How To Pick Investment Real Estate

Defining Your Battle Plan

One of the silver linings to the recent downturn in the real estate markets is that now may very well be an excellent time to consider buying real estate as an investment. Investing in real estate can be done in a number of different ways. From buying a small single-family house or even a piece of vacant ground to buying shares in a real estate investment trust (REIT). Depending upon your situation and your goals, any of these investments might or might not be right for you. The secret to having a successful experience starts with examining just what your situation and your goals are.

So, that's where we're going to begin.

Step 1

Take an honest look at your particular situation. Are you ready to become a real estate investor? Other than buying shares in a real estate investment trust, otherwise known as a REIT, owning real estate involves risk and responsibility.

Now is the time to take a look at your financial situation. Do you have the resources to be able to take care of a property? A "Bobism" is that "all buildings are in the process of falling down and it's only through our efforts that they stay standing."

If a tenant is living in a property that you own and the furnace goes out in the middle of winter, it's going to cost you to get it fixed. If you choose to manage the property yourself, it's going to be YOU that are getting the call in the middle of the night. Are you willing and able to get up and either fix the furnace or pay somebody else to get out of bed to go and fix the furnace? If your answer is no, that you wouldn't be willing to fix it yourself nor do you have an extra couple of grand (or even more) laying around, then maybe buying an investment property isn't for you.

That's not to say that you can't invest in real estate, just that you maybe ought to consider calling your stock broker and purchasing shares in a REIT, as mentioned above.  REITs are investment vehicles that offer many of the benefits of real estate ownership without the hassles. Different REITS invest in different kinds of real estate in many different locations, both foreign and domestic. If this sounds interesting, then you need to make a call to a qualified financial planner.

Step 2

So, you've got some reserves in the bank and you want to take a more active role in owning your property than a REIT offers. The next step is to determine what your particular goals are. Are you wanting to build wealth for retirement or are you looking to generate cash flow? Are you wanting to buy a property, fix it up and "flip" it or are you looking for a long-term hold?

There is no one "right" way or "wrong" way. Sometimes you might want to do a combination of the two depending upon what opportunities present themselves.

Either way, now is a good time to consider finding a qualified real estate agent who has access to the Multiple Listing Service. The "MLS" is a cooperative database where just about all members of the National Association of Realtors place their listings.

Generally speaking, within certain geographic limitations (MLS's are regional in nature), a realtor can access the information on any property that is listed on an MLS that he/she is a member of.

Since we can all access all of the listings in a particular area, there is no need to work with different agents from different companies. A Remax agent can show you a property that is listed by a Century 21 agent, for example.

Picking a real estate agent is worthy of a completely separate article, but suffice it to say that you should probably interview several in order to find one that you are comfortable with and that has the experience and expertise to be able to help you.

Step 3

Once you've figured out just what your goals are, now is the time to consider what types of properties will work best in order to help you to obtain these goals. The possible types of property that are available run the gamut from a small vacant lot in a subdivision all the way up to Donald Trump types of skyscrapers!

For most people, it's wise to start small and to work yourself up to the larger, more expensive properties after you've had time to acclimate to owning real estate as an investment.

This is the point where you would be wise to talk with a lender. The particular type of lender will depend upon the type of property that you decided that you want to look into buying.

Certain types of properties are preferred by different types of lenders. If you're looking at purchasing a 1 to 4 unit family residential building, you can talk to any number of different types of lenders. Banks, credit unions, savings and loans, mortgage banking companies and mortgage brokers all originate mortgages on 1 to 4 family residential properties and can probably help you.

In general, banks, credit unions and savings and loans tend to be more conservative with a lot of them only originating loans for their own servicing portfolios. If this is the case, they will usually require at least a 20% of the purchase price down payment on the property. However, they can be more flexible in utilizing assets that you may own to "cross-collaterize" these assets in order to come up with the money for the down payments.

Mortgage banking companies and mortgage brokers generally originate mortgages for the secondary mortgage market. Mortgage banking companies generally keep the servicing on the mortgages that they originate, but sell the actual loan to the secondary mortgage market. Mortgage brokers tend to sell everything that they originate on the secondary mortgage market through a network of different kinds of lenders. While they don't use their own money, they can be the most flexible of the different kinds of lenders by having relationships with all of the different kinds of lenders.

If you're considering a property that is not a 1 to 4 family residential property, a mortgage broker may still be able to help you or you may want to shop around for a lender that specializes in that particular type of property. For example, if you're looking at buying a small commercial strip center that costs less than $1,000,000, then you're more than likely going to end up working with a local bank. The same is true for vacant land.

This is another area where your realtor can be of assistance by either referring you to a lender or by helping you search one out.

Step 4

Now that you've selected a realtor and lender to help you and you've determined what kind of income property you're interested in, it's time to go out looking. The important thing to remember here is another "Bobism." That is, "He who cares least always wins!"

What I mean is that you need to remember that nobody is putting a gun to your head to buy any particular property. That being the case, you should be willing to walk away from any negotiations that aren't favorable to you.

That said, please remember that the price is only one of the things being negotiated when buying a piece of investment property and it may not be the most important thing being negotiated.

For example, if you're looking at buying a property that you plan on holding for the next 20 years, does paying the seller an extra couple of grand really mean that much? Especially if the seller is willing to compromise on another issue being negotiated such as when you close or maybe taking a seller carried second deed of trust.

Now, if you're buying a property to flip, the bottom line purchase price becomes more important.

As you can see, becoming a real estate investor can become fairly complex fairly quickly. This fact is another reason to be very careful when selecting a real estate agent and lender to help you. Just because your sister-in-law has her license, doesn't mean that she's going to be the best agent for you! Keep that in mind!

If done right, real estate investment is one of the best ways of building wealth in our country. By taking advantage of the fact that you can leverage real estate by the use of a slew of different types of mortgage products, you can turn a small nest egg into a huge fortune. Be careful, be smart and you, too, can become a successful real estate investor!


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