LIL' BUDDY'S BLOG - INVESTING SMART IN A BUYER'S MARKET!
THE CHICAGO REAL ESTATE MARKET, AND OTHER THINGS CHICAGO, FROM THE POINT OF VIEW OF A LITTLE WHITE DOG!
Here I am in my Upstairs Office - my laptop is rebooting!
Woof! Hope you all enjoyed the Fourth of July! I had a great time watching the neighbor human shoot off some bottle rockets and sparking fireworks. I heard they were also thinking of shooting off some mortars, but we are in a flight path, near O'Hare Airport, and that would be dangerous.
Here's an advance tip for Fourth of July, 2008 - never hold a lit M-80 between your hind paws while answering your cell phone! Big Mistake!
This article is the third in a series about how to operate in today's Buyer's Market, like the one we're experiencing in Chicago and the suburbs. This week, we'll talk about Real Estate Investing - especially for the smaller investor (my discussion will apply mainly to the smaller breeds - Jack Russells and Schnauzers, or smaller). Larger breed investors, such as you German Shepherds, Rottweillers, and Great Danes, will be the topic of a Lil' Buddy's Blog at a later date.
Indeed, inventory levels of residential and small investment properties stands over 20% higher than 2006 levels, according to the Chicago Association of Realtors, and many properties are sitting on the market far longer than last year, before being sold.
So, it's a great time to invest in real estate, huh? Grrrr! You still need to be cautious! Remember, it was only about five years ago (or about three years before I was born) that many investors said high-tech stocks in the stock market were guaranteed "Can't Miss." With a few exceptions, many were wrong, and lost a lot of money, just a short time ago!
The other day, I was asked to lead a symposium on Smart Real Estate Investing in Today's Market. From my presentation (it was a bit tough using Power Point with my two front paws only), here are six things all real estate investors need consider today -
1. KNOW YOUR NUMBERS! The traditional "Rules of Thumb" numbers for Real Estate Investors have been Gross Rent Multiplier - the price of a property divided by the actual or potential gross annual rent, expressed as a whole number, and Capitalization (CAP) Rate - the net annual income divided by building price, expressed as a percentage. There are other more sophisticated analytical numbers - Adjusted CAP and Internal Rate of Return, which takes into account future value and tax consequences of a resale. Often, these numbers are compared to those of similar investment properties sold or available nearby. When a Financial Professional suggests a stock or a bond has "Good Fundamentals", a real estate investor looks to these benchmark numbers. Property ratios provide a good, top-line read on the price to offer, but you also need to consider repair or upgrade costs to the building, current rent levels, and rent trends in the area. Unanticipated vacancies in rental property can mean the difference between profitability and loss. Invest with care!
2. BE CONSERVATIVE - BUY LOW, PERHAPS EVEN LOWER THAN YOU'D INITIALLY THINK! OK, so you've worked the numbers, and the building you are considering seems to be priced right. Now, you might want to shoot lower than the target - in case any unexpected surprises crop up - bad tenants, unanticipated repairs. Also, changes to city building codes. Right now, in Chicago, the city is mandating owners of many multi-family buildings retrofit their rear porches and stairwells for added strength and safety. Build these potential charges or revenue reductions into your initial purchase price!
3. LOOK ON THE PERIPHERY OF THE HOT AREAS, BUT NOT TOO FAR OUT! Team Leader Dean has had a lot of success following this one! Everyone wants the hottest neighborhoods! However, you are paying a premium here for status and name. Search on the periphery of these hot areas - adjacent to them. Often times, the potential appreciation rate in these neighborhoods exceeds - often, far exceeds, those in the more established neighborhoods. Prices are usually lower, and properties more likely to pay out and offer better cash flow, and a potentially stronger return after just a few years.
4. BUY FOR THE LONG HAUL! It seems everyone wants to make the quick buck by flipping properties! In today's buyer's market, that's very risky! You might think you will sell quickly, at a particular price, but what if the property sits on the market, unsold, and your carrying costs increment? Even selling at the price you predict, your repair and upgrade costs might be higher than expected. Although many property prices have come down somewhat, costs of labor and materials have risen considerably over the last few years. Consider a rent and hold, perhaps for three to seven years, and you'll enjoy tax benefits, and greater potential equity, which you can use to build your real estate portfolio down the line. Of course, consult your accountant for tax implications on any real estate investment.
5. PREPARE FOR THE UNEXPECTED! I can't mention this enough! Always consider that repair costs can be higher than anticipated, vacancies will be longer, rents will need to be lowered in some markets. Proper Real Estate Investing is a business - think dollars and cents, and throw in a contingency in case you are off a bit in your projections.
6. CUSHION REPAIR COSTS! Again, latent repairs usually make themselves clear, after you open that wall and examine those plumbing pipes, electrical wires, or structure. In the words of my old dog friend, Scout - "Be Prepared!"
There is no such thing as a GUARANTEED RETURN, you dogs! Anyone with four paws and a tail should know that! Now's a good time to jump in to the Real Estate Investment Marketplace, but proceed with caution and care!
Want to bark back with your thoughts, comments, experience, and suggestions? Just stop by the big Maple in front of my house, and leave me your two cents worth.
Happy Investing!
YOUR ACE REPORTER ON FOUR PAWS,
BUDDY HOLLY MOSS
