3 Things That Make the Best Real Estate Investment

A couple of weeks ago I wrote The 6 Worst Types of Real Estate Investments that covered the types of properties an investor should avoid. Today I will cover what makes up a really good real estate investment.
In general you probably want to earn wealth on real estate based on risk you are taking, while minimizing the amount of time you need to spend attending to the property. In order to accomplish this, you need to make some smart choices upfront when buying investment property. Your goal should be to strive to get as close as possible on as many of these optimal scenarios as possible:

Pays a Fair Cash-on-Cash Return

When you buy property you are taking money out of your liquid financial assets – stocks, bonds, CDs – and investing it into a very illiquid asset – real estate. You were earning a rate of return on your financial assets, such as 4 percent or 6 percent, and you should strive to earn a fair cash-on-cash rate of return on your real estate. To do this, you need to pro forma your deals and buy cash flow-positive properties that earn you decent returns – not those prize properties that are negative, negative, negative. For more guidance on this, see Smart Investing – A Tale of Two Townhomes.

Isn’t Too Risky an Investment

All real estate is extremely high risk. Development of real estate, land, Tenant-In-Common (TIC) investments, private real estate funds, fixer uppers, etc., all have much higher risk profiles than just simply buying a nice established cash flow investment property. In many of those investments, you will never see a dime of your money again because there are just so many things that can go wrong! So if you want to own real estate, consider simply taking fee simple title in your own name – or an entity you wholly own – to the properties you purchase. In addition, you must do the proper due diligence, analyze, test, review reports, etc., to make a lower risk real estate decision.

Doesn’t Require a Lot of Time or Managing

Some properties just require way too much time and management to make them smart investments. Examples include vacation rentals, low quality properties in bad areas, college rentals, etc. Nice boring properties rented for as long as possible to decent credit profile tenants seem to take the least time to manage. In addition, treating your tenants fairly and with respect goes a long way towards keeping good relations with them; and reducing your hassles when there is an issue you need to address. And believe me — there will be issues!
It’s the nice, boring, wholly owned, in good shape, cash flow-positive properties that are the best investments. They are out there for your picking, but it’s not as simple as finding a property on the MLS and buying it.
You need to do some hard work, research, read up, and make smart, educated decisions to acquire the best real estate investments!

Author:ProfessorBaron.com

Real Estate Investing: Why Cash Flow Is King

As real estate values rise nationwide and many properties listed for sale are being fought over by investors and home buyers, it seems that, once again, investment property buyers are paying outrageous prices for properties. Anyone recall this phenomenon in 2004, 2005 and 2006?

An “outrageous price” is one that is way too high considering the cash flows the rental property can generate. These negative cash flow properties are rarely profitable investments, compared with other investment options a buyer could have chosen.
Experienced real estate investors only buy properties that are cash-flow positive — based on conservative estimates — and skip those pesky negative cash flow deals. Note that those negative cash flow properties are typically the fancy prize properties in town; you know, the location, location, location properties.

Penciling out a deal

The main reason investors keep paying these high prices is because 95 percent of them acquire properties without doing any financial analysis to determine whether the property will actually produce decent investment returns. Instead, they hope that a property will go up in value, they’ll sell it and make a bundle. Unfortunately, that scenario rarely happens.
As an example, let’s say an investor buys a $125,000 house by investing cash equity of $40,000 (25 percent down payment plus closing costs and rehabilitation costs) that generates rental income of $1,200 per month. The mortgage plus other operating expenses total $1,015 per month. So the rent less all the expenses leaves $185 of positive monthly income, or $2,220 per year. If we divide this $2,220 annual cash flow by the $40,000 initial cash investment,  it calculates to a cash-on-cash return of 5.55 percent — a pretty fair deal on a decent real estate investment.

Additional perks

Only about half of the properties in a general marketplace would generate positive cash flows and a decent, actual return such as 5.55 percent. In actuality, real estate investing is much more complicated than just penciling out your cash-on-cash return, but that analysis is a good start.
And with that nice positive cash flow, you also will get some extra return yield as a result of the amortization of your mortgage. Plus you probably will get some tax benefits and possibly some appreciation in value too.
Cash flow is king, and if you buy positive cash flow properties, you will feel like royalty each month as your bank account balance builds up and you earn wealth over the years!

From:ProfessorBaron.com

How to Make a Better Real Estate Investment

Investing in real estate has lots of risks that can derail even the best-looking deals, so you need to make sure you are addressing the known perils and doing the hard work to diminish the chances that something will go astray with your purchase. And here’s the most important part: You must start before making the purchase and continue during ownership.

Financial sense

When you buy real estate, you must make sure that it’s a smart financial decision. Rentals make sense if they are cash-flow positive and provide a fair rate of return on the invested equity. Investors should not purchase negative cash flow properties, period. If you pencil out your rate of return on a negative cash flow property, you’d probably realize it would have been better to invest your money elsewhere in an asset with better returns.

