Bonds, CD’s and Treasuries are paying historically low rates, and the stock market has become quite a scary place. Consequently, many investors have recently ventured back into the real estate arena seeking deeply discounted bargains emanating from the distressed market we’ve seen over the past several years. Those venturing into the real estate investment market are well served to take heed of these tips which could have saved many unlucky investors who came before them:
Avoid Teaser Rates
Most lending institutions have ceased offering “teaser rates”, but they are sure to return at some point in time. Many real estate investors during the recent bubble took out mortgages with very low initial teaser rates which significantly increased after a defined period of time — such as one year. Investors were counting on being able to refinance before the rate got jacked up, and ideally flip the property within a year thus saving significantly on mortgage interest.
The unfortunate result ended up being the vast majority of investors being unable to refinance their loans, and they also ended up being unable to service the loan with the higher interest rate. Consequently, they fell into foreclosure and were among the first victims of the real estate crash. Investors who took out fixed rate loans weren’t completely spared, but they fared much better, and many were able to hang on to the property and will eventually profit as the market continues to recover.
Many novice real estate investors fail to properly budget for the investment. Costs like maintenance, increasing property taxes and insurance rates are often not realistically envisioned. Endeavor to identify all costs pertaining to the ownership of the property, and when in doubt err on the side of caution. Knowing your future carry costs is critical in order for the venture to be a financial success.
Plan For Vacancies
Do not assume that your investment property will be fully leased 100% of the time. This is most often not the case. Your revenue projections need to include an assumption of vacancies. Many investors use 10% as a projected vacancy amount, but if you want to be ultimately conservative you can increase it to 20%. Obviously, in some depressed areas it could be much higher. Being able to accurately predict future occupancy rates — and corresponding rents — is a key skill towards becoming a shrewd real estate investor.
Know Local Zoning Laws
Getting entangled within the web of local zoning and land use regulations can kill many real estate investments. Do the necessary due diligence within this arena before you make any real estate investment. Nasty surprises within the zoning realm after you make an investment can result in huge losses. Not taking the time and expense to fully confirm your intended use is legal is penny wise and pound foolish. Many localities have zoning laws which are nothing short of Byzantine — when necessary avail yourself to the expertise of an attorney specializing in this facet of law.
Investigate Toxic Waste Liability
Although not ordinarily an issue within the context of residential real estate investing, those investing in commercial sites which had one time been used as a gas station, dry cleaning shop, oil change franchise or many other type businesses could entail liability for toxic waste. The law stipulates that all eventual owners of property contaminated with toxic waste are liable for the cost of its clean up. This means that even if you had nothing to do with the pollution and it happened before you bought the property — you are still a responsible party for the clean up costs. These expenses could be huge.
Environmental remediation reports are available from specialist firms — and they should be used whenever there is any question of toxicity resulting from prior uses of the property. The fee for these inspections is relatively low, and one can end up saving you the worst financial loss of your entire life.
Liability For Tenants
Some localities have enacted laws requiring landlords to screen their tenants against sex offender registries, and have passed other laws resulting in landlord liability for tenant actions. Make sure you fully understand the laws which govern landlord liability in the jurisdiction of your investment, and take whatever steps are mandated in order to insulate yourself from liability.
Furthermore, ensure you have a comprehensive insurance policy on the property which further ensures you can’t be dragged into a lawsuit emanating from the actions of one of your tenants. Proper screening of tenants also goes a long ways towards avoiding ones who fail to pay their rent.
Multifamily Near Colleges
One of the best performing types of real estate over the years is multi-unit dwellings located near universities and colleges. These properties were relatively insulated from the recent crash because students still need a place to live while in school no matter what the macro economy. The do not suffer lay-offs or business closures which can hurt other residential and commercial real estate values in non-college settings.
While value is protected within this environment, leasing to students does entail other issues and your budget for property upkeep should reflect this reality. Furthermore, don’t give in to the temptation to reduce your revenue via barter arrangements with sorority sisters looking to rent your units.
Cater To A Single Profession
Those looking to invest in commercial real estate should strongly consider a building which solely caters to a given profession. A good example is a medical building — or a building just with law offices. These type buildings fare much better than mixed use equivalents. It is easier to manage the building to suit the needs of a single business type as opposed to manage a property having to be conducive to several different types of tenants. Furthermore, it has been proven that higher rents can be charged in single-use buildings as opposed to mixed-use within the same area.