Buyer Guide: What Home Buyers Should Look For And Ask When Touring Homes

Buyer Guide: What Home Buyers Should Look For And Ask When Touring Homes

How to Tour Homes Like A Real Estate Pro

17 Point Checklist

Below is a list of what home buyers should look for and the questions they should be asking each time they tour a potential home they are considering to purchase.

1) I first notice curb appeal.  Does the subject property have it or are there significant imperfections?  Simply put – is the exterior ugly, does it only have a back entrance, or maybe no parking?
The majority of the housing stock in Los Angeles is older and some properties carry significant flaws.  Most active and seasoned agents tour 20-40 properties a week and will be able to quickly communicate any out of the ordinary features, which may need considerable exterior updates or structural changes in order to correct.  If the price accounts for the flaw(s) and the buyers budget is met, then a defect may be an opportunity and not necessarily a hurdle.
2) Lot location is another important factor to gauge when previewing a home you will potentially purchase.  Luckily for us, it’s 2018 and Google street view is a tool everyone can access and one you should be using before touring a property.  You can get a generic feel for the area, a bird’s eye view of the neighborhood and make a few minor pre-determinations as to whether the property will be a good fit and if you should even go and tour it.  
I also ask myself the below listed questions.
  • Is the home on a busy road?  
  • Is it next to a freeway?
  • Does it back up to a fast food restaurant or gas station? 

These, and a few others, may decrease your average sales price when compared to other listings in the area when you try and sell in the future.

3) Neighborhood or Area.  Neighborhood, curb appeal and lot location are key factors that determine price and desirability.  Do the neighbors show pride of ownership?  Are the neighboring homes in the process of being remodeled or or do they look tired and worn out?  Quality of schools, access to public transportation, zoning restrictions, and upcoming developments also play a role in pricing and future desiribility.  In fact, there is a 21 point checklist of items you should consider and ask your agent when discussing potential areas and before deciding where your target neighborhood will be. For example, if you are purchasing a home between 1.5M-2M there will be a host of exchangeable neighborhoods through out Los Angeles, so taking a look at the list below will be important in helping determine where you should go.

 https://westlaliving.com/blog/price-is-just-one-factor-when-buying-real-estate/

4) What shape is the roof in?  I’m not an inspector, but I’ve read 250+ inspection reports, and toured thousands of homes.  I’ll never be the final word when it comes to the condition of a roof, but can provide a general opinion.  You’ll obviously have it inspected and either a roofer or your general inspector will be the final say.  But if we can determine that a home has a host of upgrades that you and the seller are likely not going to deal with or negotiate for, then you can save yourself time and valuable inspection dollars by moving on to the next potential option.
5) Does it have new or old windows?  Windows can be expensive and if they are old, in disrepair, or original to the home (if its older) they can increase your heating and cooling costs as they will not be as energy efficient as the new ones.
6) Does the flooring feel uneven or sloped?
7) How old is the electrical panel?  Is the panel 100, 200, or 300 amps?  If the property is older, has it been re-wired for electrical?
8) How old is the water heater?  Does look like its in good shape?  **PRO TIP** Most water heaters have a sticker somewhere on them that tell you the date the unit was manufactured, in case the seller or listing agent do not know.
9) Is the sewer line original or has it been replaced recently?  Any recent plumbing issues?
10) How old is the plumbing inside the house?  Is the plumbing galvanized, copper or PVC?
11) Has a termite inspection been completed?  If there is a termite inspection, will be provided a copy before or after we submit an offer?
Will the seller be willing to pay for a section 1 termite clearance?  If not, when was the last time it was treated for termites?
12) Is it possible for me or the buyer to poke my head underneath the crawl space to take a look a quick look at the foundation? 
**PRO TIP**
If it’s a raised foundation, then you may be able to see the plumbing underneath and determine if it’s copper, galvenized or PVC.  Also, if it’s a raised foundation you may be able to check and see if it’s been retrofitted for earthquake safety, which means it may have anchors, bolts and cripple walls.  However, even though I can give you a general opinion, the home inspector(s) will have the final say.  If you notice that the foundation is raised and made of bricks, you should think very carefully about purchasing the property.  Replacing a brick foundation can cost anywhere from $25,000 – $60,000 or more. Brick foundation are extremely unsafe and volatile during an earthquake.  If you cannot afford to replace or if there seller is not willing make a price or credit concession in consideration of the brick foundation, I am of the opinion that you should move on to a different option.
13) Are there any other disclosures the seller or listing agent made during the showing or that they maybe forgot and we should be made aware of?
Before I arrive, I also have the following information handy.
14) Average sales price to list price ratio for the area and comparable homes.  Are similar listing trading for more or less than the asking price of the subject property we are visiting?
15) What are market trends for the neighborhood, are they trending up or down?
16) What are the average days on market for similar listing in escrow and recently sold?  This will help tell you if you should move quickly with an offer or take a few days to think it over and compare other potential options.
17) Listing agents leave a blue print.  How does this listing agent operate?  Meaning, does he or she price their listings below market value to bid them up OR have they historically priced high and been worked down on price  OR do they normally price their properties at fair market value and achieve asking price or close to it?
Like this information?  Want to talk privately?  Shoot me a message.

Get In Touch

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Written By: Robert Rodriguez

Personally Speaking: I’m a proud dad and hockey player who leads with empathy and gratitude.

Goal: Providing my clients, friends, and colleagues with timely, intelligent and actionable advice.  I am always available to answer your questions regardless of whether you need to buy or sell.  Text, call or email 424-353-9004 | Robert@WestLALiving.com

Professionally Speaking:   Over 100 million in total sales volume, successfully completed over 200 transaction sides throughout the LA area and in a variety of neighborhoods with a wide range of property types.  In my 9 years as a licensed sales agent, I have climbed the ranks of the LA residential sales industry, distinguishing myself both locally and nationally.  I have sold complex Estates, land, income property, single family, luxury leases and condos. Both colleagues and clients widely recognize me as a respected professional whose reliability, dedication, and expertise is second to none.

How to Search For and Rent A Home in Los Angeles

How to Search For and Rent A Home in Los Angeles

How to Search For & Rent A Home In Los Angeles

The Los Angeles rental market is fragmented and scattered across many platforms. There is no one website, central hub, or database that holds a list or directory of all of the available properties for lease.

Leasing in LA is a little more work with a few more mouse clicks. Below is a breakdown of all the available sites that hold the majority of the rental inventory and the different approaches to take with each one.

