Real Estate Investment

What is with the selling market? I’ve been online looking at homes for sale in the Orlando area. The price range is low – $120,000 to $150,000 — because I’m also checking out homes for my daughter, a single woman in search of her first home.

Unfortunately, she didn’t find anything she liked before the tax-credit qualification period ran out but it isn’t deterring her. What is hindering her, though, is the presentation of these homes! It’s amazing, she tells me, that the majority of these sellers don’t take the time or make the effort to make their homes presentable to possible buyers.

What are they thinking? Even though the recent National Association of Realtors’ monthly report stated the number of homes sold in April was up (probably boosted because of the rush to make the tax-credit deadline), it is still a buyer’s market! The supply is high, the demand is low–that’s a given in any market. Therefore, sellers have to take the initiative to do everything they possibly can to make their home a value in a potential buyer’s eye. And that first step is to get them to look at their home.

There were 91 homes listed in the area my daughter is interested in. I didn’t bother looking at any that did not have a photo, nor those with just an outside view — that made me wonder, what’s inside that they may be hiding? Then there were those that I wish wouldn’t have shown the insides! What is it with bright yellow and purple walls? Yep – those were the colors in one very nice-looking-from-the-outside house. How about deep royal blue walls in the kitchen? YIKES! These may be the personal tastes of these sellers and they may want to paint their next houses these colors – but if you want your house to sell, make it neutral in color. The cost invested will be well worth it.

Another turn off is clutter. One empty house had pictures of two different rooms with what looked like nails, extra tiles and construction materials all over the floors. One empty house showed a picture of the kitchen with the refrigerator door open and a towl hanging out of it. It would only take a few minutes to take the towel out of the door and close it or pick up the construction materials from the floor. Some still-lived-in homes had so much furniture and nick-nacks it was hard to see what the room looked like.

I wouldn’t waste my time making appointments to see any of these homes. Too bad, there goes another potential buyer just because of presentation.

Sellers must understand that their home is a huge investment – one that they made and one that a buyer will make. To get the most for their money, sellers have to make their homes look attractive, presenting it in such a way that any buyer could see herself living in that house – investing her hard-earned money in that house.

Real Estate Investors

Make Your Property Manager Your BFF

I’ve talked about the necessity for having good real estate agents on your team. Another important asset to this team is the property manager. Once you’ve found good real estate agents who find properties for you to buy, you need to have a good property manager to manage the property. This person is responsible for a multitude of things, including the selling, leasing, transferring and operation of the property, and make sure all transactions go smoothly. They also oversee and manage any employees associated in the caretaking of the property. This includes leasing agents, maintenance workers and more. The property manager will oversee the work that these individuals do, address any complaints or concerns issued by the employees and take care of payroll for such employees.

If your property is to be leased by tenants, it’s the property manager’s responsibility to market the property effectively, show the property to prospective tenants, qualify prospective tenants, and complete the lease agreements. It is also the property manager’s responsibility to make sure rules and regulations of the lease agreement are followed.

Property managers must keep abreast of zoning regulations, tenant and federal laws, tax information, and property values. And keep records of all documents in an orderly manner.

When choosing a property manager, look for those who are proactive. Since the property manager is the liaison between the tenants and you, he or she should be someone who can ensure that all parties are happy. Look for someone who is sociable, who easily communicates with you and the tenants, who inspects the property frequently to make sure everything is running smoothly. If problems do arise, the property manager is the person tenants will seek out for solutions. A pleasant person is more likely to appeal to tenants.

Good organization skills are another type of positive trait which property managers should possess. A property manager who is organized is one who will be able to complete their tasks more effectively and efficiently in the long run.

With a good property manager, you, as the real estate investor, will be able to spend your time doing the investing in properties, rather than taking on the task of the day-to-day operation of the property.

Real Estate Investing

Location, Location, Location!

As part of my job as an editor for a retailing magazine, I got to attend booksellers’ conventions across the country. I learned a lot about the bookselling retail business, and one of the most important things I came away with at every seminar was summed up in three words: “Location, location, location!” In fact, the location of your store was 75 percent of how successful your business would be.

