A cautionary tale to heed…
In trying to answer the age-old question, “is real estate a good 
investment?” I’d like to submit this little tale of woe about the “professional” property investor who thinks he knows what he’s doing. I recently showed a house an investor had renovated to a young couple I represent as a buyer’s agent. The house was a simple 1915 Cape Cod style home. For the most part, the investor had done a fairly decent rehab job on the property. He claimed to have done all the work himself. This is a rarity. In my experience, most people who invest in homes traditionally create their own crew to work with from project to project. Not this guy.
Self-selling investment properties?
On top of this, he was selling the house himself. Turns out he had listed it with a real estate agent a year earlier, and committed the
deadly sin of overpricing from the get-go. So it just sat there. No offers. No nothing. He kept reducing the price several times. Ultimately, after six months, in the dead of Winter, he took it off the market. And in the Spring, he placed it on the market by himself, with a much lower, more realistic asking price. Problem was, he was still over-priced for the market and the work he had done. But I could tell he had boxed himself into a corner. He was trying to price the property based on what his costs were. Not what the market would bear. So, basically, he was sunk.
The finer points of owning an investment property
As he showed us the house, he also proudly showed his Building Permit and 
final Certificate of Occupancy he received for successful completion of the project. Check…and check. At least the town felt it safe. So why didn’t I? Most times, I can forgive stupid-looking remodeling work. This guy had redone everything. But his upstairs full bathroom offered the tiniest of a vanity, while utilizing a five foot wide shelf for….I have no idea. It was free form…unconnected to anything. Stupid. But you know, investors can be stupid and still make money on their flip projects in spite of themselves – and their lack of understanding of what buyers really want.
This guy was an idiot, however.
We went down into the basement, where he had a brand new boiler,
water heater and well tank and pump. All were on raised blocks. The concrete flooring was all newly done. Looked great. New solid support beams on the new concrete. Fantastic. And a huge pond of water on one side of the basement leading to nowhere. Oh – and a lovely sump pit with new sump pump doing nothing, sitting on the other side of the basement floor… “Oh, that – probably coming from the well outside,” he volunteered. WTF????
Learning the hard way…ouch
So what does it take to be a property investor, preferably a good one? Well, not what this guy did. This fool had spent easily over fifty thousand dollars on the renovation, but he allows his support beams to get drenched from some major water problem he did not choose to 
address? He claimed to have been doing this sort of rehab work for many years on many different projects. I don’t see how. For a few thousand dollars more, he could have installed a French drain in the basement, solving his water problems. (A French drain is a basic interior drainage system.) Now, any buyer’s home inspector is going to send out red alerts about what major water issue could be confounding the property surrounding the house. Could be a high water table. Could be a well leak. Could be any number of things. A French drain would by an easy solution. Instead, he does all this work, and has trouble selling his investment property, due simply to his stupidity.
And he’s still trying to sell it…
Let this tale of woe be an example to any beginner property investor. This particular investor may know how to do renovation work himself 
(and clearly, not all renovation work). But he knows nothing about marketing a house. Indeed, he also knows nothing about identifying what buyers in his area are truly looking for. If he did, he’d know what to give them. In addition, he’d know his target market, their price range, and the price his renovated house would need to sell for – before he ever acquires the house to flip! In so doing, he can best plan his renovation work, materials needed, and work to be done, so that he can price based on the marketplace – and not on what his overall costs end up being. Certainly in his case, and sadly at that, he will most definitely be taking a substantial loss on all his efforts.
Beware older home rehab projects
As in this example above, older, period houses usually come equipped with renovation costs that can skyrocket out of control very easily. Costs that the average property does not share, and that you may not properly account for when you crunch your numbers, and come up with your overall rehab budget. It would be sad indeed to purchase an older house at a great price, only to discover you’re sinking in red ink as your fix-up costs spiral out of control, and way beyond what you originally planned on.
Do you have the business acumen for older homes?
I have written in prior articles here about purchasing older homes, and their pitfalls. I have noted that any property investor should “consider what an older house brings to the table: sash windows that are thin by
today’s standards, and also are quite leaky – producing many drafts, thereby increasing your heating costs. Also think about the costs of rewiring hundred-year-old electrical wires and circuits throughout the house. And how about replacing antiquated plumbing lines and fixtures as well. On the whole, your repair costs could run 25% to 50% higher on an older property than on a newer one.” I have gone on to recommend that the best investment property search results can usually be found through investing in newer houses that need less repair work to begin with, and which will cost less to maintain in the long run.
photos courtesy of mistakes-kristinandcory.com, realtypin.com, sheetsdesignbuild.com, flooddamagetoronto.com, minnesotabasementrepair.com, lawofficewalterjennings.com, aspectestateagents.com, metrosdrealty.com
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There are many ways to finance investment properties. If you’re not paying all-cash for a property, and you want to utilize leverage to greatly increase your prospective ROI (return on investment), you’ll find many options available to you. Which one you choose is a matter of personal taste. And deciding among different investment property loans available, that will suit your temperament and pocketbook, will be critical to your bottom line.
