Also serving the communities of De Luz, Rainbow, Camp Pendleton, Pala and Pauma

Investing in real estate - part 1

Having made the big decision to invest in real estate, where at least you may have something to show for the money invested, there are still many steps to take and mistakes to avoid. So let's look at a few.

The analysis paralysis. Believing the more information you get the better decision you will make. The focus is on the criteria used to determine if they will make an offer. Often using a set formula for performance and return on investment. Some like cash on cash some like an internal rate of return. There are many financial methods to determine the viability of how the investment meets your goals. Consistency is the key; use the same method in property comparisons. Smart investors don't get caught up in the minutia.

Your due diligence can make or break you. Doing only a cursory look – This mistake usually takes two forms: The first being not reviewing the historical operating statements and current rent rolls carefully. One of the tricks of the trade to use is look at the utilities – often they will tell a story about tenant turnover and vacancies.

The second biggy is only doing a cursory physical inspection of the property. If you are buying apartments, you need to have your building inspection inspect every unit, the roofs, the laundry areas, the attics, the crawl spaces, garages and parking areas too. You need to review the title and plotted easements carefully to make sure there are no neighbor problems.

If you are buying property with a group of investors or syndication make sure that those in the investment group have the same goals and exit strategy as you. Secondly make sure that each of the investors is financially in the same position so that you don't end up carrying someone. If you don't like what you hear from the managing partner of the group or even one of the investors – pass on the property.

Another important factor but not the least is a lack of cash reserves. One of the biggest mistakes investors make is not having the cash reserves to facilitate unexpected expenses. Or being over optimistic about the funds needed for cost of tenant improvements or leasing commissions or vacancies.

Last but not least is the investor in a 1031 exchange which allows the investor to defer capital gains and reinvest the equity into a like kind-exchange. Sometimes investors are so eager to avoid the taxes on the gain they overpay for the exchange or up-leg property.

Please feel free to email Pam Moss is you have any questions, [email protected].

 

Reader Comments(0)