Real estate investment is still, and always has been one of the greatest methods of obtaining wealth, but like any other investment choice it comes with risk.
Over the years I have worked with thousands of real estate investors, often they came to me too late and had already been sold something that had little or no chance of being profitable. Many years ago I penned an article Investment Property 101 - The ten most important things to know about investing in real estate!
Since I wrote that article many things have changed in real estate investment, but those 10 things remain true!
One thing I neglected to note in that article was how common it is for the scammers in the real estate investment world to operate under multiple names, organizations and LLC's.
To name a few; seems if you are hiding something many think it best to have several shell corporations. Here is a hint to another one that seems to be headed for some real trouble.
Vancouver men sued for pitching U.S. 'unsaleable' properties. Usually when they show up on my radar screen, it won't be long til I'm reading about them in a press release from some Attorney General. I will certainly be following this story.
Some of the latest schemes involve buying "shares" although usually not overseen or approved by the SEC. These plans make you a partner in large acquisitions of real estate, often purchased in bulk REO packages and flipped to you, site unseen with the promise of huge profits. The reality is that often they are stripped, vacant, shells that have no real value beyond the small piece of dirt they occupy.
With the new lead paint rules, you would be better off bulldozing it!
So here are those ten all important items for real estate investors to know.
1) Location, Location, Location. That is pretty simple and the most over-used quote in real estate history. We wish we had a patent on it!
2) Value is not based on current or past income, but income potential. We cannot stress this enough... DO NOT buy a property based on the current rent roll figures.
a) Were these figures consistent throughout the history of the property?
b) Are these figures realistic in the immediate future? Has the market changed?
c) Do you know the market, and does your agent know the market?
3) Do not believe the Pro-Forma! the proforma is there to entice you to buy, it is not factual!
Do Your Homework:
a) What are the local community, civic and economic forecast for this properties location? (Developments, TIF's, Improvements, Changes in the Neighborhood)
b) Are the expense histories based on real figures and current facts?
i.e.: Did they just rent the entire property up, and now the utilities will be 40% higher than they were last year with a comparable vacancy rate?
c) How long has each tenant been there? This is vital!
4) Get professional help! If you do not know this market, ask someone who does? If you are represented by a buyers agent ask yourself... "Just who is this person working for?" If he is getting paid a percentage of what you spend... and the more you spend the more he makes.....? Think about it?
5) Inspections! If you don't know what to look for, get someone who does!
6) Maintenance: If the previous owner did some, or all of his own maintenance; you will likely find that your numbers will be nearly double the ones they provided if you cannot do the work yourself.
7) Agent: If you are buying an investment property, don't rely on a residential agent to represent you! Buying and selling investment property is a whole new ballgame! If you’re using a buyers agent and they don't request the deposits and pro-rated rents, guess what, the seller isn't going to volunteer to give them up.
8) Investment Scams: Are rampant! We have had many clients who were nearly bankrupted by mortgage scandals and scams.
If the same guy who is selling the house hooked you up with the appraiser and the inspector and the lender.... And you are getting anything guaranteed your screwed. There are no guarantees in this business.
9) Charity: If for some crazy reason you are buying property to 'give back to the community" or "help out the less fortunate" you will be bankrupt in a few months!
Seriously, give the money to Big Brothers or the Salvation Army. Save yourself the headache!
If they say they are not making a dime, and all the money goes to a church...... RUN!
10) Cash Flow, NOI, CAP Rate... Know the terms! If you just finished reading Charlton’s book or stayed up last night watching late night TV. You have an unrealistic perspective! Distressed sellers are not selling cash-flow property no-money-down at 20-50% under market. Some of those schemes worked in the early 90's. That's when those guy’s wrote those books!
That's it in a nutshell! Ten simple things that will help you not lose money to an unscrupulous scam artist.