Some Financial Aspects of Property and Real Estate Investments

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Property or real estates are not considered to be really liquid investment instruments since individual properties or real estates are not interchangeable. Therefore identifying land or real estate in which to invest can take a pretty high amount of time and efforts and much depends on how familiar the investors might become with the particular segment of the market corresponding to their interests. Real estate or land investors often use a variety of appraisal methods to make their lives a bit easier, by means of price comparison. The sources of information relative to prices may include: public auctions, private sales, public agencies, market listings or real estate agents.

Real estate or land assets are much more expensive than bonds or stocks. Therefore investors most often avail themselves of a mortgage loan that can be collateralized by the land or real estate itself. Accordingly we usually use the terms *equity* or *leverage* with reference to the money paid by the investor as opposed to the amount lent by the bank. Their ratio is called Loan-to-Value (LTV) which is considered to represent the risk taken by the investor. Most banks regard 20% of the appraised value as a minimum equity requirement. Quite a number of pension funds and REITs, or Real Estate Investment Trusts, regularly purchase land or real estate with *zero* leverage thereby minimizing their risks, but capping their Return-On-Investment (ROI) as well.

If the purchase of the land or real estate is leveraged, the necessary monthly instalments or “carry costs” might create a negative cash flow for the investor right away after purchase. In addition to possible positive cash flow elements such as those generated by depreciation, equity buildup and capital appreciation, investors might also partially or entirely offset the “carry costs” by means of the so-called Net Operating Income, or NOI. This technical term typically means *rents less expenses* and in countries other than the US it is often referred to as Net Cash Flow. The ratio *NOI/purchase price* is called the Capitalization Rate. It indirectly indicates in how many years the property or real estate will pay for itself in an interest-free financial environment.

E.g. if an investor has purchased a piece of land or real estate for $ 800,000 which generates a positive Net Operating Income of $ 40,000 annually, then the Capitalization Rate of the property is 5%. It shows the investor that the land property or real estate will pay for itself in 20 years in terms of net cash flows.

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Original article by B Lakatos

Investing In Real Estate For Beginners: Apartment Complexes

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Here is some advice for investing in real estate for beginners who are thinking about investing in apartment complexes. Many commercial property advisors with an opinion say that apartment complexes with over 150 units are the properties to buy, it’s not necessarily true. Multifamily units are indeed a solid investment. However, what you really want to invest in is where you can earn the most rent per unit. Often that is in multifamily complexes with less than 100 units.

When you are making a purchase bid for a large complex, you are often bidding against financial institutions with deep pockets. This creates two distinct disadvantages for you as a beginning investor.

First, most beginner commercial investors are forced to join a large consortium of other investors to get in on a multi-million dollar deal. This dilutes your ownership interest and the weight your opinion counts when issues arise such as when to sell.

Second, when you and your investors are bidding with the last dollars that you have to invest, the large institution can easily out bid you by several thousand more than you can raise. Going up against large institutional investors can be overwhelming.

There are many other reasons to invest in complexes with less than 125 units:

A. There is less upkeep and maintenance. You may be able to avoid the added expense of an on-site manager and full-time maintenance crew.

B. There are more medium-size complexes available at any given moment. That means less competition from other investors and more opportunity to find one with exceptional cash flow.

C. Cash on cash returns for medium complexes are frequently better than for large complexes as you are able to offer a wide variety of amenities and services.

D. You will not be dealing with a financial institution as the seller with a cumbersome sale policy. The seller will more likely be an individual or small partnership that can provide flexible sales terms if they choose.

E. They typically will require less equity to acquire. This means you can control the property as an individual or with a couple of partners. You thus own a higher percentage of the property and thus a bigger amount of the profits.

F. Often the less knowledgeable seller has avoided raising rents because they have become friendly with the tenants or they are afraid the vacancy rate will increase. By studying the local market rents and vacancy rates, you could find that you can immediately increase cash flow through rent increases.

There are some very good arguments to owning small apartment complexes in the 4 to 12 unit range. This can be a good start if you personally manage them and perform most of the maintenance. However, this size complex seldom generates enough income to leave a profit when a property management company is hired.

Investing for beginners can begin with small complexes and once the income is stabilized buy another. After a couple of years, you will have 3 or 4 small complexes located all over the city. This becomes a problem because now you have the equivalent number of units as a medium-sized complex but are still managing them yourself. You also have the added burden of having properties at multiple locations meaning you have to drive all over town to take care of maintenance and upkeep.

