Financing (The devil is in the details.): There is more to a loan than its interest rate, term and points. When comparing potential loans compare all of its aspects. This is not an easy chore and the lender's jargon doesn't simplify it. Find a lender you can trust, your broker should be able to help you, and let him perform his magic. Read the documents.

Reserves (Remember the old westerns with the cavalry riding over the hill to save the embattled troops?): Plan on having adequate cash reserves. The amount will vary from investor to investor because of banking connections, available equities, sleeping habits, etc. Just make sure you are comfortable that when (not if) an emergency arises, you will be able to handle it without jeopardizing your portfolio.

Leverage (It's hard to reach the top of a mountain by digging a hole.): As a general rule, only buy investments that have a cap rate higher than the mortgage interest rate. Otherwise, your leverage will be negative. With positive leverage, an investor makes money on each dollar he borrows. With negative leverage, an investor loses cash flow to the lender on each dollar he borrows.

Loan term (A short fuse is the mother of fancy footwork.): There is no downside to a long term loan. The longer the term of your loan, the more insulated you are from economic conditions over which you have no control. The option of paying the loan down prior to its maturity can easily be negotiated at acquisition. Don't get intimidated into a time bomb disguised as a pot of gold. Only accept loans with terms longer than economic cycles.

Financial Analysis (Analysis is an art, not a science.): The software necessary to complete a thorough analysis is expensive but available. Insist that your broker provide you with the following as a minimum: Annual Property Operating Data, Property Acquisition Report, Property Sale Report, Pro-forma Income Statement, Analysis Assumptions Report, Real Estate Investment Analysis, and a Sensitivity Analysis. Also, you need to be

involved in the analysis process so that your assumptions and beliefs can be reflected in the results. "What if scenarios must be available to you. Don't go into contract without it!

Disclosed Data (Trust is a precious commodity. Make people earn it.): Do not assume that the sellers or their broker are providing you with accurate numbers. Require two years of operating statements, preferably those that the seller presented to the IRS.

Contracts (Never buy a horse without checking its teeth.): In real estate there is no such thing as a verbal contract. Get it in writing. If it is not in writing, pass. Review each service contract, each lease, and all other pertinent documents. Only accept a contract that provides for you to receive, review, and approve all appropriate documents prior to your deposit "becoming hard".

Estopple Certificates (You're not only buying property, you're also buying tenants.): Only accept a contract that stipulates that you will receive an estopple certificate from each tenant prior to closing. This is a statement from the tenant acknowledging the accuracy of the provisions in his lease.

Renting During Escrow Period (Remember the lesson of the Trojan Horse.): Only accept a purchase contract that contains a provision that the seller must get your written approval prior to signing a new lease.

Specialize: Life is complicated enough, why try to know everything? Each type of real estate investment, i.e. apartments, industrial, retail, office, land, hospitality, retirement homes, has its own idiosyncrasies. It is hard enough to become an expert in one sector of the market. The closer you stay to what you know, the better results you can anticipate.

Remember your purpose: You are purchasing investment property to accumulate wealth. Keep this in mind when you make your investment decisions. Keep this in mind when you screen tenants. Keep this in mind when you hire your advisors. -

MIKE HESSE, CCIM, CPM
Real Estate & Investment Specialist
DIRECT - 720.581.2222
online at www.MikeHesse.com
email Mike@MikeHesse.com