Getting Started in Real Estate Investing

Michael C. Thomsett

• Publisher: Wiley
• Year: 2009
• ISBN:
  9780470480182
• Edition: 3
• Topic: Negocios y empresa
• Subtopic: Propiedad inmobiliaria

Real Estate

A MUST-READ GUIDE TO REAL ESTATE INVESTING

DURING TURBULENT TIMES

GETTING STARTED IN REAL ESTATE INVESTING

THIRD EDITION

Given the current state of the economy, you might be asking yourself if right now is the right time to be investing in real estate. With the third edition of Getting Started in Real Estate Investing as your guide, you'll quickly discover how a combination of commitment and caution can help you make it in today's market.

Designed for investors who want to get started in real estate, but don't know where to begin, this reliable resource will help you break into this fast-moving field and build equity the right way. Getting Started in Real Estate Investing, Third Edition addresses everything from selecting the right properties and becoming a landlord to using the proper tax strategies and finding the right professionals to work with. It also outlines issues you must be aware of in light of recent events, including the best ways to finance your real estate investments, considering the status of mortgage financing, and new requirements that may be thrown at borrowers.

The new edition is updated to include information on:

• Surviving in the post-bust housing market
• Picking investments with the new credit realities
• Looking ahead to future housing booms
• Reading the emerging housing trends

Written in a straightforward and accessible style—with a focus on residential and multifamily properties— Getting Started in Real Estate Investing, Third Edition also contains helpful information that will allow you to analyze your financial ability to buy and hold real estate as well as avoid potential pitfalls.

In order to excel in real estate investing, you need to start by defining what you want to do and how much risk you can afford. But ultimately, success depends on making informed decisions about where and when to invest, and Getting Started in Real Estate Investing, Third Edition gives you the tools to achieve these goals—even under the most difficult market conditions.

Chapter 1

Should You Be a Real Estate Investor?

Headline: “The big run-up in real estate values is now over.” This headline could easily have appeared in any U.S. newspaper in 2006, 2007, or 2008. But, looking back over time, the same pronouncements were made at various times in the 1970s, 1980s, and 1990s. Real estate values change every few years, and the cycles are continuous. The big difference in the cycle that began a downward spiral in 2006 was that additional economic conditions aggravated the situation. These included liberal credit, widespread speculation, and predatory lending practices. Making matters worse, big financial institutions jumped into the speculative trend, investing billions of dollars in mortgages through formalized programs.

You have probably seen and heard the bad news for yourself. Foreclosures are up, housing prices are falling, and the number of homes on the market is higher than ever before. Adding to the problem are “experts” on television financial programs, some announcing that the housing crisis will last another two to three years. In fact, however, no one can really illustrate the market cycles that way, and financial news programs thrive on bad news. Unfortunately, this only makes things worse because audiences become increasingly afraid when they hear the endless streams of negative forecasts.

Key Point

Endlessly hearing bad news affects investors and adds to their apprehension. Remember, however, that when things sound the gloomiest, it is the best time to buy.

The downtrends always end, and the market always turns upward. But, knowing how long it will take can be very difficult because so many factors influence the timing of every cycle. Wherever the market is at this moment, it will be at a different place next year; and, in the future, the pattern will be repeated.

The uptrend cycle is also interesting. Once real estate cycles turn around, the same doom-and-gloom experts will tell you that you have missed the boat and that you should have bought last year. These experts fail to realize that, with real estate, even when you have missed the latest boat, there will be as many “boats” coming in the future as you have missed in the past—if not more. Real estate is not a one-time opportunity, as it is made to sound on financial programs. Many factors—shifts in the job market, population growth and migration trends, regional desirability, and economic factors like interest rates—all mean that real estate opportunities occur not just once, but repeatedly and in very predictable cycles.

The many advantages of owning real estate are difficult to beat with other forms of investment. Real estate comes with the usual investment risks, but some very special risks related to real estate should also be kept in mind when you compare it to alternatives. With real estate, you gain tax advantages and direct control over the asset, and attain the ability to borrow money to purchase a property without being taxed on the money borrowed. (In fact, by refinancing, it is possible to keep your capital working while you still own the property.) In exchange for these advantages, you need to buy an expensive property, place yourself in debt, and in most cases, be unable to get your cash out through a quick sale. You also cannot sell part of your investment as you could stocks or shares of a mutual fund.

Real estate provides you with a combination of benefits and control. You can influence the value of a property with landscaping, roofing, a new coat of paint, and interior design, for example. When you buy stock in a corporation, it does not give you the right to go to corporate headquarters and sit in on management meetings, and you cannot own the specific assets represented by your shares. Stock ownership gives you a portion of ownership in an intangible unity called “equity,” which collectively owns the company and appoints executives and managers. This is an important distinction.

real estate

land and all permanent improvements on it, including buildings.