Medium-sized apartment complexes have long been the favored type of and classic value for commercial investing. Now is the ideal time to make this investment move. Vacancies are down and rents are up. Income can be very predictable.

Do the math and you will see that very small apartment buildings are more risky than medium but medium size complexes have advantages over the large complexes that we’ve already discussed.

If you own a small eight-unit complex, each unit represents 12.5% of the income stream. If you own a 80 unit complex, each unit represents 1.25% of the income stream. Still, an 80-unit complex is much easier to manage than a 175-unit complex.

Investing in real estate for beginners can be profitable, but you need to know what works best for you.

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Original article by David Earl Morgan

Buy and Hold Real Estate – The Best Strategy During Tough Economic Times

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Buy and hold real estate is a strategy most successful investors use during tough economic times. If you were to compare buy and hold investing with say a flipping strategy, you’d need a longer time frame to realize your goals, but its well worth the wait. This strategy will make you a lot of money if you plan and work the deal appropriately.

First, let’s describe how you execute this strategy. The idea is to buy a property at below market value, and profit from the appreciation of the property as the value rises over the years. In most cases, it takes a few years to realize considerable gains. Contrasting that with a flip strategy, you would purchase a property with the immediate intent to fix it up and sell it for a higher amount. The caveat is you may not be able to sell the property for the amount you’d like, so you may end up buying and holding it anyway.

Now that we know what the strategy entails, let’s discuss the reason it works well during distressed economies. When the housing market is in turmoil, property values become very low. Prices are generally well off their all time highs. This means the real estate investor can buy and hold real estate over a number of years and realize a profit. Simply put, there’s room for the value of the property to grow. If you made the mistake of buying the property at its’ highest value, you’d have to ride it down and wait for it to return to previous highs, or take a loss. Your investing time horizon and threshold for losses will help you make your decision.

Another benefit gained from this strategy is you can receive monthly rental income while the home is rising in value. To some investors, this more than offsets the time required to realize a profit through appreciation. Hopefully this article makes your choice of strategy clear for investing during tough times. Every strategy has its’ time in the sun. You should look to buy and hold real estate when property values are depressed.

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Original article by Ronnie Adams

Sell Your House in 7 Days – Deal Or Scam?

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I’m sure you’ve seen these advertisements on bandit signs by the highway, or in the real estate section of the newspaper. Perhaps you’ve wondered if they are realistic – or are they just a scam?

Well, the truth is that the better ones are genuine. They are placed by private investors who have immediate access to funds and can afford to close on your property quickly. They will often cover the closing costs, and will certainly arrange all of the paperwork. Sounds too good to be true? Well, it isn’t, but there is a snag – I bet you guessed that!

If someone is prepared to buy your house, for all cash, and close in 7 days, they are not going to pay retail market value. That’s a fact – they can’t afford to. These people are not philanthropists – they do this to make a profit (although the reputable ones also like to think they are helping people in distress). So, somewhere below the retail market value is what you can expect to see on their offer. How much below market value? It depends on the condition of the property, its location, and a number of other factors, but it could be around 70% of the retail price.

Before you think this is just a plain rip-off – think about it. If you sold the property through an agent, you would pay them at least 6%. Add on closing costs, inspections that you might pay for, and a small discount on the sales price, and it can easily get up to 10%. Then you can factor in your holding costs. If it takes you 6 months to sell the house (and that’s not bad in today’s market), you have your monthly costs – loan payments, tax, insurance, utilities, etc – to taken into account as well. On a house valued at $250,000, the monthly outgoings could easily be $2,500 a month. Over 6 months, that amounts to another 6%.

Add on the costs of preparing the house for retail sale – maybe another $5,000 and the situation could look like this:

Asking price $250,000

Discount for sale (2%) 5,000

Agent’s commission (6%) 14,700

Closing costs (2%) 4,900

Net sales value 225,400

Less:

Holding costs 15,000

Sale preparation 5,000

Total costs $20,000

Cash available $185,400 (74%)

So, if the house sells in 6 months, and you only have to discount by 2%, you might walk away with about 75% of the asking price. If the market continues to decline, or you have to cut your price for a sale, that could soon be below 70%. I think that makes an offer of 70%, cash, immediately, look attractive.

