If income properties are such a great investment, why aren’t more people investing in them? The answer is the presence of too many risks and concerns. Some may be self-imposed, others may come from external influences. The cure-all for any of the “ailments” is knowledge. The better you understand these circumstances, the less intimidated you’ll be.
No Startup Capital
Probably the biggest obstacle for many, but this is the easiest to overcome. The average investor may look at the modest balance in their bank account and conclude they’re not ready to invest. That’s wrong because you don’t need a lot of cash on hand.
If you absolutely cannot come up with some capital through assets (especially money tied up in a mutual fund or some other investment), the two easiest ways to invest in real estate are through home equity loans and options
What is an option?
An option is a written agreement between an owner of a property (seller) and a prospective buyer (in this case, you). It gives the buyer the right to acquire a property at some time in the future at a fixed price. The fixed price is arrived at when the option agreement is signed.
In exchange for this right to buy, the prospective buyer gives the seller an agreed amount of money, referred to as option money. The option money can vary from a small to larger amount depending on the size of the deal. The time frame to exercise an option can range from a few months to a couple years.
The most commonly used options are:
- An option to purchase the property
- A lease of a property with an option to purchase.
- A sales contract subject to certain conditions. For example, changes must be made to the land or the deal is off and the deposit will be refunded. This is technically perquisites for a sale, but still labeled as an option.
Options are easier to receive in a down market. Let’s say you obtain a one-year option to buy a small office building for $700,000 with $10,000 option money. You can neither find a seller or a use for the building, so you renew the option for another year, costing an additional $15,000. The price of the building is now $725,000 because the owner can renegotiate a price when drafting a new option.
After a year or so, the property increases in value to $950,000 and you sell it to a third-party purchaser for that price. A simultaneous closing takes place: You close on your purchase of $725,000 by paying the balance of $700,000 – $25,000 is subtracted due to the two option payments – and the third-party purchaser pays you $950,000 for the office building.
That’s a profit of $225,000, quite the return on the $25,000 you invested by purchasing the option. 900% to be exact. So don’t let a lack of capital dissuade you from investing in real estate!
Every real estate investor was inexperienced at some point. Seek out a trustful person who has seen success in your categories of interest. Ask whether he or she would consider letting you become a partner in the next investment. This way you can learn the steps involved and get your feet wet under the guidance of someone who knows the ropes.
The Price Tag
Anytime an investor wants to question if a price is too high, they should then ask what it’s high compared to. Price is all relative to the market at the time. If you can buy a property at (or below) market value, then you are not paying too much.
Don’t be the investor who passes up opportunities, then is all “coulda, woulda, shoulda” when they see their mistake. As long as you go through the steps to find good real estate and negotiate the best deals possible, you’ll realize that worrying about the price tag is unnecessary.
Management and Leasing
The thought of managing property scares away some would-be investors. Property management doesn’t have to be a hassle. One of the best ways to increase the value of your building is – you guessed it – good management: Including and not limited to structuring the right leases, maximizing income, keeping operating expenses under control, and making sure tenants are happy.
No one can predict the market. Smart investors know there are ways to weather the ups and downs. Smart investors also know how to capitalize if a recession hits. During a recession is when the properties are at its lowest prices.
“Good quality income properties in top locations are virtually recession proof.”
– David Dabby, South Florida real estate analyst and consultant
There’s always going to be risk involved. As you move forward with your investment strategy, pay attention to those who have been successful, and tune out the naysayers.
Lack of Information
Some people steer clear of commercial real estate because they think they just don’t know enough about it. Seek out books, magazine articles, publications, blogs (you’re in the right spot!), and seminars.
You’ll be able to get valuable, unbiased advice from a Counselor of Real Estate. A CRE is a professional who has an overview of the dynamics of a given marketplace. CREs know what type of properties and what locations represent a good investment with minimal risk. They charge a consulting fee, but their knowledge of the ins and outs of a successful investment makes it the best money you’ll ever spend.
No investment is risk free, but real estate holds key advantages over other investment opportunities, including the stock market. One of the most important of these advantages is the abilitiy to make a lot with just a little.
If you put 10% down on a property, then sell it for 10% more than you paid, the math will show you that you’ve made a 100% return! I can explain that in better detail:
- See a house on sale for $100,000
- You put a down payment of $10,000 on the house (10%)
- You sell the house for $110,000.
- The $90,000 mortgage is gone, but you own the $10,000 you paid for the house (this is called equity)
- You sold the house for $110,000. That’s an extra $10,000 in your pocket when it’s all said and done.
- You’ve invested $10,000, got your money back and an extra $10,000!
No other investment comes with this kind of leverage!