What are things to look for when searching for investment property? Renovations. Are there major renovations going on in the area? Are any planned for the future? This could be a good thing or a bad thing. Road renovations can deter a successful sale or rental of the property. However, major upgrades – like what Altamonte Springs did with Uptown Altamonte (a complete overhaul of a small park area with stores and ongoing park activities) – can appreciate the value of surrounding properties.
Check the schools in the area. Are they rated “A” or “Blue Ribbon” schools? An “A” school rating means the students are high achievers. A “Blue Ribbon” given to a school acknowledges that it is an outstanding school.

A real estate agent is not a real estate investor and may not understand what you are trying to do as an investor. That is okay, as real estate agents are there to help you buy and sell properties, not to make decisions on where or why to invest.  Once you understand the rental market in an area from talking to your property manager, you will want to get information on the sales market.  A real estate agent will provide you with data on the market as it relates to sales, but remember they are real estate professionals, not real estate investors. 

You can contact a real estate agent in an area where you are interested in buying and have them provide you with lists of homes available for purchase.  Give them the characteristics of the property you are looking for based on the information your property manager recommended. Through their electronic database called the Multiple Listing System, or MLS,  real estate agents can find properties quickly that match your criteria.  As a potential buyer, the services of a real estate agent are completely free.

A real estate agent can determine how long a property has been on the market and if their have been any recent price reductions.  A property that has been for sale for an extended period of time or has been recently reduced may mean the seller is getting anxious.  These circumstances should allow you to negotiate a lower price.   

A real estate agent must understand the local market from a perspective of buying and selling.  You should interview multiple agents and find one with knowledge of the area, command of trends in pricing, an understanding of what homes have the best resale potential, and an idea of the best areas to buy.  Your agent should also have a good attitude toward negotiating.  Some real estate agents are timid and do not like negotiating, and would therefore encourage you to make an unnecessary full-price offer.  If an agent is unable to provide this information or lacks the understanding of the market, move on to the next potential candidate.

When interviewing a potential candidate to serve as your real estate agent, ask the following questions:

1. How long have you been in real estate, and how long has your firm been in business?

2. How many real estate agents work in your company?

3.  What commission do you charge when selling a property?

4. Do you charge any additional transaction or MLS fees?

5. Are you able to take additional pictures of a property and email them to me since I am out of state?

6. How do you feel about attempting to negotiate a substantial reduction in sales price in potential purchases?

7. Where are the best school districts in your area?

8.  Are there any areas that are currently being revitalized?

9. In your area, does the seller or the buyer select the closing agent?

10. Are there any closing costs that are typically paid by the seller in your area?

11. What type of home seems to sell the fastest in your area? Get specifics, including number of bedrooms, bathrooms, area of town, and style of home.

12. Can you provide references of investors you currently work with who are satisfied with your performance? 

Real estate investors must surround themselves with the best real estate professionals possible.  In earlier posts, I discussed that a real estate investor should allow real estate professionals to handle the ‘leg work’ in the transaction. Having the right people doing this work is imperative.  Some of the professionals can work with you in multiple areas around the country, while others will be specific to certain geographic regions.

In the coming posts I will look specifically at each of the real estate professionals.  It is important to interview prospective candidates in each area of expertise before making a decision.  The end goal is to build a long-term working relationship with each of these professionals, so don’t settle for the first one you find in the phone book.  Through the interviewing process, your goal is to uncover strong knowledge in their field of expertise, a high level of professionalism, and an amiable personality. These qualities lead to a good relationship, both on the individual basis with you as an investor, and collectively as a strong team, working to make the best use of your money and time.

With each description of the team member, I will give sample questions to use when interviewing each professional.  This is just a basic outline, as you will want to ask your own questions to make ensure the candidate will serve as a strong member of the team.

Think about house prices in your area five or ten years ago.  No matter where you live, they would have been much lower than today.  In some areas of the country prices 10 years ago were half current prices (even after the large correction we have seen in the last 2 years).  This is because the value of housing appreciates over time.  This is what allows you to make real money with real estate.  When you buy low and sell high you make money!

There is no way to predict how much a home will go up in value, just like with stocks and other investments.  You can how ever analyze a market, and analyze the past and make a better decision about where to buy.    Also, in the same way the stock market can "crash", real estate values can to.  There are not safe bets in life.

