Real estate investment has provided many investors with positive cash flow, tax benefits and the satisfaction of making an impact on other lives. However, like any investment, real estate has intricate nuances and market trends that, when ignored, can cause an investor tremendous heartache.
Unbelievably, many first-time investors and even seasoned investors are willing to part with their hard-earned cash without taking the time to really study their investment. They rely on traditional trends and gut feelings. Before you risk your investment, take the time to learn all you can about your particular real estate market segment. By aligning yourself with the right professional and applying these 13 tips you can ensure an excellent return on your investment.
1. Determine Your Time Need – Cash flow, capital appreciation, tax benefits, loss of management, equity pay-down and pride of ownership are just some of the things that need to be addressed before you make that investment. A service-minded real estate professional can be a tremendous asset by taking the time to evaluate your needs and making sure you’ve got all your bases covered.
2. Use the Current Tax Laws to Your Advantage, Ask about or research the laws that can assist you. An example would be IRS revenue code 1031. It is an IRS code which allows the seller of a commercial/investment property to rollover the gains and loan down payment into a "like-kind" investment and defer the tax consequence. This exchange has helped our clients preserve their wealth and continue purchasing more investment properties.
Another example would be the changes in capital gains rules regarding the sale of your primary residence. It used to be that you had to rollover your equity into a new home or take a one-time exclusion if you were over 55 years of age. Now the requirement is you need to live in the home two out of the last five years. This means that you can convert a current residence to a rental, hold it for two or three years and sell it tax free. This can be a strategic advantage in your plans to acquire property.
3. Check the Numbers – Claims of extremely high rates of return run rampant in real estate investment. Don’t get caught up in the excitement – check everything: rents, payment history, taxes, expenses, deposits, future modifications…everything! Make sure you have the right agent. Having the right agent is like having a good insurance policy. It helps you catch all the seemingly insignificant but very important details.
4. Remember You’re Buying a Business – Owning investment property carries great potential for creating wealth and some potentially difficult decisions. Evictions, re-investment into the property and time management all need careful consideration. Remember this is not a "hands-off" business.
5. Avoid Negative Cash Flow – Property that eats cash every month can drain your working capital. This creates stress and frustration. Predicting constant appreciation is extremely difficult if not impossible for the unseasoned investor. A strain on your cash flow may cause you to sell the investment before the benefits of ownership are ever realized. Low interest rates and increasing rents have made it easier to receive steady cash flow. Multiple units, from 5 and above, normally provide a greater cash flow because the value is based upon the income that the property generates. The value is not based on intrinsic or emotional values that would be found in a single family detached home.
6. Always Perform Thorough Inspections – Look under every rock! Hire a professional inspector. Ask tenants about pest problems, structural damage or any type of recurring problems. It is essential that nothing is overlooked. An experienced value-driven real estate professional will help you find the right inspector and can help you avoid costly mistakes. When investing your hard-earned money, be sure to use sound business judgment!
7. Have Adequate Insurance- Investment property brings liability. Tenants, cars, parking lots, property liability – the list that increases your exposure to liability is quite extensive. Adequate insurance coverage is an absolute must. Be sure to consult with an insurance professional and protect your hard-earned assets.
8. Inspect, Approve and Confirm All Documents – The list of documents that need to be proofed can be overwhelming to the first time investor. Building permits, zoning laws, rental and lease applications, health licenses, insurance, the list goes on and on. Don't attempt to do it alone. The right professional can remove most of the stress and bring the transaction to a conclusion smoothly.
9. Get a Bill of Sale for All Property Involved – Many types of personal property (appliances, furniture, fixtures, etc.) can be involved in an investment sale. Be very detailed and know who owns what. You don't what to close escrow and find what you bought was not what you bargained for.
10. Select Qualified Good Tenants From the Start – Take the time to check references. Previous landlords, employers, financial references, credit and judgments are all vitally important. If there are any questions, investigate fully. A little work upfront can save tremendous problems later on down the line.
11. Get Estoppels – Get letters from tenants confirming the status of tenancy. Make sure their version of the rental or lease agreement corresponds with the seller’s interpretation.
12. An Ounce of Preparation – Investment property can be one of the most rewarding aspects of your financial portfolio. Be certain to have all your “ducks in a row” before you invest. It is important to do your homework. Consult with a professional commercial real estate broker and relieve yourself of the hidden troubles that can plague first time investors.
13. Just because you bought it… – Just because you own the home you are in now does not mean that it is the best rental property for you to keep. Would you have bought it as a rental or would you buy the home you are in for the price you could sell it for in the open market? Look at the equity you have in the property and calculate the return on investment you would receive for your equity. Just because it is convenient doesn't mean that it is the right thing to do. Do the math and analyze the benefits.
