Monday, July 30, 2007

Buying LAND...Advantages & Disadvantages

Ever thought about buying land as an investment? A favorite saying in the real estate industry is, "Location, Location, Location," known as the 3 L's of real estate. The location of real estate will dictate it's value more than any one factor.

I've mentioned on more than one occasion, that God isn't making any more land here on earth. There is a finite supply of land that we can build on, and the population is growing exponentially. This is a very good thing for the land investor but is it the right investment for a novice investor? Here is a list of advantages and disadvantages to consider when buying land:

Advantages:
1)
Supply & demand will always put upward price pressure on land.
2) The cost of land is relatively more affordable when there are no improvements, (structures built on the property), on the land.
3) Due to the relatively lower cost of land, expenditures like Property taxes, and all around maintenance are less.
4) Unlike Rental property, you'll never have to worry about finding tenants, have to evict anyone, or worry about city regulations that could restrict your income.
5) Choices. You can buy land in varying sizes, from several thousand square feet to acres. You may not have enough money to buy or build your dream home today, but you may be able to afford and secure the land you'd like it to be built on in the future.

Disadvantages:
1)
You will not have immediate cash flow from the purchase of land. Profiting from land could take years. If you need investment income now, rental property would be a better investment choice.
2) Geological surveys can be expensive and are recommended to ensure your land is free from any condition(s) that would make it unsuitable for development. Conditions like earth fissures, chemical contamination, flood zone status, to name a few, can have an adverse effect on the value of your land and your ability to sell it.
3) Zoning. City government can step in at any time and re-zone the land for a different use. If you bought land for future residential prospects, you may find that your land in now zoned for commercial use. This may or may not adversely affect your land's value.

Saturday, July 28, 2007

What is a REIT? The Advantages & Disadvantage of owning them

What is a REIT?...you may ask. REIT stands for Real Estate Investment Trust. Defined as a corporation or trust that uses the pooled capital of many investors to purchase and manage income property (equity REIT) and/or mortgage loans (mortgage REIT). REITs are traded on major exchanges just like stocks. They are also granted special tax considerations.

Advantages:
1)
Liquidity... unlike traditional real estate, REITs can be bought and sold like stock.
2) Most REITs pay dividends quarterly. A well run REIT can provide consistent income without having to lift a finger. This is perfect for the investor who doesn't have the time to manage his or her own property.
3) REITs offer ownership in not only residential property but other real estate such as malls, hotels, commercial and industrial property.
4) Like stocks, REITs value can increase substantially.
5) Buying REIT shares/units requires far less capital than traditional real estate.

Disadvantages:
1)
Like stocks, REITS value can decrease substantially.

Friday, July 27, 2007

Condominium Advantages and Disadvantages

Not interested in the SFR or Multi-Unit investment? Buying a Condo might be right up your alley. Basically, a Condo is an apartment like dwelling that you can own.


Advantages:
1)
Very low maintenance requirements (the Homeowners Association [HOA] dues cover the majority of maintenance in the building).
2) Typically are less expensive making for a more attractive entry point for the first time investor.
3) Utility costs like water and gas are often included in the HOA dues.
4) Can have comparable market appreciation in a seller's market.
5) Views are more likely due to multiple floors (penthouse for example), thus adding value and appeal.
6) Smaller square footage available. This may appeal to elderly tenants who want to keep the amount of house they have to clean to a minimum.
7) Some Condo buildings offer concierge services comparable to some fancy hotels.

Disadvantages:
1)
People do relate Condos to apartments thus reducing their appeal to many.
2) HOA dues can be very expensive. This adds to the investor's overhead.
3) The square footage is typically on the low side when compared to a home. Large families do not favor Condos over the SFR. This reduces the marketability of your investment.
4) Parking is limited. A Condo is likely to have Tandem parking due to space constraints. This can be a major inconvenience when you have to move your car so the other vehicle can get out.
5) Privacy can be a big issue. Since you share walls with your fellow Condo owners, you will hear the sounds of daily living coming through the walls. Homes (SFR's) offer much more privacy
6) Neighborhood congestion is more prevalent in condominium communities. The density of units in the neighborhood can sometimes make it impossible for friends and family to find a parking spot on the street. There is also data that suggest that there is an inverse relationship between population density and crime. The more dense an area, the greater the crime rate.

Weigh out the Pros and Cons and decide for yourself if the Condo investment is for you. In my opinion, the SFR is the better investment.

Sunday, July 22, 2007

Advantages & Disadvantages of owning Multi-Unit property

Multi-Unit properties can be a Duplex, Triplex, Quadplex or Apartment building.

