Real Estate Tips

Most “guru’s” are currently spouting about how good real estate investments can be. I won’t seek to reinforce their sales pitch, nor will I argue with it. Real Estate can be a great investment, but if you not careful it can also be a financial disaster. You may ask who I am to speak on real estate. Whilst not a multi-millionaire selling my next great book I can give you some practical advise of someone who rented out for over five years and explain the pitfalls and the success stories.

Important Lessons:-

1) Good Insurance:- number one is not an option - its a necessity. Ensure your asset is fully insure both normal house insurance and extras like tenant damage and loss of rental income. Given a disasterous tennant this can lessen the pain. Be WARN! Don’t underinsure your house, if it burns down, particularly if there is any suspicion of arson the insurance company will do their own independant investigation and here is the real kicker - THEY WILL CHARGE YOU FOR THE PRIVALEGE - thats right, read the fine print, the insurance company before paying you out will minus their costs - i.e. $100,000 policy - $20,000 investigation means only $80,000 to you. Read the fine print, the insurance despite their ads is not your friend if a million dollar house and therefore a million dollars on the line, don’t expect the insurance company to be happy to pay out, if they can find a way to slime out of the policy they probably will. An insurance policy is a contact make sure you read it. Make sure you chose an insurance policy not just on price but also on good reputation and on company strength. (Want more advice try Real Estate Underground - Click Here!)

2) A Bargin isn’t always a bargin:- When purchasing a house remember to be very careful. Don’t buy on emotion. Never buy without visiting it several times on different days and times. I know of a nice suburb that has nice houses with big yards, but the smell of the local slaughter house is enough to make you want to vomit. Remember you only become aware of such things by visiting the house personally. Go at least one time without the real estate agent, speak to the neighbours and ask if they like living there. When buying a fix it uper check how easy it is to fix up. Does it contain asbestos, lead paint or like harmful products that are going to cost you a fortune to remove? Would you like to live there? If you don’t then don’t expect others to. Remember whilst more expensive houses may cost more they tend to attract better class of tennants and less maintenance costs as well as higher rental returns. Remember there are always more houses out there it the buyer is stuck on a price thats no good for you, don’t be afraid to walk away. Never buy a house on emotion! (Want to learn more on fixer upper fortunes then click Here!)

3) Do it yourself:- Unless you have a huge portfolio of real estate under your control try to do it yourself and you will save alot more. If you engage a real esate agent to rent your house they will charge between 10%-15% of the rental income, in return you get very little. They will rent out the house, may inspect once or twice a year (some agents will charge extra for this privallege) and you don’t have the choice of the tennants. Do it yourself and save the money. Pay a small fee to join online real estate black list - (this is a list that blacklists bad tennants) and you are in the same position as them. A real estate first goal is not to please you but to ensure they get their cut - this may mean they make decisions that are not in your best interest, but in theirs (e.g. they may get kick backs from their trademan and other relationships - in my case they repaired a hot water cyclinder without my permission - the cyclinder was less than a year old and still under warranty - thus I could of got it repaired for free, was I angry - you bet). Don’t forget with agents its your house, if they are not keeping you satisfied, change agents. In regards to maintenance trademens are hugely expensive, whatever you can do yourself, do. For example, changing a tap washer is an easy thing to do, some plumbers charge $100 just to pay a visit. (Want to Buy and Sell Real Estate from home? Click Here! )

4) There is more than Rent. Remember to factor in the rise in real estate prices. You may be able to buy a cheap house in a country town, but if that town has shown no growth and is unlikely to grow then you will not be able to resell the house at the later stage for a much increased price. What creates regularly increasing house prices is even increasing demand. Be careful buying in places like a mining town or a town with one industry, mine resources are limited and one industry towns can turn into ghost towns overnight if the main factory closes. Play it safe buy in towns and cities where growth has been and will continue to be good. Therefore don’t just consider the rate of return on investment in terms of rent, but also factor in capital growth. If there is likely to be little or no capital growth the rental returns need to be higher - if they aren’t, forget it and keep looking. When a place is vacant charging too high a rent will ensure it takes weeks to fine a new tennant - every week it is unrented is costing you between $5-$10 a week in rent - (e.g. which is better renting a house for a year at $400 a week or $380 a week - if the fails to rent for four weeks at $400 even if you finally rent it at $400 you have lost out ($20 extra rent X 48 weeks - ($960) (4x$380= 1520)- if you’d rented it straight away at $380 a week - you would have been $560 better off for the year)