 

Broker Listed Rental Properties:
Properties listed for lease with an agent or brokerage fall in this category.   If you have an agent helping you search, they will set up daily property alerts which arrive in your inbox every morning.  From the list you are sent you must select the ones you want to see and notify your agent.
**PRO TIP** If you and I are working together, I will set up an account for you in our proprietary search system.  You will receive daily property alerts, and will also be able to save properties in a collection, opt-out of the ones you don’t like, and add notes under each listing inside your account.  We will also be able to share records and collaborate on property collections. Just click the star on the listing you want to see, and I receive the notification and will get to work.
**IMPORTANT**  You must complete two steps before you have access to the properties I send:
Step 1) Open the registration I email I send you and create an account.
Step 2) Download the compass app and login so you can take notes on each property as we go and tour. https://itunes.apple.com/us/app/compass-real-estate-homes/id692766504?mt=8  
Non-Broker Listed Rental Properties:
Some homeowners and property management companies choose not to list their property or rental unit(s) with a realtor.  The majority use the three below listed sites.
  1. https://www.zillow.com/rent/
  2. https://www.apartments.com/
  3. https://losangeles.craigslist.org/search/apa
**PRO TIP**  If you are working with me or an agent, I highly suggest you send the list of properties you find in the non-broker listed sites so they can vet them on your behalf.  There are Property Management companies that are notorious for mistreating and not correctly servicing their tenants and agents know the city better than most and can advise you on the area and the building.  They can also check to see if it’s listed for lease with a broker (they sometimes are) and can assist with the process.
**PRO TIP ** I also included a list of recommended financial documents you should have ready before you start touring rental homes.  You want to be prepared so when you find “the one” you can move quickly and receive an approval.
Documents Usually Required for Leasing:
1) Proof of Income which includes one or a combination of the following:
  • Two most recent paystubs
  • Most recent w2
  • Most recent tax return
  • Offer Letter or Employment Contract if relocating from a different city
  • If you are unable to provide the above-listed proofs of income, then the landlord may require 2- 6 months of recent bank statements showing you consistency in deposits
2) Identification (Driver’s license or Passport or State Issued ID)
3) Rental Application is mostly given to you by the owner or agent(s)
4) Your Credit Report which is usually pulled by the owner, listing agent or property management company.
If you have any questions or need help with anything else, please feel free to reach out. 

Get In Touch

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Written By: Robert Rodriguez

Personally Speaking: I’m a proud dad and hockey player who leads with empathy and gratitude.

Goal: Providing my clients, friends, and colleagues with timely, intelligent and actionable advice.  I am always available to answer your questions regardless of whether you need to buy or sell.  Text, call or email 424-353-9004 | Robert@WestLALiving.com

Professionally Speaking:   Over 100 million in total sales volume, successfully completed over 200 transaction sides throughout the LA area and in a variety of neighborhoods with a wide range of property types.  In my 9 years as a licensed sales agent, I have climbed the ranks of the LA residential sales industry, distinguishing myself both locally and nationally.  I have sold complex Estates, land, income property, single family, luxury leases and condos. Both colleagues and clients widely recognize me as a respected professional whose reliability, dedication, and expertise is second to none.

Are we in a bubble?

Are we in a bubble?

Are we in a bubble?

Is California in the midst of another bubble?

One of my least favorite buzz words is “bubble.”   The resurgence of our economy has incensed doubt in some potential purchasers and sellers. One of the top real estate related questions I’m hearing from my clients is, “are we in a bubble?”  The cheap answer is there is no way to know with certainty, while partially correct, as your real estate professional,  I owe you more than a canned response.

The Facts:

  1. 8 years of uninterrupted price growth, which means we have entered the second-longest bull market in US history.
  2. All 1.3M jobs were lost during the recession.  2.6M jobs have been added during the expansion.
  3. Statewide median price plunged to $245,000 in 2009.  The median price is now closer $550,000, still 9% below the pre-recession peak.
  4. Unemployment remains at all time lows.  Income is growing and expected to increase.
  5. According to Wikipedia, an economic bubble or asset bubble, sometimes called a speculative bubble, is a situation in which asset prices appear to be based on implausible or inconsistent views about the future.

So, what’s the problem?

The foreclosure backlog has been wiped out, homeowners have equity, and there is significant new wealth creation for many families.

  1. Home price growth is far outpacing income growth.  The home price-to-income ratio measures the relationship between home costs vs. median household income.
  2. Currently, the median home price is roughly 8 times higher than the median household income, which is well above its historical average of 5-times income.
  3. The housing affordability index, which measures the percentage of households that can afford the median-priced home has dipped to 28% – meaning 72% cannot afford the median price home.
  4. Over 830,000 working-aged adults have left California, in the past decade, to states where home prices are dramatically lower.
  5. Low housing inventory, deteriorated affordability, and declining rates of homeownership are the concern.  Studies show that high housing costs are burdening the top employers, either by not being able to develop competitive enough hiring packages or being able to subsidize relocation costs.

How are the economics today different from the previous crash?

  1. The average FICO score for closed conventional purchases was 752.  This represents excellent creditworthiness for most people purchasing real estate.
  2. Most borrowers have skin in the game, meaning they are putting anywhere from 5-20% down.
  3. Most borrowers are locked into fixed-rate loans.
  4. As long as the borrowers keep their jobs and the economy doesn’t experience an external shock, then there is little incentive to default or walk away from a mortgage.
  5. During the run-up to the previous crash, borrowers were in loans they couldn’t afford, in adjustable rate mortgages, and many in zero-down payment products.  Further fueling the drive up in prices was loose lending standards, which drove speculation and a house of cards real estate market.  This is certainly not the case now.

What are the tipping points?

Look out for interest rates increases, which will affect affordability and place downward pressure on price appreciation.  The Federal Reserve recently raised interest rates for the 6th consecutive time since the previous financial crisis.

Also, keep an eye on potential external shocks to the economy that will affect the demand side of housing.  It’s simple; California housing prices grow because demand outstrips the chronically under-supplied market.  An economic shock that takes away demand by ramping up job losses or impacting wealth or incomes will most certainly reduce price growth.

Right now, the stock market or global economy look like the most likely targets for a potential shock.  The national price-to-earnings ratio is above its normal range, hinting that the value of many publicly traded companies is higher than their profitability suggests.  It’s important to note that if we see an external shock that causes a decline in home prices, the damage will likely not be as widespread as the previous “Great Recession.”

The wildcard is tax reform, which could tip the balance in either direction.

What do I think? 

