2008 February (2)

Archive for February, 2008

A Million $ View…..

February 9th, 2008 Categories: In Case You Missed It---

A view of the Santa Clara River (Heritage Valley) looking towards Fillmore, CA.

How To Invest In Real Estate

February 1st, 2008 Categories: Real Estate Investment Notes

There have been thousand of books written on the subject. Hundreds of seminars conducted on this topic. Millions of people think they are experts in the field of real estate investment, some have been very successful and others have failed.

I am no different. I have some experience in real estate investment and I think it is only right that I present what I think is the “how” to invest in real estate.

Some summary items to consider.

Buy in locations that you think you would like to live. Forget the numbers. If the location does not suit you as a place to live, find another place.

Buy new. It is not a guarantee that the place you buy will not have problems but at least they are new problems and not problems that you inherited by purchase.

Buy in areas that has Starbucks, WalMart, Home Depot and Dunkin Donuts (I threw the last one in because I like donuts—-don’t tell my doctor).

Buy in locations that have a rental vacancy of 8% or less. The lower the vacancy factor the better (generally).

Buy near water. People like to be near water of any kind……lakes, ponds, rivers. It speaks highly of the life style of the area.

A look at some specific ingredients.

Buy single family homes. Make it a three bedroom, 2 bath, garage, 1400 sq. ft. home on a lot size of 6,000 sq. ft. if possible. Be especially diligent when looking at condos. When looking at multi-plexes definitely buy new.

Buy properties that sell for $ 150,000 or less. This price offers an opportunity to break even or have a small monthly positive cash flow. No guarantee but if you go through the numbers with 20% down at a fix interest rate of 6%, 30 years the monthly principal and interest will total $ 719. Add real estate taxes and insurance of about $ 300/month you are looking at about $ 1,000 per month cash out. Homeowner association dues only adds to the cost. Using these numbers the rental market of the area has to be around $ 1300-1400/month minimum with homeowners association dues; about $1,100 without HOA.

Look for a realistic appreciation rate of 60% in five years (10-12% a year) as a norm. 20% over a two year period is good but be careful because the odds are that this will be high and the market may not be able to sustain itself at this pace. If the area has appreciated 90% or more in the last five years than any purchase will be at the peak. Expect that areas real estate to decline shortly.

Limit your negative cash flow to $ 100 or less. Ideally one wants a positive cash flow but more often than not the property is good to break even or have a small positive cash flow.

Buy one property in any area. I suggest that one buy one property in different States before purchasing another. Then purchase a property in a different region within the State. Like in stocks, one wants to spread the risk.

Look at the job market and the type of jobs. Good rental areas are good job areas. After location, jobs is the number one priority of the area. Some would argue that the job market is more important than location. Both have to be looked at equally.

What is the cost of living in the area. This will impact rentals because of affordability. The main expenditure faced by people are housing cost and taxes (or fees) of all kinds and levels.

Buy in areas that have a good school system. University towns can be a good investment area.

Roadways. Transportation is vital to the growth of a community. Major roads and air terminals are pluses to consider.

Weather. The tendency today is for people to move to warmer climates. Therefore the South, Southwest, California, Nevada and Arizona tend to attract more people.

While warm weather is a consideration, cold climate areas should not be dismissed. Only recognize that people, especially as they get older, want to live in warmer climates.

A summary thumbnail listing to consider in any real estate investment are:

Location (you may have to live there so choose wisely).
Economy: cost of living; unemployment; job growth; forecast of job growth; and municipal bond rating.
Weather: number of sunny days; annual temperatures; snow and/or rain fall.
Housing: Median price range; changes in average price; utility cost. Try to buy 10-20 % below the median price range in the area. Again, buy new.
Life Quality: commute time; pro sports; arts; good schools.
Pollution: water and air.
Crime: property, violence and trends.

How to shop for an investment.

Yes the Internet is a good place to start. Visit the area. Definitely visit the Chamber of Commerce in the location that is of interest. Get the newspaper of the area. Talk to Realtors of the area (especially if you plan to have a property manager).

Timing of purchase. How goes the economy, so goes real estate.

There are five stages to a real estate market and these five stages generally occur over a 10 year period.

Characteristics of each stage:

Stage one will have limited if any appreciation; a high number of foreclosures; quite easy to find good properties and is really the time to buy. Today is stage one or the beginning of the investment cycle. Look at the foreclosure rates.

Stage two appreciation will approximate 5%; foreclosures are still high; good properties are easy to find and it is a good time to invest.

Stage three appreciation will approximate 10%; foreclosures are decreasing; good properties are hard to find. This is the start of the acceleration of real estate.

Stage four appreciation will range between 16-20%; very few foreclosures; good properties hard to find.

Stage five. Appreciation will tend to be zero. Foreclosures are increasing; finding good properties is easy. If one is planning to sell they should hold properties at this time until the market turns to the upside.

Reflections….

What I have written is but a drop in the bucket. As mentioned there have been thousands of books written on “How To…..”, and there are millions of so called experts.

Once you buy a rental property you can count yourself amongst the experts. Buy two or more and you become a guru.

Critical is that you have fun with this form of investment and have a plan in place that compliments your personality. If you find that real estate investing keeps you awake nights, sell the properties and get into something that is more suitable.