investment property loans from banks traditionally require at least thirty percent down by the buyer. So I was able to leverage an additional ten percent by going with the seller financing. This was a great way to get a business loan for rental property.
benefits of an unbelievably low monthly payment, and resultant high cash flow – and even greater net income. This four family house quickly became a huge cash cow for me. And I had plenty of time in which to refinance to a traditional loan. So while I ended up paying about ten percent higher in market value than the property was worth, the difference was more than made up for (while I held the property) in net cash flow income and capital appreciation when it came time to sell. So my advice: if you can find seller financing, take it. And don’t be afraid to give the seller “their” price” in return for “your” financing terms. It could end up being a major financial windfall for you in the end.
are usually at least double conventional mortgage loan rates. And their points charged (pre-paid interest) can be triple or quadruple conventional points charged.
due within 1 to 3 years. In all but rare instances, hard money lenders require being in the first mortgage position, so they can get their money out first if you default.
a minimum of 30% down in most instances. In that case, you’d be obtaining a loan of 70% of the purchase price. Your loan-to-value ratio (LTV) would therefore be 70%. When buying investment property, you’ll usually want to try to obtain the greatest return on investment (ROI). Leverage (also known as cranking) is one of the ways you can purchase multiple properties over time, and thereby maximize your ROI. Depending upon your credit rating, as well as the type of property you’re purchasing, the down payment required may be higher, and could go up to 50% – and therefore your LTV would be a low 50% as well. In addition, the points charged on the loan (pre-paid interest) are roughly twice as high as for a conventional home loan.”
homes or apartment buildings with at least five units in them, the you’ll definitely need a commercial loan from a lender. Lenders have separate divisions to evaluate and extend credit on these type properties. Since commercial properties are much more specialized, their inherent risk need to be evaluated as a niche within most banks. Unlike conventional residential mortgages, you can expect that underwriting requirements will be much more stringent by comparison. For example, a commercial lender will be poring over your financial statements with a fine toothcomb, and you can certainly count on much more scrutiny of your assets and income, as well as the existing income statement of the property you’re considering purchasing. Also expect rates and points to be higher than standard residential loans.
way of financing. Interest rates are usually as low as you can obtain from any lender. Second, the interest is tax-deductible as a business expense. And third, you can choose to make interest-only payments monthly on the outstanding balance, usually for a period of ten years, knowing that you’ll have a balloon payment looming down the road. Most times, the balloon will be incorporated into a second ten year payback period, where you’ll be making monthly principal and interest payments. In this way you can utilize the equity in your home to create a credit line for further property investments. You’ll find this a great way to finance further investment property acquisitions. Also, you can structure the loan as a revolving credit line. So when you sell a property, you can pay off the credit line. Then you can take it out again when you’re ready to purchase the next house.
the U.S., you’d think a large segment of the population will be ready to bolt depending on the outcome of the general election in November. How many celebrities and political pundits to date have made half-assed threats to leave the country should Donald Trump be elected president? There is no denying the more-than-implied threat to both national, and therefore, world economic stability should Trump succeed in his endeavor to gain the presidency, and then as he attempts to make good on many ludicrous economic “suggestions” he seems to come up with on a daily basis…
experienced investor. Consider how it may be a smart move to diversify your real estate holdings. While the knee-jerk response to buying real estate overseas might be “it’s too risky,” understand that property investments outside the U.S. should be thought of as part of a total portfolio of real estate holdings long term. In this way you can best diversify to offset the vagaries any one property (or set of properties) in one particular country (like the U.S.) may perform, based on events way outside your control (read: Donald Trump’s being anointed King, or some facsimile thereof.)
countries can show yields in the double digits year to year. Your selection process will be critical, based on the degree of risk you’re willing to assume. I always recommend getting advice from other property investors who are experienced, and know how to buy real estate overseas. There are online property investing clubs for real estate investors who just invest in overseas property. Seek them out as part of your initial research into different countries. In addition, know that overseas real estate investment is going to be for the adventurous at heart…the risk-takers who have the guts and stamina for dealing with investment property that is not close to home. From time to time you’ll be able to travel to them, but for the most part, you’ll probably have a property manager handling the day-to-day duties of running the properties overseas.
well as the amount you’ll accept when it comes time to sell your property. In addition, your diversification will also include having holdings in different currencies. In this way you can take advantage when certain countries currencies appreciate in value. Remember too, your property investment overseas has the ability to make use of multiple land uses, depending on what is “hot” at the time in that particular country. You shouldn’t think that purchasing real estate overseas can be simply for renting to people. Some countries rely on a burgeoning forestry or agricultural usage of the land.
