Archive for the 'Real Estate Investment Notes' Category
Insurance—A Necessary Consideration for Real Estate Investments
October 25th, 2008 Categories: Real Estate Investment Notes, Real Estate News
Insurance that real estate investors should consider for rentals are listed below. By all means this should not be considered as a complete list. It is simply a “head start” to guide you in the right direction.
Of course cost is the final determination that will prevail when shopping for insurance, so shop as you find necessary and select what is required.
Just like a lighthouse land mark you want to have a safety net around your investment and your immediate assets.
Insurances to consider:
- Hazard Insurance
- Landlord’s Liability ($ 5,000,000) with Personal Injury Protection (an endorsement type of landlord’s liability).
- Dwelling/structure not covered by Association
- Wind and Flood Insurance
- Earthquake insurance
- Mold and bio-agent insurance
- Animal insurance protection
- Loss of rental income insurance
- Assessment (inadequate insurance obtained by association)
- Damage (a result of a legal liability for an event emanating from one’s unit)
- Discrimination Insurance
- Excess Liability Insurance
- Sewer line insurance (sewer line gets blocked and sewage backs up into residence or rental unit)
I also ask that if I have left something out do let me know. There may be an insurance that may be mandatory to have in specific locations (like flood insurance along coast lines).
Your comments are welcomed.
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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.
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Buy 10 Properties And Your Kids Could Get A Free Education
November 28th, 2007 Categories: Real Estate Investment Notes
You are now a proud parent looking at your son or daughter now lying in your arms and it dawns on you that they may want to go to college.
You are imaging that they may want to become a doctor, dentist, perhaps a veterinarian or pilot. To be sure schooling will be expensive.
And who is going to pay for this? Well….look in the mirror and you will see. How will you pay for this?
Buy One Property Each Year For 10 Years.
It may be quite simple. Buy real estate.
Each year for the next 10 years buy a rental property, recognizing that after every 7 to 10 years the property will appreciate about 50% and in some cases 100%. That appears to be the norm for the last 50 years and it is anticipated that this norm will continue.
Be Smart.
Purchase properties in developing areas and priced around $ 150,000. Purchase new properties. Try to limit the loan amount to $ 100,000 at 6% fixed interest, 30 year period. At this loan amount the monthly principal and interest will be about $ 600 per month.
Add approximately $ 50 per month for insurance. Estimate real estate taxes at about 2% of the purchase price (depending on State). Add 7-10% for property management and do not forget homeowner association dues which can range from $ 125/month on up.
Buy properties around $ 125,000.
With a real estate purchase of approximately $ 125,000, with 20% down per property you should be able to rent the property for most of your costs. You could end up with a small positive cash flow of $ 25-$ 50 per month. Be happy.
But circumstances may be such that you will have a monthly negative cash flow. Limit this to $ 100 per month or less.
The Good And The Bad.
Why is this good. It is good for the following reasons:
-First and foremost someone is helping you to pay off the property. You are building tangible equity.
-Your negative cash flow (if there is one) is limited
-The property is appreciating (which is what you want).
-During your ownership you will have some rental tax deductions on your personal return (limited to $ 25,000 per year).
Keep in mind that real estate appreciates about 50% to 100% every 7 to 10 years. So the math suggests that your first property could be worth $ 187,500 up to $ 250,000 in 7 years.
Keep it for 14 years and the property could be worth $ 281,250 to $ 375,000 or more. So in 14 years you will have approximately $ 181,000 equity in the first home for your child’s schooling.
Do this 10 times and your son(s) and daughter(s) education will be paid for because the pattern will be about the same for each property.
The bad side.
-Tenants move so there will be periods where you have no income from the rental but still must manage the monthly obligations.
-Tenants may damage the property.
-Mother nature may damage your property.
-You may not be land lord material. You must exam your own temperament. Can you be a landlord even with or without a property manager?
-Don’t forget future tax payments. If you sell the property the depreciation you deducted over the years will be added back as ordinary income in the year of sale unless you do a 1031 exchange (which is another story). You will also be exposed to capital gains tax of 15% if todays tax laws exist.
Be Smart. Understand the Risk versus Reward Scenario.
When looking to buy a property be sure you look all over and beyond your own State. There can be some excellent properties one can buy out of state.
But the option to buy rental properties for your childs (or childrens) education should be considered even before buying stocks or putting the money away in a bank account.
If your child (or children) don’t go to college you may elect to give them a home and set aside the other properties for your retirement. Now that would be something.
Keep in mind.
If today’s tax laws stay as they are you could move to the rental properties, make them your home for five years and possibly end up with a tax free transaction depending on whether you are married or single. Do that two, three or more times and you will have some serious savings.
Just start.
The earlier you start this saving type of plan the better off you are but it can be instituted at any time. The driving force in not doing it…..fear to act.
You do not want to later start thinking ” well I should of…….well I could of…….well I needed to…….well…” and opportunity has gone by the way side.
Think of the risk. Manage the risk. BUT DO IT!
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