Monday, June 22, 2009

Be Patient, Make a Profit

We've all watched the late night infomercials and the reality shows about flipping property to make a quick buck. Some of us have even attended seminars and read the books on getting rich by flipping houses.
For ages, investment property has been looked at as the ticket to long-term growth and financial independence. But does investing in income property still make sense in today's market?
I would say yep, absolutely. Income property can be looked at like a bond that pays you interest. As long as the property is pulling in enough rents to cover mortgage, taxes, insurance, repairs and other operating expenses, and bringing a decent return on investment, you are good to go no matter how much the property fluctuates. As long as your goal is to hold the property for the long term, you won't get caught up in the risky business of flipping, hoping you'll make a profit, such as those speculators who got burned when the market went from hot to extra frosty in a matter of months.
Ask yourself this question...are you investing in real estate to create long-term wealth or make a short-term profit? You can not and should not treat real estate like a game you play with the stock-market.
The key to successfully making money in real estate is to do a thorough analysis of the property expenses and cash flow to make sure you are purchasing at the right price. You must also consider how much up-front cash (down-payment, closing cost, repairs) you can afford to put in to the property. Location is also paramount, as well as the property type. First-time investors tend to make the mistake of purchasing a single family residence or condo, in the hopes they can rent it out and make a profit, while building long-term equity. The price of residential properties rely heavily on "comps" (the selling price of similar homes in the area) and not on cash flow. Because of this, you will more than likely end up paying much more for a house and if the local market takes a dive, the value of your property will more-than-likely plunge as well.
That's why the fastest and easiest way to make a profit in income property is not to purchase a home, fix and flip it, but to find a multi-unit complex or apartment building who's seller has owned the property for many years and is charging below-market rents. As the new landlord you can come in, raise the rents, find new tenants and increase the value of the property by boosting its income stream. Now there is a risk in this. You must be able to cover any vacancies until you get them occupied. Another option is to leave the current tenants in place, but sign them to shorter lease terms. One year, versus long-term leases of five to ten years. This way you can eventually replace them with tenants willing to pay more, ensuring a higher stream of cash flow.
Apartment buildings, off-campus housing (near community colleges and major universities), and multi-unit complexes, are all opportunities smart investors should be taking advantage of, especially in the depressed California market place, where you are able to find distressed owners willing to give up the property for much less. There are opportunities and possibilities in every market. Do you homework and you'll find your reward!

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