First, you need to understand what makes a home go up in value.  Stocks go up in value when a company makes profits, or shows the potential to make profits increasing the demand for that stock.  Houses increase in value for two reasons, inflation and demand.  Inflation is the gradual increase in costs over time, and demand is based on the location of the home and the desire to live there.

Supply and Demand are basic principals in economics.  When there is a high demand and a limited supply prices will increase.  When there is too much supply available for the demand prices reduce to entice more demand.  Excess demand will increase prices, while excess supply will reduce prices, therefore they move inversely.

We can look at supply and demand in real estate on a small level and then expand the principles to larger areas.  Let’s say there is a neighborhood with 100 homes.  There are usually 5 buyers per year that want to move into this neighborhood and 5 people that wish to sell.  The supply and demand are balanced so the little appreciation that is seen will be based on inflation. 

Suddenly a new road goes in making this neighborhood very convenient to the downtown area where many people work.  For this reason instead of 5 people wanting to buy here per year, 100 people want to!  There are only 5 houses for sale per year and now there are 100 buyers competing for them.  The supply is still at 5, but now the demand is substantially higher.  With 100 people battling to own only 5 homes, prices will increase rapidly as they attempt to outbid each other to get the homes.  High demand and low or static supply results in increased appreciation and prices.

As the prices begin to increase other people will start to sell to take advantage of the new higher prices.  For some people, being close to downtown is not important so they will sell their homes in this neighborhood at the higher price and move to another neighborhood that is not in such demand.  This will increase the supply as more people are willing to sell their homes at the new higher prices.

Now the supply will increase as more homes go up for sale, so in our example we will say there are now 50 homes for sale.  As the supply increases to meet the demand the prices will start to level out.  Finally the price will be at a point that outweighs the benefit of being close to down town.  When this happens the buyers will move on to other areas reducing the demand.  Prices will level at a point when the supply and demand meet and return to normal levels of appreciation.  The reduction in demand, caused by potential buyers being discouraged by price, will ultimately cause prices to stop increasing.

This is the supply and demand cycle.  The supply and demand cycle is much different for real estate than it is for other goods.  If there was a product that suddenly came in demand the manufacturer could simply make more of it and meet the demand, or a competitor would begin to produce a the product to meet the demand.  In our example above there were only 100 homes in the neighborhood in demand.  No one can create new homes in this neighborhood so the only way to create more supply is for more people to sell.  The only way to motivate more people to sell is to increase the price.  The longer the existing owners refuse to sell in an area the faster prices will increase and the longer the increasing trend will last.  The market will continue to increase prices until they reach a point that motivates the existing owners to sell, or the price outweighs the benefit of owning in that location.

This supply and demand imbalance can be applied on a larger scale to the areas that had high amounts of appreciation in 2005.  Due to low interest rates and our aging population many people began buying homes in desirable areas such as Arizona, Nevada and Florida.  As the demand increased, the supply remained the same – for a while.  As prices increased some owners decided to sell their homes at the new higher prices, claim a profit and move to other states.  The areas that experienced the growth had large amounts of vacant land.  This allowed more supply to be created.  When we were talking about a neighborhood with a fixed amount of homes for sale the supply was easy to track, but when looking at a larger scale area with the option to create new homes things get a little more complicated.

The development and construction industries can take around 18 months to add substantial amounts of new inventory to an area.  When the demand for these areas suddenly increased the development and building communities started large scale attempts to add new supply to the market.  For the first 18 months they had no effect on the supply because of the time it takes to develop and build a new home. 

During this time the only way to meet the demand was to increase prices to motivate existing owners to leave.  This 18 month period was an appreciation spike seeing rates as high as 30+%.  It took a 30% price increase, in some areas, to motivate enough existing owners to sell.  They had to be motivated to sell to meet the demand imbalance in the markets.  Prices spiraled out of control.

The markets are efficient, although often slow.  Eighteen months after this all began the construction and development industry finally showed up with the increased supply needed to meet the demand.  Balance was restored to the market, and the appreciation spike stopped.  The demand remained the same, but the supply was finally able to catch up.  Some fear that prices will drop, but as long as the demand stays constant the previously reached prices are justified. 

The first thing a Real Estate Investor must do is to make contacts.  Your contacts will include property managers, real estate agents, mortgage brokers, insurance agents, builders and all types of real estate professionals.  An investor must utilize these contacts to do the “leg work” in purchasing and maintaining real estate.  The real estate investor’s job is to make a decision and an investment.

