Now that I have a solid understanding of personal finance and economics, I wanted to go to the next level and understand a bit more about real estate investing. Before I was a programmer, I was a construction worker in New York, where we typically worked on high-end spaces for wealthy people and celebrities, and the entire time I wondered “Why do these places cost so much?” and “How do I get one?”
Going into this book, I was very skeptical. The cover and title seemed cheesy, and the first couple of chapters I breezed through, because it was information I already knew. Afterwards though, I found a wealth of information.
I mark up every book that I buy, with highlights and stickies, so that I can quickly reference the key points I’d like to remember, or quotes which really speak to me. This book was no different.
Below, is just some of the information which stood out to me.
On researching properties for potential investment in a city outside of your own:
Even before we arrived, we had made phone calls to set up meetings with property managers, commercial brokers, commercial lenders, city officials, and business people like the publisher of the local apartment guide.
The market is more important than the property.
The three drivers of supply and demand:
On targeting properties who have owner-managers who live out of state, and why they seldom manage teh property to its full potential:
- Buying in a hot market, far from home. Frequently underestimate how much time and energy are required to manage it.
- Easy to lose interest wheny ou are out-of-town and don’t have to see it each day
- Many wrongfully believe that real estate is not a business
- Lack of Information
- Owners know little of the market, potential, or condition of the property itself
On trying to force a good deal:
In good deals the numbers work. In bad deals, they don’t.
On determining price:
- The seller’s asking price is irrelevant.
- You determine the property value, which becomes your offer.
- With multiple units, the property value is based on the current cash flow of the property.
On determine price (cont’d):
- Verify property income.
- Verify expenses.
- Determine net operating income.
- Find the capitalization rate and valuation.
- Calculate loan payment and your profit or cash on cash.
For instance, if you put $100,000 down on a property and it brings you $1,000 of income per month, your cash on cash is 12 percent per year.
Cash on Cash = Profit / Down Payment
There are three types of income when determining if a property is good:
Annual income: The total income the property generated in the prior 12 months.
Actual potential income: Total income the property could have generated in the prior 12 months, had all of the units been occupied & the owner taken advantage of all income opportunities
Future potential income: Total income the property could generate at today’s market rents, 100% occupancy & taking full advantage of all other income opportunities
Typically, many property owners will try to sell their property based on the future potential income. it is in your best interest to buy it at the actual income.
Capitalization Rate = Net Operation Income / Purchase Price
Property Value & Offer Price = Net Operating Income / Capitalization Rate
On Property Taxes:
There are two kinds of property taxes:
Real Property Taxes: based on the real estate property
Personal Property Taxes: based on the contents of the property, like refrigerators, stoves, dishwashers, and other appliances.
Taxes usually go up after you purchase the property because the assessors use the new purchase price as the new assessed value.
There’s a wealth of information in this book, which I am not able to convey here. I was able to get through it all in roughly three hours, and plan on going through it again shortly before I purchase a home. Again, I was pleasantly surprised to see how much useful information in here, as I started out very skeptical.
Can you recommend any other real estate books?-----------------------