5) Good Tennants are worth keeping. If you have good tennants who are looking after the house, you don’t alway have to keeping raising the rent every year with the general market increase - reward good tennants and increase your likihood of retaining them by giving them a discount on the market rate. If the tennant puts in a garden and trees and other landscaping, the capital value they are adding to your property may mean you should not hit them with the highest possible rent. Tennants who damage a house or fail to pay rent can cost a fortune. It normally takes 6 weeks or more to evict a non-paying tennant, that can mean a big loss, doubly so if you are paying the mortgage.

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People who want to invest in land to either “develop” it (as that term is defined in the articles in this Land Development Values series) or to build on it and sell a total package (e.g., a new home on its lot) have to sift through many parcels because everybody wants to try to sell them a property! The process of identifying the parcels that are worth pursuing, therefore, is very time consuming, and land buyers need tools to enable them to quickly weed out the junk and identify those parcels that warrant further consideration. So buyers typically use rules of thumb and formulas for their preliminary screening.

These rules of thumb are designed to provide rough estimates relating to the yield of a site and different cost factors because these are the key aspects in calculating the “right” price they should pay for the land. By defining the price at which the numbers work, land buyers can see within minutes if the seller’s asking price is realistic. If the land parcel is substantially overpriced, the buyers can simply discard the property and move on to better prospects.

Commercial Land Developments
Not surprisingly, the methodology for roughly estimating site yield and improvement costs is not the same for both residential and non-residential land developments. For retail or office parcels, the yield is the amount of potential building space that can be built. This is usually a function of the number of parking spaces that will fit on the parcel and taking into account the overall development limits imposed by impervious coverage and green space requirements set by the zoning ordinance. One rule of thumb might be used to estimate the total amount of land area needed for each car that would be parked on the office property (e.g., square feet for parking space plus drive aisle). Another would approximate the amount of land area taken up by sidewalks and walkways. A third rule of thumb might assume that the cost for vertical and horizontal improvements would be $100/sq. ft. of office space.

Residential Land Developments
The rules of thumb applied to residential land developments would be designed to estimate the number of building lots that the parcel could produce once the subdivision had been completed, and the cost for horizontal improvements. The value of each “raw” building lot would be calculated based on the projected sale value of the finished product (house on its lot) and the improvement costs.

One site yield rule of thumb might net out of the gross land area of the parcel the amount of square feet that would be wasted or couldn’t be used for whatever reason and then would divide the result by the amount of the minimum lot size required by the zoning to come up with the number of lots. For example, the rule of thumb calculations might look like this for a 15 acre vacant parcel zoned for 20,000 sq. ft. lots:

Step 1: 43,560 sq. ft. x 15 acres = 653,400 sq. ft.
Step 2: 653,400 sq. ft. x 70% = 457,380 sq. ft.
Step 3: 457,380 sq. ft. divided by 20,000 sq. ft. = 22.87 building lots

The final result is always rounded down, so there would be roughly 22 building lots for this parcel. In the second step, 30% of the gross site area was deducted to account for wastage, square feet lost because of natural constraints (e.g., slopes, floodplain, irregular shape) and land area that would be taken up by new roads in the community.

Remember that rules of thumb can vary by geographic area. They are rough estimates so you should modify them as circumstances warrant and not just apply them blindly. If a substantial portion of the 15 acre parcel was in floodplain, it wouldn’t make any sense to deduct only 30% from the total gross site area. If you’re not sure what rule of thumb to use, be conservative.

At last, there is a resource for people interested in buying or selling land. Check out Nancy Chadwick’s real estate investing and land development guides, articles and books at http://www.LandBuyingandSelling.com/

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