To intelligently analyze the market, you have to be able to differentiate between a symptom and a cause.  For example, the flu is an infectious illness, which causes symptoms like fever, chills, cough, runny nose, etc.  The inability to systematically produce enough new housing units is the flu, and the symptom is the run-up in prices.  LA, which is currently the most underbuilt county in California, must build up and/or become denser.

Approximately, 180,000 new housing units must be produced each year just to tread water on housing affordability.  We will likely see more high rises, townhomes, an expansion of public transportation, and changes.  Every time I drive around our scenic city, I can’t help but notice there is almost zero vacant lots/land.  This may be unpopular for some, but a likely path.

Areas once considered low income or undesirable will become the next “it” neighborhoods.  This has already happened in individual pockets.  If you’re looking to take advantage of double-digit price appreciation, some areas are still trending at above average year over year price growth.  You just have to know how to search.

I also don’t believe we are at the tipping point yet.  Sentiment among local agents and the buyers and sellers I speak to is optimistic.  There is still room for more growth.  We will likely not see a downturn this year and possibly even next year unless an external shock hits the US or global economies.  I’m of the opinion that the current tax reform bill will likely fuel wage increases, corporate profitability and continue to stimulate growth in the markets.  According to the report in the link below, the two most overvalued regions are the Bay Area and Orange County.  However, not all markets are overvalued, but if prices do fall, they will likely hit those areas hardest.

What’s the silver lining?

Most economies in large cities are mainly made up of Finance, Insurance, Real Estate, Law and Health Care.  Los Angeles additionally features technology, film/tv, creative, media, and international trade sectors which help keep it slightly more insulated than other cities. 

Do you have questions? We have answers.

4 + 1 =

Robert Rodriguez

Robert Rodriguez

Compass

Written by me, for you.

Goal: Providing my clients, friends, and colleagues with timely, intelligent and actionable advice.  I am always available to answer your questions.  Text, call or email 818-395-5517 | Robert@WestLALiving.com

Professionally Speaking: In my 8 years as a licensed sales agent, I have climbed the ranks of the LA residential sales industry, distinguishing myself both locally and nationally. I am closing in on sales upwards of 200 properties throughout the LA area and in a variety of neighborhoods with a wide range of property types. I have successfully sold complex Estates, land, income property, single family, luxury leases and condos. I have widely been recognized by both colleagues and clients as a respected professional whose reliability, dedication, and expertise is second to none.

Los Angeles Real Estate Remains a Flight to Safety

Los Angeles Real Estate Remains a Flight to Safety

LA Real Estate Remains a Flight to Safety for International Investors

Wealth preservation is the name of the game when it comes to foreign investors parking their cash in US real estate.   International cities like San Francisco, LA, NY, Miami, and Chicago are viewed by the wealthy abroad as “safe” investments to position their cash.

When analyzing and viewing what drives this behavior one only needs to look at the economic environment overseas.  South America is in recession, the exchange rate in lots of countries in that continent have depreciated 25-35%.  For example, Brazil, Venezuela, Columbia, and Argentina are all either in recession or have seen falling commodity prices and political turmoil.  The wealthy citizens in these parts of the globe are scrambling to get their cash out while moving it to safer investments like US real estate and treasury bonds.

 Foreign buyers from many parts of the world are still very much around.  Not in numbers like they were, say, two years ago, or a year and a half ago, but foreign buyers are absolutely here.  San Francisco and Los Angeles remain a haven for flight capital, and its real estate is a “safe financial investment.”  People wanna be here, whether they’re coming from London, Paris or Singapore.  The uptick in domestic demand for luxury real estate is noticeable.

LA has the beaches, the lifestyle, shopping, events, arts, culture and proximity to the east. We have direct flights to nearly every major city in the world.  Domestic demand, while strong, has not soaked up supply in the uber luxury markets.

Additionally, In 2016, investors enjoyed the lowest interest rates of the current cycle, approximately eight years after the Federal Open Market Committee (FOMC) dropped the federal funds rate to the “zero-bound.” Although the Fed lifted the funds rate off the floor in December of 2015, spooked investors rushed back into dollar-denominated assets in a flight to safety. Weakness in emerging economies, in particular, sent a cascade of money into U.S. Treasuries and US real esate.

Strong job growth, low vacancy, high projected rent gains and limited threat from renters purchasing high-priced homes are some of the factors that make economies like LA more attractive for investors. Furthermore, the number of jobs per newly issued permit is considered to serve as a hedge against the prospect of overbuilding. Metros like Oakland, San Diego and Los Angeles – along with the top metro of Seattle have among the strongest job markets in the country, and the highest rent growth forecasts this year.  The demand remains organ

What could impede foreign dollars from continuing to enter our economy?

1 ) Great Britain’s potential exit from the Eurozone.

2) Global crude oil prices.

3) Interest-rate hikes by the U.S. Federal Reserve. 

4) The wildcard that is Trump.

5) Potential nuclear war with North Korea

6) Global warming and rising sea levels.

Should you worry?

That depends on your economic opinion.  Great Britain’s potential exit from the EU could cause further investment in US markets.  Global crude oil prices could stay low, which leaves more dollars in the consumer’s pockets.  We’ve been hearing about the threat of rising interest rates since 2013, and four years later — they are still low.  DID YOU KNOW?  Data showed domestic US inflation increased at its slowest pace since late 2015, boosting expectations that the Federal Reserve will hold off from increasing interest rates again in 2017.

Trump will be Trump, and the local LA economy remains strong.  North Korea could be scary, but a war with the US for them means total annihilation — who would act against their own self-interest in that way?  Global warming, possibly, scares me the most.  However, at least here in LA, we are seeing a wave of electric cars and solar companies leading the wave of change.  Thank you, Elon.

Metrics I like:

DID YOU KNOW?  The EURO has strengthened by over 14% since its lows around December 2016……is the European foreign buyer coming back? Our Compass agents in NYC are seeing them….

DID YOU KNOW?  Almost ONE TRILLION DOLLARS is sitting around in cash in private equity funds waiting to be deployed….but nervousness about over-inflated asset prices is holding back a buying and investing spree…..sound familiar?  Why is this happening?

1.   Private Equity loves value buying. When prices are high its hard to spot value. When you buy high it’s tougher to expect large gains…..and investors expect strong returns when they pay 2% fees every year….

2.   Geopolitical tensions and the potential for more interest rate hikes make waiting a safer place.

3.   There is wide-ranging fear that the markets could turn: why buy/invest now if you can buy/invest later, cheaper?

4.   The good news?  This pile of cash is a form of an insurance policy waiting to be deployed the minute good deals appear…..which means the deals may not be that good. Prices plummet only when there are no or few buyers…..or worse, no money. Now the money sits waiting…...

