Declining interest rates and lower home prices may be signs of a cloudy economy - but for real estate investors, they're a bright silver lining. Eric Tyson & Robert Griswold, coauthors of Real Estate Investing For Dummies®, lay out the rules for doing it right.
There's no question that America is in a tight spot. Every day seems to bring a new wave of recession-related bad news. But stop panicking for a second, tune out the negative chatter, and listen closely. Hear that? It's the sound of opportunity knocking. The recent financial and housing crises have actually led to some serious opportunities for level-headed investors who want to get rich right rather than get rich quick. Where will you find these opportunities?
"The grand irony is that the financial and housing collapses actually create a favorable environment for real estate investing," says Eric Tyson, coauthor along with Robert Griswold of Real Estate Investing For Dummies®, 2nd Edition (Wiley, March 2009, ISBN: 978-0-470-28966-2, $21.99). "Interest rates are down. Property values are depressed in many parts of the country. And real estate is still a great long-term investment. That hasn't changed.
"It's not for everyone, but if you're in the right place financially and can afford to invest in real estate, there are plenty of opportunities out there," he adds.
In their new book, Tyson and Griswold draw from their years of experience in the real estate and financial worlds to provide a complete course in real estate investing. The book - which offers tried & true advice on investing in residential rental properties, commercial properties, and undeveloped land -teaches new and experienced investors alike to proceed with confidence in any economy.
"Our core advice is as true today as it was before the recession," says Tyson. "The fact is, there's a right way and a wrong way to invest in real estate. The wrong way led to the recent real estate crisis. The right way can lead to great financial gains for long-term investors."
Here, excerpted from Real Estate Investing For Dummies, are 10 methods for pursuing a real estate fortune the get-rich-right way:
Save, save, save. All real estate investors need a nest egg. That means even as you develop additional sources of income, you should hold steady on or preferably even cut current expenses in order to build up your savings. Even if you can find properties where the seller provides all the financing, you can't escape certain out-of-pocket expenses or the opportunity cost of lost income as you expend your time and energy tracking down properties and performing due diligence.
"Most people generate wealth and achieve a higher standard of living through sacrifice and living below their means in the short-term," Tyson points out. "If you haven't been doing this, start doing it now. That way you'll be in a more secure position to invest in real estate later."
Get your credit sparkling clean. The best opportunities and the most options are available to the real estate investors who have both cash and good credit. Sellers and lenders aren't going to provide financing to a buyer with a poor credit history. Because the purchase of real estate virtually always necessitates the borrowing of funds, make sure that your credit report is as accurate and as favorable as possible.
"Your credit score is a key element not only in qualifying for real estate loans, but also in getting the best terms to maximize your use of borrowed capital," says Tyson. "Get a copy of your credit report and correct any errors-pronto! At the very least, ask the credit bureau to place a letter in your file with your version of any disputes. If legitimate delinquent balances appear, formulate payment plans and send the credit reporting bureau updates showing the balance was paid."
Buy property in the path of progress. It's usually a good idea to buy in areas that will continue to improve through new investment and economic activity. After you locate the best cities or neighborhoods, look for two types of underachieving real estate assets:
- Income properties that are tired and worn and have deferred maintenance
- Those that are physically sound but poorly managed
"Your preference will depend on your specific talents and resources," says Tyson. "My coauthor, Robert, favors well-located, physically sound properties that simply have underperformed due to poor management. He's able to use his skills and expertise as a property manager to upgrade the properties, bring in new tenants, and increase the rents."
Buy the right property at the best price possible. Sounds like a no-brainer, especially in the current environment, right? Unfortunately, it's often easier said than done. To be successful, you'll have to follow certain guidelines. Get-rich-right investors rarely buy new or fully renovated properties unless they're in the path of progress or a prime location. Why? Because the value-added or appreciation has already been taken by the current owner.
"Two important characteristics of successful real estate investors are discipline and the ability to predetermine the maximum price they'll pay for a property to ensure plenty of room for appreciation potential," says Tyson. "You don't want to simply lower your purchase price by the cost of the repairs, because the value you add to the property should be significantly higher than your out-of-pocket expenses."
Don't fall into the do-it-yourself trap if the "time" factor doesn't make sense. Yes, doing the work yourself may be cheaper if you know what you're doing. But it makes no sense to have a rental property off the market for three weeks while you spend evenings and weekends painting in a misguided attempt to save the $1,000 that a contractor would charge for painting that would take two days.
