Beat the Crowd when Investing in Real Estate
By
Peter Dobler
Copyright 2005 Peter Dobler
We
all are thinking about it and some of us are actually taking action and
getting their hands on real estate investment properties. The longer
the NY Stock Exchanges doesn’t produce desirable returns the more
people are starting with real estate investments.
For most of us
the obvious choice of properties are single family homes. Although you
can invest in real estate without owning a home, most people follow the
experience they made while purchasing their own home. This is familiar
ground and the learning curve for doing a real estate deal of this type
is pretty slim.
Of course there’s a drawback with this
approach. The competition is fierce and there are markets where
investors are artificially driving up the cost of the properties while
completely discouraging first time home buyers. If this is the case,
the burst of the real estate bubble is just a matter of time.
How
do you avoid these situations and still successfully invest in real
estate? How do you get ahead of the competition and be prepared for bad
times in real estate investments as well? The only answer I have is
commercial real estate.
Why commercial real estate you might
ask? Commercial real estate is a solid investment in good and bad times
of the local real estate market. The commercial real estate I’m
referring to are multi unit apartment buildings.
Yes you will
become a landlord and No you don’t have to do the work by yourself. You
are the owner and not the manager of the apartment building. The cost
of owning and managing the building is part of your expenses and will
be covered by the rent income.
Apartment buildings are
considered commercial real estate if there are 5 or more units. To make
the numbers work you should consider to either own multiple small
apartment buildings or you should opt for bigger buildings. This will
keep the expense to income ratio at a positive cash flow. Owning rental
properties is all about positive cash flow.
With investing in
single family homes it is easy to achieve positive cash flow. Even if
your rent income doesn’t cover your expenses 100%, the appreciation of
the house will contribute to the positive cash flow. With commercial
real estate the rules are different.
While single family homes
are appraised by the value of recent sales of similar homes in your
neighborhood, commercial real estate doesn’t care about the value
appreciation of other buildings. The value of the property is solely
based on the rent income. To increase the value of a commercial real
estate you need to find a way to increase the rent income. The formula
on how this is calculated would be too much for this short article. I
listed a few very helpful books where you can find all the details.
What’s
another advantage to invest in commercial real estate? Commercial real
estate financing is completely different than financing a single family
home. While financing a single family home you are at the mercy of
lenders who want to make sure that you are in the position to pay for
the house with your personal income. Commercial real estate financing
is based in the properties ability to produce positive cash flow and to
cover the financing cost.
After reading all these information
about commercial real estate you want to go out there and dive into the
deals. Not so fast. First, you need to learn as much about real estate
as possible. In commercial real estate you’re dealing with
professionals. If you come across too much as a newbie you will waste
these guys’s time and your commercial real estate career ended before
it actually started. Second, no commercial real estate lender will lend
you any money if you can’t show at least a little bit of real estate
investment experience.
What’s the solution to this? Go out there
and do one or two single family home deals yourself. It doesn’t matter
if you make huge profits to start off with. Most newbie investors are
loosing money on their first deal anyway. If you can manage to show
positive cash flow with your single family home deals you are ahead of
the pack.
My advice, buy a small single family home in a
decent neighborhood and rent it immediately. This will keep your out of
the pocket expenses at a minimum and you will have rent income to cover
for your monthly expenses. Bonus, you gain experience as an investor
and as a landlord.
Here’s another observation I made during my
real estate investment career. Most people like to analyze, learn,
discuss and analyze some more. They never actually got to do a real
estate deal. They love to talk about real estate investments, but never
did it themselves.
My approach to real estate investment was simple.
- I bought some books about real estate investment.
- I read every single one of them.
- I put together a simple plan on how I want to get started.
- I started looking for properties.
- I bought my first investment property 30 days after I started reading my first book.
- I made positive cash flow with all of my properties so far.
What
is my point? You have to go out there and practice what you’ve learned.
The only valid credential in the real estate business is practical
experience. Having a couple of deals under your belt, you can go out
there and start looking at commercial real estate and even impress
seasoned investors with your knowledge. Because you made this
experience by yourself and you know what you’re talking about.
Book reference for commercial real estate investments:
Gary W. Eldred, PhD: “Make Money with Small Income Properties”
Jack Cummings: “Real Estate Financing and Investment Manual”
You
will find these books and many more on my real estate investment
website at http://www.suncoastrenttoown.com/author_directory.htm
Sincerely,
Peter Dobler
About the author:
Peter Dobler is a 20+ year veteran in the IT business. He is an active
Real Estate Investor and a successful Internet business owner.
Learn more about real estate investments at http://www.suncoastrenttoown.comor send a blank email to mailto:suncoastrenttoown@getresponse.com
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