Real Estate Fact & Fiction

These days, just opening the mail is an adventure. Within the jumble of million dollar sweepstakes, invoices, court papers, and rent checks, I’ve been delighted to find letters from my readers. Many of your comments and questions lead me to the conclusion that common knowledge about real estate investing is, well, commonly wrong. This article will dispel a few common real estate myths.

Not Location, Not Location, Not Location

Q: “The key to real estate investing is location, location, location. Where are some good areas to look for investment properties?”

A: The idea that the key to real estate is location, location, location, is perhaps the most widespread myth in real estate. Location is a factor in determining property value, but a profitable transaction is determined by cash flow or equity.

When examining potential real estate investments, always use cash flow and equity as your measuring stick. Equity is the difference between the property value and the sum invested. If you purchase a $10,000 property that will be worth $45,000 after repairs of $10,000, the equity after repairs will be $25,000. Cash flow means residual or “passive” income. One may agree to pay retail, or even more than retail, if there is a substantial cash flow.

In any neighborhood, if you can realize equity or cash flow then you can create profit. While novice investors battle for deals in trendy areas, savvy entrepreneurs can avoid competition and create profit in any area. For example, several parts of my native Baltimore are notorious for crime. Novice investors call them “bad” neighborhoods, but good people also live in “bad” neighborhoods. In one such area, I contracted to purchase four row homes from a retired police officer for the wholesale price of $25,000. The package was worth about $80,000, but seller’s aversion to the area was motivation enough for him to “cut ’em loose.” Within three days, I sold the package to another investor for a $25,000 profit.

Note: when looking for potential cash flow or equity, always consider highest and best use of the property. Sometimes a residential property could have commercial value; a home could be converted to an office, a rooming house, or it may be more valuable to a neighbor than it is on its own. An overpriced residential property may also be a bargain commercial property!

Buy Low, Sell Low

Q: “I’d like to create a lump sum of cash, but if I’m afraid that if I contract to buy a building, and I can’t sell it before closing, I’ll have to buy the building. How can I find buyers?”

A: Finish this sentence: Buy Low, Sell _____. Most people say, “Let’s price it high, we can always come down,” but in the meantime they turn away potential buyers, and incur carrying costs such as taxes, insurance, and liability. Don’t do it!

Years ago, my father Charles introduced me to his “$100,000 Real Estate Formula” which says, “Buy low, sell low, and do it often.” At only $10,000 profit, ten transactions generate a part time income of $100,000.

The formula offers several benefits. Obviously, discounted property sells faster. Instead of waiting for the top-dollar profit and inuring holding and opportunity costs, you can actually earn more by making smaller amounts over and over. Moreover, by leaving profit on the table for the next person and being fair with others, you will create a good reputation and repeat buyers. Not only is it less expensive and more efficient to transact with repeat buyers, buyers who profit are potential partners for future deals. When you help others, you help yourself!

The Market? Which Market?

Q: “With the financial crisis and the doom and gloom surrounding the real estate market, how can one still make money in real estate?”

A: Too often, agents and novice investors blame their real estate shortcomings on an uncontrollable force they call “the market.” They throw their hands up and say, “It’s a buyer’s market, sales are down.” The next time you hear someone complaining about “the market,” consider asking, “Which one?”

As a buyer, creating real estate profit is always possible if you look in the right market. Most novice real estate investors use the same sources to locate real estate sources: the newspaper, real estate agents, and banks. Why compete with novices who will pay too much? Avoid the competition and find bargains by focusing on untapped real estate markets.

The reality is that there are dozens of real estate markets. For example, there is a land market, a commercial property market, an absentee owner market, a market of expired listings, vacant property, tax sale property, auction property, pre-foreclosures, property with housing code violations, with non-paying tenants, there are geographical markets, and these are only a few of the fifty plus markets for income real estate.

Regardless of interest rates, property that is priced right and marketed property will sell. Likewise, if you’re looking in the right market you will always find real estate bargains. Instead of gathering at common investment watering holes, explore markets where the fruit is yet unpicked.

Most Important Real Estate Tips

Real estate property investments are a risky field. Many people claim they have the smartest advice for making it a profitable venture. Most of these statements are just false beliefs and will not benefit your money in the future. Here are some advice that actually work and every investor must take note.

