"Real Estate Investment in 2010"

You, too, can be just like
"The Donald!"



Are you a Real Estate Investor?
Would you like to be?



It used to be that anyone and everyone who bought property of any kind, fancied themselves as an "investor."  We were all so smart!  So you bought it from the builder for $180K and put it in the MLS for $240K as a "new build."  Simultaneous closings and pocket the difference!  Usually, "no effort in" is a "too good to be true" scenario.  It's just too risky!  And that's how that story ended in 2006, when the real estate bubble burst.  So many "investors" got caught with their hand in the cookie jar!

So here we are in the 4th Quarter of 2010... precisely 5 full years since we first noticed that "something was awry."  We've watched the market tumble here in Palm Coast and Flagler Beach, Florida to de-valuation of 50% or more.  Short sales and foreclosures comprise nearly 60% of our closings...  Inventory is large and prices are low...  Mortgage rates are extremely low.  An investor can find under 5% with 25% down.

In other words, It's a great time to invest.  If you have some cash and decent credit and are in it for a "hold," not a "flip," then your timing is good. 

Here are some of the issues to consider:

• 
  
  
  
  Use your head and a calculator, not your heart or your gut.  It's not like buying your personal home.  Heck, you don't even have to "like" it for it to be a good investment.  It's all about your ROI (return on investment) - Challenge your Realtor to demonstrate this to you. (Note: Land is a different beast.  Generally it generates no income, yet it does have associated costs of taxes, and maybe even upkeep and HOA fees, etc.  With land, it's "buying it cheap and estimating a hold period before a selloff.")
  

• 

  "Timing" the market can be elusive:-)

  Avoid overleveraging.    Debt can be a good thing, however you don't want to get caught making monthly payments "on your investment."  You want to "get payments from your investment!"  Accurate input into your Debt Service Coverage Ratio (DSCR) is important (garbage in=garbage out). 
  
  
  
  
  • 
    
    
    In general, it is calculated by:
  • 
    
    
    DSCR = (Annual Net Income + other miscellaneous expenses) / (Principal Repayment + Interest payments).
    
    
  • 
    
    
    In a nutshell, DSCR helps to determine if an investment will cost you money or make you money!
  
  
• 
  
  
  
  Real estate investing is not a get rich quick concept (like the TV ads suggest).  We were smart from 1986-1989, but dumb from 1990-1993.  Smart from 2001-2005, now maybe dumb from 2005-2010.  That is yet TBD!  It's about your holding period and commitment.  Even factoring in the current mess, real estate has beaten the S&P 500 over the past 30 years.  It's a marathon, not a 100 meter dash.
• 
  
  
  
  Get good advice from professionals.  Not only your Realtor, but also an Attorney and a CPA would be great sources of legal and financial information.  Staying on the right side of the Law and the IRS are good things!
• 
  
  
  
  Have an investment goal.  Just buying a rental house because it was cheap is not a plan.  Market shifts, vacancies, tenant damages, chinch bugs/termites, hurricanes, etc., can have a huge impact, as well as expected cash flows and your desired benefit. Your Capitalization rate is calculated as: 
  
  
  
  
  • Capitalization Rate = Annual Net Operating Income/Cost or Current Value

   Calculating your Return on Investment will tell you if you are on track with your stated goal: 

• 
  
  
  
  ROI = (Gain from Investment - Cost of Investment) / Cost of Investment. 

(Note:  Residential investing is not in the same ballpark as commercial investing... different rules and risks, etc.  if you want consultation regarding commercial issues, Margaret Sheehan-Jones in our office is a CCIM candidate and head of our commercial department... I can put you together.)

Know your level of tolerance for risk!