One of the risks that many first-time real estate owners do not consider is that if you become a landlord, you will have to interact with tenants. This means that they may call you in the middle of dinner or while you are trying to watch the game on Sunday. These problems keep many would-be investors out of the business entirely. But, with careful screening of applicants and by the proper use of a telephone answering machine, you can achieve a relatively comfortable balance, while still acting as a responsible and fair landlord. All you really want as a landlord is a tenant who will pay the rent on time and do a reasonable job of caring for your property.

rights

intangible assets added onto real estate, which have value not because of the land itself but because of the advantages these rights provide.

Looking beyond the potential problems of dealing with tenants, the potential gains from investing in real estate make it worth a serious look. Let us begin by establishing a few important distinctions. Real estate is land plus permanent improvements, which most often means buildings. You may also become involved in the rights attached to the ownership of real estate, broadly called real property. Also be aware of the important difference between the full value or price of real estate, as opposed to equity, which is the portion you own after deducting debt. Equity is the purchase price (or current value of the property) minus all outstanding debt balances.

real property

real estate plus the rights attached to it, such as leases, easements, and estates.

Should You Buy Real Estate?

The pros and cons of owning real estate help you not only to understand the breadth of this market, but also to decide whether the market is appropriate for you. A checklist of points to consider:

Positive Attributes of Real Estate

1. Direct control: It is up to you, the owner, to maintain and improve your real estate investment. You do not have this kind of control in any other type of investment.

2. Monthly income: Rent income pays all or most of your mortgage. This means that tenants pay your debt and that, as market values increase, you benefit.

3. Tax benefits: Real estate is the only investment in which you are allowed to deduct annual losses. You are allowed to deduct property depreciation, as well as interest, taxes, utilities, insurance, and maintenance expenses.

4. Historical returns: Although real estate cycles can last a while and markets can be tough, historically, returns from real estate have been better than in any other market.

5. Insurance: Real estate is one of the few investments that yields monthly cash and is insured. Through your casualty insurance plan, you are protected against fire, liability, and other losses.

Key Point

Check positive and negative attributes of any investment to identify risks and rewards of the decision.

Negative Attributes of Real Estate

1. Landlord issues: When you work with tenants, you are likely to experience some problems. Tenants can be demanding and, in some cases, they may even do damage to your property. Some investors are well-suited to take on this risk, but others are not. It is wise to know in advance how you feel about working with tenants. It also is imperative to check references carefully to make sure you get the best possible tenants.

2. Cash problems: Whether or not you have tenants who pay their rent, you have to pay your mortgage every month, as well as insurance, taxes, and utilities. So, extended vacancies or, even worse, having tenants who do not pay rent on time will negatively affect your cash situation. If your personal budget is not strong enough to carry you through a vacancy period, you could face problems with your investment.

3. Market conditions beyond your control: Cycles vary not only by duration, but from one region to another. These factors are unpredictable. So, as a real estate investor, you have to be willing to go along for the ride, no matter how long it takes or how many twists and turns are going to be involved.

4. Financing restrictions: As a homeowner, getting financing is relatively easy compared to getting investment property financing. You may be required to make a larger down payment and pay higher interest, as well as other loan fees. You may also be limited in the number of investment properties you will be allowed to finance. Lenders are going to be concerned about your personal financial strength and ability to continue mortgage payments, even if you have vacancies in your investment properties. In addition, to succeed as a real estate investor, you are going to need exceptionally strong personal credit.

equity

the portion of real estate you own. In the case of property bought for $100,000 with a $58,000 mortgage owing, the equity is the difference, or $42,000.

Real Estate as a Growth Fund

speculator

an investor who buys property with the goal of earning the greatest possible profit in the shortest possible time.

Some investors buy real estate for the long-term appreciation and tax advantages it provides. In comparison, the speculator is an investor who attempts to make the greatest possible profit in the shortest possible time and is willing to take higher risks than long-term investors because short-term profits will be much higher. Speculators often are accused of being opportunists in the market, but that characterization is not always accurate. The speculator is simply taking a different approach to investing. The same distinctions can be seen in the stock market. Some investors buy long-term growth stocks, whereas others try to guess where short-term price run-ups will occur. In all such instances, speculators chase after higher profits, but they also assume considerably higher risks. With that in mind, some long-term investors believe that speculators often do not achieve as much in the long run because real estate, by its nature, is a long-term investment. Both approaches have their good and bad features. Consider the following examples, which compare two investors who each have $50,000 to invest.

Key Point

Decide ahead of time if you want to get into the market as a long-term investor or a short-term speculator. This will affect how you invest.

Example

Karen invested $50,000 as a down payment on a $160,000 triplex. Her rents more than covered her mortgage payment, and she held onto the property for eight years. At the end of eight years, she sold the property for $235,000, realizing a capital gain of $75,000. During the holding period, she enjoyed positive cash flow and tax benefits and, upon sale, she earned a profit on the investment. Mortgage payments and other expenses were covered by rent receipts.

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