5 Tips for Evaluating a Real Estate Investment Deal
Ever hear the Warren Buffett and Charlie Munger adage: "When people are being greedy, be fearful. When people are being fearful, be greedy?" There's probably not a more fearful investment vehicle today than real estate. But a depressed market, high inventory and a tight credit market for would-be homeowners could provide a recipe for success for income property investments.
Ready to dive into the real estate market by investing in a rental property, taking on a Flip or Redeveloping a pre-existing structure into a different use? The opportunities are ripe, but don't make rookie mistakes. Follow these tips from Paul Gabrail, president and co-founder of Select Investment Group, a Cleveland, Ohio-based real estate investment company with a $50+ million portfolio of multi-family, residential and commercial properties, and you'll be on your way to securing a successful deal.
- Don't trust the owner's numbers. Your due diligence should involve checking with unbiased sources to determine the expenses, maintenance fees, leasing commissions and other costs associated with a given property. Double check data provided by the broker or seller.
- Don't underestimate property taxes. Factor in the right property tax amount, not what the current owner had been paying, particularly if it's a long-term owner. Your property taxes will be based on the sale price.
- Give special attention to the big-ticket items. The heating system, roof and foundation can be your biggest headaches and most costly repairs. Know what you're getting into. Have the major systems inspected by specialists in those particular fields.
- Don't fall in love. Remove yourself emotionally from the property. Look at a lot of properties and redevelopment opportunities before you commit. And don't base your offer on the owner's asking price. Run your own numbers to determine what sale price will work for you.
- Always have a reserve fund. Don't use your entire investment capital on the down payment. Set a goal to have one year of mortgage payments in the bank to get you through turnover cycles and unplanned maintenance expenses. Your financial analysis is for even keel expenses, but even keel is more of a long-term proposition. Short-term fluctuations are the reality.
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Other resourceful sites to personally bookmark and reference:
San Francisco Department of Building Inspection - www.sfdbi.org
San Francisco Planning Department - www.sf-planning.org
San Francisco Rent Board - www.sfrb.org
Residential Builders Association of San Francisco - www.rbasf.com