Wall Street Your Real Estate -Post #4
Rule #3: Make An Informed Decision And Move Forward
In the previous blog post, we took a minute to step back from the New Rules of Buying and Selling Real Estate and discussed the one type of Rulebreaker property. If you missed that post, click here to find out which type of property breaks our rules for investing. Before that, we talked about Buying Against the Herd and how buying unpopular types of properties or in less popular locations can work to your advantage.
This month, we’re focused on the Rules again and we’re discussing Rule number 2: Make An Informed Decision And Move Forward. This rule for investing in the stock market states, “make an informed decision” and I added “and move forward.” So many people get stuck in the research phase they don’t buy anything. The “and” connecting this rule is critical. You may not succeed in real estate if you make an ill-informed decision, and you definitely won’t succeed if you don’t move forward. As the famous saying goes, “you can’t win if you don’t play.”
Real estate is a stressful investment because buying it is time sensitive and complex and, unlike buying stocks, you’re purchasing an asset that often requires active physical management. If you decide to buy any type of property, make sure you clear adequate time in your calendar to do the research. No one wants to find out that the garage in their new duplex sits on the neighbor’s land and needs to be torn down after the closing.
The research stage and the time you’re given to conduct your research varies greatly between the types of properties. You’ll have a short due diligence period for a straightforward purchase such as a triplex and a longer due diligence period for something with potential environmental issues like a gas station. The scope and type of due diligence depends largely on the type of property you’re buying. Even though it’s not typical to look at some commercial considerations when buying residential properties, often they’re helpful. For example, retail properties are heavily traffic and population dependent. Buying in an area with a growing population is generally a good bet for both a retail purchase and a residential rental. A growing population tends to translate to the ability to raise rents when rentals are scarce. Another area where retail can inform a residential rental purchase is in demographics. It’s helpful to understand the type of tenant you might be trying to attract. If you know the demographics, you can market your rental accordingly.
The best thing you can do when buying any type of real estate is to rely on experts such as attorneys, accountants, architects, contractors, inspectors, and engineers. Even if your agent is very knowledgeable, it’s important to get a second opinion from experts for matters you deem critical to your decision. Sometimes experts cross the line into territory where they don’t belong such as an inspector giving an estimate of the cost to repair or an attorney providing an opinion on the value of real estate. If you are concerned about your expert going rogue, there’s a solution for that too. I always suggest finding a mentor who has bought the kind of property you’re researching. They’ll be a wealth of knowledge and will save you time and money in the long run. You can ask them for reliable experts, get their honest opinion on various matters, and learn from their experiences. Barring that, you can always do research online about your type of property.
When researching, these are generally the things you’ll want to know. I’ve included links for resources that may be useful. Your type of property may be unique so make sure you ask your experts or mentor about specific considerations for your property.
Rising, falling population, age, education level, income level
Market Statistics – https://www.zillow.com/research/ (for residential). For commercial ask your agent for your sector of the market
General Condition of Surrounding Properties
Crime – call the local police department, conduct online research
Proximity to other retail, restaurants, groceries, gas stations
Does location allow short term rentals
School system – www.greatschools.org
Special Assessments – HOA or Government
- Primary vs secondary home property tax rates
- Any need for upcoming Bonds – School Bonds, Open Space Bonds
- Points, interest rates, appraisal, loan closing costs, credit report
Upcoming repairs based on age of appliances, HVAC, roof, major systems
Insurance costs, including flood, earthquake, umbrella and any additional insurance
Homeowner's Association for Residential Purchases:
Budget and financials for two years
Meeting minutes for two years
Ask about upcoming special assessments
Review CC&R’s carefully
Talk to a board member
Examine all common areas for condition, age, cleanliness, deferred maintenance
Talk to the local Planning Department if you have any zoning concerns
If short term rentals are part of your plan make sure they are allowed and you understand the process for getting licensed, if any
Even if short term rentals are allowed by zoning, the HOA may prohibit them
Value of property
Your agent should run a comparable market analysis before you make an offer.
