Real Estate as an Investment “Ninety percent of all millionaires become so through owning real estate.” –Andrew Carnegie Traditionally the stock market had been America’s main vehicle for financial investment. However, real estate provides comparable rates of return, more cash flow (through leasing) and better tax incentives (depreciation, expense deductions and 1031 Exchanges) than stocks. In the past 40 years, the median price for existing homes rose from $23,000 to $164,500 appreciating annually at an average rate of 5%. While over the long run, real estate might appreciate at a lower rate than certain stocks, but real estate as an investment is less volatile than the stock market. In typical investment purchases such as with mutual funds, CDs, stocks, etc. each dollar invested equals the equivalent amount of buying power. However in real estate, each dollar invested can potentially yield four or five times the equivalent amount of buying power: a 20% down-payment can yield a leveraged buying power five times its initial investment. This is the case because the return is dependent upon the value of the investment property in its entirety versus simply its initial cash investment. Cash flow serves as another advantage real estate offers to investors. With stocks and mutual funds, investors do not have control over how the cash they have invested is being used. With cash flow, investors can enhance it through the down payment, regulating the amount of rent, minimizing expenses, taxes and insurance costs and other variables. Cash flow derived from the collection of rent is consistent thereby making the annual return on investment predictable with a high degree of certainty.

 

Strategies

In regards to real estate investments, there are two strategies that investors may choose to employ once an investment property has been acquired. The first centers on leasing the property to tenants: holding it and collecting monthly rents for a period of 3-5 years then selling the property to realize a sizeable capital gain.

The second is for investors to buy properties that are of poor interior conditions (often short-sales or REOs) renovate it in a period of 3-4 months thereby bringing the property up to marketable and habitable condition. The investor would then sell the property making a quick, sizeable profit within a short time-span. The cycle of procedure(s) would be replicated three to four times annually. top

 

Why Distressed Properties

Regardless of the supplies of properties for conventional real estate, distressed properties are still in relative abundance. The reason? Because California is one of the states that has been hit hard by the housing boom and bust back in 2007. There are still many underwater properties as a result of the subprime loans catastrophe back in 2006.

With distressed properties they are generally priced significantly below fair market value because of reasons such as: cloud(s)/liens on title, interior conditions in need of repairs and long time-frame for the closing of transaction. Bearing this in mind, an investor/buyer’s profit margin when they purchase and sell distressed properties (be it either short-sale or REOs) will be greater in comparison to them investing in new construction or existing-sale real estate. top

 

Things to Understand

While the distressed properties segment of the real estate market offers Buyers/Investors the chance to make a hefty profit through either long-term cash-flow or sizeable short-term capital gains through flipping, there are certain aspects in relation to the field of distressed properties that Investors/Buyers must first come to understand.The first being that in terms of short-sales, it is not uncommon for the timespan of a transaction to last anywhere from six to eight months on average to even over a year. The reason is that for the banks, they are literally dealing with thousands of underwater property case files within their distressed department: an investor/buyer’s particular transaction is but one out of countless any.Therefore often times the timespan for a short-sale will be long because of the various paperwork that is entailed within the transaction.A client who seeks to buy short-sale as an investment must have patience first and foremost.

Secondly, in regards to the price of short-sale it is the lender(s) that governs the price ultimately: the listing agent and Seller have little say in the matter (Seller is behind on their mortgage after all): a lender’s approved price will often be the bulls-eye price that allows purchasers to obtain the short-sale in question. It is recommended that investors/buyers do not try to submit a price that is far below or above the lender’s pre-approved price: doing so will cause additional hassles for the bank and often they will request a secondary BPO (Broker Price Opinion) to be done to reevaluate their price as a result of having received such an offer.The best move a buyer can make is to try their best to meet the Lender(s) pre-approved price.

Third,in a short-sale the proceeds go entirely to the Lender to try to minimize their losses and clearing the distressed homeowners of their financial debt: the Homeowners do not receive anything from the property’s sales proceeds.It is often customary for investors/buyers to give a certain amount of cash-incentive at closing to the Distressed Homeowners as a form of cash-for-key and relocation fee for helping the Homeowners move forward to a new chapter in their lives.This practice is to ensure the previous Homeowners leave the property in move-in condition as well as to prevent any unnecessary delay towards closing. top