Following these 13 tips can help you avoid the heartache that sometimes accompanies investing in commercial real estate.
Unbelievably, many first-time investors and even seasoned investors are willing to part with their hard-earned cash without taking the time to really study their investment. They rely on traditional trends and gut feelings. Before you risk your investment, take the time to learn all you can about your particular real estate market segment. By aligning yourself with the right professional and applying these 13 tips you can ensure an excellent return on your investment.
1. Determine Your Time Need – Cash flow, capital appreciation, tax benefits, loss of management, equity pay-down and pride of ownership are just some of the things that need to be addressed before you make that investment. A service-minded real estate professional can be a tremendous asset by taking the time to evaluate your needs and making sure you’ve got all your bases covered.
2. Use the Current Tax Laws to Your Advantage, Ask about or research the laws that can assist you. An example would be IRS revenue code 1031. It is an IRS code which allows the seller of a commercial/investment property to rollover the gains and loan down payment into a "like-kind" investment and defer the tax consequence. This exchange has helped our clients preserve their wealth and continue purchasing more investment properties.
Another example would be the changes in capital gains rules regarding the sale of your primary residence. It used to be that you had to rollover your equity into a new home or take a one-time exclusion if you were over 55 years of age. Now the requirement is you need to live in the home two out of the last five years. This means that you can convert a current residence to a rental, hold it for two or three years and sell it tax free. This can be a strategic advantage in your plans to acquire property.
3. Check the Numbers – Claims of extremely high rates of return run rampant in real estate investment. Don’t get caught up in the excitement – check everything: rents, payment history, taxes, expenses, deposits, future modifications…everything! Make sure you have the right agent. Having the right agent is like having a good insurance policy. It helps you catch all the seemingly insignificant but very important details.
4. Remember You’re Buying a Business – Owning investment property carries great potential for creating wealth and some potentially difficult decisions. Evictions, re-investment into the property and time management all need careful consideration. Remember this is not a "hands-off" business.
5. Avoid Negative Cash Flow – Property that eats cash every month can drain your working capital. This creates stress and frustration. Predicting constant appreciation is extremely difficult if not impossible for the unseasoned investor. A strain on your cash flow may cause you to sell the investment before the benefits of ownership are ever realized. Low interest rates and increasing rents have made it easier to receive steady cash flow. Multiple units, from 5 and above, normally provide a greater cash flow because the value is based upon the income that the property generates. The value is not based on intrinsic or emotional values that would be found in a single family detached home.
6. Always Perform Thorough Inspections – Look under every rock! Hire a professional inspector. Ask tenants about pest problems, structural damage or any type of recurring problems. It is essential that nothing is overlooked. An experienced value-driven real estate professional will help you find the right inspector and can help you avoid costly mistakes. When investing your hard-earned money, be sure to use sound business judgment!
7. Have Adequate Insurance- Investment property brings liability. Tenants, cars, parking lots, property liability – the list that increases your exposure to liability is quite extensive. Adequate insurance coverage is an absolute must. Be sure to consult with an insurance professional and protect your hard-earned assets.
8. Inspect, Approve and Confirm All Documents – The list of documents that need to be proofed can be overwhelming to the first time investor. Building permits, zoning laws, rental and lease applications, health licenses, insurance, the list goes on and on. Don't attempt to do it alone. The right professional can remove most of the stress and bring the transaction to a conclusion smoothly.
9. Get a Bill of Sale for All Property Involved – Many types of personal property (appliances, furniture, fixtures, etc.) can be involved in an investment sale. Be very detailed and know who owns what. You don't what to close escrow and find what you bought was not what you bargained for.
10. Select Qualified Good Tenants From the Start – Take the time to check references. Previous landlords, employers, financial references, credit and judgments are all vitally important. If there are any questions, investigate fully. A little work upfront can save tremendous problems later on down the line.
11. Get Estoppels – Get letters from tenants confirming the status of tenancy. Make sure their version of the rental or lease agreement corresponds with the seller’s interpretation.
12. An Ounce of Preparation – Investment property can be one of the most rewarding aspects of your financial portfolio. Be certain to have all your “ducks in a row” before you invest. It is important to do your homework. Consult with a professional commercial real estate broker and relieve yourself of the hidden troubles that can plague first time investors.
13. Just because you bought it… – Just because you own the home you are in now does not mean that it is the best rental property for you to keep. Would you have bought it as a rental or would you buy the home you are in for the price you could sell it for in the open market? Look at the equity you have in the property and calculate the return on investment you would receive for your equity. Just because it is convenient doesn't mean that it is the right thing to do. Do the math and analyze the benefits.
Following these 13 tips can help you avoid the heartache that sometimes accompanies investing in commercial real estate.