101 Things that everyone should know about Real Estate and Real Estate Investments
When buying Real Estate you need tounderstand the market environment in that area. Understand the implications of the area and the history of the property that you are examining. Be aware of other developments planned for that area. Research the area before you invest. The more knowledge you have, the better prepared you are! For example: reading this article is a good start! Learn everything you can about that Real Estate marketplace. Do your homework on the property! Research the property and the surrounding neighborhood at the local city, town or municipal hall. Ask neighbours in the area about the uses of the property and its impact on them. Do a title search any outstanding charges, liens or covenants. Do your own study on local pricing. Call a few successful Realtors and Appraisers. Most are quite happy to help. Remember when getting information, get conformations in threes. This means have three separate sources of information so you can identify facts from fiction. As a potential Investor, look to see if the price of one piece of Real Estate is accelerating faster in one area as compared in other areas. Check to see how the average price compares with the average price on similar properties in other neighboring towns or cities, the development costs, constructions costs and most importantly the vacancy rate and the potential return on investment. Always be ahead of changes in the Real Estate market. When the market cycle turns downward, sales fall off and you will not get the price you planned. Many people are finding this out right now! Understanding information is power! The more you know, the more you can evaluate the return on your investment. This will help you negotiate the purchase price of the property. Just because someone wants 0,000 doesn’t mean they won’t sell it for less, given a convincing presentation on current market values. Real Estate Agents are a great source of information. Always do your own research to determine fair market value. Real Estate Agent commissions are always negotiable. Just because they ask for 5-10% of the sale price doesn’t mean that you can’t negotiate. If you want to negotiate fees with Real Estate Agents, always research the Real Estate commissions charged by Real Estate Agents in the area. Remember, the more you are willing to pay in Real Estate commissions, the harder your Realtor is prepaid to work on your behalf. Learn to develop a sense for fair market values. You can do this by taking multiple similar local properties and that have sold and finding an average price. For example, take 5 similar properties in the area and divide the sum of their values by 5. So anything that is less than the average would be a good deal and anything over would be paying too much. Of course, don’t make your decision on price only. Not always, but most times there is a reason why the asking price could be lower or higher! MLS.com (Multiple Listing Service) is a great place to find information on Listings as most Real Estate Agents use this site to share listings information with other Real Estate Agents. Local papers are also a great place to look for local Real Estate Information. The internet is also a great place to find local Real Estate information. For more information on local transactions, research the land title Registries. They will carry information on Real Estate transactions that can be used to identify average prices. When striving for the leading edge on investment, look for a catalyst in the area. The increase of development display signs in an area makes a statement to an Investor, that the area maybe ripe for investing. If you are interested in investing or buying and reselling residential Real Estate, keep an eye on new roads, proposed new schools to be built or old schools to be renovated and expanded. If this is happening, you can be fairly sure that Real Estate values in that area, in the near future, will be impacted by supply and demand. The more demand for property in an given area, the more you can resell it for. Don’t be afraid to ask for more than your property is worth! Remember, you can always go down in price but it is hard to go up after you are for sale. Another great thing about asking for more is some people will actually pay it with out bargaining because they FEEL the value is there for them! Looking for and investing into growing communities at the very beginning, is a very profitable time for reselling. New development of shopping malls in either mature or growing communities is a good tell-tale sign for a profitable investment area. Never review Real Estate taxes and government assessment when buying. Learn to spot new developments. Examples: land clearing, surveying for new construction in and around major roadways are pretty good indicators. Also, look for widening of traffic lanes, the installation of turnaround lanes and the installation of new traffic lights. All these activities suggest the possibility of increased property values in the area. If you are looking for new developments, a great place to start is to contact the local town or city road and building department. They will be aware of new and future developments for the area. Another avenue for finding out about new developments is contacting the city, province or state department. Ask when and where new developments will be coming up. Always be aware of the property taxes. If the property tax is lower on the property of interest than others around it, find out why and be prepared for it to increase. To find out information about property taxes you can always call the local Tax Assessor and they can reveal how much the town or city is charging. It is called the mill rate. Keep an eye on school rankings. Remember the better the school does in over all marks; the more people want their children to go and learn there! This creates more of a demand to live in the area. This demand will create an increase in the value of property in that area. If the properties in a major city or town have become overpriced, the areas on the outer fringes most likely will soon be in demand. Areas in close proximity to major bus and rail transportation are even more desirable. Nearly any area that is about to install a major train stop or a new major bus route will see its property go up in value. There are 6 main groups of Real Estate. They are