People Who Should Avoid Real Estate Investing: Bull Market Geniuses, Risk Averse Investors, and Cash Poor People

Buying real estate as an investment is a dream many have. The idea of renting a piece of property to someone else while equity builds and debt reduces can be great. And it is, but these aspects of property ownership do not stand alone.

Owning a rental property has expenses, and they can be unpredictable. While simple wear and tear will happen, more expensive problems can occur like old wiring falling out of code and drainage pipes eroding. For the latter reasons, people who should not invest in property are:

  • Bull market geniuses
  • Risk averse investors
  • Cash poor people

Bull Market Geniuses Should not Invest in Real Estate

A bull market genius is a person who makes money when everyone is making money, and finds it to be a testament of his or her investment savvy. In the late 1990’s the buying market was full of these people. In early 2001, many of them were getting washed away by the fiscal tsunami that came with favored stocks like Enron and WorldCom sinking like stones.

Shortly after that debacle, more of these investors were found to have been caught in the rush of rising homes values. The result of being so house rich and cash poor may have led them to refinance, pulling out a hundred-thousand dollars to invest elsewhere. After all, they made all that money on their home; they must know what they’re doing.

The Risk Averse Investors Should Avoid Real Estate

Risk is relative. While some invest in real estate because they are risk averse, others feel that property is too risky. This could be because they don’t know enough about what they are investing in (making them very smart to avoid what they don’t understand) or from a bad past experience.

Either way, if buying piece of property is going to shorten one’s life due to stress, it is best to avoid it. For those who need the security of knowing their money will be there tomorrow, even if it isn’t going to grow tremendously, there are low risk investments that will still bring a fair return.

Real Estate Requires Cash

The whole point of investing is to make money, not spend it. While this is true, it also takes money to make money, and someone who has no money cannot make money with money unless it is someone else’s.

Now, this is entirely possible with the purchase of a property via mortgage, and the building of equity by way of rent, but the remaining necessary cash is going to have to come from one’s own pockets at times.

For example, let’s say a property owner has a single family home with a renter. Suddenly, holes are forming in the yard. Upon further inspection, it is due to eroding drainage lines, and the problem cannot be ignored, but to the detriment of the property. Unfortunately, getting to the person in one’s local government who can solve this problem can be challenging for such an issue, and in the end, the problem may not be theirs to handle. Such a repair can cost more than $10,000.

Owning property can be a great endeavor. There are incredible tax benefits and the opportunity for great growth, but for any of the above people, it should be avoided.

Invest in Real Estate Today: Risks and Rewards to Buying Now

Right now good real estate investors have a competitive advantage. For the most part, the real estate market has been in a tailspin, investors have either been on the sidelines or actively fighting with lenders to rescue some of their fallen capital. Owners that have a choice about buying or selling are choosing to stay put and those that have to sell face serious sharks in the water that smell blood.

Why Not Invest in Real Estate Today?

So what is the down to being a shark in the water? First, investors really need to do their homework. Just because something seems like a great deal does not mean that it is. Understanding the risks of the deal is important, particularly with new construction. With the high number of homebuilders shutting their doors or facing foreclosure, buying a new home might leave you holding a very bad bag. In this market, every property should be inspected thoroughly. The incentive to cut corners when building and running out of cash is extremely high. Before considering any purchase, be extremely thorough in your due diligence.

No one wants to catch a falling knife. Maybe if you buy something today, real estate prices decline another 10%, 20% or even 50%? Lets think about what would have to happen in the economy to see real estate prices fall 30% over the next 3-5 years. First, there would have to be no inflation. Inflation would be a sign of economy recovery. Rapid deflation might do it, but the likelihood of that is minimal. Second, we would have to see an increase in the current levels of inventory. Again, though some will disagree, this is also not likely. There is already a tremendous amount of unsold property on the market, builders stopped at least a year ago, some by choice and some by way of court ordered bankruptcy liquidation. So where is the additional 10-20% inventory increase going to come from? An economic recover means higher real estate prices.