The decision on where and what to buy and the investment required to purchase the property.  That’s your only job; all other aspects of real estate should be handled by others.  Making the decisions is merely analyzing the potential properties that are presented by your contacts.  It is not the job of a real estate investor to contact hundreds of sellers and make offers or find buyers, these are the responsibility of real estate professionals who’s services you will utilize.  Many books and programs advocate the investor taking on these responsibilities to maximize the return on each deal; a true real estate investor would rather maximize the return on their time.  There are unlimited deals out there but we only have so much time, and once it’s gone you can never get it back.  A real estate investor understands their time is valuable and can maximize their return on time by letting the real estate professionals do their job and earn their fee.  A real estate investor trying to perform all of these functions themselves would be like a stock market investor trying to be the C.E.O of the company that bought stock in.  As an investor you job is to make decisions on buying and selling and let the professionals handle the other work.

Through late 2004 and early 2005 there was a considerable spike in appreciation in many parts of the country.  In some areas property was appreciating at rates estimated as high as 45%.  This unprecedented increase caused many instant fortunes to be created in real estate making many people feel ‘unstoppable’ in real estate.  When appreciation rates are that high you can buy almost any property and succeed as a real estate investor.    Unfortunately this success has lead to many people forgetting the true principals Real Estate Investing.

If I presented you with the following investment what would you think?

Purchase a property worth 200,000 for a price of 220,000 (10% more than market value) with a yearly negative cash flow of 5% ($10,000 over a 12 month period).  This may sound like a terrible investment but had you purchased this deal in late 2004 in Orlando Florida and realized 44% appreciation you would have the property for 280,000.  At this price you would regain the 220,000 purchase price and the 10,000 in negative cash flow and still profit $50,000 in only 12 months!  When even a poor choice of investment such as this can generate boasts of a $50,000 profit, it’s easy for anyone to feel unstoppable in real estate.  Had this same purchase been made under times of more realistic appreciation of only 7% the ‘investor’ would have suffered substantial losses.  As appreciation rates begin to level off it will be much more important to make wise decisions in choosing real estate investment.  For that reason I developed the Appreciation Opportunity System.

    Â Â Â  44% Appreciation  Â Â Â Â Â Â  7% Appreciation

Initial Value  Â Â Â Â Â Â Â Â Â  200,000  Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  200,000

Value in 1 Yr  Â Â Â Â Â Â Â Â  288,000  Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  214,000

Initial Cost:  Â Â Â Â Â Â Â Â Â Â  -220,000   Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  -220,000

Cost to Hold  Â Â Â Â Â Â Â Â Â  -10,000  Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  -10,000

Gain/Loss`  Â Â Â Â Â Â Â Â Â Â Â  +58,000  Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  -16,000

Even the worst real estate decision can have a positive outcome when appreciation rates are this high.  Many people who succeeded blindly under these circumstances will fail as appreciation rates return to normal levels.

Real Estate investment remains a very powerful way to build wealth.  As the market begins to level off many of the fly by night investors will move on to other things.  This will bring balance back to the market reducing the competition for investment property making it easier to find a good deal.  Real Estate fortunes are not made overnight, you should consider a twenty year plan for real estate investment.

Real Estate Investing is about owning real estate and holding it for long periods of time allowing it to increase in value.  Real Estate investing is not a full time job and never should be, that isn’t to say it can’t generate enough income that you may not need to work, but it’s never a full time job.  Do stock market investors take on full time jobs with all of the companies they invest with? No, being an investor is not about working in the business you are investing in.

As a real estate investor your job is to own the property and let others take care of finding buyers and renters and doing the leg work, like a stock investor lets the CEO and Employees of their investments run the companies.  The true power of real estate is to spend 3 to 5 hours finding and negotiating a property.  Closing on it and spending a few hours a year on accounting and tax returns while it increases in value.

If a property appreciates $20,000 a year you are earning as much as $4000 per hour – now that’s a great job!  Real Estate investing does require capital and good credit, I will talk more in later posts about how to acquire the needed capital by owning real estate (there are a few ways to buy real estate with no capital to help get you started) and how to perfect your credit profile to be able to obtain financing for your real estate investment.