As with any investment, you should always consider the worst case scenario, that is, if you were to lose all the money you invested in the property. If you’re concerned too much that the government of the country you’d like to invest in may be corrupt, or too third-world for your tastes, then very simply, don’t make the jump into buying real estate overseas. At least not until you’ve fully vetted the country and it’s political environment enough where you can sleep at night. Once you feel it is safe enough to make the jump, then by all means, dive in.
start looking. Pacific rim countries like China, Japan and the Phillipines are all doing well right now. In Europe, countries like Turkey, Latvia and Romania are in fine shape, with low debt and rapidly increasing economies. Meanwhile, the usually reliable spots for investors, like Italy, France and Spain, are all currently struggling. However, if you stay in major cities like London or Paris, there is much more stability in real estate valuations. Of course, if you’re unfamiliar with specific areas, you’ll need to do a good amount of research first before investing. You’ll need to make sure the market has been relatively stable over the past five to ten years.”
investment for another key factor – and one that, given the explosion of refugees from Syria over the last year – remains such a huge factor. I refer, of course, to immigration. This factor is one of the key stabilizing factors in buying real estate overseas! One might think the opposite, given the negative press Syrian refugees have received. However, Europe’s largesse should be a beacon to overseas property investors. The high immigration patterns throughout Europe tend to create a very robust rental market for each developed country in the European Union.
as confidence in the marketplace stays high. Basically, you’re taking lemons and making lemonade out of them. I have also noted before that, as long as you are utilizing the services of a local property management company, the risks of such long-distance investing can be reduced substantially. This is especially true in countries where market rental rates are increasing and demand remains stable.
But, that’s OK. I eventually learned to become honest with myself. And then I went out and hired a nice property manager to handle all my rental units….dealing with the tenant complaints, collecting rents, selecting tenants when old ones left, keeping my vacancy rate down, maintaining my properties, and inspecting them on a regular basis. Oh – and supplying me with monthly accounting statements as well. Let’s face it – if you don’t have the right temperament for the job, fire yourself! And hire a property management company. While you’ll be paying a management company fifteen percent of your gross rent roll, it may well be worth it in your time – and more importantly – your sanity – saved.
include being entrepreneurial, being decisive, and having a proper aptitude (though not genius-level) with math, as well as being meticulous, grounded, and having stick-to-itiveness. These are some of the basic qualities a good property investor will display. Notice I did not include: being good with people, or being a “wheeler-dealer” type. These two traits are not something you need…and they can be learned, as well as delegated to others. That’s what property managers , as well as real estate agents come in and can do for you.
business to take on the added risks. Rather, hands-on property investors enjoy wearing many different hats: being the site locator, searching for properties, then being good numbers crunchers to see which are the most attractive properties available at any given time.
understand that this is no simple task. Here are the most basic responsibilities of property managers: Maintaining your rental property – As your own manager, you’ll be responsible for regular on-site checks on your building(s) to ensure proper safety and regular upkeep/maintenance. Also, you’ll be responsible for all emergencies (ie. – emergency calls from tenants), and making sure the right tradesperson is called to fix the problem, as well as follow-up to ensure the problem was fixed properly, quickly, and resolved to the satisfaction of your tenant – all at the most affordable cost to you. Ask yourself if you’re okay with these emergency calls from tenants – whether in the daytime, or in the middle of the night and on weekends. If you’re a calm person who’s good at “putting out fires” without it taking an emotional toll on you, then by all means you’ll be a good property manager for your own real estate holdings. If not, look towards hiring a professional property management company.
handyman you’re comfortable with can suffice, as he can perform many of these tasks as a general all-in-one repair/maintenance service person who‘s “on call” for you. In addition, you’ll need to advertise, locate, screen and approve all tenants. Show your rental units that are vacant. Prepare all leases, and have them signed. Collect rent from all tenants. Make all collection calls on delinquent tenants. Represent yourself in any tenant eviction process, if necessary. Work with your attorney to aid in a smooth eviction. And keep all accounting for each property – you’ll need to deliver to your accountant each tax season a proper set of books ( or files) for each building you own.
cash flow problems paying your expenses. As part of your job as your own property manager, you’ll also want to stay in regular (at least once a month) contact with your tenants. Many times, tenants will not tell you about “small” problems they’ve been having with your property – until it’s a big problem. By being pro-active, you can scope out these problems when they are indeed small. So, for example, you can ask each tenant each month if there are any issues you should be aware of – for example, any small leaks going on in the unit, any bug problems they’re seeing, any safety-related issues (say, a constant flickering light that would indicate a potential electrical wiring fire hazard). By asking you’ll stay way ahead of the curve – and be able to jump on any potentially big problems when they’re still small – and easily (and cheaply) corrected!
best for you to better understand the rigors that come with managing your own properties. And in the process, you will develop a finer appreciation for the sheer amount of work and expertise required of the job. Even with property management software readily available online, it’s still going to be a learning experience for you. And this experience will only help serve you in good stead as you move forward, and purchase your next investment property. You’ll know from limited experience how demanding property management can be – and time consuming as well. You may find that it will be much smarter for you to hire a property manager as you grow your investment property empire. By doing so, the extra cost for their services should be outweighed by your time costs, as a property management company will aid in providing you more time to search for new property acquisitions.