"If you decide to use contractors for your renovations, get three comparable bids from licensed, competent professionals," advises Tyson. "However, if you already know you have a reasonably competitive bid, you can expedite the process by asking the contractor whether she can lower the price by 10 percent - then you don't have to go out and get additional bids."
Keep abreast of market rents. One of the biggest challenges for most rental property owners is determining the proper rent to charge tenants for newly renovated rental units. But finding the right rental rate simply requires some homework and research. The best indications of the market value of your renovated property can be found through a market survey of comparable properties.
"After you've acquired and upgraded your new rental property, immediately test the new rental rate structure by offering your vacant rental units or space at the higher market rates you determined in your rental survey," says Tyson. "The response you receive from prospects will let you know whether you're at the right rental price."
Recover renovation dollars through refinancing. A key element of the get-rich-right strategy is to keep your capital working and use leverage reasonably while maintaining sufficient equity to weather the ups and downs of local real estate cycles. Acquiring and renovating your rental property required cash, but you also have increased the income, which has created additional value. You can now use this increased value to refinance the property to cover your initial costs. While you should avoid borrowing too much and overleveraging your investments, you also don't want to be too conservative and underestimate your cash needs. Borrow extra money or have an untapped line of credit available to allow for reserves.
"Just remember the lessons learned during the recent real estate collapse," says Tyson. "A falling real estate market can be devastating to investors who borrow too much. Real estate markets have and will continue to have cycles, and you don't want to be too aggressive and find that your real estate empire collapses to the point that you yourself can't afford to rent one of the apartments you used to own!"
Reposition property with better tenants. One of the best ways to increase the income and value of your newly renovated real estate investment is to reposition the property with new, more financially qualified tenants. So look to upgrade your tenants by marketing to a new target tenant profile and re-leasing the property. After all, the current tenants may be the reason that the previous owner sold the property (and that it's in need of a complete renovation)!
"Although you may occasionally find that the current tenants are financially qualified and will treat the property as their own, the harsh reality is that most repositioned properties should start with a clean slate," says Tyson. "At a minimum, require that current tenants complete a rental application. Go over the lease renewal exactly as you would for a new tenant and use the same financial criteria. And always require that they pay a security deposit."
Refinance or sell and defer again. Notwithstanding the decline in property values in most areas in the late-2000s, long-term rental property owners find that they have a considerable amount of equity tied up in their property because of the appreciation that has occurred over the decades throughout much of the country. Having some equity in the property is good and keeps you from faltering should the local real estate economics take a hit, but too much equity just sitting in a property lowers your overall returns.
"Use the equity in your current properties to invest in additional properties with a view toward diversifying to reduce your overall risk," advises Tyson. "You can access that equity to generate the cash you need in one of two ways: Either conservatively refinance your rental property or look to sell the real estate investment in a tax-deferred exchange. The best option will depend on the market conditions at the time, and a good accountant or tax advisor can help you make the right choice."
Consolidate holdings into larger properties. Most long-term real estate investors find that they reach the point where their management responsibilities and duties no longer conform to the lifestyle that they can afford. They decide to simplify their lives and hire professional property managers to deal with tenants, turnover, toilets, and trash. But finding and paying for a qualified property manager for a diversified portfolio of small rental properties isn't easy or cost-effective, says Tyson - and there is a better alternative.
"Look to a tax-deferred exchange and consolidate your estate holdings into one or a small number of larger properties that can be professionally managed," he advises. "You will still enjoy the benefits of real estate ownership without having to deal with the day-to-day challenges of managing so many properties."
"In our experience, successful real estate investors tend to be savvy, hard working, conscientious individuals who enthusiastically perform comprehensive due diligence before buying a property," says Tyson. "They don't reinvent the wheel with each deal, because they know their market niche, personal skills, and available resources. They have a vision and use their tried-and-true game plan for each property.
"If you develop these skills, you can uncover unique properties with value-added potential that are often missed by others," he concludes. "So, take advantage of today's buyer's market, and get started now."
About the Authors: Eric Tyson, MBA, is one of the nation's best-selling personal finance book authors and has penned five national bestsellers. His Personal Finance For Dummies (Wiley) won the Benjamin Franklin Award for the Best Business Book of the Year. He is also the author of Investing For Dummies and coauthor of Home Buying For Dummies and Real Estate Investing For Dummies. He's on the web at www.erictyson.com.
Robert S. Griswold, MSBA, is a successful real estate investor and hands-on property manager with a large portfolio of residential and commercial rental properties. He is the author of Property Management For Dummies and Property Management Kit For Dummies and the real estate expert for NBC San Diego, with a regular on-air live-caller segment since 1995.