Real Estate will Recover

What if interest rates go down? Again, this would imply a significant economic set back, which does not seem to be in the cards. The government has done everything within its power to keep the economy from disaster and for the most part it worked. It’s a safe bet that they will not let their work be undone. Expect the recovery to continue at a slow to moderate pace and real estate values to begin a slow climb to normalcy.

Paying Down a Mortgage vs. CDs and Savings

Today borrowers face an interesting dilemma. The market entices them with low interest rate mortgages and historically low priced homes; however, their ability to obtain the financing to purchase these homes limited. In order to purchase many condos, the building needs to be at least 50% sold, which can defeat the purpose of trying to get in early for the best deal. Furthermore, any home over the conforming mortgage limit of $415,000 also forces the homeowner to put 20% down just to be eligible for a loan.

Saving vs. Real Estate Investing

The lure of cheap financing has many consumers thinking about how they are saving their money. Does it make sense to keep $20,000 in a savings account yielding 1.0% at most or should they use that money to lower their monthly mortgage payment? The debate is no longer around investing in the stock market vs. paying down their mortgage.

Over the past year or two, the volatility of the stock market made many investors wary of the ups and downs in the market. Moving to cash or the money market enables consumers to feel safer, but the safety has come at a steep price. Many consumers wonder if they are even keeping pace with inflation rates. Why not invest to secure living arrangements, lower monthly payments and lock in low interest rates for the next 20–30 years?

Does it Really Make Sense to Prepay the Mortgage?

In the United States, consumers gain several benefits from paying interest on their mortgage. First, the government allows borrowers to deduct interest payments directly from their income. In the first five years of a mortgage, when the majority of the payments go towards interest, consumers see the greatest benefits. Not only does it reduce the total tax burden, but it can often put borrowers in a lower tax bracket, which also lowers their tax rate. In 2008, counting only the tax returns that deducted mortgage interest, the average deduction was $12,221 based on findings by the Tax Foundation.

Given the substantially lower savings rates, consumer might still benefit from paying their mortgage down rather than buying a CD. Let’s start by looking at the consumers in the highest tax bracket of 35%. At the current interest rate of 4.5%, a consumer would net a benefit of 2.9% (4.5% x (1-35%)) on the money invested in their mortgage. On the surface this seems like a very low rate of return. However, compared to current 5 year CD rates of 2.64%, it seems like a better investment. Borrowers might also accrue additional mortgage savings by no longer having to pay PMI or mortgage insurance.

Potential Reasons not to Prepay the Mortgage

The two major issues the analysis above does not consider are liquidity and the volatility of real estate prices. While putting some savings towards the mortgage will lower the monthly payment, it will also lower the liquid cash available to borrowers. If a sudden need for a large amount of cash arises, potentially for a better investment or an unfortunate emergency, borrowers might find themselves hard pressed to recoup the cash from the homes via a refinance.

Additionally, prepaying a mortgage is akin to investing in housing. While the investment could appreciate over time, it could also depreciate. In the scenario above, the investor will earn at least a 2.9% return if the home maintains its value. If the value declines, the investor will earn far less, even with the decrease in monthly payments.

Prepaying a mortgage is a great strategy for retirees or for people expecting to remain in the home for a long period of time. Also, people with lots of disposable income could benefit from the additional security of lower payments. At a minimum, prepaying a mortgage or putting additional money down should be a consideration when thinking about investing and saving opportunities.

Cash Flow Investing – Real Estate Investment That Produces Profit

There are lemons in real estate investing just as sure as there are lemons in new cars. Knowing exactly how to have the right cash flow investment will not only aid the pocketbook, but it will aid the investor’s future real estate investment portfolio.

To understand cash flow investing, the investor must know how to make and scrutinize all real estate net sheets. Hopefully when purchasing real estate investments, the agent is ethical and using due diligence for the client. Just in case the agent is unethical, it is imperative when looking for cash flow investing properties to know how to read and interpret a proper balance sheet (net sheet).

