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| Making the right choices is the key to success! |
Real Estate provides opportunity for investors to really grow their dollars through careful and strategic management. Real Estate allows an investor to own a direct investment versus stock providing independent control of their choices. Many individuals enjoy the autonomy of decision making versus being dependent upon the management decisions of others. There are a few things to consider when investing, and I wanted to outline those factors today for first-time investors or those working to streamline their portfolio.
The first step is deciding what property type are you most comfortable owning based on your management skills, ability and time availability. Most investors normally have a full-time career and time availability to oversee a real estate project may be very limited making a NNN investment a more common sense decision. However, there are other investors who rather make their real estate investments a part of their daily career choice purchasing multi-family projects which require more hands-on management dealing with tenants and overseeing the property. As part of the first step, I would include first choosing markets of which you are familiar rather than buying out-of-state. It is good to have a real grasp of the local demographics, consumer behavior, market knowledge, traffic patterns, physical features, site knowledge and physical characteristics of the trade area.
The second step before investing is to totally grasp cash flow is the lubricant of your real estate machine. This is why calculations like cash on cash return are so critical so you may realize the return of your dollars into your pocket to re-invest into another investment and continue to watch your dollars grow like children. It is important to have a full financial analysis prepared so you understand analytics of the project. It is good to always approach investment opportunities with eyes wide open and use a common sense approach to analyzing a purchase.
Make sure you are working with a real estate broker who can provide you with the financial details. You need to make sure you have enough cash flow to handle your mortgage payments, it is always good to figure cash flow before and after taxes.
Another point I would like to make, sometimes first-time investors take too much advice from those who really do not know a whole lot about real estate. Novice investors many times rely on their attorney, accountant, family members and friends who are not actively involved with real estate investment. This can cause them to be overly cautious not understanding the dynamics of commercial real estate financing which is much different than buying a single family home. These days fixed rate financing is a rarity and the finance term is more likely to be 5 or 10 years. It is important to be cautious, but also to grasp a realistic understanding of the marketplace before approaching investments in this arena. Also looking at the performance of the S & P 500 versus real estate, I would put my betting money on real estate.
Another factor to consider is “The Giant Engine” of real estate, and that is appreciation. Nowadays after suffering such a terrific recession over the past few years, appreciation seems of little consequence to some. However, economists are predicting in 2014, appreciation will be back on track. Appreciation is what has made real estate such a great investment as a long term hold investment. Each year the value continues to increase because of market factors, inflation, and cost of living increases.
The next factor to consider is income tax ramifications. There are many tax advantages to owning real estate including depreciation, and if you decide to sell an investment and purchase another, you may capitalize on a 1031 exchange to defer any immediate tax consequences.
The third step is to choose a great team to work with you to become more prosperous. This team will compromise a competent commercial real estate broker who understands the marketplace, financing options and has a grasp on preparing a financial analysis for you. It also includes a relationship with a attorney who really know real estate law, not every attorney has the everyday working knowledge to understand what are the mechanics of Letters of Intent and purchase agreements, reciprocal easement agreements and the like. Another partner should be your accountant to help you take advantage of favorable tax consequences. And finally, to choose lenders with specific knowledge of your property type and has intimate knowledge of the financing programs available through sources like Fannie Mae, private sources, hedge funds and insurance companies.
In this moment of history for most of our lives, this is the greatest opportunity to take advantage of the real estate market and position oneself financially for the future. I hope you find this information helpful as we all practice the fundamentals to propel our success.
