Investments

Recently a broker with one of the major investment firms told me his investors had lost 15% less than the market average. I found that a very dubious distinction.

The most aggressive investors I have worked with have realized a 15% return in as little as three months. They bought highly distressed property, brought in a team to bring the house up to neighborhood standards and sold it with attractive financing. Changes in finance rules make this more difficult now, but with proper documentation it can still be done.

Rehabbing distressed properties is exciting. You take your best guess at repair costs, make an offer and try to stay on schedule and under budget. Closing day is truly a time for celebration.

For those of us who don’t enjoy nail-biting there is rental property.

Currently it is more popular to buy rental property. The most popular rental properties are four-family homes. Four-families have several advantages—maintenance is more central than four single-family rentals and there is less risk with four tenants guaranteeing income than only one. They are also surprisingly affordable.

The first step with rental property is analyzing income. Income is often expressed as a percentage of purchase price. One takes the total monthly rent and divides it by the sum of the purchase price and cost of repairs (there are almost always some even if you’re not doing a rehab). One percent is the traditional goal. This allows the investor to maintain the loan, maintain the building and acquire equity. Amounts above one percent should be income which can be equated to dividends.

Cost of Building - $95,000

Repairs - $5,000

Monthly Rents (combined) - $1400

$1,400 / (95,000+5,000) = 1.4%

$400 per month would be income.

(There are some assumptions in this very simple example—your project income may differ.)

In choosing an investment there is a lot to be considered. Experience counts so new investors should start small. That beckoning white elephant is both the source of grand profits and unforeseen expenses.

If you don’t have time now, you won’t have more after the purchase, so allow for contract maintenance when you prepare your budget. Finally your cash/credit position matters and the project has to fit with your reality.

As I said, there is a lot to be considered but real estate may represent a great haven for dot com refugees and you won’t have to brag about losing less than average.

Mark Magas