you have to step back and ask yourself: “Too high compared to what?”
Price is all relative to the market at the time. There are people who bought their own home 25 years ago for $100,000 and then sold it for $400,000. Just because they made a big profit doesn't mean the price had peaked. The new owner might resell the home a year later for $500,000. The price paid for a property many years ago (even if it was $100) has no bearing on its value today, even if it sells for $2 million. If you can buy a property at (or below) market value, then certainly you are not paying too much.
The world is full of people who lament: “I could have bought that property 10 years ago for $150,000. It's now selling for $750,000. I could have made a killing if I'd bought it back then.” These are the people who, because of price tag fears, pass up every opportunity. Don't let the same apprehension make you a “coulda’, shoulda’, woulda’” person. It's not only the price that matters but how smart a deal you make. I'm going to walk you through the steps of how to find investment real estate with the best moneymaking potential and then negotiate the best deal possible. You'll soon realize how unnecessary price tag fear can be.
Fear of Management and Leasing
The thought of managing property scares away some would-be investors. But property management doesn't have to be a headache. In fact, one of the best ways to increase the value of your building is with good management – by structuring the right leases, maximizing income, keeping operating expenses under control, and establishing harmonious relationships with tenants.
Owners often choose to self-manage small buildings. With big buildings, your best bet is to rely on a professional management firm. A management company has an incentive to obtain the highest rent possible and keep the building at full occupancy, because the company usually works on a percentage of the gross rental income as well as on a percentage of new leases and renewals. In Chapter 12, we will discuss management and leasing and show how good management can substantially increase your bottom line and free you from the day-to-day operation of your building. In most cases, the cost of using a good management firm will be more than offset by the money the firm saves you.
Fear of an Economic Recession
No one can predict for sure when an up cycle will end and a down cycle will begin. When the Great Recession of 2008 hit, top-grade income properties held their value and, in some cases, increased in
value. The reason for the increase in areas such as Coral Gables, FL, was that capitalization rates started to drop.
Smart investors know that there are ways to weather the ups and downs. Even more, there are ways to capitalize if a recession hits. It is a good time to pick up certain type properties at lower prices. When it comes to real estate, it's easy to ameliorate the effects of a recession. “Good quality income properties in top locations are virtually recession proof,” says David Dabby, a well-known South Florida real estate analyst and consultant.
Fear of Risk
Most people resist change because of the risk they associate with it. They prefer to stay where they're comfortable. Change brings anxiety. But life is filled with change. When people are familiar with a situation or routine, they do not think about it as risky even if the risk remains. For example, if you work and pay your bills, there's no risk. Right? But what happens if you lose your job? Risk is always there. Sometimes it's major, other times it's minor, but it's rarely absent.
What you need to recognize is that risk is one thing, but the fear of risk is quite another. Letting fear get in the way will cut your financial rewards. As you move forward with your investment strategy, pay attention to those who have been successful and avoid the naysayers who create false anxieties with tales of doom and gloom. Our goal is to strike a balance between risk and reward.
Lack-of-Information Fear
Some people steer clear of commercial real estate because they think they just don't know enough about it. This book is designed to demystify the property-investment landscape. But there are also other ways to become well informed. If you are just starting out on your investment career, one of the best strategies is to build a relationship with a good mentor. You would be surprised at the number of successful investors willing to share the techniques that have made them wealthy. All you have to do is ask. During my own investment career, only a handful of people have asked how I mastered real estate investment. Yet I would have been happy to talk shop with anyone interested.
Novice investors can also get valuable, unbiased advice from a Counselor of Real Estate (CRE). A CRE is a professional who has an overview of the dynamics of a given marketplace. He or she knows what types of properties and what locations represent a good investment with minimal risk. A CRE is a professional who understands the ins and outs of a successful investment. A CRE will charge a fee for the service, but it will be the best money you've ever spent. Furthermore, there are educational courses and seminars offered by professional real estate associations to provide the remaining nuts and bolts that you need to become a successful investor. In Chapter 2, we'll discuss how and where to find the most valuable courses.
Among investment choices, real estate affords the greatest opportunities for wealth. Financial independence is important. It provides a safety net during personal and business catastrophes, and it means that you can stop working for a salary at the time you determine. Probably the most important reason for financial independence was summarized by Oprah Winfrey: “The real beauty of having material wealth is that you don't have to worry about paying the bills, and you have more energy to be concerned about the things that matter” (“Leadership for the 21st Century,” Newsweek, Oct. 24, 2005).
Keep in mind, however, that investing in real estate requires research and study. You shouldn't buy a property, even in a top location, unless you know what you are doing. You must be familiar with the market and make comparisons of rents, sales prices, and vacancy factors. You must check out zoning regulations as well as distances to shopping centers, houses of worship, restaurants, and entertainment venues. You have to understand mortgage financing and other factors. You'll also need common sense, persistence, and self-discipline. But once you master those and begin to make real estate investments, your money will be working for you.
Since the beginning of recorded history, wealth has almost always been measured by the amount of land a person owns. It defined classes – between royalty and commoners, “the haves” and “the have-nots,” the rich and everyone else. There was even a term for people with investment real estate. They were the “landed class.” Today, things haven't changed all that much. The difference is that in our free market society, by knowing what the rich know, you can apply the same principles to create your own wealth.
No investment is risk free. But real estate holds key advantages over other investment opportunities, including the stock market. One of the most important of these advantages is the ability to make a lot with just a little. If you put 20 percent down on a property and then sell it in a year for 10 percent more than you paid, the math shows that your return is a dramatic 50 percent! Few investments come with this kind of leverage.
Even investors without piles of ready cash will find a welcome mat when it comes to real estate. The players in the financing game – local banks, mortgage companies, pension funds, and insurance companies – compete for your business. As a result, not only can the terms of a deal be exceptionally attractive, but they can be matched to your financial circumstances and abilities. Think back to what we've just said: You can make a real estate investment with as little as 20 percent down. You won't find options like that when it comes to stocks or bonds. On top of it, you'll enjoy tax benefits.
Some people are scared away from investments because they over-analyze or worry. “Over-analysis can lead to paralysis,”
