THANKS from Deb at The IQD Team...
TIPS YOU MUST KNOW BEFORE BUYING INVESTMENT REAL ESTATE
Hello again friends, recently I was asked by a fellow Dinarian who knew that I have been in the Real Estate Industry for over 20 years some questions about buying investment properties after the RV. I figured I would relay some of his questions over to you as well, I hope this helps, but remember your situation is different and please be sure to always consult several other local to your State and area professionals for their assistance.
Q: Should I buy Residential Housing (i.e. Apartment Building) or should I buy Commercial?
A: The answer primarily depends on your preference, both have positives and negatives, here are some things to keep in mind.
1) Renters tend to come and go much more frequently, causing higher costs to 'refresh' the unit (clean carpets, paint, repairs, etc.) a typical rental contract is 1 to 2 years.
2) Renters tend to be more 'destructive' as they have no sense of ownership.
3) Renters tend to be "high-maintenance" needing their toilets repaired at 3:00 am, etc.
4) Renters may not be as consistent with making their monthly rent payments.
5) You will be responsible for all property taxes and other potential liens (i.e. Trash/Water & Sewer).
6) Management services will need to be employed to manage points 1, 2, 3 and 4 - costing you extra.
7) Consists of 1 to 4 units (single family residence (sfr), Townhouse/Condo, or 2,3 or 4 unit building (duplex, triplex or 4-Plex).
1) Desirable Premium Types:
a) Major Chain Restaurants (i.e. Applebees, McDonalds, Starbucks)
b) Consumer Stores (i.e. Grocery, Electronics, CVS, Rite-Aid, etc.)
c) Professional Business (i.e. Dental, Legal)
d) Senior Retirement Homes
2) Commercial Tenants tend to be much more stable and not move.
a) They want to lease long-term (i.e. 5, 10, 20+ years) from you because of the tax deductions
b) They want to lease because your property's location is more desirable to anything they can currently purchase.
3) Tenants typically lease with a "Triple-Net" Lease - in very short "plain English" that means that they pay you a monthly amount and they are responsible to pay all other costs including, maintenance, repairs, and property taxes.
4) Tenants mail you a monthly check, many times you would not need a Management Company, saving you money.
5) Consists of 5+ units, or undeveloped land, or Farm/Ranch land.
Q: Should I just pay cash for the property?
A: If it was up to me, I would use "OPM" (other people's money) and only pay the minimum cash required. With commercial / investment type properties, many banks will want to see a sizable deposit, such as around 50% deposit cash!
TIP & TRICK: An old "loophole" - this loophole may have already been "plugged up" with the new lending laws, however it may still be open, so listen to this which was taught to me many years ago by an old Mortgage Pro.... Every year he purchased a few 4-Plex Rental Units. He would officially "occupy" one of those units as his "Primary Residence" and then rent out the other Three Units. He did this to get around the classification of Investment Property which required a 50% deposit of cash. Since he was buying this 4-Plex as his Primary residence he only put down 10% cash. He had the utilities, cable, phone all in his name for one of the four units. Then several months later he would "decide to move" to another 4-Plex unit which he was purchasing as his new "Primary Residence". Last time I heard, he had purchased over 20 of these 4-plex units this way! Again, the lending laws may have plugged up this loophole, but it is worth checking in to, just be sure to ask the right people, or you may get yourself into trouble.
Q: The real estate saleswoman told me that with the rents collected on this one property, I will easily cover my mortgage, expenses and my property taxes - does that sound like a good property to buy?
A: Be careful of real estate sales people's "fuzzy math"!!! After looking at her Estimate she left off the most obvious, but most frequently (and conveniently) overlooked aspect of the investment!!!
This "overlooked" (ooops!) aspect is when they conveniently forget to factor in YOUR "Cost of (YOUR) Money" more importantly the COST of using your CASH Money Deposit! The 10% to 50% Cash paid to purchase that property! They never factor that you could take that money and invest it in other safe investments that will often pay 4%, 5% up to 10% (or more) annually. So, if that is not included, you had better factor that in!!! It is not enough that the rents cover the Mortgage, Expenses and Taxes, it MUST cover the cost of using your own money which could have been invested somewhere else! This is an OLD TRICK, so don't let them fool you!!!
TIP & TRICK: Watch out for the Cost Estimate Sheets that also don't factor in the true costs of Vacancy! The cost of Vacancy is not just the lost monthly rent income, but it is the cost of keeping electricity on in that vacant unit, the advertising costs, the vandalism costs, and lastly the profits that would have been earned you would have invested those profits on other investments that may be paying you 4%, 5%, 10% or ???%!
Watch Out Especially if you are purchasing a Residential Income Property (i.e. Apartment Building) - You must account for the vacancy factor!!! Even if all the units are rented out "today" that does not factor for the reality of "tomorrow".
Watch out also with Commercial Property and the Vacancy Rates. The property may be a "dud" even though it is located in a "hot" area, so be sure to look in to that as well. And, that reminds me, go look at the property and the neighborhood before you commit yourself to buying it! I'm sure you, like me, have driven by that one "prime building location" for the last 5 years, and it is STILL "empty" - ask yourself, if that location is just so "good" then why is that unit always "empty"??? Probably because it isn't as great as we think!
Q: The real estate person told me I had to put my offer in today, or else I'll lose my chance to buy it!
A: Great, then you in most all cases just "lost" the chance of being RIPPED OFF!!! If you have not yet had a chance to go tour the property and look around the neighborhood then DON'T BUY the property! The harder a salesperson pushes you, the more reason you need to walk away from that deal AND also that salesperson! As my dad always told me growing up: "Haste Makes Waste".
There will be many more questions to cover in the future, especially after the RV and The IQD Team has said they will host calls after the RV to provide Professional Help and Advice to you, so in the inter-rum, hopefully these few tips and tricks and answers will get your creative juices flowing and help guide you on starting to think about what you will want to buy (or not buy) in terms of real estate.
Thanks to "Anonymous" Again for sharing with us and our listeners