Sunday, January 30, 2011

Is Now a Good Time to Invest in Real Estate?

A condominium sold just the other day in Newport for $185,000. It had originally been listed for $350,000 and is assessed for $305,700. 
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Did I catch your attention? Is this exactly the type of investment you’ve been scanning the real estate ads for?

There are plenty of enticing opportunities available in the wake of the 2008 market crash. But how do you know if real estate investing is right for you, and what types of concerns and criteria should you be familiar with before you take the proverbial plunge into rental property ownership?  In this blog, I will seek to provide information to help you decide your level of readiness for such a venture, and also address some concerns you should be aware of before you buy.

First, although I’m sure most of you are already familiar with how stock investing works, I’m going to quickly go over some basic “Investment 101” points in order to illustrate a few differences between investing in stocks and investing in real estate.

The Basics: Stocks vs. Real Estate

When you purchase stock as an investment, you purchase a share in a company that pays dividends or income on a quarterly basis.  The returns may not be high, but hopefully you chose a stock that will appreciate in value so you can see two types of return on your investment: dividends and appreciation.  Investment real estate works similarly in some ways.  You take some money and purchase a property that will bring you an income stream (rental income).  But unlike stocks, which ask nothing of you after your initial investment, real estate demands that you keep an eye on it – or pay someone else to do so.  Stocks don’t break down.  They don’t leak, rust, chip, or stain.  They don’t need mowing and plowing and routine maintenance.  They don’t complain about rental increases and the other stock’s yappy dog or high heels clacking overhead… et cetera, et cetera.

On the other hand, you can improve your property and thereby increase its value, which is something you can’t do with a stock.  A stock is a stock is a stock, and you probably have little direct influence over its worth, the way you do with your property.

Some Things to be Aware of Before You Buy

When buying investment property, I urge people to exercise caution.  You should definitely have structural/mechanical and radon/ hazardous materials inspections included as part of your purchase agreement. 

Make sure that:
  • You are buying in a neighborhood that is attractive to renters
  • The apartments are not in violation of the housing code
  • The apartments are legal and registered with the city
  • That apartments built prior to 1978 have current lead-safe certificates

Additionally, you may want to consider those things that need attention right off the bat – usually maintenance items that were deferred by the previous owner:
  • Roof condition
  • Foundation/ masonry condition
  • Heating and plumbing maintenance and repairs.
  • Kitchen appliances, counters, cabinets, floor coverings
  • Bathrooms
  • Paint and wallpaper condition

These expenses should be mentally added to your purchase price. 

If everything seems to be a go at that point, then you need to think about the care and feeding of your new investment ‘pet.’  I usually sit down and create a maintenance and repair plan and schedule. There is a lot to think about when you choose to take on an investment property, and you’ll be better able to anticipate future costs if you adopt a forward-thinking approach.  

Financials

Critical to the whole process is whether this purchase makes financial sense for you.  Meet with your accountant and do a cash flow analysis for the next few years.  Make sure that you factor in vacancies, repairs and maintenance, inflation, as well as the commissions you will pay for finding tenants.

There can be significant tax advantages to owning investment property.  Under President Reagan, when Congress decided to rein in some tax code abuses, it categorized rental property income as “passive.”  At the time, this characterization struck me as a wild misnomer.  Owning investment property is probably one of the most hands-on endeavors you’ll ever take on!

If you choose a good property in a good rental neighborhood and are able to do some repairs and improvements on your own, then owning residential real estate investment property can be very rewarding.  I know plenty of people who have been able to retire on the income that their properties throw off once they’ve finally paid down their mortgages.

There’s also another pretty clear benefit to owning real estate instead of stock: real estate is something tangible.  Even if the market goes down the tubes and your house is declared “worthless,” at least you can still live in it!  The floors and walls and roof are still standing to provide you with shelter.  The same cannot be said of a devalued stock certificate.

Commercial Investments: Good Idea / Bad Idea?

Investing in commercial real estate, by which I mean office buildings, retail stores, strip malls, destination malls, and industrial space, has its own set of advantages and drawbacks.  When you buy larger commercial properties (shopping centers, office building, etc.), part of the process includes a period of due diligence.  This is a time period, usually 30 - 60 days, where you can explore all the ins and outs of the property and have a number of thorough (and often costly) inspections. 

Commercial leases tend to be long term – sometimes decades – and the leases have built in escalators to allow for increased expenses in taxes, insurance, inflation, and annual building maintenance.  These are called “triple net” leases.  While the leases can be long term, the waiting period to find a replacement tenant can be painfully long as well.  For this reason, a commercial investor needs to have deep pockets.  If you want to get into commercial real estate investment, you need to be familiar with the culture and leasing specifics around each kind of commercial investment, or hire a property manager who has this expertise.

Because of the length of time that it takes to pay off a mortgage, a friend of mine once jokingly referred to real estate investing as a “dead man’s game.” But if you work hard to find the right investment property and invest within your means, I can assure you that this will not be the case!

6 comments:

  1. Informative read about real estate investment,Real estate investments are technically a thing of the past.In the simplest of terms,it can plainly be considered as the selling,acquisition,renting out or reselling of properties.

    ReplyDelete
  2. Real estate is a long term investment, and usually a good one.

    ReplyDelete
  3. People are mostly afraid to invest in real estate at times like these. But if you look at the industry historically, the price of real estate still goes up after every bear market. The best time to buy a property is now, when you find a lot of bargains.

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