DID YOU KNOW?  USA GDP for the 2nd quarter was revised upwards to 3%. That’s super strong! Hopefully, the costs of the Hurricane Harvey don’t impact future growth too much.

 

Do you have questions? We have answers.

10 + 4 =

Robert Rodriguez

Robert Rodriguez

Written by me, for you.

About Me: Father, husband, realtor, hockey player and a gourmet taco enthusiast.

Goal: Providing my clients, friends, and colleagues with timely, intelligent and actionable advice.  I am always available to answer your questions.  Text, call or email 818-395-5517 | Robert@WestLALiving.com

Professionally Speaking: In my 8 years as a licensed sales agent, I have climbed the ranks of the LA residential sales industry, distinguishing myself both locally and nationally. I am closing in on sales upwards of 200 properties throughout the LA area and in a variety of neighborhoods with a wide range of property types. I have successfully sold complex Estates, land, income property, single family, luxury leases and condos. I have widely been recognized by both colleagues and clients as a respected professional whose reliability, dedication, and expertise is second to none.

Los Angeles Investment Property Guide

Los Angeles Investment Property Guide

Private Client Report | E-Guide to Buying Investment Property

Chapter 1: Your Home is NOT an Investment Property

As a hard and fast rule of real estate investing, your home is not an investment property.

Owning a house is not the same as investing in real estate.  For you to consider your home an investment, it’s got to generate actual profit, or “cash flow”. This is the most basic concept of real estate investment.

What’s the explanation for the perception versus reality? Well, generally, when homeowners calculate their “investment returns”, they often don’t take into account the reality of the costs involved with owning a property. Generally, all they do is to subtract the cost of their down payment from the proceeds of the sale and consider that to be their profit. But they neglect other factors: maintenance, the declining value of renovations, and the interest incurred through long-term mortgages.

No matter the increased value of your home over time, you can only borrow against it or sell it.  In the end, homeownership is a wise financial move. Not spending a certain amount of money by renting instead of buying over the years is a fiscally sound decision.  This e-guide is here to help you understand the basic concepts of investing in real estate.

Chapter 2: Getting In on the Ground Floor: Where to Get the Money and Build a Network for Investing in Real Estate

Real-estate investors make money by providing one of life’s necessities. Done properly and prudently, real-estate investing can provide considerable wealth and income, and the capital investments are quite minimal. If you’re seriously considering making your first investment purchase, it’s good to plan on at least one full year of preparation before you close on your first property. A great deal of that time will be spent on educating yourself on the ins-and-outs of investing, and further on a great deal of research should be put into the specific neighborhoods and properties you’re planning to buy in.

Once you’ve decided to take the plunge, you may be asking yourself “Where will I get the money?”. Fortunately, it’s not as hard as it seems to generate startup capital. For example, if you’re looking into investing in smaller multi-unit properties, you can get a quality loan with as little as 3% down if you plan to owner occupy one of the units.

Another potential source of capital could be your retirement fund. If you save in an IRA, the IRS will allow you to take out up to $10,000 penalty-free to buy a first home. And don’t be discouraged by the term “first home”. If you haven’t owned a home for 2 years, the IRS will consider any home you buy to be a “first”. Additionally, lenders will include future rental income along with your salary when computing your loan eligibility. A good standard is to try and keep your “PITI” (Principal, Interest, Taxes, Insurance)—under 25% of your pre-tax income, including the rental income.

Now it’s time to decide what kind of investor you’d like to be. Would you prefer to be a resident landlord to supplement your current salary? Or perhaps you’d like to cast aside your day-job and become a full-time developer in commercial real estate? These are important questions to decide, as it’s imperative to have a well-defined business model if you want to find success in that business.

Whether you’re relatively new to the business or a seasoned veteran, networking is always crucial. Networking in the real-estate world as a novice can help you navigate uncharted waters and guide you to investments that are right for you. There are many ways to network. Working with a knowledgable brokers, like us, is one and this will also give you access to the data bank of properties listed for sale in MLS and to off market opportunities that are many times shopped through broker networks.

Outside of working with an agent, most metropolitan areas and social media sites have real-estate investing groups who meet and share information and forge partnerships. Utilize the tools already at your disposal.

Most importantly, however, is to realize that real-estate investing is a business, and business is work. There are no “get-rich-quick” schemes. It’s possible to make a fortune overnight, but highly improbable. Avoid scammers and “gurus” who invite you to pay hand over fist for seminars and educational materials, promising you mansions and yachts and exotic cars. These people make their money selling fantasies, not real estate. Be practical, be resourceful, and do your research.

Chapter 3: The 3 Most Important Questions to Ask Before Investing

When evaluating potential properties to purchase, it is important to always ask these three questions:

  1. “Is buying this property the best use of my money?”
  2. “Will this property pay for itself?”
  3. “Can I increase the value of this property?”

The answers to these questions should become readily apparent as you go through your due diligence—the in-depth research which precedes any real estate purchase. In the end, if the answer to each of the three questions is not a resounding “yes”—then you should not make the purchase.

While real estate may seem like a sure-fire investment, the fact is that the housing boom of the early 2000s has since left building prices in many boom regions too high to produce adequate income. Although not a high-level risk, real estate investing still ranks in the midrange of investment risks.

A good barometer to assess an investment’s worthiness is to calculate it’s internal rate of return (IRR), and compare it with the current interest rate on a 10-year note from the US Treasury. For as long as the government continues to pay its creditors, there is no safer investment than to loan the US money. If your investment property can’t beat the guaranteed profit on a Treasury note, then it’d be best to leave the gambling for the casinos and invest meticulously.

So—is your investment going to pay you more than a Treasury bond? You always want to temper your financial risks and ensure a positive cash flow on your properties. Savvy investors use leverage to their advantage, having a property pay for itself. Leverage can be attained by buying properties in dire need of repair and taking out a mortgage-rehab loan which covers 125 percent of the property’s price. Another is to use the rent acquired from the tenants in a multi-unit property to pay for that building’s mortgage and maintenance and keep what’s left as profit.

These are but two examples of positive “cash flow”. Cash flow is the bottom line. Novice investors tend to base their purchases on what they think they can sell the building for in the future, as opposed to what it generates now. It is imperative to structure your purchase so that the building covers its own costs. To get a clear picture of a building’s costs, you and your accountant should question the seller on every cent coming in and going out of the building, and carefully inspect all the seller’s financial records relating to the property. Incomplete or shoddy records are warning signs.

