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.