NOTE: Let me just say this upfront, I am not a proponent of multi-unit properties. Many investors, usually very seasoned, find them substantially beneficial to their real estate portfolio. My experience has found them to be a headache at best but they do have their advantages. I believe REITs are a better way of dealing with multi-unit properties, (I'll get into REITs in a future post), but here are some advantages and disadvantages:

Advantages:
1) If you keep it long enough, it's equity will rise especially if you pick a great location.
2) There are substantial tax benefits to owning multi-units (very similar to the SFR rental benefits).
3) Greater land appreciation potential due to the typically larger land footprint (when compared to the SFR).
4) You can live in one of the units and have the tenant's rent cover the mortgage for you (thus living mortgage free with respect to it coming out of your pocket).


Disadvantages:
1) Typically, the Multi-Unit property will be far more expensive when compared to a SFR in the same neighborhood. This can be cost prohibitive for most beginning investors.
2) With a SFR, it is not uncommon to have the tenant take care of the yard, but the multi-unit property is a different beast. Your tenants will expect you to keep the yard well maintained, and this can be an expensive part of your overhead... ranging from hundreds of dollars a month to thousands depending on the size and complexity of the landscaping.
3) Types of tenants: In my experience, tenants who seek multi-unit dwellings can differ from tenants who seek a home in the following ways: Multi-unit tenants tend to be more nomadic (more likely to stay for shorter periods of time). Income levels tend to be less than those seeking a home. Credit history is often sub par which may account for them not being home buyers. Education levels and how that relates to income can have an impact on what the tenant is able to pay, thus making them more likely to rent an apartment than a pricier SFR. You are more likely to have to evict an apartment renter, in my opinion and experience, than someone renting your SFR.
4) Rent Control: Many cities enforce what they call Rent Control. When you own a multi-unit building, the city will actually restrict how much you can raise the rent each year (usually restricted to 3% per year but can vary city to city). This is a terrible thing for the investor because you are now limited on how much of a return you can make on your investment.
5) Systematic Code Enforcement: Many cities impose this on owners. The city basically inspects your properties every year and can fine you for problems they find whether you knew it was a problem or not. This can really add up and cost a bundle to remedy.
6) To evict or not to evict.....Many cities will not let you evict a tenant unless you can prove they have not paid their rent with substantial notice to cure the breach of their contract or prove they are involved in illegal activities. Other than the fore mentioned, you could be responsible for up to $10,000 in relocating costs and you still can't raise the rent when the new tenant takes their place! Talk about BIG government in our business....that is just ridiculous...which is why I sold all my multi-unit property.
7) Property Management is almost a must with multi-units unless you're retired and have the time to manage them yourself. Management companies can charge up to 15% of the rent plus other fees leaving you with yet another expense which will reduce your net return.

Author's Note...

I'm sorry I've been away from the keyboard so long, but I've been very busy with several projects that have commanded much of my time. I'll try my best to post more frequently. This "Blogging" is far more time consuming than I had anticipated.

I want to thank all the readers for the positive feedback. I'm glad to hear you find the blog informative, useful and educational in just the several posts to date. That was and will be my ongoing goal.

Monday, July 16, 2007

Advantages & Disadvantages of owning the SFR

SFR (Single Family Residence): In my opinion, this is the best investment you can add to your portfolio.

ADVANTAGES:
1) You can live in it and enjoy home ownership.
2) You can lease it out to tenants for added income.
3) It can be flipped for a quick profit.
4) It can qualify for a long term capital gain (taxed at 15% if you own it for more than 12 months).
5) You can defer taxes using the IRS's 1031 exchange (I'll explain this in future posts).
6) You can receive TAX FREE profits of up to $500,000 if you're married, and $250,000 if single when the property is sold.
7) It can be left to family when you pass away tax free assuming the Estate falls beneath the Death Tax threshold (I'll explain this in future posts).
8) You can depreciate it....reducing your taxable income and write off all expenses incurred while using the property as a rental.
9) It offers a great return on your investment. The value of Real Estate will more than double every 15 years
10) You can pull money out of a property that is worth more than you owe (a Home Equity Line of Credit or HELOC).

DISADVANTAGES:
1) Maintenance is required to keep your property in good condition.
2) You will have to pay Property Taxes and insurance.
3) If you pick bad tenants, you may need to seek legal assistance to evict.
4) If you have a mortgage, a vacancy can cost you monthly until it's rented out.

There are many more advantages and disadvantages to owning a SFR, but in my opinion, the advantages outweigh the disadvantages.

In my next post, I will go over the advantages & disadvantages of the Multi-Unit property (Duplex, Triplex, etc...)

Friday, July 13, 2007

Types of Real Estate

When your credit is where it should be and you have a little money in the bank, it's time to decide what type of Real Estate you want to invest in. For the first time investor, that can be a daunting decision.

Types of Real Estate:
1) SFR (single family residence)
2) Duplex (2 units in one building)
3) Triplex (3 units in one building)
4) Multi-Unit ( 4 or more units)
5) Condominium
6) Townhome
7) Commercial
8) Land
9) REITS (Real Estate Investment Trusts)
10) Mobile / Trailer

The advantage and disadvantage of each will be discussed in my next post.