Finally, you’ve got to figure out if and how you can raise the property’s value. Landlords can be helpful in this area—from freeing up your time by dealing with the day-to-day minutiae of building maintenance to coming up with their own ways to increase revenue.

You’ve got to imagine how the building could be when assessing its potential. Is there space for a coin laundry? Can you rent parking spaces to tenants? Many cable and internet providers will make you a deal on wiring an entire building. You could pass some of the savings on to your tenants and pocket the remainder of the profits. Some localities allow “mixed use” of properties, which would allow for some spaces to be used commercially—such as a doctor’s office or small legal practice.

The bottom line is to carefully consider all three questions. Once you’re sure that the answer to all three is “yes”, then you’re ready to buy a building!

Chapter 4: Finding, Buying and Closing the Deal

The old realtor’s adage about “location, location, location” is just as relevant today as ever. It’s important to realize, however, that a desirable location for your home may not be a desirable location for your investment property—especially if you’re looking for a commercial property.

In newer cities and suburbs especially, you’ll notice that commercial and residential areas are very segregated. Zoning laws and business practices typically group properties with similar uses: residential, commercial, industrial, etc. In older cities, however, you usually find greater population density—and with that, you’ll see more “mixed-use” neighborhoods. Do your due diligence, but whatever you do, don’t make a firm offer on the first place you see.

Another “don’t”: buying a cheap property in a blighted part of town simply because it’s relatively inexpensive. Sure, it may seem like a steal, but one building alone will not attract the young, hip crowd you’re hoping for. It’s better to be an early investor in an up-and-coming neighborhood than to be the first investor in a neighborhood who’s future still has yet to be seen.

Finally, be wary of long-distance real estate deals. While it may seem tempting to invest in a hot neighborhood on the other side of the country, putting your money in faraway hands can be a recipe for disaster. How quickly could you react to a crisis? How long would it take to find out if a tenant skipped town? If these scenarios aren’t enough to scare you off the prospect of long-distance investing, then at least be very careful about who you hire to manage the property. Your real-estate agent might be your best choice, as they have a financial interest in the property and they’ve got a lot of contacts to help you find renters.

Now it’s time to determine the value of a given property. During your research, the sellers and real-estate agents have most likely shared with you simplified financial statements for various properties. This information should be interpreted with a healthy bit of skepticism, as it’s not uncommon for sellers to pad the rents and underreport operating costs. A good rule of thumb is to shave 10 percent off of the reported income and at 15 percent to the reported costs. Be sure to inspect the seller’s financial records with the help of professionals—now’s the time to utilize your accountant and your attorney. You don’t want any surprises, so ask to see all the receipts. If there isn’t a paper trail of every bit of income generated and every significant expense paid for, be wary. Sloppy accounting on the seller’s part is a red flag.

With this information, you’ll be able to make a reasonable calculation of a given property’s capitalization rate. The “cap rate” is the most important calculation a property investor makes—the most fundamental indicator of a property’s value. It is easily calculated with the following formula: Net Operating Income ÷ Purchase Price = Cap Rate. Buyers ideally want a higher cap rate, since it indicates a greater return on investment. But obviously other factors will affect the cap rate—similar buildings in more-desirable neighborhoods will have lower cap rates than buildings in more marginal, higher-risk parts of the same town. You’ll also want to factor in “sales comparables”, which will let you know what other similar properties sold for, as opposed to just what sellers ask. In most states, real-estate sales figures are public record. This information can help you adjust your bid accordingly.

Finally, you’ll want to bring in your contractor and join him on a thorough inspection of the property. If it’s an apartment building, you’ll want to inspect the interior of each individual apartment. The seller should help you arrange this. It’s a good opportunity not only to spot any significant issues with the building, but also to meet your future tenants and get a handle on how they treat their personal spaces within the building.

Assuming all of this goes well, it’s time to get your documents in order to submit to your lender. You’ll need a loan application form, a purchase contract, the building’s financial documents, and copies of your tenants’ leases. If you’re buying a larger building or launching a company which will acquire multiple properties, you’ll also want to submit your business plan. You can find business-plan templates online—one of the most popular for real-estate investing is MSN Real Estate by Palo Alto Software (www.bplans.com).

Assuming everything goes smoothly, it’s time to build a relationship with one more new business partner and friend—the IRS.

Chapter 5: Why the IRS is Your Friend

Since the very formation of the United States of America, our government has actively encouraged real-estate investment, speculation, and development. And while no investor looks forward to tax time, real-estate investors often find themselves at a great advantage when the IRS comes looking for their share. As a matter of fact, real-estate loopholes are deeply embedded in the tax laws. Here we will go over some of these loopholes to ensure that you keep the lion’s share of your real-estate investment profits.

One of the principal rules in real-estate investing is that no property should cost more than it makes. However, from a tax-paying perspective, this isn’t necessarily the case. When April 15th comes around, it’s actually in your favor if your finances appear to be a bit in the red. Why? Because the government will actually compensate you for your losses by cutting your taxes. For example, anyone who makes less than $100,000 a year can deduct as much as $25,000 of “passive activity losses” against regular non-real-estate income.

Here’s how it works: for tax purposes, “earned income” (income earned as wages or salary), is treated differently than “passive activity income” (money received from the tenants of your rental properties. Earned income is taxed from the first dollar you make, whereas passive activity income isn’t monitored or taxed until you declare the amount earned. Moreover, only after all of your operating expenses are covered will you have any taxable income—but even then, you’ve got more deductible expenses in the form of “depreciation”.

As it turns out, Congress has written the tax laws to allow landlords to depreciate the “improvements” made to the land (buildings, garages, driveways, etc.). Even though, technically, most land doesn’t depreciate in value, Congress wants to encourage property investment and create housing, so it maintains the fiction of depreciation to help incite individuals to operate rental properties. Subsidizing depreciation in this manner gives you, the property owner, the right to transfer a portion of the cost of your real-estate investment to other taxpayers! Additionally, you’re even allowed to use the depreciation write-off to cut your taxable income even if you’ve made money!

Not only is all of this legal, but the government actually requires real-estate investors to take depreciation. On the flip side, investors are required to give a quarter of the depreciation back when a property is sold in the form of a 25% “recapture” tax.

