- Written by Mike Hesse
In times of great appreciation, the phrase that comes to mind is, “All boats rise on an incoming tide.” For the past few years it has been hard to make a mistake when buying investment real estate. The success formula was easy… buy something… buy anything. Every property went up in value; it was just a matter of how fast and how far.
Boom markets make everyone look like financial Einsteins. Now that we are no longer experiencing a boom market, however, is it axiomatic that we can no longer profit from investing in real estate? It’s certain that we definitely cannot play spin-the-bottle investing any more, but we can make profits – strong profits in fact – profits as sizable as ever. We just have to think a little harder, be a little more patient, understand the market a little better, and appreciate our capacities, intentions, and idiosyncrasies a little better. Now that there is less room for error, experience can be a critical assist, too.
The question is, “How”? The following is not intended to be an exhaustive study of the subject, but perhaps we can stir-up some creative investment juices because now is certainly the time to buy. There are two basic reasons to leap into a sound investment, NOW. The first is that some sellers are nervous and overextended, either financially or psychologically. Lost is the brazen cockiness all owners had just a short time ago. It is certainly not universally true, but many owners are ready to deal for the first time in a decade. The second reason to buy now is financing. Who would have thought that adjustable loans are readily available with interest in the low fives? Serious cash flows can once again be developed.
If you’re considering a strategy of investing for retirement, the low interest rates are an opportunity not to be missed. Locking in a low interest rate mortgage will make you look like genius a few years from now. Not only will you appear to be of high intellect, you’ll have an abundance of extra cash to help you celebrate your timely decision. For instance, on a 30 year amortized, fixed-rate mortgage for $500,000, the difference between 6% and 8.5%
interest over a five-year holding
period is $50,809!
Let’s forget the premise that the way to make money in real estate
is by “stealing” the property from a seller – buying
an investment that is dramatically under its market value. Can this be
done? Of course, it is, obviously, a possibility. But come now, how often
in your lifetime have you gotten something for nothing?
Let’s make the realistic assumption that it is going to be up to us to develop a sound, profitable transaction. There is one basic method at our disposal: increasing the Net Operating Income (NOI). This is true because the value of a real estate investment is directly proportional to the income that the property generates. Investors buy return. The NOI is the residual income that a property produces after all expenses are paid. There are, fortunately, an infinite number of ways this may be accomplished. Let’s look at some possibilities.
As income and expenses are the two components of NOI, the NOI may be increased by either increasing the income or by decreasing the expenses. Simple. Not easy, but simple. The question then becomes two-fold: “How can I drive up the income and/or drive down expenses.”
Controlling expenses is the dry side of the equation. That’s why it is commonly overlooked. In fact, in good times it is routinely ignored. For most of us, it is just more fun to concentrate on creative ways to increase income. A wise practitioner, however, regularly examines each expense and searches for less expensive alternatives: Insurance? Get bids. Management? Research your opportunities. Utilities? Check your options. Taxes? Appeal your assessment.