Thursday, July 12, 2007

How much house can you afford?

It is important that you invest within your means. The following link, http://www.bankrate.com/brm/rate/calc_home.asp , will provide you with the necessary calculator to determine just how much house you can afford.

Wednesday, July 11, 2007

Your Credit Score and Bank Account

90% of the largest U.S. banks use FICO scores. When you buy Real Estate, you will most likely seek a loan from a lending institution. Your FICO score is your credit rating. It's basically your Credit History Report Card and it follows you wherever you go.

On the low end of the FICO score range is 300 (bad credit falls between 300 - 600). On the high end, 850 would be perfect (excellent credit falls between 750 - 850). Average to good credit falls between 600 -750. Banks look at your FICO score to determine whether you are credit worthy. If your credit score is too low, you will be most likely declined for the loan. If your FICO score is high, you will not only qualify for the loan but will be rewarded with a lower interest rate. Lower interest rates can save you tens of thousands of dollars over the course of a loan.

FICO scores are calculated based on your rating in five general categories:
Payment history - 35%
Amounts owed - 30%
Length of credit history - 15%
New credit - 10%
Types of credit used - 10%

Lenders will give you preferred loan terms if your credit score is high. Good credit may qualify you for a low down payment, and if your score is in the 800's, they may not require a Down Payment at all. You can actually get a loan with NO INCOME VERIFICATION if your credit is outstanding. Excellent credit is the most powerful tool you'll have in the Real Estate game.

Have poor credit?......all is not lost, just fewer options. Sometimes, your credit score doesn't give an accurate picture of how responsible you are. Maybe you went through a divorce, and the Ex-spouse was the irresponsible one. Maybe you went through a health crisis, or a death in the family. Banks know bad things happen to good people. It is very important that you continue to pay your current bills on time and re-build your credit history if you want to be a success in Real Estate.

Money in the bank- If you're a good saver, you may offset your credit challenges with a substantial down payment. Lenders are primarily concerned with one thing when they loan you money........"Is the home worth more than we are lending you". If the answer is "yes", you have a good shot at securing a loan. People with average to poor credit, can expect to pay 20% of the purchase price. This gives the Lender a comfortable equity position in your property should you default on the loan. The more money you can put away in the bank each month, the greater your chances are to meet the down payment you'll have to pay to offset your less than perfect credit.

Tuesday, July 10, 2007

Why invest in Real Estate?

God isn't making any more land.....two-thirds of the earth is covered in water.....and our population is growing exponentially. How's that for an answer? Now that I have your attention, there are many more reasons why real estate will most likely be your single best investment you'll ever make. Lets look at one fact that makes a good case for making real estate your first investment choice. Did you know that every 15 years the cost of goods and services DOUBLE! Remember when gas was 30 cents a gallon in the 1970's, then 60 cents in the 1980's, $1.50 in the 1990's and now in 2007 we see prices over $3.00 a gallon. Whether it's College tuition, cars, or Real Estate, the doubling effect has been a fact of history.

Real Estate, however, has been known to double in 2 - 3 years in a seller's market. The strategy you must learn when buying your first piece of property is WHEN TO BUY. Learn this, and you will be quite successful. Fail to learn this, and you'll put yourself in the poor house. I will explain the strategy in greater detail in future postings.

In tomorrow's Blog, I'll get into how much money you'll need to start investing and how your credit score can save you thousands of dollars or cost you thousands when you're ready to buy.

Monday, July 9, 2007

Warning for new investors...beware!

Have you ever stayed up late and watched a Real Estate Info Commercial? There are many out there that guarantee you can buy property with no money down or bad credit. They often suck you in with promises of getting rich without using any of your own money. They'll then convince you to spend $300 on their Audio Cassettes or DVD that will show you how to achieve this remarkable feat. DON'T FALL FOR IT! They're in the business of separating you from your hard earned money. Most of the information in their literature isn't even relevant to the Real Estate laws in your state. What about the money back guarantee you say...These companies know that 95% of their buyers will never take the time and effort to send the tapes back. Shipping and Handling, (which is usually non-refundable), for those programs can exceed the cost to produce the Real Estate Guru's tapes (so he has already made a profit even with a refund......how do you like those apples?).


The point is, nothing worth having comes easy but with the right information you can succeed. In tomorrow's Blog, I will give you the first of many pieces of the puzzle that will help you successfully get your very first piece of Real Estate.

Sunday, July 8, 2007

Welcome to the life of a Real Estate Investor

Wherever I go, I inevitably get into conversations with strangers about what I do for a living. Maybe it's the vehicle I drive, or that I'm working out in the Gym in the middle of the day, but the question will be asked, "What do you do?" After literally spending hundreds of hours over the years telling people what it is that I do and how I do it, I've decided to create this Blog to give people insight into the world of Real Estate Investing. I hope you, the reader, will find it educational, entertaining, enlightening, and useful in your quest to increase you net worth through Real Estate investing.