How Much Experience

One doesn’t need extensive financial experience to invest in property. Many blue collar members think they cannot handle investing in real estate because of their lack of experience. But all one actually needs is a practical business sense and self-assurance when making deals with a mortgage broker or loan officer.

Connections

Even if you do not require financial experience, it aides to have peers or contacts in the real estate business. These contacts can link you with more authentic or experienced people in real estate or offer tips on how to manage the market. Though some may not agree to help, a good percentage will be more than willing.

How Much a Person Should Know

Another misconception is that one needs to know much about real estate prior to investing. Opposing this well known belief, many individuals start out with a fundamental or slight understanding of the market. After all the information gathering is finished, experience is still the best teacher.

Taking that Big Leap

It is not always smart to play it safe. Many beginning investors would rather spend on tiny properties. Truthfully, it’s more worthwhile to take a risk on something with large promise. The greatest thinkers and inventors in the past were believed to be fools during their time. Just like them, you will have to live dangerously to enjoy the advantages of your investment.

The Cash Required

One does not need to be rich to spend on real estate. Although most major players have acquired enough wealth, most of them engaged in risks with their money. A business venture is always a risk. Either you profit or you lose some.

Venturing into finance is different from setting aside money for your personal property. Distinct from savings, investments enable with you profits which let you pay back your mortgages. Cash will be spent but you’ll have means of earning it back.

Top Ten Real Estate Tips

One of the questions that I get asked a lot is “What is one real estate tip that you would give to a new landlord”? That’s a great question. So I checked in with several seasoned real estate veterans that own and rent apartments and homes in the Atlanta area to get their opinion and give you the “Top Ten Real Estate Tips for Landlords”.

  1. When screening tenants, be firm but friendly. Make sure you screen them hard. Don’t let them move all their friends & family in with them.
  2. Complete repairs in a reasonable time frame which keeps tenants happy and they will stay in your apartment for a longer time which reduces your turnover which has a positive impact on your bottom line.
  3. First of all I’d say buy the right property! If you buy for too much, or if you buy in an area that it is difficult to get good tenants, it is a downhill battle. Once you have bought the property… spend the money up front and get the place looking good, so it shows well, and you increase your chances of finding good tenants quickly. Once the tenants are in, if you are managing it yourself, have some sort of regular contact with them.
  4. I would advise ordering a credit report when they apply. You not only learn a lot about the tenant’s credit history, but you are also double checking the social security number. If you ever have to evict them and you get a judgment for the money they owe you, you know the social security number is correct if you want to send it to a collections company and try to collect on the judgment. That is one tip I don’t hear mentioned often, probably because not many people go after them. But it is something we are working on doing to see if it will pay off!
  5. Take action and actually buy the first property. I wish I had started investing years earlier.
  6. Put your properties in trust so that you can honestly tell your tenants you are not the owner of the building. This way you are the property manager. who has to get permission from corporate for everything. For example, one of the tenants wanted new carpet. That was going to be expensive. I said, “Let me see what the office says”. I went home asked my husband and he said “Hell No!” I went back and said it wasn’t in the budget. As owner they all think you have all the money in the world and get resentful. As property manager you are just another working stiff like them. Any hard feelings are directed at “The Man” rather than you as an individual.
  7. Notify the tenant as a common courtesy before you enter the property for maintenance, repairs, or inspections. Many states require at least a 24 hour notice.
  8. File your dispossessory early and take advantage of consent judgment payment plans.

9 Avoid bad neighborhoods – i.e., communities in great disrepair, with lots of crime and lots of vacancies.

  1. Work hard to provide a safe and secure rental property. Take a good look at your property and assess the situation. There are a few easy steps you can take like upgrading the lighting and trimming shrubbery. If a security light goes out, get it replaced that day. Don’t let your tenants and property be an easy mark for a criminal. Assess your property’s security and take reasonable steps to protect it. Often the best measures, such as proper lights and trimmed landscaping, are not that expensive.

More millionaires made their fortune investing in real estate than in any other form of investment. There are many methods of making a fortune in real estate investing. Regardless of the method that you use to build your fortune in real estate, you need a solid business plan to use as your road map to success. You can purchase the business plan I used to build a multi-million dollar real estate business.