Tips on Buying Investment Property, Part II

Don’t forget to read Tips on Buying Investment Property, Part I

Thinking about buying investment property? In some places, in years past, the price of property was been escalating more than 40 percent a year. Numbers like those have some investors scratching their heads, wondering if they shouldn’t be investing cash in buying investment properties instead of buying shares of stock.

It’s a good thought. Investment advisors say that part of your net worth – as much as 30 percent – should be in real estate. Over time, as they pay down their home loans, most homeowners easily meet that requirement with the equity they have in their homes.

Purchasing real estate for investment above and beyond the stake you have in your home can be difficult and time-consuming. And like all investments, there’s no guarantee you’ll ever make any money.

That said, real estate has traditionally appreciated just ahead of inflation, approximately 3 to 5 percent per year. But there are ways to boost that return, especially when buying investment property like a condo, single-family house, or apartment building you rent out, or a small retail or office building, investors say.

If you’re going to invest successfully in real estate, you’d better have a calculator handy. If you don’t figure the numbers correctly, experts say, you may wind up losing money instead of adding to your wealth.

Getting started is just about the toughest part, says Bill Silverstein, whose family has been investing in real estate for decades, and currently owns and operates 1,000 units.

“You start with a smaller building and these days, those are the likely candidates for condo conversions. If you want to pay a certain amount of money for the property and then keep it, you’re competing against guys looking to improve the property and flip it. You might pay $150,000 for a 2-bedroom condo knowing you can improve it for $100,000 and sell it for $350,000,” he explains.

Silverstein says it’s hard to beat that kind of return, which is why there are more people generally investing in the real estate market.

So why not just buy a bigger building? It’s tougher to come up with the 20 percent down payment many lenders will require. On a $3 million purchase, you may be asked to put down $600,000, which is quite a chunk of change for most homeowners.

And if the property needs renovating, as most do, you can expect to spend that much or more.

One hundred percent financing is available to many investors, but the price is steep, said one lender who asked not to be named. He routinely charges his real estate developer clients credit card prices for loans of up to 100 percent.

“Financing was so difficult for me in the beginning. You get turned down so many times, you’re willing to accept almost any kind of financing,” says Dwight Yackley, a commercial property developer and manager.

And while the market has been hot in the past few years, you’re buying on faith that the market will go your way over the long term.

In this market, people are paying so much for certain properties and you may not be able to expect a cash-on-cash return right away, says Silverstein. “You may actually have to accept no return for awhile.”

But there aren’t a lot of people who can afford to put down that much cash without getting something back for it, especially with the stock market returning 20 percent per year, he adds.

On the other hand, people are still making fortunes in real estate.

“I think you should wait for the really great deal,” said the lender. “I look at a lot of deals for my clients, and out of every 10 deals, there’s only two that will really make a lot of money, like a 100 percent return in under two years. But those are the ones that are really worth it, and I advise my clients to wait for those deals.”

But many investors will happily settle for less.

Yackley says he likes to have a 25 percent average annual return. Other, smaller property owners are going for long-term cash flow to supplement other income and improved financial stability.

But on one point, real estate investors agree: There are deals to be made no matter where you live. You just have to look for them.

Once you purchase your investment property, don’t forget to take care of your tenants.

“I see a lot of landlords that could care less about their tenants. It surprises me that landlords don’t do things to keep their tenants happy and encourage them to stay,” Yackley observes.

“But it’s good for me.”