Of course, you can try to sell the property yourself, saving the cost of an agent, but market statistics show that over 80% of FSBOs (For Sale By Owner) end up using an agent anyway, and those that do sell the house themselves, achieve a lower price than the agent would have done. This is partly because the buyers know that the seller is saving agency commissions and discount that from the offer price.

When a private investor talks about buying your house in 7 days, this is just one of the ways in which they can do it. But as you can see, although at first glance the offer may not seem to be very generous, once you take into account the variables we have discussed, it can start to look like a good deal.

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Original article by Chris X Lewis

Zoning 101 – Understanding Buncombe County Zoning and Real Estate in Asheville, North Carolina

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Zoning can be a confusing issue regardless of where you own real estate, whether it’s a large city like Charlotte (NC), a small city like Asheville (NC) or a rural area like Buncombe County Western North Carolina. Zoning is a tool used to designate individual areas of land for specific purposes. When used correctly zoning can help fast developing cities and counties create a smart growth plan. This is one of the reasons Buncombe County commissioners are implementing new zoning in the metropolitan region surrounding Asheville, North Carolina.

The new zoning, adopted in May of 2007, impacts property owners throughout Buncombe County, as well as future homebuyers, sellers and real estate investors. A clear understanding of the zoning ordinances and restrictions is essential if you are going own real estate. It affects the value of your home and the choices you can make when selling or building on your property. This applies to residential real estate as well as commercial property owners.

Zoning Rules for Real Estate in Asheville, NC: The Importance of Community Accountability

In a video entitled “Will Zoning Affect You?” on the Buncombe County web site, [http://www.buncombecounty.org/governing/depts/Planning/landUse.htm], Assistant County Manager Jon Creighton explains the county’s motivation for implementing new zoning in the spring of 2007 and describes the proposed zoning changes. He also confirms that concerns about the increasing number of county residents, real estate developers and homes being built on the tops and sides of mountains have compelled Buncombe County and city of Asheville officials to make zoning a priority.

Creighton begins by defining an Open Use zoning designation. Open Use, or OU, is zoning usually found in rural areas. Land considered available for Open Use means property can be purchased and sold for a wide variety of residential and commercial purposes with the exception of certain restricted uses. The uses restricted on Open Use land include incinerators, concrete plants, landfills, asphalt plants, chip mills, mining operations and motor sports facilities.

According to Creighton these types of businesses have a large impact on the community, as a whole, so any real estate investor or property owner interested in these ventures must present a project proposal at a public hearing. This allows other property and homeowners in the Asheville area to hold Western North Carolina business and real estate developers accountable for the impact they have on existing neighborhoods and residents.

How Does Zoning Affect Buyers and Sellers of Mountain Homes and Land Near Asheville, North Carolina?

The comprehensive zoning throughout Buncombe County and Asheville, NC also changed in 2007. Comprehensive zoning differs from Open Use because it separates residential and commercial areas into designations like R-1 and R-2 residential districts, employment districts, and neighborhood and commercial service districts. Buncombe County and Asheville homebuyers and sellers can find their property’s zoning designation using the county’s online GIS system. The system can be found at [http://www.buncombecounty.org/governing/depts/Planning/landUse.htm].

Property owners and real estate investors interested in changing the zoning designation of specific land can approach the Buncombe County Commissioners and Board of Adjustment. Public hearings are required if an Application for Variances or Conditional Use Permits or an Application to Amend the Buncombe County Zoning Ordinance Text or Maps are submitted. In order to obtain a building permit for any zoning district other than Open Use real estate investors and property owners must file for Certificate of Zoning Compliance. The cost associated with these applications varies.

Size Does Count! Downtown Zoning in Question on Merrimon Avenue

The most recent zoning debate taking place in Buncombe County is actually happening in downtown Asheville, NC. In an article written by Mark Barrett in the January 15, 2008 issue of the Asheville Citizen Times the Asheville City Council will explore two major zoning matters in 2008. First, the developers of the Horizons Project, which would erect nine buildings including two 10-story towers, have asked to postpone a public hearing until July in order to evaluate neighborhood opposition and economic conditions.

Barrett also writes that the Asheville City “council is scheduled to hear from city staff on zoning proposals for the 2.4-mile stretch of Merrimon between Interstate 240 and North Asheville Library near Beaver Lake.” “The city had considered creating a new zoning district for much of the property along the street that would encourage taller buildings closer to the street,” Barrett continues, “but several property owners and some residents objected.”

