Investing in Real Estate

Gary W. Eldred

• Publisher: Wiley
• Year: 2012
• Print ISBN: 9781118172971
• eBook ISBN: 9781118240021
• Edition: 7
• Topic: Business
• Subtopic: Real Estate
• Index: Business

The bestselling guide to real estate, newly revised for today's investors

More than ever, investing in property today will set you on track to conquer financial uncertainty and build your long-term net worth. Investing in Real Estate, Seventh Edition offers dozens of experience- proven methods to convert these challenging times into the best of times.

Whether you want to fix and sell or buy, improve, and hold, market savvy real estate investor Gary W. Eldred shows you how to achieve your goals. He provides time-tested ways to grow a profitable portfolio and shows you how property investing can deliver twenty-two sources of financial return. You'll learn how to negotiate like a pro, read market trends, and choose from multiple possibilities to finance your properties. This timely new edition also includes:

• Historical context to emphasize how bargain prices and near record low interest rates now combine to offer unprecedented potential for short- and long-term profits
• Successfully navigate and meet today's loan underwriting standards
• How to obtain discounted property prices from banks, underwater owners, and government agencies
• How to value properties accurately—and, when necessary, intelligently challenge poorly prepared lender appraisals
• Effective techniques to acquire REOs and short sales on favorable terms within reasonable time frames
• How to market and manage your properties to outperform other investors
• And much more!

Join the pros who are profiting from today's market. All you need is the knowledge edge provided by Investing in Real Estate, Seventh Edition —the most favored and reliable guide to gaining the rewards that real estate offers.

Chapter 1
ACHIEVE A PROSPEROUS FUTURE: 22 WAYS YOU CAN EARN PROFITS WITH PROPERTY

For at least the past 20 to 25 years, financial planners, mutual fund sales reps, Wall Street promoters, and various cheerleading professors of finance (most loudly, Jeremy Siegel of the Wharton School) have championed the mantra, “Stocks for the long run”; “Stocks for retirement.” These advocates of equities assert that over the long run, stocks outperform all other types of investments. “If your retirement still sits at least 10 years into the future,” they advise, “place 100 percent of your nest egg in stocks.” (Admittedly, the 2011 bull market in bonds converted a few of the stock market enthusiasts to a more balanced view—but the majority seem undaunted.)

In his widely read (and praised) book, Winning the Loser’s Game, Charles Ellis encourages investors to place all of their money in stock index funds rather than property because (according to Ellis),

Owning residential real estate is not a great investment. Over the past 20 years, home prices have risen less than the consumer price index and have returned less than Treasury bills. . . . Own a home as a place to live, not as an investment.

Leave aside for a moment how Ellis arrived at his long-term house price figures—no data that I have seen (even if we factor in the recent downturn) report that long-term housing prices, relative to incomes or consumer prices, have become cheaper. However, Ellis errs most egregiously in another way. He does not understand how investors should measure the total potential returns that property offers.¹

Neither Ellis, stock market enthusiasts, financial planners, nor you should evaluate property returns (past or future) simply on the basis of historical or expected price growth.

Frequently, even advocates of real estate investing often err in a similar way. I often read property investing advice such as, “Always buy from a motivated seller”; “Never buy unless you can buy at least 20 percent below market value”; “Always buy in an area poised for growth (or experiencing rapid growth).” Unfortunately, this stock market mentality that focuses upon price growth has infected the way too many people think about property.

22 SOURCES OF PROFIT FROM INVESTMENT PROPERTY

No question about it. I love price gains and will elaborate on this point as my next topic. Nevertheless, as you evaluate properties as investments, expand your perspective. Apply each one of the potential returns listed in the prologue and explained with examples in this chapter. You can achieve stock market–beating returns from property—at much lower levels of risk—in many different ways. When you fail to evaluate the full potential of a property, you not only bypass properties that could yield great profits (albeit in ways you may never thought of), you also slight the full range of profit possibilities that lie within the properties that you do buy.

Will the Property Experience Price Gains from Appreciation?

Passive price gains (as contrasted to gains from actively creating value) can arise from two unique sources: (1) appreciation and (2) inflation. Yet, in everyday conversation, most people do not differentiate between price gains that result from appreciation and those that result from inflation. Appreciation occurs when demand for a specific type of property, location, or both, grows faster than the supply of competing (substitute) properties, whereas inflation tends to push property prices up—even if demand and supply remain in balance (although in cities such as Detroit or Buffalo, demand may slide so much that property prices lag the Consumer Price Index by a wide margin).

Homes in Central London, San Francisco’s Pacific Heights, and Brooklyn’s Williamsburg have experienced extraordinarily high rates of demand growth during the past 15 to 20 years. And since 1990, houses within a mile of the University of Florida campus have more than doubled (and in some cases tripled) in market price—primarily because UF students and faculty alike now prefer “walk or bike to campus” locations.

Areas Differ in Their Rate of Appreciation. Although properties located in Pacific Heights and Williamsburg have jumped in price at rates much greater than the rise in the Consumer Price Index (CPI), some neighborhoods in Detroit have suffered price declines of 60 to 90 percent. Appreciation does not occur uniformly or randomly. You can forecast appreciation potential using the right place, right time, right price methodology discussed in Chapter 15.

Likewise, you need not get caught in the severe, long-term downdrafts in prices that plague cities and neighborhoods that lose their economic base of jobs. Just as various socioeconomic factors point to right time, right place, right price, similar indicators can signal wrong place, wrong time, and wrong price.

