The Most Important Factors For Investing In Real Estate - Investopedia | Real Estate Investing

The Most Important Factors For Investing In Real Estate - Investopedia
Real Estate Q&A: Buying Property With Tenants & Investing in Real ...
China, From Within: Miami Real Estate in Investor Crosshairs ...
Real Estate Investing: Rookie mistakes and saves | A Gai Shan Life

The Most Important Factors For Investing In Real Estate - Investopedia

Posted: 06 Nov 2014 09:13 AM PST

Compared with other types of investments, real estate investing involves a relatively favorable risk/reward profile, but with relatively low liquidity (ease of entry and exit). Let's see some of the most important factors to be considered for investing in real estate.

I. Location of the Property

Why is it important? The age old punch line "Location, Location, Location" still rules and remains the most important factor for profitability in real estate investment. Proximity to amenities, peaceful conforming areas, neighborhood status, scenic views, etc. are major factors for residential property valuations; while proximity to markets, warehouses, transport hubs, freeways, tax-exempt areas, etc. play an important role for commercial property valuations.

What to look for? A mid-to-long term view, about how the locality is expected to evolve over the investment period. Today's peaceful open land at the back of a residential building may be developed into a noisy manufacturing facility in future, making the residential valuations less profitable. It is advisable to conduct thorough check about ownership, type and intended usage of neighboring areas, establishments and free land in the locality.

II. Valuation of the Property

Why is it important? Real estate financing during purchase, listing price during sale, investment analysis, insurance premium and taxation - all depend on Real estate valuation.

What to look for? Commonly used Valuation Methodologies include:

Sales comparison approach: Recent comparable sales of properties with similar characteristics –most common and suitable for both new & old properties
Cost Approach: All cost summation minus depreciation – suitable for new construction
Income approach: Based on expected cash inflows - suitable for rentals

III. Investment Purpose & Investment Horizon:

Why is it important? Given the low liquidity and high value investment in real estate, lacking clarity on purpose may lead to unexpected results including financial distress, especially if the investment is mortgaged.

What to look for? Identify which of the following broad categories suits your purpose and prepare yourself accordingly:

Buy & Self-use: Savings on rentals, benefit of self-utilization and value appreciation
Buy & Lease: Regular Income & long term value appreciation. Requires building a temperament of being a landlord - for handling possible disputes & legal issues, managing tenants, repair work, etc.
Buy & Sell (Short Term): Quick, small to mediocre profit - usually buying under construction properties and selling slightly high once ready
Buy & Sell (Long Term): Large intrinsic value appreciation over long period of time; solution for long term aims like retirement planning, child's education, etc.

IV. Expected Cash Flows & Profit Opportunities:

Why is it important? The investment purpose & usage influences cash flows and hence profit opportunities.

What to look for? Develop draft projections for the following modes of profit & expenses:

Expected cash flow from rental income - Inflation favors landlords for rental income
Expected increase in intrinsic value due to long term price appreciation
Benefits of depreciation (and available tax benefits)
Cost benefit analysis of renovation before sale to get better price
Cost benefit analysis of mortgaged loans vs value appreciation

V. Be Careful with Leverage - Know the Pitfalls:

Why is it important? Loans are convenient but may come at a big cost - you commit your future income, to get utility today for a cost of interest spread across many years. Real estate financing needs higher amounts and hence has higher exposures. Understanding it properly allows you to benefit from it to the maximum, while ignoring the risks can lead to major pitfalls.

What to look for? Depending upon your current & expected future earnings and paying capability, consider the following:

Decide on type of mortgage loans (Fixed Rate, Adjustable Floating Rate, Interest Only or Zero Down Payment), whichever suits you best
Be aware about the terms & conditions and other charges levied by financiers
Hunt around and bargain for a better deal - lower interest rates, lower insurance premiums or processing charges waiver, as possible

VI. Investment in New Construction vs Existing Establishments:

Why is it important? New construction properties usually offer attractive pricing, the option of customization, clearly documented amenities and clear titles. The investor has to deal with only the construction company as a counterpart. Risks include delay in possession, increase in costs, no awareness about neighborhood, etc.

Those on resale have vice-versa factors and may need a more thorough check on ownership, documents and legal matters.

What to look for?

Check past projects and the reputation of the construction company for new construction investments
Review property deeds, recent survey and appraisal report for old constructions
Be aware of monthly maintenance costs, outstanding dues & taxes from past owners. These costs can severely impact your regular cash flows
Investing in on-lease property (possessed by others) – Is it rent controlled, rent stabilized or free market? Is the lease about to expire? Does it have renewal options in favor of the tenant? Are interior items owned by the tenant or owner? etc. are some of the details to be aware of.
Quality-check items (furniture, fixtures and equipment), if included in sale

VII. Indirect Investments in Real Estate:

Managing physical properties over a long term horizon is not for everyone. There are also a few alternatives to indirectly invest in the real estate sector and aim to reap the benefit.

What are the Options?

