If You're A Real Estate Investor We Speak Your Language . . .
Real estate investing can be very lucrative but it can also be an expensive learning curve as many a novice investor will tell you. If you're looking to buy investment real estate, the key is to do your homework first and answer all the important questions, so you're going into the purchase with your eyes wide open. And if you're thinking of selling an investment property, there are plenty of questions to answer, too, before putting up a for sale sign. Sound preparation is the key.
We hope this overview will help you get started, but it's by no means comprehensive. So if you're ready to take the next step and buy or sell real estate investment property in our Solano or Contra Costa County market area, feel free to contact us for a complimentary consultation to make sure you haven't overlooked anything and see if we can assist you. (There's absolutely no obligation.) We've helped a number of real estate investors over the years and are always happy to share our knowledge and experience with new clients.
If You're Buying Investment Property...
Buying investment real estate requires a decidedly different approach than buying a home to live in. Things that might matter to you personally are often negligible from an investment standpoint. It's all about the numbers. If they pencil out, it's a good investment. Otherwise, it doesn't matter how much you like the house, the location or the cute amenities. Depending on your investment goals there are different strategies, too. Are you looking for appreciation or cash flow? Both are nice, but for many investors, one strategy is often more important than the other.
And If You're Selling Investment Property...
And if you're planning to sell a current investment property, what is your exit strategy. Are you looking to liquidate or might you be willing to carry paper (and if so, are you aware of the stringent seller-financing laws)? If you're looking to buy more investment real estate, are you aware of the potential benefits of a 1031 tax-deferred exchange? What's the current condition of the property? Would it appeal more to another investor or an owner-occupant? Is the property currently tenant-occupied? Be sure you know the answers to these and other important questions before you sell.
Important Tips & Considerations For Real Estate Investors
But if they’re selling because the property has turned into an albatross, it’s better to find that out before you decide to buy.
And if the seller doesn’t have up-to-date financials or they’re incomplete, that could be a huge red flag.
But as most landlords will tell you, tenants move out, things break and appreciation is never guaranteed. Which means that you need to go into an investment property purchase with the understanding that there won’t be any income when you’re in between tenants. And that you might need to lower the rent in the future to attract new tenants. Or that at some point you might have to get involved in resolving an issue between your tenant and a neighbor. And when the garbage disposal stops working or the roof leaks, you’re the one the tenant is going to call.
So expect the unexpected and always make sure you set aside funds to handle those unexpected occurrences when they arise.
Let’s say you bought an investment property five years ago for $200,000 that’s now worth $300,000. If you paid cash, that $100,000 profit is a 50% return on your initial $200,000 investment. And that averages out to 10% a year, which is a pretty good return.
But what if you bought FOUR $200,000 properties instead, put $50,000 down on each and financed the rest? Now you have a $400,000 profit and a 200% return on the $200,000 that you invested, which is a whopping 40% average annual return.
The lender paid 75% of the cost of each property, but you got all of the appreciation. And that is called Leverage.
Well if you’re planning to sell, don’t expect an investment buyer to rely on that claim as fact. Rather, do your homework up-front and find out what other similar rentals in your area are selling for. And compare their property with yours objectively.
Be realistic. Is theirs fully updated and on a court while yours is on a busy street and fairly original? For just because they’re both 1,300 sq. ft. and built around the same time doesn’t mean they’re worth the same. Savvy real estate investment buyers are going to do their homework and base the value of your property on its condition, location and rental capabilities. Do the same before you sell and you’ll stand the best chance of attracting an eager investment buyer.
Sellers who have a complete package ready for the buyer to review are like gold to an investor. Over the years, we’ve seen many a buyer quickly sour on a property when they discovered that the seller had minimal or sketchy paperwork. Investors want to feel that they’re making a good investment. You wouldn’t buy a stock or other security without researching details and performance of the company behind it. And for that same reason, real estate investors tend to shy away from properties that look promising on the surface but which are lacking the paperwork to justify it as a sound investment.
For the last thing an investment buyer wants is to get into a dispute with one of the tenants over an existing issue right after taking ownership. Comparing the lease with what the tenant declared in the estoppel certificate gives the buyer an opportunity to clarify any discrepancies. Perhaps the lease was amended or extended at some point. If so, the seller should be able to provide a copy of the signed extension form. Or maybe the landlord gave the tenant verbal assurance about renewing the lease at a different amount a year from now. If so, the buyer has a right to know about it.
So be sure to have all your tenants fill out and sign an estoppel certificate ahead of time. Your lease probably contains a clause requiring them to do so upon your request. And if you find any discrepancies between what’s in your paperwork and what they wrote on their certificate, get that resolved so that your paperwork and theirs both match up Before putting your home on the market.
But if your tenant is reluctant to make the property as appealing to prospective buyers as you’d like, consider offering them a financial incentive. Temporarily reducing their rent can often turn a grouchy tenant into your biggest advocate.
Once you’re in contract, leave things the way they are until you close escrow. Don’t muddy the waters by bringing in a new tenant or extending or changing an existing lease. Let the new owner handle all of that after the property is theirs.