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Last Updated: May 14th, 2012 - 22:24:01 |
Scan first, then narrow down. Hunting can be fun, and educational. The fun is in becoming a sort of detective, scanning the field for clues, following up leads, piecing together information, drawing conclusions. The education comes in learning your way around, picking up knowledge that will help make your money grow.
But this process requires you to make efforts and spend time. Don’t rush in too fast. You’ll almost certainly blunder if you buy one of the first properties you see, without looking at many others. You haven’t yet developed an eye for bargains, a feel for the hidden rewards and booby traps. You need the experience gained by comparing good and bad points of many different properties. This will begin to come as you look at more real estate.
The best way to start is as a hunting dog does, ranging all over the field in search of a scent – or as a radar operator does, systematically sweeping the void in all directions, studying the blips that the beam picks up. This broad preliminary scanning will give you ideas about where to look more closely.
Begin by glancing through the real estate ads in the classified section of the Sunday newspaper. See what kinds of property are being offered, for what prices, in what locations. Mark every ad that sounds like a possibility. Then clip your selection of ads and save it for use a little later on. Even in this preliminary scanning, you should keep systematic records so you can quickly refer back to any property that interested you.
One-third of all realty transactions begin with a newspaper ad. The newspaper is a central marketplace for real estate. Most realtors use it – but not always to advertise their best buys. They don’t want to tip off an unscrupulous rival to a hot property. So they advertise a good selection of their listings, hoping to attract prospective buyers not only for these properties but for hidden bargains too. Their business depends on keeping a steady stream of customers coming to them.
Now go out and roam around, street map in hand, sizing up various neighborhoods. You can drive through some areas in your car, eliminating some in a few minutes and spending more time in others. It’s also worthwhile to ride various bus routes or rail lines, getting out at points along the way to make leisurely explorations on foot.
You’ll probably find no bargains in a luxurious high-rent district. You want low-price property that can be upgraded quickly and inexpensively. This is more likely to be found in middle-class neighborhoods. But you ought to prowl some of the better districts too, as well as some of the worst, so you’ll have a mental yardstick for comparison
Checklist for a neighborhood. Are the residences mostly neat, clean and well kept, as if the people are proud of them? Are any new stores, houses or apartment buildings going up nearby? (They often bring a rise in property values.) Is the neighborhood separated from industrial areas and from crowded commercial districts?
A better neighborhood is worth higher rents to the residents. Does a major traffic artery slash though the area, or is all traffic local, with no trucks or motorcycles? Is there enough open space for sunshine and good air?
Are there hazards nearby – abandoned lofts, or a freight yard, or a river that sometimes overflows? Do some buildings look dilapidated and vulnerable to fire? Are there nuisances such as a noisy or smoky factory, a sports arena, an all-night restaurant? If you find any of these, you’d better cross the neighborhood off your list.
The prevailing range of rents is one of the most important pieces of information you’ll need about any neighborhood you’re considering. It tells you the approximate top rents you can charge. You must buy a building that is renting for less than these top rates, so you won’t price yourself out of the market when you upgrade it and raise the rent.
The rent range gives you an idea of the income you can expect from a building in the neighborhood – and the price range in which it might sell, since an apartment building is usually priced somewhere between four and nine times its annual rent roll. This range may rule out some neighborhoods without further inspection.
High-rent buildings aren’t for you, obviously, because purchase prices will be more than you should prudently invest in your first venture. Nor will a very low-rent district be promising, because the income and resale potential won’t be attractive unless the district is starting to improve dramatically.
You might ask what houses have recently been sold or rented and why. Heavy turnover is a bad sign. So is conversion of owner-occupied houses to rental. Many appraisers say that when one-fourth or more of the houses are rented, a neighborhood is likely to be on the skids.
If the area is mostly apartments, you can get a surprising torrent of information just by visiting an apartment manager and saying, “If I were to purchase this property, would you stay on?” Pick a manager whose building has few vacancies, as indicated by the mailboxes; this means he or she is probably good at the job.
The manager will probably begin by telling you what’s wrong with the current owner. Then you can steer the talk to the neighbors, the crime rate, the public services, the shopping, the prevailing rents up and down the street, the changes in ownership of nearby building, and almost anything else you want to know about the scene.
