Real Estate Advice for the New Investor: Do Your Homework

Enthusiasm is an asset in a process that could take some time and is full of challenges. I tend to err on the conservative side re investing, as I prefer modest steady gains over high risk gambits, so I will always give you the cautious viewpoint.

If you are doing real estate as an investment, it is like any other investment: you must research your investment, do the math, calculate the risks, and develop a worst case scenario to make sure you can live with it if your investment goes bad. This is one reason most real estate investors use OPM - other people's money- like mortgages, etc. to reduce their own exposure. They also form limited liability companies to hold them, to limit their personal exposure to lawsuits or liabilities, and protect other private assets. Just as with stocks, bonds, credit default swaps, & all those other fancy instruments, the greater the risk, the greater the potential return. However, as you have seen in recent years in the economic upheaval, worst scenario is a real possibility, so go in with open eyes. (Note that risk is not as significant a factor when buying a home for oneself, as one has the expenses of residing somewhere whether one owns or rents. In this article I am strictly talking about investing.)

In contrast to most other investments, real estate is NOT A LIQUID ASSET and does not give you the flexibility of a liquid asset. There are actually times when real estate does not sell at all (as in the recent period right after the economic collapse, when the credit markets froze up and there was no cash for buyers, even if you could find a buyer.) You should always have some liquid reserves somewhere else. Even now, banks are being so picky about qualifying buyers, that many willing buyers are still on the sidelines.

One of the golden rules of investment (that was broken by lots of people who should have known better, and who put all their money with Bernie Madoff because they liked the returns they thought they were getting) is "Don't put all your eggs in one basket!" If what you are investing in ONE real estate purchase is equivalent to "all your eggs," you might be better off diversifying into other arenas and forgetting about real estate...

First, visit some financial institutions: tell them you want to invest in real estate, and find out what kind of financing, if any, would be available to you. Most investment financing requires a minimum downpayment of 30%, often involves multiple (percentage) point fees up front, and is at a higher interest rate than regular owner occupied residential property.

Once you find out how much you can afford to borrow, you can now consider what type of property you want to purchase as an investment. Here's where things get tough. If you are considering buying anything larger than a 2 family, there are a lot of applicable laws you must follow. Check out the Rent Stabilization Organization (http://www.rsanyc.com/ - an association of landlords). For a reasonable fee, you can join, and they will have lots of information for you regarding Rent Control, Rent Stabilization, limits on annual increases, causes for which you can evict someone, annual notice requirements, etc. They can also assist you when (notice it is "when" not "if") you end up in landlord tenant court.

Find an attorney who is familiar with real estate in the area you want to purchase. (Make sure real estate is a decent chunk of his/her practice, as you need someone well-versed in the NY City real estate laws, especially concerning Multiple Dwellings (3 & up). Even if you have to pay for a consult, you should benefit from having the attorney explain some basics (esp if you have already checked out the info at Rent Satbiliztion Organization), and explaining your goals to the attorney, so he/she is prepared when you find a property.

Go property hunting: Check out my article "10 Tips for Buyers" for advice on checking out neighborhoods, etc. Keep in mind that renters are not as particular as buyers regarding location, but they are also more transient, and you may find yourself paying money to refurbish your apartments every few years when someone moves out. (This figure should be worked into your reserve requirements-see below).

Do your homework! Once you find a property, the financial approach is as simple as it is necessary: Determine all the expenses of a property (the seller should be forthcoming with details here, actual utility bills, etc, or walk away from the property) to determine your annual carrying costs without the financing. Then factor in the financing. Then factor in the anticipated repairs and determine how much of a reserve you need for contingencies, and emergencies (remember about the apartment turnover mentioned above). Now add up the expected income, subtract about 10% for potential empties & non-payers, and if the remaining number is not higher than your total expenses, then you are not even breaking even. The annual amount that's left, over and above your total expenses, divided by the total cash you put into the property, is your return on investment (ROI). My suggestion is that if you do not see at least 15% ROI, don't even consider it!

Co-op & condo investment is a whole 'nother ball game. Usually not for the novice. Very case by case. Call me for a free initial phone consultation.

718.941.3725

Good luck with the hunt! Think of it as a game....you only need ONE good property to start, and there's thousands out there!