or Chris J. Slater, Rei and I am a
. .
Would you like to become one too?, (for instance) Sally B. Quick, R. E. I. or whatever your name (fill in the blanks) _ _ _ _ _ _ _ _ _ _ _ _ _, R. E. I. ?
I much prefer to be a R.E.I. or REI and
So let's look at Wikipedia for a short course in becoming an REI, or rei and once you do, please let me know of this under comments of your
Real estate investing involves the purchase, ownership, management, rental and/or sale of
real estate for
profit.
Real Estate has traditionally outperformed the Wall Street equity
market. A street by street knowledge of the market make it perfect for
small savvy investors. Large institutions lag behind trends. Improvement
of realty property as part of a real estate
investment strategy is generally considered to be a sub-specialty of real estate investing called
real estate development. Real estate is an
asset form with limited liquidity relative to other investments, it is also
capital intensive (although capital may be gained through
mortgage leverage) and is highly
cash flow dependent. If these factors are not well understood and managed by the investor, real estate becomes a
risky investment. The primary cause of investment failure for real estate is that the investor goes into negative
cash flow
for a period of time that is not sustainable, often forcing them to
resell the property at a loss or go into insolvency. A similar practice
known as
flipping is another reason for failure as the nature of the investment is often associated with short term profit with less effort.
Sources and acquisition of investment property
Real estate
markets in most countries are not as organized or
efficient
as markets for other, more liquid investment instruments. Individual
properties are unique to themselves and not directly interchangeable,
which presents a major challenge to an investor seeking to evaluate
prices and investment opportunities. For this reason, locating
properties in which to invest can involve substantial work and
competition among investors to purchase individual properties may be
highly variable depending on knowledge of availability.
Information asymmetries are commonplace in real estate markets. This increases
transactional risk, but also provides many opportunities for investors to obtain properties at bargain prices.
Real estate entrepreneurs typically use a variety of
appraisal techniques to determine the value of properties prior to purchase.
Typical sources of investment properties include:
Once an investment property has been located, and preliminary
due diligence
(investigation and verification of the condition and status of the
property) completed, the investor will have to negotiate a sale price
and sale terms with the seller, then execute a contract for sale. Most
investors employ real estate agents and real estate
attorneys
to assist with the acquisition process, as it can be quite complex and
improperly executed transactions can be very costly. During the
acquisition of a property, an investor will typically make a formal
offer to buy including payment of "earnest money" to the seller at the
start of negotiation to reserve the investor's rights to complete the
transaction if price and terms can be satisfactorily negotiated. This
earnest money may or may not be refundable, and is considered to be a
signal of the seriousness of the investor's intent to purchase. The
terms of the offer will also usually include a number of
contingencies
which allow the investor time to complete due diligence, inspect the
property and obtain financing among other requirements prior to final
purchase. Within the contingency period, the investor usually has the
right to rescind the offer with no penalty and obtain a refund of
earnest money deposits. Once contingencies have expired, rescinding the
offer will usually require forfeiture of the earnest money deposits and
may involve other penalties as well.
Sources of investment capital and leverage
Real estate assets are typically very expensive in comparison to other widely available investment instruments (such as
stocks or
bonds).
Only rarely will real estate investors pay the entire amount of the
purchase price of a property in cash. Usually, a large portion of the
purchase price will be financed using some sort of financial instrument
or
debt, such as a
mortgage loan collateralized by the property itself. The amount of the purchase price financed by debt is referred to as
leverage. The amount financed by the investor's own capital, through cash or other asset transfers, is referred to as
equity. The ratio of leverage to total appraised value (often referred to as "LTV", or
loan to value
for a conventional mortgage) is one mathematical measure of the risk an
investor is taking by using leverage to finance the purchase of a
property. Investors usually seek to decrease their equity requirements
and increase their leverage, so that their
return on investment
(ROI) is maximized. Lenders and other financial institutions usually
have minimum equity requirements for real estate investments they are
being asked to finance, typically on the order of 20% of appraised
value. Investors seeking low equity requirements may explore alternate
financing arrangements as part of the purchase of a property (for
instance,
seller financing, seller subordination, private equity sources, etc.)
If the property requires substantial repair, traditional lenders like
banks will often not lend on a property and the investor may be
required to borrow from a private lender utilizing a short term
bridge loan like a
Hard money loan from a
Hard money lender.
Hard money loans are usually short term loans where the lender charges a
much higher interest rate because of the higher risk nature of the
loan. Hard money loans are typically at a much lower
Loan-to-value ratio than conventional mortgages.
Some real estate investment organizations, such as
real estate investment trusts (REITs) and some
pension funds and
Hedge funds,
have large enough capital reserves and investment strategies to allow
100% equity in the properties that they purchase. This minimizes the
risk which comes from leverage, but also limits potential ROI.