Your lender will require an appraisal. If you’re concerned about the value of the property and are paying cash, you can order an appraisal.
Additional Available Inspections:
Wetland analysis for land
Specialty Inspections for Your Location – ask your agent
Age of roof
Age and condition of anything that can’t be examined by inspector
Any roof, foundation or other warranties? Get warranties transferred from seller to you if you can
Make sure to get warranty info at closing
Home warranty policy may be worth purchasing
Understand the leases – tenant termination rights, eviction rights, etc..
Make sure leases are assigned to you at closing
Talk to the tenants if you will become their Landlord
Make sure Tenants sign Tenant Estoppels for commercial leases
Ask about any past defaults, security deposits, renewal rights, neighbor complaints, etc.
Many residential properties won’t have a survey available but it’s worth asking
Most commercial lenders require a survey, typically and ALTA survey
What kind of heat, electric, sewer/septic?
What kind of internet? Fiber? Fast/slow
How is cell service in the area?
Cable tv, dish available?
Title insurance shows some of the issues with title such as any easements, restrictions, etc.
If you don’t know how to read a title report, have an attorney read it for you or ask the title company. This is an often overlooked area of residential purchases.
For commercial properties, ask your attorney about appropriate endorsements to the title policy and whether they are worth purchasing, such as a Zoning Endorsement, Comprehensive, etc.
Types of Loans
15 Year vs. 30 Year
Alphabet Soup – FHA, VA, etc.
Stigmatized Property and Disclosures
Ask about any murders, suicides or crimes at the property
Ask about any ghosts/paranormal issues at the property if this is a concern
Wow. That is a lot of research. Just looking at this amount of research may be so overwhelming you may decide investing in real estate is not for you at this time in your life. That’s a wise choice if it makes you nervous to have that level of risk. You may find you enjoy it at another time in your life or you may decide it’s just not for you. Investing in real estate requires a certain level of risk tolerance so you can sleep at night. It’s critical to understand if you’re comfortable with a certain level of risk and if you can manage that risk through your research before you “move forward.”
Most of you have already decided you’re comfortable investing which is why you’re here. The big question is, what level of risk can you tolerate for the property you’re buying? The number one best way to hedge against any risk is money. The three questions you need to ask yourself for any property are:
- Is the property a good deal given all the research? Given your research into all the above factors, is the price of the property low enough and the income high enough that if you need to invest money in it, the property value will still be at or above market value? Make sure you consider this in a rising market and in a declining market. Make sure you understand the needed repairs, rental market and all potential income and costs in this analysis. For example, if you buy a property for $1,000,000 and need to put $100,000 into it, it would be ideal if the property is worth $1,200,000 after you invest the additional funds. This is a reasonable cushion even if the market goes into a decline if you’re planning on a long-term hold to ride out any market decline.
- Do you have an adequate rainy-day fund? Do you have adequate savings so that you can easily handle the cost of repairs, tenant vacancies, declining rents, increasing management fees, increasing taxes, and any additional expenses.
- Given your research and rainy-day fund are you comfortable with tackling the issues at this property? Are you willing to address the problems found in your research? Some people would never take on a property with a roofing issue, yet others know they’ll pick up a bargain due to the problem, have the expertise to repair it or the ability to hire a great roofer, and would relish the challenge.
After all this analysis, I still think it’s important to do a gut check. If you have a strong negative physical reaction when you think about buying the property, even if everything looks good on paper, revisit that feeling the next morning and if it’s still there, don’t do it. Something in yourself is saying no and it’s critical to listen to that. As my grandmother used to say, “you can always buy, you can’t always sell.” If, on the other hand, your research shows some issues, but you feel good about it, move forward. We know that no property is perfect, but some properties might be perfect for you.
Next month we’ll be looking at Rule #4: “Invest In Real Estate You Understand And That You Have Time For”. This is a crucial concept to master if you want your real estate ownership to be as stress free and enjoyable as possible. After all, we’re not in this to lead you to an early grave. You can’t spend all of that money if you’re dead!