Friday, November 16, 2007

Ask Chris

I received this email early this morning from a would-be real estate investor that I'm working with:

I know appreciation is a big piece of the return, but in this market I don't know what I can count on. It makes me think I should maybe look cash flow instead until the market turns around and move more toward growth at that time. Your thoughts?

Well, I'm glad you asked.

First, let me state unequivocally that this would be investor is sharp. He is looking at real estate investing as a way to secure a retirement worth having. But when you are newer at anything there is always a period of confusion and wonderment. Now to the question at hand.

Appreciation and growth are always going to be important when you are working with me planning out your real estate investments. I don't advise heavy cash flow (run-down housing, mobile homes, etc.) income property and I believe that when you are starting a good healthy dose of leverage (with proper cash reserves) is in order.

Having said that, a rental property that pays for itself is of paramount importance. As the writer wonders, what will this market bring? What isn't stated, but implied, is:

  • How long will this market last?
  • How can I time it to move from cash flow to growth?

Quite simply, you cannot know any of those things. You have to go with historical growth calculated along with growth assumptions, population & job trends, available real estate and desirability (along with a few other things) plus experience and then you blend those all together so that you come up with a target area and property type. Easy, right? :)

In the mean time, you absolutely must acquire properties within those parameters that will pay for themselves based on the down payment you have, the loan product you choose and the expenses you expect (and don't expect).

Real estate investing is part science, part voodoo and a little bit of luck mixed in doesn't hurt. (See California's 20% a year growth. How 'bout the guy who sold it all at peak without knowing it was peak? That's luck.)

What am I saying? Buy your rental property, income property, investment property (whatever term you use) based on sound financial principals. Base your growth projections on sound homework. Then you should be fine.

1 comment:

Raj said...

Nice post buddy...
Particularly in a very tight commercial investment property market, you've got to allow at least 9-12 months for the process to play out. It can take several months to research your alternatives, open up negotiations with prospective landlords then come to your final decission. And you'll want to allow 2-4 months if you have to plan a move.