Real estate company stocks – Equity stocks of real estate companies can be bought and sold on exchanges (e.g. Forest City Enterprises FCE.A listed on the NYSE)
Real estate sector-focused mutual funds/ETFs – Sector specific funds like "Fidelity Real Estate Investment Portfolio (FRESX)" offer the benefit of diversification and professional money management, at the cost of fund expense charges
Mortgage bonds – Secured by physical property, they offer lower rates of return compared to corporate bonds
Real Estate Investment Trust (REIT) – offer high yields, tax consideration and high liquidity as they trade on stock exchanges.

The Bottom Line

Real estate investments offer a good high value risk-return profile. Thoughtful consideration of the above mentioned factors in mind will enable investors to reap the benefits while mitigating the risks.

Real Estate Q&A: Buying Property With Tenants & Investing in Real ...

Posted: 05 Nov 2014 04:44 PM PST

Tips & Advice / story / By ProfessorBaron.com on 5 Nov 2014

Real estate investor and Zillow Blog contributor Leonard Baron answers questions from readers regarding buying, selling and investing. Have a question? Send it to Leonard@ProfessorBaron.com

Buying a property with tenants in place

Hi Leonard — We bought a short sale with a tenant in it, and he has stopped paying rent. Did we make a mistake by not getting a credit check? Our real estate agent did not advise us to do so, and we wish we had. Help! Rana and Colin S.

Hi Rana and Colin — Sorry to hear about this issue. Hopefully you can get it resolved amicably without too much pain.

Regarding whether you made a mistake by not getting a credit check: did you research the tenant? Did you ask the seller for copies of cancelled checks to verify the current tenants were paying rent? Did you ask for an estoppel certificate signed by the tenant to verify lease terms? Did you check the owner's file to see any past credit report from when the property was leased to the tenant? If you verified these and they were fine, then you probably could have assumed all was okay.

If you did not take any of these steps, then absolutely you should have required a lease application from the tenant and/or pulled a credit report. Alternatively, if their lease was month to month, you might have requested the seller terminate the lease and have the tenant vacate the property before you closed escrow.

Many buyers do not perform any of these actions, and sometimes they end up with tenants that become a problem and default on the rent/lease.

Regarding whether the real estate agent not advising you to pull a credit report: Everyone wants to blame their real estate agent – but you are the investor and it's your responsibility to educate yourself about and handle these issues. The agent's job – unless you contracted them to manage the property, too – is to help you buy the property, get the seller disclosures required by law and/or that you request, and facilitate the transaction.

A real estate agent should never do your due diligence. That's your responsibility, not their liability.

Again, I'm sorry to hear about this issue. Hopefully you can resolve it, and chalk this one up to a lesson learned. I'm sure you won't forget it for a long time. Good luck.

Starting as a real estate investor out of high school

Hi Professor — A few years ago I became passionate about investing, and decided I wanted to be a real estate investor. I'm 17 now, and I want to go to real estate school after I graduate high school. Could you give me the names of a few books, websites, articles or other sources that could help me with getting started? The more information, the better. Thanks! Jayco J.

Hi Jayco — Let me give you some guidance here. Skip real estate investing!

At your age, you should be working toward college. If you are not planning on going to college, turn that plan around right now. If you must, go to a community college for two years and transfer into a state school. If you like investing, an accounting degree would be best — and a dual accounting and finance degree would be even better.

When you graduate college, get a job working for a big company like Wells Fargo, an accounting firm or maybe a large property management company. With a quality education, you should be able to get a good job and earn a stable and consistent income.

But you're not done yet. You've got to save some of that pay, too. First, max out your 401k plan, but also save separately. Set up automatic payments to a mutual fund, like one of the Vanguard or T. Rowe Price low expense ratio diversified stock mutual funds.

After several years, you should have some money saved – and earnings on that money – to make your first real estate investment. Buy a place to live that you can convert to a rental property in a few years, when you're buying your second place to live – which you'll also convert to a rental property a few more years down the road. Then buy another place that will also be a future rental. Repeat this process many times over 20-30 years, and you'll have plenty of money for an early retirement.

I know this guidance isn't what you are looking for, but the chances of being successful in real estate investing and earning wealth without a college degree and a good starting job are very low. Probably close to 0.0%.

Alternatively, if you get a good business college degree and a decent job, and start saving for your investing, you probably have about a 90 percent chance of prospering and earning wealth.

Heck, you might even decide to skip real estate and just invest long term in the stock market, which realistically can produce more wealth than real estate – without all the hassles.

So start searching online for what course of action is going to get you into a decent public four year college that will lead to a good job. Your future depends on it.

Related:

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

ProfessorBaron.com

Leonard Baron, MBA, is America's Real Estate Professor®. His unbiased, neutral and inexpensive "Real Estate Ownership, Investment and Due Diligence 101" textbook teaches real estate owners how to make smart and safe purchase decisions. He is a past lecturer at San Diego State University and teaches continuing education to California real estate agents at The Career Compass.

China, From Within: Miami Real Estate in Investor Crosshairs ...