Industrial, Commercial, Investment, Recreational, Agricultural and Residential. Residential Real Estate is the most common. It has been our experience that people believe that this is the best investment to start. This Real Estate is mainly known as houses, duplexes and condominiums. Commercial property is the second most popular and is for the more sophisticated investor. This type of Real Estate includes shopping malls, strip malls, theatres, retail stores or main line office buildings. Recreational property is the third most popular investment and is usually done by very sophisticated investors and Trust Funds. These are the “get away” locations like hotels, resorts and spas, golf and nature retreats. Industrial properties are the least popular because most people have a difficult time understanding the development and construction process especially for a specific need. You will find large Investment Trust companies and more highly sophisticated buyers involved in these types of projects. Agriculture property surrounding populated areas are a valued investment for land developers. For long term holding properties. Did you know? Usually in a Real Estate transaction, it takes just as much effort to buy or sell a residential property as it does a Commercial property! Most times, the only difference is the number of 0’s at the end. Appraisals are important and you should get one before closing a purchase on a property. Borrowing money is just as important as buying the property. Remember to find the right Lender with an affordable interest rate. Meet Lenders in the local area… They are your business partners. Meet and interview lawyers in the local area. As the Real Estate zoning process is municipally controlled, a Real Estate Lawyer represents your needs to know the municipal idiosyncrasies. Last but not least, meet local Accountants and ask questions about tax implications of buying and selling Real Estate in their area. Property in different states or provinces has different rules when it comes to taxation. A good way to find competent people in lending, law and accounting practices, is to ask a successful Real Estate Agent in that area. You will know who is knowledgeable by how much they advertise and provide creditable information. Those that advertise the most, tend to do the most business. Building strong relationships with competent people gets the job done right. Banks aren’t the only place for money. A Lending Broker is another source however, there could be a price. Understand “Cap Rates”. To understand this definition see capitalization rates on our website under “glossary”. Different Real Estate assets have different asset classes, and depending on the class, can value or devalue the asset. If you are still reading this, good for you! And if not we understand but here is a fun fact. Did you know that the Guinness Book of World Records holds the record for being the book most stolen from Public Libraries? A condominium, or condo, is a form of Real Estate where the specified unit is for the free use and enjoyment of its owner. A specified part of the property and buildings is owned by the strata corporation and the use of and accesses to common facilities are identified as limited common property. The lands upon which the building is located is mostly identified as common property. Condos use what most people call Strata Titles. Look at insurance and understand what you have and don’t have insured. Understand where your unit and or property are located and make sure that all common elements in that area have been covered. Keep everything insured! The last thing that you want is to lose a substantial investment as a result of a fire or earthquake. Surprisingly, this happens a lot more often then people think. Banks and Real Estate Trusties are also a good place to look for Real Estate investments. Another place to look are public auctions. These usually have foreclosure sales, estate sales, etc. at a great price! You don’t need to pay the asking price for a property if you can’t get conventional or high ratio financing. You can ask the Vendor (Seller) to participate in a “Vendor Take Back” second Mortgage. This is the cast when the Vendor (Seller) takes a second mortgage on the property and you can pay it off over a period of time, to be agreed upon the time of sale. “Agreement For Sale” is another method of financing. This is when the Vendor (Seller) retains title in their name and the amount of funds to be paid are calculated in the same manner as with a convention lender and with a specified term. Upon the maturity of the term, the Agreement For Sale must be paid out in full to the Vendor (Seller) and at that point, title is transfer to the buyer or the Agreement For Sale can be renegotiated as long both parties agree. As an additional tip, the renegotiation process should start well in advance of the term due date so as not to jeopardize any part of this process. Land is the one asset base that will out last any generation. Land will always carry a value no matter what happens in the world unlike metals and money. In some places in the world, property is sold under a 99 year lease. Make sure you know what you are buying. This is why it is so important to learn how to read a land title. When buying Investment Real Estate, be sure to have identified the carrying costs and the length of time required to sustain the mortgage payments. There are four typical ways Investment properties generate cash flow – these are NOI (Net Operating Income), Tax shelter offsets, equity build-up, and capital appreciation. What is a NOI (Net Operating Income)? It is the sum of positive cash flow from rent and other sources of income generated from the property minus the sum of ongoing expenses. What is a tax shelter offset? Tax shelters can happen one of three ways – depreciation, tax credits and carryover losses. These can reduce income tax liability charges against income from other sources. So when looking for investments, some may find a loss attractive! Equity build-upis the increase in the Investor’s equity ratio as the portion of debt service payments devoted to the principal accrued over time. is the increase in market value of the asset over time, realized as a cash flow when the property is sold. Capital appreciation can be very unpredictable unless it is part of a development and improvement strategy. Learn to manage and evaluate risk in Real