Today’s property markets seem to offer a best-of-both-worlds opportunity: You can earn good returns from cash flow—and good returns from appreciation when the economy and property supply and demand balances return to normal. In the past, in markets strong in longer-term appreciation potential (for example, coastal California or as with urban Vancouver now), investors had to sacrifice cash flow as a trade-off for expected price gain. Fortunately, that trade-off no longer exists to the degree that it used to.

You Do Not Need Appreciation. Should you invest in properties that are located in areas poised for above-average appreciation? Not necessarily. Some investors own rental properties in deteriorating areas—yet still have built up multimillion-dollar net worths. My first properties did not gain much from price increases (appreciation or inflation)—but they consistently cash-flowed like a slot machine payoff. With one of my early apartment buildings, a $10,000 down payment grew into $100,000 of equity over 10 years—just through mortgage amortization.

When you choose a quick turn, fix, and sell strategy, appreciation isn’t needed. You achieve gains in equity that are unrelated to market temperature. Appreciation isn’t necessarily required, either, when you buy at a price 15 to 30 percent below market value. Savvy buying can reward you with five years of appreciation-like price gains—instantly upon purchase. Throw out the popular (but erroneous) belief that you can’t make good money with property unless its market price appreciates. Appreciation represents one highly rewarding goal to achieve, but by no means is it the only goal that counts.

Will You Gain Price Increases from Inflation?

In his book, Irrational Exuberance, the oft-quoted Yale economist, Robert Shiller, concludes (as does Charles Ellis, cited earlier) that houses perform poorly as investments. According to Shiller’s reckoning, since 1948, the real (inflation-adjusted) price growth in housing has averaged around 1—at best 2—percent a year.

“Even if this $16,000 house [bought in 1948] sold in 2004,” says the eminent professor, “at a price of $360,000, it still does not imply great returns on this investment . . . a real (that is, inflation-adjusted) annual rate of increase of a little under 2 percent a year.” (Note that Shiller also omits rental income from his supposed investment results.)

Shiller Thinks Like an Economist, Not an Investor. Every investor wants to protect his wealth from the corrosive power of unexpected inflation. Even if we accept Shiller’s inflation-adjusted rate of price growth—and I believe it reasonable (on average—though savvy investors need not accept average), yet certainly not beyond critique—even Shiller’s data show that property prices have kept investors ahead of inflation in every decade throughout the past 75 years.

[Side Note: Not true for stocks (or bonds). Consider the most inflationary period in U.S. history: 1966–1982. In 1966, the median price of a house equaled $25,000; the Dow Jones Index (DJIA) hit 1,000. During the subsequent 18 years, the CPI climbed steadily from 100 to 300. In 1982, the median price of a house had risen to $72,000; the 1982 DJIA closed the year at 780—below its nominal level of 18 years earlier.]

Inflation Risk: Property Has Protected Better than Stocks. No one knows what the future holds. Will the CPI once again start climbing at a steeper pace? At the runaway rate at which the U.S. government prints money and floats new debt, the odds weight the scale in that direction. During periods of accelerating inflation, most people would rejoice at staying even. In fact, the popularity of Treasury inflation-protected securities (TIPS) reveals that goal (and worry).

Imagine that in the early to mid-1960s you were a true-blue stocks for retirement kind of investor—and you were then age 45. In 1982, as you approach age 65, your inflation-adjusted net worth sits at maybe 30 percent of the amount you had hoped and planned to accumulate. What do you do? Stay on the job another 10 years? Sell the homestead and downsize? Borrow money from a wealthy friend who invested in property?

Property Investors Do Not Buy Indexes and Averages. Economists calculate in the nether land of aggregates and averages. Investors buy specific properties according to their personal investment objectives. An economist’s average does not capture the actual price gains (inflation plus appreciation) that real investors can earn—when they set price gain as their prime financial objective. Investors apply some variant of right time, right place, right price methodo...

Table of contents

• Cover
• Content
• Praise For Gary Eldred
• Title Page
• Copyright
• ACKNOWLEDGMENTS
• Prologue
• CHAPTER 1: ACHIEVE A PROSPEROUS FUTURE: 22 WAYS YOU CAN EARN PROFITS WITH PROPERTY
• CHAPTER 2: OPM: BORROW SMART, RAISE CASH, BUILD EQUITY
• CHAPTER 3: APPRAISAL: INS AND OUTS OF MARKET VALUE
• CHAPtER 4: MAXIMIZE CASH FLOWS AND GROW YOUR EQUITY
• CHAPTER 5: PAY LESS THAN MARKET VALUE
• CHAPTER 6: PROFIT WITH FORECLOSURES
• CHAPTER 7: PROFIT FROM REOS AND OTHER BARGAIN SALES
• CHAPTER 8: PROFIT BY CREATING VALUE
• CHAPTER 9: MORE TECHNIQUES TO PROFIT WITH PROPERTY
• CHAPTER 10: NEGOTIATE A WIN-WIN PURCHASE AGREEMENT
• CHAPTER 11: STRATEGIC MANAGEMENT BUILDS EQUITY
• CHAPTER 12: DEVELOP THE BEST LEASE
• CHAPTER 13: CREATE PROMOTIONS THAT SELL
• CHAPTER 14: PAY LESS TAX
• CHAPTER 15: MORE IDEAS FOR PROFITABLE INVESTING
• CHAPTER 16: OPPORTUNITY FOR A LIFETIME
• INDEX
• END USER LICENSE AGREEMENT