By leveraging the purchase of an investment property, the required
periodic payments to service the debt create an ongoing (and sometimes
large) negative cash flow beginning from the time of purchase. This is
sometimes referred to as the
carry cost or "carry" of the investment. To be successful, real estate investors must manage their cash flows to create enough positive
income from the property to at least offset the carry costs.
With the signing of the
JOBS Act
in April of 2012 by President Obama there has been an easing on
investment solicitations. A newer method of raising equity in smaller
amounts is through
real estate crowdfunding
which pools accredited investors together in a special purpose vehicle
for all or part of the equity capital needed for the acquisition.
Sources and management of cash flows
A typical investment property generates
cash flows to an investor in four general ways:
Net operating income, or NOI, is the sum of all positive cash
flows from rents and other sources of ordinary income generated by a
property, minus the sum of ongoing expenses, such as maintenance,
utilities, fees, taxes, and other items of that nature (debt service is
not factored into the NOI). The ratio of NOI to the asset purchase
price, expressed as a percentage, is called the
capitalization rate, or CAP rate, and is a common measure of the performance of an investment property.
Tax shelter offsets occur in one of three ways:
depreciation
(which may sometimes be accelerated), tax credits, and carryover losses
which reduce tax liability charged against income from other sources.
Some tax shelter benefits can be transferable, depending on the laws
governing tax liability in the jurisdiction where the property is
located. These can be sold to others for a cash return or other benefit.
Equity build-up is the increase in the investor's equity ratio
as the portion of debt service payments devoted to principal accrue
over time. Equity build-up counts as a positive cash flow from the asset
where the debt service payment is made out of income from the property,
rather than from independent income sources.
Capital appreciation is the increase in market value of the
asset over time, realized as a cash flow when the property is sold.
Capital appreciation can be very unpredictable unless it is part of a
development and improvement strategy. Purchase of a property for which
the majority of the projected cash flows are expected from capital
appreciation (prices going up) rather than other sources is considered
speculation rather than investment.
Risk management
Management and evaluation of risk is a major part of any successful
real estate investment strategy. Risks occur in many different ways at
every stage of the investment process. Below is a tabulation of some
common risks and typical risk mitigation strategies used by real estate
investors.
| Risk |
Mitigation Strategy |
| Fraudulent sale |
Verify ownership, purchase title insurance |
| Adverse possession |
Obtain a boundary survey from a licensed surveyor |
| Environmental contamination |
Obtain environmental survey, test for contaminants (lead paint, asbestos, soil contaminants, etc.) |
| Building component or system failure |
Complete full inspection prior to purchase, perform regular maintenance |
| Overpayment at purchase |
Obtain third-party appraisals and perform discounted cash flow analysis as part of the investment pro forma, do not rely on capital appreciation as the primary source of gain for the investment |
| Cash shortfall |
Maintain sufficient liquid or cash reserves to cover costs and debt service for a period of time, |
| Economic downturn |
Purchase properties with distinctive features in desirable locations
to stand out from competition, control cost structure, have tenants
sign long term leases |
| Tenant destruction of property |
Screen potential tenants carefully, hire experienced property managers |
| Underestimation of risk |
Carefully analyze financial performance using conservative
assumptions, ensure that the property can generate enough cash flow to
support itself |
| Market Decline |
Purchase properties based on a conservative approach that the market might decline and rental income may also decrease |
| Fire, flood, personal injury |
Insurance policy on the property |
| Tax Planning |
Plan purchases and sales around an exit strategy to save taxes. |
Foreclosure investment
Main article:
Foreclosure investment
Some individuals and companies are engaged in the business of purchasing properties that are in
Foreclosure.
A property is considered in foreclosure when the homeowner has not made
a mortgage payment for at least 90 days. These properties can be
purchased before the foreclosure auction (pre-foreclosure) or at the
foreclosure auction which is a public sale. If no one purchases the
property at the foreclosure auction then the property will be returned
to the lender that owns the mortgage on the property.
[1]
Once a property is sold at the foreclosure auction and the
foreclosure process is completed, the lender may keep the proceeds to
satisfy their mortgage and any legal costs that they incurred. The
foreclosing bank has the right to continue to honor the tenants lease
(if there is a tenant in the property), but usually as a rule the bank
wants the property vacant, in order to sell it more easily.
[2]
Thus distressed assets (such as foreclosed property or equipment) are
considered by some to be worthwhile investments because the bank or
mortgage company is not motivated to sell the property for more than is
pledged against it.
Foreclosure statistics
U.S. foreclosure activity dropped to a 74-month low in April 2013,
with 144,790 properties with foreclosure filings. Although still about
twice as high as the average 75,000 per month in 2005, it was 60 percent
below the monthly peak of more than 367,000 in March 2010. - See more
at:
http://www.inman.com/2013/07/09/the-foreclosure-crisis-is-over/#sthash.eNrqJEjm.dpuf,
with about one of every 100 U.S. households at some stage of the
foreclosure process, according to the latest numbers from data
aggregator
RealtyTrac.
[3]
See also
References
External links