What to Look For in Cash Flow Investing Balance Sheets

There have been many new investors who lost “their shirts” in purchasing real estate, due to the fact that the net sheet was not accurate and correct. Net sheets are meant to show every single penny that the investor has to spend on the proposed real estate property.

Many investors in rental properties scams have lost their entire investments due to agents caring more about the commission than the client and their right to know. Due diligence means a complete and thorough investigation of the property. The net sheet should show more than the mortgage payment and the rent schedule. The net sheet should include:

  • Repairs
  • Lawn maintenance
  • Mortgage payment
  • Taxes
  • Insurance
  • Management expenses
  • Major repairs needed
  • Personnel and Real Estate commissions
  • Utilities
  • Vacancy allowance
  • Maintenance crews

Apartment Investing and Searching for Cash Flow Investments

Cash flow investing can include many types of properties including the purchase of restaurants and shopping malls. Looking for a cash flow investment is not as easy as it may seem and a good quality real estate investment could take months. It is important first of all to have many sources when searching for a cash flow investment.

Most investors will be looking for a 10% return on their investment per year. So if the total investment was $50,000, a net profit of $5000 per year is desired. This means that each month the investment must bring in $417.

Another way to look at this equation is to take the balance sheet and subtract all the costs of the real estate investment and add in the rents. Take the total amount received against the amount lost and see if the difference is at least 20% or more. It may be advisable in some cases to buy real estate investment property with less than 20% cash flow, as rents will rise yearly in most areas.

Best Source for Cash Flow Investing

The same rule has applied since the beginning of time. People have to eat and they have to have a place to live. Sticking with these two scenarios will almost guarantee success. It should be noted that due diligence is important in no matter which of the two that is invested in. Many restaurants will fail and many apartments will remain empty due to poor rental property management, too high of interest paid on the loan and failure to investigate neighborhood conditions.

NYC Real Estate Co-op vs. Condo: Differences between Cooperatives and Condominiums

The vast majority of apartments available for purchase in New York City are either cooperatives or condominiums. The major difference is that purchasers of cooperative apartments or co-ops own shares in the entire building corporation. Condominium ownership is more like owning a single-family home in that purchasers own their physical unit.

Pricing Differences New York City Co-op vs. Condo

In general, in New York City, cooperative apartments tend to have lower asking prices than comparable condominium apartments. But there are other factors to consider. Since co-op owners are shareholders in the entire building, the costs associated with the building such as the underlying building mortgage and the real estate taxes are the pro-rata responsibility of each of the shareholders. The number of shares allocated to each apartment is typically determined based on apartment size and location within the building.

Board Approval for Co-op Purchases

Each co-op building has a Board of Directors and its own set of requirements for prospective purchasers. Typically a would-be buyer must submit a full financial package listing all of their assets and liabilities and include copies of recent tax returns. The package is usually reviewed by the Board members or an admissions committee and then an interview is scheduled with the prospective purchaser. Boards can dictate the percentage of the purchase price that the buyer can finance. Boards can also require maintenance escrows or other forms of financial assurances. Condos generally do not require board approval.

Maintenance Fees in Co-ops and Condos

Since shareholders in a co-op own a stake in the underlying building, their maintenance fees sometimes referred to as common area charges, are generally higher than in a condo. However, since a co-op maintenance fee includes a portion of the underlying mortgage payment and local real estate taxes, a portion of the maintenance is tax deductible. Other costs covered by the maintenance charges in both co-ops and condos include staff salaries and electricity in the building common areas such as hallways and stairwells.