But there’s another loophole investors can take advantage of when selling a property. In a “1031 exchange”, an investor may trade up to a more valuable “like-kind” property without paying taxes on the original sale. The 1031 exchange arises from the notion that there is no profit to be taxed if an investor sells one investment and then buys another. There are some stipulations—the exchange must be executed through an IRS-approved third party—a “qualified intermediary”. Additionally, once the original sale closes, the seller has just 45 days to find the replacement “like-kind” income property of equal or greater value, and just six months to close that deal.

There’s one more loophole that bears mentioning—the $500,000 homeowers’ exclusion. Congress allows all married homeowners filing jointly to pocket up to that amount out of the sale of a primary residence tax-free. If you and your partner have lived in a home for two years out of the previous five, you qualify. And you can do it again and again, with every house you’ve lived in for at least two years. The tax savings are unbeatable.

It’s important to note that all of this tax advice should be reviewed with your attorneys and financial advisors in advance of filing with the IRS. All of these techniques legal, but it’s always best to have specialists dot your “i’s” and cross your “t’s” for you. Remember, as with anything, honesty is the best policy. Report all your income, report your expenses, and as long as you stay within the bounds of believability and reason, the IRS is going to take your word for it.

Chapter 6: Buy a House or Small Apartment Building First

The novice real-estate investor should look to a house or small apartment building as a first property. These types of properties tend to be cheaper and easier to manage than other types of property. And, of course, you’ll want the best building you can find/afford in the best neighborhood. But what defines the “best” neighborhood? Well, it all depends on the type of landlord you want to be.

To make that decision, you’ve got to consider your likely tenants. Perhaps you’d like to invest in a trendy neighborhood with urban charm? These areas are immensely popular with young, single folk who will be willing to pay a premium to live in a “hip” part of town. The downside to this kind of tenant is that they’re likely to move more often than your older, more stable tenants.

Consider the flipside—investing out in suburban neighborhoods with lots of smaller apartment buildings and single-family homes—more sprawl, quieter, and closer to the good schools. These tenants are likely to be your younger families—they’ll be more cost-conscious, but likelier to stay longer whenever they decide make their home in a given place. Both of these options are solid, but it’s all up to you who you’d like to cater to.

Another type of property investment—the most basic type—is your so-called “in-law” units. This term refers to an extra living space which sits on the same site as a single-family home. Sometimes these “in-law” units come attached, but other times they take the shape of guest houses or “servant’s quarters” on the property but unattached to the main home.

It’s important to check your local laws regarding rental of your in-law units, but it’s not unheard of for people to ignore the spirit of regulation by renting to “nieces”, “nephews”, or distant “cousins”.  Regardless of whether or not you want to operate in this grey area and rent on the sly, the most important advice we can offer is to always adhere to tax laws. Declare your income on the rental, lest you find yourself answering difficult questions to the IRS down the line.

That being said, the rental of your in-law unit can be of great advantage to you financially. Additionally, you’ll be able to write off all of your costs on the in-law unit, in addition to the “deprecation” on the unit itself. You’re also unlikely to have to pay any income tax on the money the unit brings in, and it will likely pay for a large portion of your own mortgage principle.

Weekend or vacation homes can be yet another entry-point into real-estate investing,. As with renting out your in-law unit, vacation home rental is not away to “get rich quick”, but rather a fiscally sound method of cutting back on your own home costs while earning a reasonable profit via tax savings and/or moderate profit. The greatest advantage for second-home owners is the IRS’s tax break of up to two weeks of tax-free rental income annually.  If your vacation home is in an area with strong seasonal attraction, you can maximize your rental income during these “burst” periods. If your property is in or near a college town, you may be able to rent it out during the school year to pay the entirety of the mortgage and use it during the summer slowdown.

Let’s talk investing in small, single-family homes. The best way to turn a profit is renting houses, but you don’t want to purchase a house with an 80 or 90 percent loan. A great way to purchase a rental home in s desirable neighborhood without taking on such an imprudent mortgage is to shop for foreclosure homes or those that have gone through some type of government seizure. This is a complicated area to navigate for novice investors, as the foreclosure market is swimming with more sophisticated players—but there are still steps to take to get a great deal.

You’ll want to look into the public records of the county in which you’d like to buy, and seek out the clerk’s “lis pendens” list for properties with litigation pending. By the time a home has litigation pending, both homeowner and the mortgage holder are likely looking for a buyer, and quick. At this point, the homeowner has already missed at least three months of payments and is likely in dire financial straits. This means that they probably aren’t spending much on home maintenance, and the house and landscaping are likely falling into disrepair. Meanwhile, the lender hasn’t received their payments and is still legally required to wait an additional three to six months before it will be allowed to take over the property. So the lender is facing a potential year of lost income, in addition to the substantial costs which will be incurred after purchasing the property back at public auction.

This is where you come in. Ideally, you’ll strike a deal with the homeowner to acquire the building for the cost of making good on the back rent with the lender and any other creditors with liens against the property. This is called a “subject-to” purchase, and it is subject to approval by the principal lender. Now, you don’t want to simply pay the owner’s debts and take over an existing 90-plus percent mortgage—you’ll want to let the property slip into foreclosure, then lowball the lender. A foreclosed home is a lender’s failure, and they’ll be eager to recoup some of their losses. Your goal in this situation is to get the property at 30-40 percent below value.

Aside from foreclosures, another way to buy property at a serious discount is to shop for derelict, abandoned, or otherwise undesirable properties in the best neighborhoods—then rehabbing them and selling them within a short period of time. This is colloquially known as “flipping” a property. You’ll look for properties you can buy for 20 to 40 percent below the price of comparable renovated properties. For “flipping” a house, you should be projecting about 2 years ahead when speculating the value of the property when you sell. Despite the illusion of the phrase “flipping”, construction and renovation take time, and you’ll want to ensure a nice return on your invested time and money.

With this manner of investing, you’ll want to be especially focuses on where you can cut expenses. Steps such as getting your real-estate license can help you cut the sales commission in half. You can also save a lot on construction costs if you can do some of the work yourself. Plenty of construction work can be done by just about anyone—from hanging drywall to tiling to stapling insulation battens. Lastly, you could potentially save big depending on how you own the place. If you purchase the home as your principal residence, not only will you get a better mortgage interest rate, but you’ll get a very large tax break upon sale. As we’ve discussed previously, you can take up to $500,000 of the profit from the sale tax-free as long as you’ve owned and lived in the home for at least two out of the previous five years. This sort of investment definitely requires a certain commitment, but can certainly pay handsomely if you put it the effort towards a high-quality renovation.