Buy a property in good shape

Skip the fixer-uppers: They almost always cost way too much to repair. Many a buyer has theorized that it would be fun and profitable to buy a property, fix it up and sell it at a profit. Rarely does this scenario come true — usually the buyer ends up losing money. This may work for a construction contractor who is experienced in estimating the costs of repair, but for the Average Joe, chances are you will lose your money.

Secure long-term financing

Make sure to take out long-term fixed interest rate financing. It costs significant amounts of money every time you finance or refinance a property, so try to do just one financing at purchase and enjoy the peace of mind knowing you won’t have to worry about interest rate changes in the future. Go long!

Review your title documents

All buyers should review the title insurance policy, schedule of exclusions, title abstract and a plat or survey of the property. Schedule an hour for your title insurance agent to go through all those items with you, in detail, so you can address any issues before you purchase. Significant issues are rare, but you have to address them before you close escrow.

Property and liability insurance

Make sure to keep the proper insurance in place and for an appropriate amount, as needed for the specific property and your specific circumstances. You should sit down with your insurance agent and discuss your complete financial and insurance picture so that if something does happen — such as a fire, dog bite, flood or slip-and-fall — your insurance company will work with you to reduce the chances it would significantly impact your finances.

Manage rentals well

If your property is a rental, make sure to secure good tenants and keep them for as long as possible. Treat them well, keep your property in good shape, address issues and resolve them quickly. You’ll make the most money with the least hassle by treating your tenants the way you’d like to be treated.
So, if you want to make a better real estate investment, the areas above are good places to start. You’re reducing the likelihood of property issues occurring that could cause you financial pain or take up an inordinate amount of your time. And if you talk to long-term investors — and you should do that, too, to pick their brains — they’ll probably have many “I learned that lesson” stories to share. It’s better to learn these lessons from other investors than to learn them the hard way during your property ownership.

Author:ProfessorBaron.com

5 Smart Moves a First-Time Buyer Should Consider

As a first-time real estate buyer, you probably have no idea how the overall purchasing process works or how to make sure you’re making a smart decision to purchase. And you’ll probably be very surprised to learn how much work it really is just to buy a home. To get you started in the right direction, and this is just a start, here are a few tips that you should consider.

Get lender-qualified and find a good real estate agent

To start off, you should get qualified by a lender to see what price range you can realistically afford and interview some real estate agents to find the right person to represent you in your transaction.
Once you’re qualified and have your price range estimate in hand, you’ll be able to spend your time shopping in neighborhoods that you can afford. But remember: Just because the bank says you can qualify for a certain amount, that doesn’t mean you should spend that amount. Make sure you can actually afford the monthly payment, along with all your other bills.
For real estate sales professionals, you should get referrals for a full-time agent or broker who sells at least five or more properties per year and is well-educated on the process and location where you plan to live. You should call references, check that the agent’s state sales license is up to date and interview them to make sure you’ll be comfortable working with them.

Make sure you plan to be a long-term owner

Once you know your price range and have looked at some properties, it’s time to make sure that you believe you can find a property that you will own for a minimum of five years. If your price range doesn’t match where you want to live, you’d be better off staying a renter and saving some additional money until you can afford where you want to live. This is because an owner really doesn’t earn any equity, on average, in a property for at least five years. That’s the general breakeven point, and you really need to shoot for longer than that as an ownership strategy. The truth is, long-term real estate ownership can be a great way to earn wealth, but short-term ownership usually will diminish your wealth.

Educate yourself

Buying property is probably the most complex, riskiest and expensive thing you will ever do. Do your homework: Talk to real estate owners, go to first-time buyer seminars, check out online material and read some books to learn what to avoid in the buying process. The more you educate yourself, the better the chances that when things go wrong — and they will go wrong — they will only be minor issues, not major headaches.

Find a nice affordable property

The real gems in real estate are the nice, decent shape, moderately priced, boring houses, town homes and condominiums that are within your budget. Most buyers stretch to purchase the most expensive property they can afford. What if you lose your job? How about saving some of your money for retirement? You want your home to be an asset you can afford, not a liability that leaves you with no additional funds over the cost of homeownership. Also, skip the fixers, prize properties or anything that sounds too good to be true: Those always end up having issues, and owners realize, after the fact, that the deal they thought they were getting really was just too good to be true!

Take your time

Realistically it should take you six months or longer to buy a nice quality property that will add to your long-term wealth. Make sure you have a full understanding of what the marketplace has to offer in your price range and that you know what you’re doing.
Those are a few tips to get you started in the right direction. Real estate is buyer beware, so try to make sure you’re one of the buyers who is “aware” of how to make quality wealth-building real estate decisions. Down the road you’ll pat yourself on the back when things work out well.

Author: ProfessorBaron.com