you've worked the process so much it has becomes easy to create cash flow through that means. Then branch out into other fields, one at a time, until you have several investment options open to you. Remember that with each new niche there is a learning curve that will likely cost you money in the beginning and most certainly cost you time.
Know the True Costs Going In
I have been a mentor to a large number of new real estate investors. There is one thing that seems to hold true for most of them. They are notorious for underestimating costs and over-expecting on the return side.
Some factors often overlooked is the loan fee costs in a traditional loan, costs of selling, cost of marketing, cost of holding and cost of loan payments (including taxes), etc. In addition, many new investors whose strategy is to buy and hold for a period of time, over anticipate the rental value of the property. My advice is to be realistic. If the current rent comparables show $900 per month, don't convince yourself that you can get $1,600.
If you are purchasing apartment buildings or commercial buildings, you need to take a good, hard look at the financial statements. What are the real operating costs? What does the real cash flow statement look like? Just because a seller or his broker tells you something it doesn't mean they are correct.
I believe successful real estate investors make their money at the point of purchase. They've worked out a deal that creates wealth the moment closing documents are signed. If you are hoping for appreciation to generate wealth, you are a speculator - which is fine if that is what you want to be. However, as an investor you want to make money at the closing table.
Compare Property Values
One mistake made by new investors is to compare the asking price of a nearby property and apply that number to establish value. The asking price of a property is not the same as a sales price. I've had protégés purchase investment property based on the comparable asking price of neighboring houses only to wind up in a tight spot because the asking prices were inflated and not factual sales prices. The result is little or no created wealth.
When you determine the value of a property, use comparable sales data to get the best result. A title company will usually provide you with this information free of charge. They can be a great source of information, and much of it without cost to you. Give them your business and they will jump through hoops for you.
You can also contact an appraiser who, for a fee, will give you their best estimate of value. I regularly have my appraiser give an approximate value before I build an investment house, most of the time before I have the building lot purchased. I want value established so that I know how much wealth I'll create before purchasing the building lot or subdivision. This is especially true if I'm looking at a new area and have no first hand knowledge of sales prices.
Be sure to follow the same pattern when establishing rental rates if you are into rental properties. If you price your rental too high it may sit empty while you are stuck making the mortgage payments. Be realistic.
Talk to Your Tax Advisor
A CPA or other tax expert is invaluable to successful real estate investing. The IRS and Congress continue to tinker with the tax laws and they will keep you abreast of changes. It is prudent to pay taxes, just don't pay more than you have to.
My advice is to develop a strong working relationship with your tax advisor. Call regularly with questions that affect your real estate investing business. It will likely save you thousands of dollars. I talk to mine often. He sends me a bill for his time, but it's worth it to me. By the way, never nickel and dime the people whose expertise you need. Pay them what they are worth and you will benefit!
Plan ahead. Build a strategy that increases your net worth while saving you tax dollars. Sometimes an IRS section 1031 exchange makes sense. Other times taking the cash and paying the taxes does. Either way, talk it out with your tax pro.
Other items to discuss as they relate to the best use of your money and tax laws would be the purchase of a new vehicle and the sale of the older model, mileage deductions, vacation and travel write offs, how to sell a property (via a land contract with installment payments, lease/option or cash), rental strategies, the best legal entity for your business, medical expenses and the use of a self-directed IRA (and type), or a "self-directed" 401K retirement plan. The point is, keep calling, keep asking questions and keep your tax pro abreast of your potential ventures.
Keep in mind, however, when talking about a specific investment property, that a good investment is a good investment regardless of the current tax code. If you make your money when you sign the closing docs, you don't have to fret over tax implications. The right property, with the right terms, trumps tax codes.
Inspect the property
Unless the house has no value and will be removed, I always have an inspection done by a licensed home inspector. One of the least expensive things you can do is hire a property inspector. In Oregon they are licensed by the state and insured. If they fail to discover something of importance, I have recourse.
I have seen investors forced to spend their profit on heating and air conditioning units, roofs, foundations, appliances, siding, and many other items, when a simple inspection would have revealed the deficiencies. I believe a property inspector is money well spent.
Ask the Four Questions
Before you close on the sale of an investment property, ask:
If I purchase this property, how much wealth will I create?
If I close this transaction, how much money out of my pocket will it take?
If I close, when do I get my out-of-pocket expenses back?
If I close on this transaction, does it create positive cash flow?
These four questions will give you some insight to the value of a real estate transaction in terms of creating wealth. If you are honest in the answers, they can lead you in the right direction. They are also applicable in most types of investments opportunities.
Have fun with real estate investing. It can be an exciting place. It can free you from the burden of a daily job and it can be a vehicle for you to become philanthropic beyond your dreams.
Sign up for Don's Newsletter at www.RealCashFlow.net. When you do you will also receive Don's new ebook, "Success Begins With a Dream."
Copyright 2007 by Don Loyd
Comments(2)