Chapter 7: Going Commercial – Large Apartment and Commercial Buildings

While many of the principles of investing in smaller residential properties are the same as with larger apartment buildings and commercial properties, the bigger investments come with much greater costs—and potential rewards. Entering into this territory is not for novices. This level of real-estate investment requires a professional management and expertise. For this reason, it’s almost always better to own investment properties through some sort of corporate or partnership structure.  There are four types of ownership you’ll want to consider in large-scale real-estate investing: sole proprietorships or general partnerships, limited partnerships, corporations, and limited liability companies.

A sole proprietorship is a standard one-person business, while a general partnership is a typical structure where you and a friend or spouse go into business together. These types of ownership fall under the same category, and are mostly suitable on a small-time level.

A limited partnership separates the “limited” partners (usually the financial backers) from the “general” partner(s). In their role, the limited partners are insulated from any liability towards any ofvthe business’s debts. The general partner enjoys no such insulation, and is in fact the one responsible for filing all financial paperwork and shouldering the financial burden.

There are two types of corporations: S corporations and C corporations. S corporations are generally small businesses with limited shareholders, while C corporations are much larger and may have tens upon thousands of shareholders. S corporations are the preferred form of ownership for real-estate investors, as they are separate legal entities, but they pay no corporate income taxes.

Limited liability companies (LLCs) combine some of the best features of partnerships with corporations.  LLC members are not liable for the LLC’s debts. LLC members also get to choose how they are taxed—like a partnership or like a C corporation.

The larger your company becomes, the more ownership situations you may find yourself in. It is not uncommon for a property to be owned by a partnership—or another entity—which is, itself, owned by another. That sort of ownership, however, is unnecessarily complex for novice investors, for whom LLCs are generally the best option.

When you go about acquiring your first larger or commercial property, you’ll see that many of the residential rules no longer apply. The financing, for example, will require a much larger down payment—usually at least 25 percent down on building acquisitions. The loan terms will likely be shorter, and interest rates will be higher. On the flipside, you’ll be more likely to find flexible lenders in local banks, as they have a vested interest in lending to local businesses, and they’re not beholden to the big residential mortgage backers Fannie Mae and Freddie Mac. Local banks can be quite welcoming to neighborhood investors—but be sure your business plan is impeccable.

Keeping your business plans in mind, keep in mind that in commercial investing, you’re also responsible for the businesses of your tenants. Your margins for error are much narrower—anything that goes on in the building that interferes with your tenants’ business will not be lightly tolerated. For this reason, the owners of most commercial properties utilize professional managers to oversee their buildings. As your own real-estate empire grows, you’ll likely find yourself in delegating to a management company and/or your own staff of managers and salespeople.

There are six different types of commercial investments: multifamily buildings and complexes, office buildings, retail properties, mixed-use properties, industrial properties, and land.

As mentioned before, property managers will become a necessity in commercial investments. Perhaps nowhere will they be of more service than in large residential properties. A residential building’s full-time supervisor—the “super—will save you time and money by focusing on the daily minutiae of life in the building. He or she will handle routine maintenance, handle the move-ins and move-outs of the tenants, and see to the preparation of vacant units for rental, in addition to a myriad of other duties. Supers in NYC are so essential that some command six-figure salaries!

If investing in office buildings, your interests are not that different than in large-scale residential housing. Your main concern here will be what type of office building you’d like to invest in. Office buildings come in three general types: “Class A”, “Class B”, and “Class C”.  The buildings are classed by the condition of the property, the tenants, and the neighborhood.

Newer, state-of-the-art, landmark-style buildings that are home to large, well-known companies or other top-tier businesses are typically considered Class A. They’ll often have one high-profile tenant who’s paid for the property’s naming or signage rights, and generally command the highest rents.

Class B buildings are usually a bit older, and maybe not so cutting edge—but they’re still desirable to investors and tenants, as they’re usually located in or near desirable districts. They can also potentially be renovated and modernized into Class A properties.

Class C buildings offer low rents, high vacancy rates, and minimal bells and whistles. These properties are often renovated and converted to mixed-use. The returns on these investments can be incredible—but the process can be quite daunting.

Retail properties are generally beyond the financial means of novice investors, but a small retail center could be a feasible investment. Newcomers to these investments will want to concentrate on smaller strip malls or neighborhood centers. These investments can be quite lucrative if you can land a secure long-term tenant, such as a national food chain.

Mixed-use properties have been gaining popularity and transforming neighborhoods for the last couple of decades. They’ve consistently been integral to neighborhood revitalization, drawing in the always-desirable young, creative professional. Mixed-use properties show no sign of losing popularity, and they’re certainly within financial reach even for an inexperienced investor.  Industrial properties are generally an unsound investment. You’ll likely be reliant on a single tenant, and manufacturing is a fickle business. It’s much better to have a mix of tenants in different industries. That way, you’re not left holding the bag if one goes belly-up.

Finally, we’ll look at land investments. There are two ways to make money in land investing: “banking” it, or developing it. Regardless of your preferred method, be sure that whatever land you buy is in the path of a community’s growth/expansion.  Banking land is just what it sounds like. You purchase the land, and hold it until such a time that the value of the land has become valuable enough to sell at a nice profit. Land banking tends to work better in commercially zoned areas because it’s easier to make the land pay for itself while you wait for the value to increase. Common uses include parking lots or inexpensive buildings that produce a small income, but not as much as the full value of the property.

It’s harder to get a bank loan on raw land with no track record, and the real money is in development anyways. You’ll need development loans, which you can get—but you’ll be expected to have substantial interest in that land, and you may also have to put the land up as collateral.

It’s a different path to start on, but once you’re able to navigate the waters of commercial investing, you’ll see why it’s the preferred investment strategy of real-estate magnates. It’s a steadier business than residential investing, and this predictability can pay serious dividends in the long run.

Chapter 8: Do You Really Want to be a Landlord?

Before you sign on the final dotted line, you’ve got to ask yourself: “Do I really want to be a landlord?”.  No one can answer this question other than you. You have to decide if you’re prepared to deal with the situations that will inevitably arise within your building once you take ownership. Sure, you may have hired one or more people to take care of certain issues for you—but if you’re not intimately familiar with your own buildings, you’re just waiting to be taken advantage of. On top of that, every job delegated means more money taken out of your own profit. Think about it.  If you said “Yes! I’m ready to take on this responsibility!”, then great! There are many ways you can make your life as a landlord more manageable.

