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Tuesday, September 05, 2006

Real Estate Investing Survival Guide

Congratulations! Chances are if you are reading this then you understand the potential of Real Estate to
enhance your wealth...and it's true, millions of people have used real estate investing to supplement
their income, create passive streams of income, retire early or even become very wealthy. On the other hand,
real estate is often a confusing and potentially high risk endeavor IF you don't understand what you
are really doing...or worse, if you happen to fall prey to the many scams, frauds, con artists and
others that take advantage of guillable newbies.  If you have already invested in real estate or are thinking of investing, take some time to read this article first. If you enjoy it, pass it along.

A little about me. I'm probably a lot like you. I became interested in real estate several years ago and have bought/sold homes and vacant land. I am NOT a realtor or broker but I have worked in the marketing area for realtors and brokers and know a few of their less than impressive tactics...tactics that disgusted me to the point that I quickly broke off that relationship. I've also been "taken" once or twice by less than ethical brokers and have known others who were as well. All in all, I've made a nice profit despite the learning curve and dealing with a few shysters.  I've also met some incredible people in the real estate field and several who helped me along. I believe in passing it along soooooo - for those of you who are really interested in delving into this, feel free to keep reading!

First - I'm NOT SELLING ANYTHING. I won't be selling anything at the end of the article either. 
I don't have anything to sell so that keeps it simple.

Second- Use common sense. What worked or didn't work for me may or may not work for you. Every situation is different, every town and location is different.

Third - Trust YOUR Instincts but educate yourself. Do NOT leave anything to 'chance' or rely upon others to have your best interest at heart. Unfortunately, there is a lot of money to be made and where there is money, there are copy-cats, shyster, crooks and just plain ignorant people. You will probably encounter most of them at one time or another but when dealing with a large dollar purchase, you don't want to make a mistake that could cost you your financial future.

Four- Understand what you are buying AND why. This sounds simple enough but a closer look will usually demonstrate that many people don't understand what they are buying or why. Do you want to hold the property for the long term? Do you want to flip it? If you flip it are you calculating all fee's including transaction costs, realtor, vacancy, repairs, income taxed at normal rate [remember, if you hold less than a year then you do NOT qualify for capital gains tax...and it very well might bump you into a higher tax bracket!].  If you intend to hold it for more than a year, what is the rental market like in your area?

Here is a "caution" area...often potential investors rely upon realtors or others who will usually say something like "This house could/should rent for xxx per month" which sounds great...ASSUMING you can rent it at all, and assuming you do not have long vacancies, assuming you don't have any repairs due to tenant neglect or malfeasance, assuming you do all the work yourself and don't hire a property manager, assuming your taxes and insurance don't increase etc...

So, by this point you are probably wondering about numbers.  Here are a few quick examples.

Let's say you are thinking about buying a small single family home to use as an investment property. I'll use my own properties as an example so you have a "real life" situation. I'm in Florida which has been a VERY high growth area but I purchased right before the current boom.  My properties are all fairly similar so I'm just going to use one as an example. It's a 3/2 in a rapidly growing area. Built in the late 90's, about 1200 sq ft living area, on 1/4 acre subdivision very conveniently located. It's in excellent condition and new homes are still being built in the immediate area.

The PITI [principle, interest, taxes and insurance] were originally about $650 per month and I originally was able to rent it for $750 per month. The first tenants were military and broke the lease, left a few repairs but nothig major [they had a cat
which was NOT supposed to be allowed]. Meanwhile taxes and insurance went up so PITI went to about $700 per month. Vacancies in the local area began getting a bit longer so between a few minor repairs, gasoline, re-advertising etc, I was basically breaking even when I re-rented it.

Next lease was also broken and then we experienced a longer than average vacancy to find a qualified tenant. Making a couple mortgage payments resulted in a loff for the entire year but no big deal. Eventually, to fill the vacancy we had to lower the rent to $650 per month...meanwhile taxes and insurance increased to about $800 per month total.

Meanwhile, the boom has taken place and the exact same home is being built and sold for over 200% more than the price of this house....many by investors who were under the impression that the house "should" rent for $1200 a month or more. Since their base PITI is a minimum of 1k per month...they NEED it to rent for that to break even [with a property manager etc]. Unfortunately, most people who could buy--did. So there is a glut of vacancies and a glut of unqualified tenants...putting one in your home is a HIGH risk proposition. Just ask me, I did and they did over 8k in damages...lesson learned!


Now, if you had bought with the thought of renting then chances were, you were going to eventually loose some money in the short term so then you begin to consider selling. Unfortunately, if you purchased the rental for the new going rate, you would have to sell for a MINIMUM of about 10% OVER your purchase price just to get near even...realtor fee's and closing costs. That wouldn't count mortgage payments you made, down payment to take out the mortgage etc...much less any repairs or fee's.  IF you have any profit left over, then it will be taxed at ordinary income rate AND might put you into an even higher tax bracket overall. Even people who think they are making a profit are surprised to learn how little it was after everything was taken out!!

Okay, but let's say instead you decide to hold, you would be competing with people who are able to offer a lower rent cost....again, most people buy when they can so you must know what working class who rent can afford...and today, renting is VERY affordable because the market is literally flooded with "investors" who are desperate to rent out their homes to offset costs.

Here are a few facts from the US government... nearly 40 percent of homes were either 2nd /vacation homes OR investment purchases. Now, that doesn't sound to bad until you realize that over 65% of people now own their own home...it's the highest in history. So, if 2 out of ever 3 people already own their own home, and then a LOT of those people own more than one [and many own a LOT MORE THAN ONE home!!!], then it stands to reason there are a LOT of homes to choose from.  Statistics demonstrate this as according to government data, vacancies are VERY HIGH!


So, what about the so called housing shortage you hear about? Well, listen closely because it's always said very specifically...it's a lack of AFFORDABLE HOUSING!!! And what qualifies as affordable housing? By government standards its low--very low. To low for me to break even on the house in the example above and definetely far to low for the new buyer to get anywhere near breaking even.


Okay, that's it for today, sign in tomorrow for more updates. Lots of good stuff to come including making sense of mortgages, special programs for investors that you DON"T hear much about, how I bought properety for penny's on the dollar [literally...and I'll show you how to look it up to verify it AND how to do it yourself. No gimmicks!], some interesting facts about the so-called "investors" that are really pushy sales-people...and how YOU can look up what they really bought, paid and sold for property [like the guys pushing big preconstruction deals who don't own any for themselves!]....all kinds of good stuff! Be sure to check back or sign up for the feed!
 

1 Comments:

At 7:21 PM, Anonymous Anonymous said...

You seem to know alot about vacant land investing. You can find more resources on my vacant land investing blog.

 

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