Begin your search with people you know. Just mention you’re interested in buying residential property as an investment. You’ll be surprised how many of them know someone who may want to sell.
Practically every accountant, attorney, banker, builder, and insurance broker knows property owners who are thinking of selling. Then too, whenever an owner of apartments is looking for a buyer, his suppliers are likely to know about it. So you can get leads from interior decorators, hardware store people, plumbers, painters, handymen, carpeting dealers, swimming pool maintenance services, and others in service industries. Your dentist and your barber often hear about real estate soon to be put on the market. So do people in your church, your PTA, and any clubs you belong to. Ask them.
How much can you afford to pay? You should have some fairly definite figures in mind. Total price isn’t your most important consideration. Sometimes it’s good business to overpay if you get favorable terms. If you can afford the down payment and whatever repairs or improvements you plan to make, you can probably afford to buy the property, because there is a good chance the mortgage payments can be covered by the rent from tenants. You won’t go into a deal unless you are certain that the cash flow (mainly rent) will cover the loan payments and operating expenses, with a reasonable cushion against vacancies.
To buy a fairly old and small property, the down payment will probably be 5 percent to 25 percent of the purchase price. You can occasionally get title to a small property with no down payment whatever, just by signing a personal note or giving the seller carry back paper. You’ll always be trying for a deal with maximum leverage, which means minimum down payment. And you’ll need to conserve some your cash for refurbishing whatever property you buy.
Talk to several Realtors soon after you begin asking acquaintances for leads. About eight-five of every one hundred realty transactions are eventually handled through brokers. An owner may start with an idea of making the sale himself, but sooner or later he’ll probably decide that a broker can negotiate better for him.
Many inexperienced buyers think they can save at least part of the 6 percent broker’s sales fee if they deal directly with the owner. Theoretically they can, but in practice they seldom do. If there is a broker’s commission the seller usually pays it. Yet a building handled by a broker is less likely to be overpriced than one that an owner himself is selling. Most owners have an exaggerated idea of what their property is worth. So even if they concede the commission to the buyer, the price may still be high.
A first-rate broker can identify the weaknesses and selling points of a building. Just remember that his business is selling to you, the prospective buyer. When he shows you property, don’t expect him to point out all its weakness.
A broker won’t consider you a hot prospect if you simply stroll in and say something like “I’m thinking of buying property. What do you have?” A much better way to approach him is to express interest in one of the properties he is advertising.
After you’ve asked enough questions about one or two of his advertised properties to show that you’ve serious and fairly knowledgeable, you can ask, “Have you another property of the type I’m interested in?” Go on to explain exactly what you’re looking for: an older building in a specified price range, located in a stable or improving neighborhood where mot buildings are priced higher than the one you’ll buy.
As for age, many experts believe that the best buys are buildings from seven to fifteen years old. You can see what you’re buying. Unlike a newer building in which the quality of materials and workmanship may be hard to judge, these have been tested by time. Problems of plumbing, wiring, roofing, insulation, and the like have usually been worked out. It may be advisable to call in a contractor or electrician to inspect a house you are seriously considering. The records of rents and expenses in past years give you solid data on which to estimate profitability. The owner of a building this old probably won’t expect an outrageous price for it. And there may be an old mortgage you can take over at a low interest rate.
On the other hand, the older the building, the more money you’ll probably need for repairs and maintenance. Estimate them carefully before you buy.
You can explain to a realtor quite frankly that you’re looking for basically good buildings that can be dramatically upgraded with such “cosmetic” improvements as a new paint job or fresh landscaping or attractive wallpaper. If he’s experienced, he knows that one building in a drab block can be made to stand out like a new penny by spending $1000 for an imaginative two-tone paint job – and that this $1000 expenditure may add as much as $20,000 to the amount the next buyer is willing to pay for the building. So the realtor begins to respect you as an astute investor.
You might also mention specific neighborhoods that interest you, and the size of the buildings you’ll consider. Probably you won’t want anything bigger than a fourplex for your first venture while you’re learning. Depending on prices and the money you have available, a duplex may be a more promising investment. And you won’t rule out a small one-family house as your first buy, even though multi-unit properties are usually more profitable.
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