Ok, so I'm not so arrogant as to assume that I know everything there is to know about real estate investing.
Not even close.
There are a few simple concepts, however, that I believe anyone interested in real estate investment should know.
It's frightening to see the decisions that are made when folks run half-cocked into the marketplace.
It's not only frightening to me, but it's financially devastating to the people that do it.
Let me give you an example.
In my neighborhood I just saw a for sale sign in the yard of a house that is now zoned commercial.
We're always trying to see what's going on in our market, so Roger and I contacted the seller.
The house is probably about 2,200 square feet, in fair condition.
It doesn't have central air nor does it have much parking.
I know of three similar houses roughly 5 blocks away that sold within the last 4 months or so for less than $225,000 each.
Keep that in mind.
The current owner has a friend who is a residential real estate agent.
In talking, the residential agent gave him an estimate as to what it should be worth.
The owner obviously got excited and immediately up a "for sale by owner " sign.
So now he is asking for $750,000.
Let me write that again.
$750,000.
It boggles my mind to think how he or his agent friend could reasonably justify a price like that.
I wonder how long the property is going to sit vacant and losing money before the owner wakes up.
The worth of commercial real estate is based solely on its ability to generate revenue.
For a property to be a good deal, it should generate cash flow.
If it doesn't, you'd better have a dang good reason for getting into it.
So what kind of revenue would this place need to generate to be profitable? Let's see.
If you put down 20%, you'd still need a loan for $600,000.
A 25 year loan at 8% would mean monthly payments of $4,630.
90.
Plus a couple hundred dollars a month in expenses plus a couple grand a year in property taxes...
Anyway, the place would have to rent for $5,500 a month or so just to break even.
If you could only put down 10% ($75,000) you'd need almost $6,000 a month.
There's open office space everywhere you look in my area right now and there's no way it would rent for that.
In fact, you'd probably be lucky to get $2,000 a month for that space.
Does buying a property just so you can lose an extra $3,500 - $4,000 every month sound good to you? Me neither.
But now let's say that you came into a lot of money and paid cash for the place.
And let's say you're able to do the impossible and rent it for $2,500.
Now you're making $30,000 a year on your $750,000 investment.
You'd be earning a 4% cash-on-cash yield.
You can make more than that with zero headache in a CD or a money market account.
In all fairness, you do get more benefits than just cash flow from a real estate investment.
It'd be hard for those to offset the $42,000 - $48,000 loss from the borrowed money example.
I wish this kind of bad deal was rare in the marketplace.
Unfortunately, lemons like this show up all the time.
I have the fear that someone is going to buy that place at or near the asking price and from there go steadily bankrupt.
So what's the solution? Education.
You need to understand the business of investment real estate.
You need to know how to recognize the diamond in the rough.
You need to know how to acquire and operate and perhaps someday sell an investment.
And once you know the business, if you still need an agent, you need to find one that really understands it it, too.
There are a few out there.
You just have to look around.