The first—and perhaps most obvious—is insurance. Fires, accidents, mudslides, burst pipes…calamities can happen anywhere, at anytime. Residential property owners have got to cover their investments. Insurance can be expected to cost you around 2.5% of your annual gross.   You’ll want to carry different types of insurance—firstly, you’ll want “property and casualty insurance” to cover for general incidents. This insurance doesn’t cover the loss of tenants’ property, however, but you can require that your tenants have their own insurance as a stipulation of the lease. You’ll want additional, specialized property coverage to cover incidents not covered by the property and casualty insurance. Often, specialized coverage is specific to geographical hazards (i.e. earthquakes in California, tornadoes in Oklahoma, etc.).

Next, you’ll want to have liability coverage. This will serve as “umbrella” coverage, to compliment your general policy. Your liability policy should cover bodily injury, property damage, personal injury and damage from slander or false advertising. It’s not uncommon to carry liability coverage upwards of $1 million for a small property, due to the litigiousness of today’s society.   It’s not a bad idea to bring an independent insurance agent and an independent adjuster into your network of real-estate professionals. You’ll need the agent anyways when closing on your property, and an independent adjuster (also known as a public adjuster) will work for you—not the insurance company. He or she will get a percentage of your settlement, but you’ll almost certainly get a better settlement when a public adjuster does your negotiating.

Once you’re properly insured, it’s time to choose your tenants! You’ll want to be very selective in your choosing, but you’ve also got to be aware of anti-discrimination and equal-opportunity laws. That being said, the law only prevents you from not renting to someone for the wrong reasons. You can rent to whomever you like.   You’ll want your tenants to pass some strict criteria: the most important being their finances and rental history. You’ll want them to fill out a formal application giving you permission to conduct employment, bank, credit, background and reference checks. Depending on local custom, you may also be able to pay the costs of the background check (usually between $25-50). But don’t just rely on these services—you should also do some investigation. Call their references and employers to know the kind of person you’re considering as a tenant. If, in the end, your research results make you decide not to rent to this person, tell them in writing why the application—not the person, has been rejected. You don’t want to have to deal with a discrimination complaint down the road.   Now you’ve chosen your tenant(s), you’ll need them to sign a lease. Leases don’t just set the terms between landlord and tenant—they create the value of the property itself! By documenting the building’s income with written leases, you’ll be able to provide future purchasers with the building’s future purchaser.

The lease should indicate who will be living in the unit, the length of the lease, the cost of rent and how it is to be paid, the details of the security deposit, the tenants responsibilities vs. your responsibilities as landlord, and the terms of lease renewal. Again, it’s good to have your attorney provide you with a building-specific, rock-solid lease that incorporates local law and customs.   Once the lease is signed and your units are occupied, your responsibility is now to uphold your end of the lease agreement. This will mostly entail maintenance. You’ve made a legal agreement with your tenant(s) to provide a functioning living environment. There will be inevitable maintenance emergencies that must be seen to immediately, but outside of those (hopefully rare) occasions, you’ll save yourself a lot of headaches by having a schedule and dedicating hours during which your tenants can schedule routine maintenance on issues within their homes.

You’ll also want to perform semiannual preventative maintenance inspections on air conditioning, heating units, refrigerators, etc. This sort of maintenance will not only save you money and time on emergencies—but the tenants will see you as a thoughtful and caring landlord.  Despite the fact that you’ve held up your end of the landlord-tenant agreement, unfortunately, inevitably, you’ll have a tenant who does not.  Regardless of how much you like a tenant; you must remember that your relationship with them is strictly business. If they do not abide by their lease terms, they must leave. And there’s no favoritism allowed here—rules must be enforced across the board, or you could find yourself in court.

Unruly tenants have to go—but eviction is to be enacted only as a last recourse. Before you get to that level, you’ll want to escalate the dispute very slowly. Your first step will be to talk to the tenant one-on-one. This can be don first via telephone, but if the problem is not resolved, you’ll want to speak face-to-face. Should the dispute continue further, you’d want to put the dispute in writing—giving the tenant clear, concise instructions to avoid being kicked out. The next step should be mediation. Many communities even offer free landlord-tenant mediation services.   Your two final options are to offer the tenant a monetary “incentive” to vacate, thus sparing you more time with a unit that’s not bringing you any money. Lastly, you can hire the local sheriff’s department to deliver  legal documents pertaining to the dispute. If this show of force still doesn’t work, then unfortunately you’ll have to enact eviction services. An eviction could easily take four to six weeks, and determined disruptors could potentially stretch this period to months. Every day that you’re involved evicting a tenant is a day that you are not making money on that unit, and that’s the last thing you want.

Chapter 9: REITs – Real Estate Investment Trusts

It may be the case that, after some soul-searching, you decide that being a landlord isn’t right for you. This is an important realization to make, but it does not necessarily mean that you’re ineligible to participate in investing in the real-estate market. There is one other option—take your investment capital away from Main Street and invest it on Wall Street.  Now, technically, buying shares of real-estate companies on sale in the stock market is stock investing, not real estate investing. Once you’ve made your investment in a stock, you’ll have relinquished your ability to materially affect your investment’s performance. The best you can do is to monitor it—buy more if/when you think you should, and sell when you’ve made—or lost—enough money.

The best option in buying real-estate shares is to invest in “real-estate investment trusts” (REITs). REITs are corporations that develop, acquire and operate properties. The largest and most widely known real-estate companies are known as “equity” REITs, and they generally specialize in specific types of buildings.   REITs are generally valued based on a measure called “adjusted funds from operations” (AFFO), which calculates the REITs profit and modifies it with its properties’ maintenance costs. In an REIT’s valuation, the AFFO, rather than reported earnings, is the main benchmark, because the investors know that the depreciation charged against reported profits is a phantom expense. REITs are also distinguished in their tax status: the corporation is exempted from income taxes and required to pass along the bulk of its income directly to its stockholders. For these reasons, REITs are traditionally viewed as income-producing investmens (though REIT investors generally pay higher income tax rates on their dividends).

Finally, just as with any stock investment, diversification is crucial. With REITs, you’ll either want to invest in one company with a broad portfolio (a diversified REIT), or a mutual fund specializing in REITs and real-estate-related investments. Concentrate on companies that operate in more than one geographic region so that your investment isn’t exposed to the ups and downs of a singular region’s economy. Remember, it rarely hurts to spread your bets.

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Written By: Durado Brooks | Produced By: Robert Rodriguez – Teles Properties CalBRE 01859103.

 

Source: Crook, David.  The Wall Street Journal Complete Real Estate Investing Guidebook.  New York: Three Rivers, 2006.  Print.

Source: Zillow.com

Source: TelesProperties.com