This may be one of the most controversial philosophies in my real estate investment system. Having a property perform correctly with little or no money out of your pocket is every investor’s dream. It is possible, and it has been done before. It is just not probable that you will obtain a performing piece of real estate with no financial commitment on your part. Let’s address the basics of performing real estate assets.
With my years of experience I have found, in most instances, that when the down payment is minimum or non-existent, the “insider” investor (real estate agent) will be giving up some attribute of a performing piece of real estate. These attributes may include location, condition, a positive or break-even cash flow, the potential for future appreciation, safety in regards to the financial terms, and possibly, control.
Obviously, location has a lot to do with any real estate investment. It not only determines how easy it will be to collect rent (no guns should be needed to collect rent!), but also, possibly, the quality of tenants and the rate of future appreciation.
Condition has a lot to do with your future cash flow. Deferred maintenance needs to addressed, and major problems with any of your systems need to be improved during your ownership.
A positive or break-even cash flow is paramount because it gives you holding power. Many investors have found that investing for speculation and trying to squeeze the last few dollars of appreciation in an unbelievably hot market can be elusive. If the rebound they’re looking for (whatever “that price” is) isn’t forthcoming, then many of these appreciation/speculation investors will find it very difficult to hold on to a property with a monthly “alligator” biting them in the rear!
Though my system is not based upon future appreciation, it goes without saying that when you buy a property in a mediocre-to-good area, there is always the opportunity for appreciation. It has been proven that appreciation is consistently positive in real estate. It is those short term drops you have to weather so you can take advantage of the next climb to find where your appreciation will come from.
Appreciation has a lot to do with the safety of your financial terms. Not only do we like to see low interest rates that lead to the possibility of positive or break-even cash flow, but we also like to see long term loans that are fully amortized, which will eliminate the need to refinance or sell the property.
The final and one of the most important attributes is that I would like for the “insider” investor to be able to control the investment for themselves. Whenever investors bring in a partner, they bring in the potential for pain. Seldom do partners have the same needs and ideas on how to manage, utilize, and market any piece of real estate. My philosophy – if the investor is not married to the partner, in every sense of the word, he should avoid partnerships. This is a personal decision; however, my experience has been that partnerships breed distrust and disagreements making someone an eventual loser.
We’ll continue to break down how “insider” knowledge as a real estate agent is greatly beneficial as you build your real estate portfolio. Check back with us tomorrow.
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