Other Considerations for Purchasing a Co-op or Condo

When considering the purchase of an apartment is a co-op or condo, it is important to look at the following items:

  • House Rules – In addition to containing standard language regarding noise policies and rules about floor coverings, the House Rules also set forth the building policies on pets, washer/dryers, restrictions related to apartment terraces and balconies and any flip tax requirements. Flip taxes are fees paid to the co-op or condo at the time of sale of the apartment usually by the seller but sometimes passed on to the buyer purchase.
  • Maintenance History – Find out how often the maintenance has increased in the last several years and ask why. Also find out if the building has imposed any assessments on apartment owners. Assessments are usually used to cover major building expenses such as an unexpected repair or a renovation of common areas.
  • Reserve Fund – The reserve fund is the amount of money a building has set aside for capital improvements. A prospective buyer should feel comfortable that the reserve fund is large enough to pay for foreseeable capital expenses such as building repairs and mandatory façade inspections required by New York City.

Narrowing Down Choices in NYC – Co-op vs. Condo

In the end, whether to buy a co-op or condo might well be determined by personal preferences about the actual building and unit. The majority of NYC apartment buildings are cooperatives especially the pre-War buildings. New construction tends to be built as condominiums.

Real Estate Investment Clubs Fully Explained: First Time Investors Benefit From Joining a Money Group

The news of foreclosures looming and sellers desperate to walk away brings on news of despair and sadness for many. This news also brings out many first time real estate investors. These new buyers are interested in dabbling in the art of investing and do not know where to begin. The Real Estate Investment Club is exactly the right place for these brand new buyers.

Many would be investors have lost thousands of dollars investing in properties that were presumed to be a good ideal. Up front they seem to be a wonderful chance at making money, but then the reality sets in. Too many times Realtors, anxious to have a sale, will leave out many of the details concerning a rental property. After the deal closes the Realtor is no where to be found.

The Real Estate Investment Club not only invests the money to buy new properties, they also have lectures presented by knowledgeable mentors. They teach all the members when to buy and how to buy and keep a profit.

Pros and Cons of The Real Estate Investment Clubs

As sure as there are benefits, there are also disadvantages too. According to Business Week, the investor should be aware of the pitfalls of such a club. Buying properties in today’s market can be a detriment to the new investor if he is not prepared to hang on for many years to come.

The goal of the investment club is to buy rentals and keep them and not resell. Their money is made strictly from the money received monthly. A good investment club that is run properly can provide income for the new investor for years to come.

The initial investment in a Real Estate Investment Club is very minimal. The association dues are between $200-350 normally. This money is used to pay the secretary and the rent on the building provided for the meetings. The goal is to have no out of pocket money for the association or Real Estate Investment Club.

What to Look for in a Real Estate Investment Club

When looking to choose a Real Estate Investment Club, the new investor should look for certain qualities of a club. These are some of the questions that should be asked:

  • How many members are in the club?
  • How often does the mentor or guru give lectures?
  • How much is the yearly dues?
  • Do the members have to participate in each sale?
  • Who manages the properties?
  • Do the members have to participate in management, maintenance or bookkeeping?
  • How does each member get paid?

Normally a club will hire a management team to handle all the properties and each member is paid monthly after all debts are paid, but it is best to check thoroughly all the details. In most clubs, each member is given a territory to work. This territory could amount to an entire county or in the case of a large county; the county would be split up into sections.

The member therefore can submit properties for purchase that they have located. The club will vote on the purchase or not agree to the purchase. Each club will decide on the compensation paid to the member bringing in the best weekly deal.

First Time Investors Benefit From Joining a Money Group

In a normal million dollar deal, the buyer would have to pay at least 20% down. This would amount to $200,000. In an investment club with 200 members, this amount would equal only $1000. So each member has a minimal down payment and low risk involved in the property. Each member benefits from joining the money group with the profits they acquire.

The first time investors have low down payments, minimal closing cost and low risk involved in being part of a large money group. With multiple purchases, the chances of losing out big time are minimal. Keep in mind that a low down payment also means a low monthly allowance from the property. The rents are also divided by 200 members.

There are thousands of Real Estate Investment Clubs located all over the world. Each club has its benefits and disadvantages. It is always good to interview several clubs in your area before joining one particular club. The normal investor will join for a few years and then branch out on their own.