Estate. Always verify ownership of property… do a Title search! Learn what Title Insurance is and make sure you get it if you feel you will need it. Make sure when purchasing Real Estate that you get a property survey from a licensed property surveyor and determine that it is acceptable to the local government authority. Obtain an environmental study when purchasing or even selling the property. Contact a local Real Estate Property Inspector. Have them inspect the premises for structural, mechanical and maintenance deficiencies. Surprisingly, many people want to believe people are honest. Over and over again, we hear buyers complain that the property was misrepresented. The truth be known, many times the Sellers have not known that there were deficiencies, or if they had acknowledged the deficiencies they would have received less. Yet again, we are stressing that a third party appraisal and inspection are always obtained. Cash Flow! Take care of cash shortfall. This mean to maintain sufficient liquidity or cash reserves to cover costs and debt service for a potential shortfall period. There is nothing wrong with selling or leasing a property before you have received a Certificate of Title. This is called an Agreement For Sale. We have talked about this before but we need to show it in another light. This is risky but can be done. Have long term leases signed with Tenants with Conditions in the Agreement For Sale. Before you lease, Confirm in writing that the potential tenant is financially responsible. Specifically address the terms of the lease with the tenant including the tenants responsibility to keep the premises clean and free of any environmental issues. Learn how to find and hire proper and experienced Property Management Companies. Always analyze financial performance using conservative assumptions to ensure that the property can generate enough cash flow to support itself. There is more than just a conventional mortgage/loan that you can obtain from your bank on the Real Estate. You may want to explore other types of loans and mortgages. Examples are: Assumable mortgages, Balloon mortgages, Blanket loans, Bridge loans, Discounted mortgages, Commercial loans, Equity loans, Flexible mortgages, Graduated payment mortgage loans, Offset mortgages, Participation mortgages, Reverse mortgages, Interest-only mortgages, Wraparound mortgages, and other Non-conforming mortgages. Theses are just to name a few! When buying and selling Real Estate, always be aware of the financing rules of the individual Lenders. For example if you are trying to buy a property to get more money because the appraised value is more than the purchase price, be aware that most Lenders will only give you a percentage of the appraised value or purchase price which ever is the lesser. Understand how your Lender works and how they lend money. Learn how to understand payment and debt ratios. Learn how to manage and build a credit score. When building, buying and/or selling Real Estate, in most cases it make more sense for liability purposes, to purchase through a legal entity rather than own the Real Estate as an individual. Most Banks will finance 60-80% of the Commercial or Industrial project. This means that you will have to come up with 20-40% of the cash for the project. You can raise this cash either from family, friends or third party Investors and allow them a second mortgage as collateral. Most typical small Real Estate loans are amortized over 10 to 25 years. Always keep an eye on interest rates because sometimes it makes sense to break loans and get them refinanced. Take a look at your current interest rate on your loan and compare it to today’s interest rates and see if it makes sense. Net Lease is becoming more common, as it requires the tenant to pay additional rent to accommodate some or all of the property expenses which normally would be paid by the property owner. There are four types of Commercial and Industrial net leases: single, double, triple and bonded. Triple or net lease is the most common as it requires the tenant to pay all common expenses and if there is an increase in utilities, insurance or taxes the tenant not the property owner pays! Typically, well thought out, implemented triple net leases are ‘safe, secure equity investments’, rather than ‘just cash flow investments’. Always have a backup plan. Some times when you purchase a property life unexpected occurs. Have a plan to re-organize; if the first idea does not work or if a sale is necessary because of life’s issues, make sure you know someone that you trust so that you can transfer it in a moments notice. If looking at a new development, have a professional developer analyze the project in advance. Contact them at http://www.pro-land.ca/index.php/contactproland and just ask for a Business Development Officer. Get organized – most competent Lenders can give you a checklist of the documents required to obtain your financing. Get pre-approved – this saves you time by knowing what you can “afford to shop for”. There is no sense wasting your time or your Real Estate Broker’s time looking at three million dollar buildings if you can only afford $ 300,000. Consider low down payments and longer-term loans — this preserves your capital for better utilization, keeps your cash flow high, and allows you to redeploy the “capital savings” into other profit-generating business activities. Last but not least, only work with specific Real Estate Specialist – again, your time is precious so only deal with specialists that are involved in that type of Real Estate.
Well, if you have read this list all the way through, we complement you! Success will occur only if you understand, address and implement the use of the points referred to herein. We hope that www.pro-land.ca is able to inspire you and give you ideas on how to enter the Real Estate market and become successful. Life is a journey and is always worth living, so enjoy the opportunities out there.
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Joe Lawrence has been in the business world since he was born. Started his first business when he was 8 years old and now helps lead a aggressive Commercial, Industrial and Recreational Property development company call Pro-land. On his spare time he helps manage other Real Estate Investments but building and developing projects are where he shines most.
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