Here’s one important rule to know about investing in real estate — you don’t make any money until you sell or lease your property. Choosing the right amount of rent or the right list price can make all the difference.
These are some of the lessons learned and shared by David Crook, editor of the Wall Street Journal Sunday, and author of a brand new book called The Wall Street Journal Complete Real Estate Investing Guidebook (Three Rivers Press, 2006, $21.00).
My folks had investment houses when I was a kid. They were little houses and they had 3 teenage boys so they had built-in work crews, Crook recalled recently. His parents never got rich doing but they always had a rental property in addition to the home where the family lived.
I remember one summer my brother and I gutted a whole house and put on an addition. My father hired a 70-year old carpenter. He was working on a regular job, (and so) would come by at 7:00am and tell us what to do and then stop by at 7:00pm to see if we were doing it right, Crook said. We lived in the house while renovating it. My parents eventually moved into it and sold it.
In his life, Crook has bought and sold several investment houses. Unlike many investors who promise great riches for nothing down and little or no work, Crook says that the great secrets of real estate investing are not particularly hard to divine.
In the book, he suggests four strategies for making money: Buy a property for less than you can sell it; use as much of other people’s money as you can; make sure your property pays for itself; and, take maximum advantage of the tax laws.
Well sure, you say. I knew that.
What’s good about Crook’s book is the way he explains each of these concepts in detail. There’s no $3,000 set of DVDs to purchase in order to really find out how it’s done.
The book begins with a concept Crook says is near and dear to his heart: Your home is not an investment property.
As he explains it, once you factor in the interest you’re paying, maintenance, home improvement projects and taxes, it’s possible to generate a loss on the property even as it appreciates in value.
In the book’s example, a Los Angeles home bought in 1990 for $200,000 and sold in 2006 for $650,000 would generate a loss of $86,424 after you factor in after-tax mortgage payments, maintenance, financing and sales cost. (It’s not clear from the book whether real estate taxes are included in this figure.)
If you divide $86,000 by the 16 years someone lived there, the annual loss is $5,375, or $447 per month a small amount of money to pay for living somewhere other than a park bench.
But as an investment property, this house would have been fantastic. By generating rental payments of $18,000 per year in 1990 to $64,000 in 2006, the house would have generated a profit of $403,397 after paying the same expenses.
Crook says not everyone is cut out to be a landlord. But if you are, and if you have the capital to invest, you can’t beat real estate as an income-producing investment.
You’ve got rental income and appreciation and tax deductions. All of those are terrific compared to being a stock investor or salaried employee. But it all depends on your temperament, he explained.
Being a journalist, Crook believes that education figuring out how the real estate market works in your area will pay off. He suggests taking a year of thinking and learning before making your move.
In the first three months, he suggests you read real-estate investing books and take a real estate licensing class. Network with other landlords and real estate professionals through local clubs and groups and get your personal finances in shape.
In the next three months, he suggests you start to interview banks, line up your attorney and find potential business partners. While you do that, get to know the areas in which you’re interested. Talk to local renters, business owners and agents. Visit properties for sale and start crunching the numbers.
In months 7 to 9, get your funds together, get preapproved for your financing, and start making low-ball offers on properties.
By the time you get to the last quarter of the year, Crook feels you’ll be grounded enough to know when you’ve found the right property. At that point, you can make a solid offer for a property, do your due diligence, and close.
These days, Crook lives in Manhattan and has a second home several hours away. He doesn’t currently own an investment property. “I don’t like the idea of being 2 hours away from the building. That means I have to hire local people to handle things. It eats into whatever little profit there is,” he notes.
But that doesn’t mean he isn’t looking. For Crook, if you grow up taking care of investment properties, it gets into your blood. It’s a way of life.
For everyone else who believes real estate is the way to get rich, there are books like Crook’s.