As Buncombe County moves forward into the future growth is inevitable, but the real effects zoning will have on real estate in Asheville, North Carolina is yet to be seen. Local homebuyers and sellers can achieve more real estate success the more they educate themselves about zoning restrictions and changes. To learn more about zoning or buying and selling real estate in Asheville, NC visit http://www.MarkGJackson.com.

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Original article by Mark G. Jackson

Deedless Real Estate Investing-An Overview

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Are you looking to increase the number of real estate deals you can do without significantly increasing your risk and without increasing the amount of cash or credit you need? If so, then deedless real estate investing may be just the strategy you’re looking for.

Deedless real estate investing is a collective term used to describe a group of tactics that do not involve an immediate transfer of ownership of a piece of property. Among these tactics are straight lease option, sandwich lease option, and subject to.

The first of these, the straight lease option, describes an agreement between you the investor and the seller in which you lease (or rent) their property for a monthly payment, and you have a guaranteed option to buy the property at a predetermined price within a fixed period of time. Ownership does not change hands unless and until you exercise your purchase option, making this the first type of deedless real estate investing.

The second type of deedless real estate investing, the sandwich lease option, starts out as a straight lease option. You then, as the tenant buyer, would find a second tenant/buyer to assign your interest in the property to. They would lease the property from you, with the option to buy it from you. When and if they exercise their option, you would in turn exercise your option to buy from the original seller. This puts you in the middle of the sandwich, where you stand to profit with little or none of your own money at risk!

Finally, the third tactic for deedless real estate investing is the subject to, which means you buy the property subject to the existing mortgage or deed of trust remaining in place in the seller’s name- you simply start making the payments. Some investors actually do insist that they get the deed when doing a subject to deal, but they don’t record the deed until they resell the property and cash out the seller’s loan.

Other subject to investors don’t get the deed, waiting instead until they find a buyer who exercises their option and cashes them out of the seller’s loan. Doing it this way makes this a true deedless real estate investing tactic, but significantly increases the risk. I don’t recommend it!

We have barely scratched the surface of what could be said about these three tactics for deedless real estate investing, but now you have an overview. Add these tactics to your real estate investing toolkit, and more deals will be available to you.

Now, go make more offers!

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Original article by Tom Dunn

The Many Risks of Real Estate Investing

Every great idea invariably comes with some risk.  Without a doubt, the same is very true when it comes to dealing in real estate investing.  Regardless of the ideals of great returns and rewards, you should take a sobering look at those ideals by acknowledging and understanding the risks and dangers that you may run into.  These risks and dangers may be just as great on the negative side and cost you a lot of time and money.  Because of this, you must take care to have in place measures of precautions to help minimize the risk you are actually facing.  Doing so will allow you to be ready to accept the consequences of those risks should your investments not work to your ideals.

When it comes to real estate investment, the most recognizable risk concerns your financial investment.  Your potential losses will be a direct result of your actual financial investment.  Invest very little, and your risks and rewards will be small; however, if you invest more, your risks and rewards will be greater.  The financial investment, though a major factor in property investment, isn’t necessarily the biggest factor and largest possible risk.

This could be you

This could be you

A common practice of real estate investing is flipping houses.  When you are first starting out, you may want to buy the houses and fix them up yourself.  Of course, this carries the risk of injury during the renovations segment of the flip.  Along with this comes the fact that most flippers who are just starting out do not carry the appropriate insurance.  On top of this, an injury could result in a loss of money and time for any serious injuries to heal.

real estate investing risks

Not the natural disasters you should be concerned with

Another risk you should be aware of are the things that are outside of your control.  The real estate market fluctuates, nearby business close impacting the economy of your city, natural disasters occur, accidents happen during the course of renovations, and purchasers can up and exit the deal without notice.  Any of these factors could have a huge impact on your investment.

On top of all of that, there are many investors who simply fail to have a proper inspection performed on the property to discover any issues, such as structural damage, before investment begins before it is too late.  These issues cost money to fix and could potentially take a chunk out of your revenue leading to lower profits or even a loss.  The important thing to remember is once you discover a major flaw, you are required to disclose the problem to any prospective buyers if you do not perform the repairs before hand.

With all of the risks associated with real estate investing, don’t be discouraged.  As stated before, every great idea has some inherent risks.  You need to equip yourself with the knowledge of the risks and prepare yourself to best mitigate the potential losses from these risks.  If you take the time to learn the trade and fully understand the risks, you can better prepare yourself to reap greater rewards.