can be a source of income and capital growth or a financial drain and a headache.
Which one depends on several factors:
In booming markets it is easy to get caught up in the general feeling of exuberance. As I write these words in early 2007, the USA is going through a real estate slump. Yet just a year or two ago, real estate was THE hot investment.
Now there is talk about financial collapse of sub-prime lenders, yet two years ago they were lending money like it grew on trees.
My golden rule is that when the cab driver and the hair-stylist starts bragging about how much money they are making in any particular investment, it's time to get out. Remember day trading?
I sold about five millions dollars worth of real estate investments two years ago, just before the slump. Could I have held out for a few bucks more? Maybe, but since the price of those properties is now about four million, I think I did OK.
The sub-prime lending fiasco was an accident waiting to happen. So many lenders focused on the few extra interest rate points they could earn by taking on poorly secured debt with high risk borrowers. When will they learn that it's not what you HOPE to get paid but what you actually COLLECT that matters?
This goes pretty much in line with paying the right price. Some people will look at an income statement and say:
"Well my mortgage, tax and insurance is $800 per month and I can rent the property for $850 a month so I'll be making $50 a month."
NO! They have forgotten maintenance (allow $200 per month), vacancy (allow one month vacant per year when you will have no income), advertising, bad debts, eviction of deadbeat tenants etc.
These are the easiest properties for a novice to manage. But beware of accepting lame excuses for non-payment. If the rent is due on the 1st of the month, you should serve a 3-day notice no later than the 5th. And start eviction proceedings immediately the 3-day notice period is over. (This is based on Florida laws. The laws for eviction may be different in your state so please check them out FIRST.
Sounds tough? This is a business.
Can you imagine going into Wal-Mart, selecting your merchandise and then telling the checkout person that you don't have the money right now but your baby is hungry and you will promise to come back next week to pay? Of course not. So why should you, with a lot less money than Wal-Mart let people live in your property free in the hope that you may get paid?
Tell your prospective tenants right upfront that you expect to be paid on the first of the month, no excuses are acceptable for late or non-payment and that you file evictions immediately.
Many novices make the mistake of investing in commercial properties that they know nothing about. Then they wonder why the property is vacant and the bank wants to foreclose on them. And yes, I made most of my money in commercial properties. But I have had over 20 years experience.
Start small. Don't over leverage. And read and re-read the comments above.
Real Estate Investment and Mortgages