Posted: 24 Oct 2014 03:17 PM PDT

Every day, FP's China team at the Tea Leaf Nation channel scours dozens of Chinese media outlets to find compelling stories unreported in Western mainstream press. This week, we bring you Miami as a future mecca for Chinese real estate bling, an anti-corruption sting in Nigeria, Alibaba's booming e-health venture, the Chinese blogosphere on Mark Zuckerberg's Chinese, Hong Kong pro-democracy celebrities, and a former World Bank executive on the virtues of China's 7.3 percent economic growth.

Miami real estate could be seeing more Chinese money.

An Oct. 20 report in state-run China Economic Weekly sees the home of retirees, sun-baked beaches, and Miami Vice as the future mecca for Chinese home buyers and real estate investors. Miami homes cost only 40 percent of those in Beijing, the report argues; and the only reason Chinese buyers are overlooking the Florida seaside city is that Chinese buyers and investors simply don't associate Miami with real estate in the same way that they do San Francisco, Los Angeles, and New York.

China's anti-corruption taskforce isn't afraid of anything -- not even Ebola.

Operation Fox Hunt -- the Chinese government campaign to hunt down, repatriate, and prosecute economic fugitives -- held a sting operation in Nigeria in late August, in the middle of the (now quelled) Ebola outbreak there. The state-owned Beijing Times reported on Oct. 20 that undercover Chinese police, who "faced not only the threat of Ebola, malaria, and other diseases, but also the threat of the armed robbery ubiquitous in Nigeria," successfully apprehended a small-time criminal who fled China in 2006.

Mark Zuckerberg speaking Chinese was a pretty big deal on China's Twitter, too.

Related posts on Weibo, China's massive microblogging platform, garnered thousands of comments, though these were often of a different character than yesterday's English-language Zuck-inspired media storm. Highly up-voted comments include: "Zuckerberg has already learned Chinese, meanwhile we on the mainland still can't get on Facebook!" and "If China didn't have so many limits, think of how many Zuckerbergs we could produce."

New Alibaba health firm shares soar.

Shares for the newly-named Alibaba Health jumped over 25 percent on Oct. 22. As China's first licensed online prescription drug retailer, the firm's big value-add lies in exclusively providing, monitoring, and tracking electronic identification codes for Chinese medicines, a system known as PIATS. This means Alibaba will get a complete set of drug data from production to distribution, an integral part of its "big data" plan. The state-run Global Times wrote that the stock price jump shows that "investors are bullish on the prospects for e-commerce for pharmaceutical products."

State media tells pro-democracy Hong Kong celebrities to be more like Jackie Chan.

And they don't mean defeating bad guys with humor and kung-fu. The Hong Kong actor is known, and sometimes despised even on the mainland, for his ardent pro-Beijing views. After several Hong Kong artists and celebrities expressed support for pro-democracy protesters, leading states news agency Xinhua to pen a scathing Oct. 22 op-ed slamming the celebrities for being selfish, destructive, and unpatriotic, and telling them to emulate Chan, who recently espoused opposition to the protests, saying, "Without strength, a country cannot be rich."

Within 10 years China will become a high-income country, says former World Bank executive.

Lin Yifu, former Chief Economist and Senior Vice President of the World Bank, wrote in an Oct. 24 op-ed for Communist Party mouthpiece People's Daily that if China maintains a 7.3 percent GDP growth rate, within 10 years -- right around the time President Xi Jinping leaves office -- China will achieve the status of a high-income country. Lin's prediction of 7.3 percent growth comes as at least one U.S.-based research group haspredicted nearly the opposite: a dramatic slowdown in Chinese economic growth, to a rate of 4 percent after 2020. Lin, known for his strong pro-China stances, rejects that view, writing, "The current negative international environment presents major challenges, but if China can maintain its natural advantages, such as high-return investment opportunities, good government finance, a high savings rate, and favorable foreign exchange reserves ... then 7.3 percent annual growth can be realized."

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Real Estate Investing: Rookie mistakes and saves | A Gai Shan Life

Posted: 03 Nov 2014 03:00 AM PST

While we were traveling, a few somewhat unexpected bills came in the mail for the Investment House: utilities!

I tend to operate a little bit on autopilot when it comes to bills, I check the amounts and dates, then I go straight to paying them, particularly when a due date is in the past. I'm a bit allergic to paying after the due date, it gives me flashbacks to writing checks for Mom when I was a kid, not understanding why we didn't pay on time, and then later to my late teens when I could only JUST pay bills on time after working hundreds of overtime hours.

My bottom line was about to take a beating when I took a minute to whine at my RE friend and he pointed out that the property manager should be able to bill the tenant for these – well!

I blame the heat, pregnancy brain, and totally being a rookie for not remembering that tenants almost always cover all the utilities unless it's explicitly covered by the rental agreement. Heck, I was a tenant for years, my Dad still is and I pay his bills, so why it totally slipped my mind that we have always paid our own trash, sewer, water and electricity bills, I couldn't even say!

Luckily, it was as easy as emailing the scanned documents off to get that sorted. Whew. Saved myself $200+. Never mind the slightly horrified lurking sense that if I nearly messed that up, what else have I done wrong? Ach. Live and learn.