Advice for Novice Real Estate Investors

Sick from the sudden evaporation of wealth recently experienced in the stock markets? Some investors have sworn off equity and bonds investments, preferring to invest in “real, tangible investments” such as gold and, oddly enough, real estate. The logic is that when a stock’s value goes to zero, what's left? Only the paper the stock certificate is printed on or, nothing. If real estate markets suffer a severe shock, an investor will still be able, in most instances, to collect rent from the tenants in that handsome pile of bricks and mortar the investor owns. Yes, there’s something comforting about being able to drive by a neat, fully leased, 4-unit apartment building while so-called real estate professionals are claiming that cap rates have risen, the secondary markets for CMBS pools is dead and loan-to-value ratios have decreased to 60%.

If you would like to join the millions of ordinary Americans who successfully own and manage investment properties, then this blog entry is for you. Consider the following words of advice:

1. Pick your team BEFORE you pick your investment - Don't even think about making an investment in real estate until you have a team identified. At a minimum, the team should include: (1) an experienced real estate broker, (2) an accountant, (3) an experienced real estate lawyer, (4) your banker, (5) a general contractor, (6) an electrician, (7) a plumber/mechanical contractor, (8) a roofer, (9) a carpenter, (10) a painter/dry wall specialist, (11) a handyman/lawn service, and (12) a property manager.

2. Don't expect immediate cash flow - There is a misperception held by many novices or would be real estate investors that magically after closing, cash will start flowing. Typically, this is not true. Typically, investment real estate is priced and should be purchased such that for the first few months, the cash flow is nominal as miscellaneous closing fees are recovered, deferred maintenance is corrected, neglected capital improvements are completed and vacancies are filled. I usually counsel investors not to expect positive cash flow until at least 12 months after closing.

3. Don't be cheap - Err on the side of fixing problems correctly the first time, by experienced, licensed and insured tradesmen who will stand by their work.

4. Cash is king - Don't jump in until you have enough cash saved to cover (a) the down payment, (b) all closing costs, (c) unexpected repairs during the first few months of ownership, and (d) cash shortfalls due to unexpected vacancies during the first 12 – 24 months of ownership.

5. Easy does it - Don't jump in trying to make a big splash. Invest carefully, incrementally and thoughtfully, building your cash flow, experience and comfort levels with your portfolio and your team. Don't rush. Remember, "Flip This House" is a cable television show, not a prudent real estate investment strategy.

6. Think synergy - Focus your investments by (a) asset class (retail, multi-family, office or warehouse); or (b) neighborhood. The objective is to develop expertise and experience that will help protect your investment. Focusing on one asset class brings you expertise in types of tenants, construction costs, rents, cap rates and income yields. Focusing on a particular neighborhood can bring a thorough awareness of community dynamics that can potentially impact your investment - good or bad.

Stay tuned! I will offer more advice for Novice Real Estate Investors in future blogs.