Real Estate is so sexy and its exciting to look at, negotiate and buy but it can turn sour and costly to own. We spend a lot of our time working with investors and those with just enough credit to be dangerous on a regular basis about the risk and reward of owning investment real estate but rarely do we have the hard discussion on what owning real estate really looks like. One of the reasons most realtors do not have this discussion is that they really have no idea what they are talking about and just want to close another sale, get the commission and post it on Facebook. As cute as this is, at any point did you take a good look at what buying real estate means to you and what the ups and downs may be? We will.
This fall we are starting a series called OREBYPH (pronounced: smart-buyer) and it will be touching on some of the pros and cons of owning property beyond your personal home and the focus will be transparency not a sale. I know some will ask “why would you not want to make a sale?” and I do but I want to make good sales and I want my customers calling me for their next project. Too many times you hear of how a broker led someone full speed ahead into a poor investment and whether the broker was aware is not the discussion here but instead how can you really challenger yourself to make a really smart decision when it comes to investment property.
Money – Its really what makes the world go round and its so important to talk about as you plan to invest in real estate. I was brought up in the business with a focus on understanding how the money played a roll in investing in real estate and I am not just referring to how much money you have or how much do I think a property is worth. We are talking about really knowing a smart way to use your money and what is a property return on cash and loans. Sure anyone can guess that buying a house for $100,000 and selling it for $150,000 is a $50,000 profit but how often do we not look at what getting to that $50,000 looks like. Getting there is a strong understanding of what repairs cost, what issues will show up that are not obvious, how much did that $100,000 cost during the hold period and if you do make $50,000 whats it cost you to realize that? These are questions that your broker needs to be encouraging you to ask yourself as you begin investing and then bringing you deals accordingly.
I have a client that has a very sellable piece of land that he paid about $100,000 per acre for and today will command about $300,000 per acre all day long. Looks like a good investment right? But I don’t push him to sell because I have a deeper understanding of what the money is to him and therefore take that into consideration as we work deals. He does not need the cash and the cost of owning the property is minimal to start but the cost to sell it is huge. Lets start with fees. His land to sell will cost a realtor commission, surveys, phase 1 environmental, closing costs and the big one….capital gains. Of course each of the first fees are going to always come with a sale most likely but the capital gains, which happens to be the largest by far, needs to be accounted for. Unless I can find him as good or better land investment that is for sale and can participate in an exchange there is no reason to bring him another buyer and if you have looked for deals in land lately you will understand why I probably won’t find him a deal for a while. This is a great example of understanding what the money means and how it may apply to each client.
Money needs to be the most detailed part of the purchase in my mind. Yes most of my regular buyers are cash but is the always the best way to close? Knowing what a loan can do to cash flow of an investment and if the property qualifies is just as important. And having the insight as to really what kind of returns and timeline a buyer is expecting and not overpromising can make a huge difference to our clients. I can sell 1 property to any investor but if you look at your return client list and do the math if they stop using you because of bad advice its not pretty. Take the time to understand money as an investor and as a broker for the investor now for great success later. Figuring out what your final best case return is going to be can really be an eye opener and in my case is a turn off on the majority of transactions. Yes if you are investing millions and millions of dollars regularly you look for lower risk lower return scenarios but most buyers of real estate that we will deal with are those that will be leveraging and taking on a rather serious risk. So is a $10,000 return on a $100,000 outlay a good risk? I don’t think so but depending on how fast that is and the circumstances, some investors see that as 10% and a no brainer.
I think a broker that is going to do many transactions or chase the investor business needs to be smart and studied on how money works and how working with well planned money always will outpace just chasing a quick buck or a commission in the long run.
This is just one topic we will begin discussing and knowing that you can write enough but can write too much, we barely hit the surface. What my goal throughout this series is to help investors and brokers step back and begin to ask the questions that will give them a leg up against the risks that come with this business. We look forward to discussion and also including this in our upcoming podcasts.
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Curt has been in the Indianapolis Real Estate business for over 10 years and spent his first years learning all aspects of commercial management and brokerage. He has had great success in managing existing commercial projects and new retail and office developments. Curt specializes in building owner representation and purchases in the Westfield Indiana market as well throughout the Indianapolis Metro area. Curt is passionate about growing the local Westfield community and in his free time volunteers with Westfield Youth Assistance and raising 2 children with his wife Jennifer.