Real Estate Consultants

Real Estate Investing – Eliminating Risk
By G. Brian Davis

What would it be like to create business plans so clever that
they are virtually infallible? A lofty goal, but an attainable
one, for real estate investors willing to take the time to
create a series of safety nets for their investments.

The premise works as follows: no matter how long term your
investment goals are, investors are wise to consider and allow
for contingencies forcing them to extend their ownership
exposure for the property. In plain English, that means that you
should invest with backup plans in place in case you have to
hold onto the property.

From a practical perspective, how is this done?

If you flip real estate contracts, and your ownership exposure
is (ideally) none, you probably are only concerned with how
cheaply you can acquire a real estate purchase contract, and how
expensively you can sell it. But what happens when your buyer
bails out at the last minute? Or you can’t find a buyer? You’re
stuck settling on the property yourself, which means the next
fastest way to turn a profit is to sell the property. But of
course, you now had to pay all those settlement expenses, and
you’ll have even more expenses to sell the property. How do you
recover that profit?

The answer is that you’ll have to create value in the property.
The easiest way to create equity in the property is to improve
it, so when you’re scouting for houses, even if only to flip the
contract, look for fixer-uppers, because they’re easier to
scrape a profit from if you’re forced to settle. As a bonus,
you’ll be selling to a homeowner instead of a fellow investor,
which means they’ll be buying retail instead of wholesale,
improving your sales price further.

What’s the next safety net, if you can’t sell the property? You
probably have a mortgage that you’re carrying every month, which
means you’ll have to do something to cover that hefty expense,
and fast. This means renting the property to a tenant, so that
someone ELSE pays that monthly bill. So the trick here is
minimizing your monthly costs (i.e. mortgage) and maximizing
your monthly income (i.e. rent). Some neighborhoods lend
themselves far better to rental properties than others, so
consider the market rents when you buy a property (or put a
contract on a property intending to flip it).

Neighborhoods that tend to make for good rental investments are
college neighborhoods, immigrant neighborhoods, gentrifying
yuppie neighborhoods, and stable blue-collar working
neighborhoods. Each of these has their own pitfalls, but they
make for a good place to start looking.

Once the property is rented out, you can sell to a fellow
landlord or real estate investor at your leisure, if you so
choose. If that fails to offer the profit your books need,
what’s the next safety net?

The final safety net is to limit your exposure to neighborhoods
that you feel are appreciating in value. Thus, if you can’t flip
the contract, can’t renovate and resell, and can’t sell after
renting out, you can always simply allow the property to
appreciate on its own, after which you can refinance for cash
out, or (finally!) sell the damn thing for a profit.

Just as with each of our previous safety nets, our last one has
certain indicators to bear in mind. Areas that are likely to
appreciate must, first and foremost, have some sort of
intrinsically valuable location. This could mean anything from
an urban neighborhood close to a body of water, or close to the
site of planned sports stadium, or an area with access to
existing or planned transportation, or any number of other
factors. Keep an eye on demographic patterns, and if you see a
neighborhood that starts appealing to young professionals, it’s
a strong sign, as they tend to be the first in the door of a
gentrifying neighborhood.

The next time you consider buying an investment property (or
contract), consider all of these safety nets, and look for
fixer-uppers, areas with strong market rents relative to
pricing, and neighborhoods likely to appreciate. Don’t assume
your first plan will work, because it may be your last real
estate investment if it fails.


About the Author: Brian Davis is a real estate investor and
contributing writer to many real estate websites, including
NuWire Investor and EZ Landlord Forms, which offers free rental
forms and real estate investing resources for landlords at
http://www.ezlandlordforms.com.

Source: http://www.isnare.com

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