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.