December 11, 2009, Newsletter Issue #167: Determine Your Goals Before Investing in Real Estate

Tip of the Week

The recent "hot" real estate market has inspired many to become real estate investors. If you are thinking about investing in real estate, you will need to establish your goals first. Do you want to buy fixer-uppers and then sell them after you have improved them or do you want to buy homes that can be turned into rental properties?
Everyone is familiar with the idea of buying property that is in need of repair, fixing it and selling it for a profit. What most fail to calculate is the cost of the materials, repairs, holding expense (monthly payments, utilities and insurance for a vacant home) and closing costs associated with the future sale. If a property is not purchased at a price far below its potential market value for the neighborhood - it will result in a loss once the project is complete.
To avoid losing money, the down payment, closing costs and mortgage must be added to the cost of repairs and labor as well as to the fees for selling the home to determine basis. If the market will not exceed the total of those expenses, you will not make any money. If the market does exceed the total; you can evaluate if it exceeds the total by enough of a profit to make the project worth doing.
The second form of investing is to purchase homes that you will convert to long-term investments or rentals. In this instance, you are collecting monthly rental that should equal or exceed your principal, interest, taxes and insurance for the property. In stable markets, the appreciation for the property should be in the range of 3-5% (higher in some markets) and the tenant's rent will make the payment. The challenge to owning rental property is in finding good tenants who are rent-worthy and the role of becoming a landlord who is subject to constant repairs.

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