Investing In Real Estate, Lesson 5
“Failure is the opportunity to begin again, more intelligently.” – Henry Ford
Here’s a very nice and easy way to make good money in real estate. It’s something you can’t do all the time, but when you can it’s golden. The idea is to buy pre-construction homes/condos in very promising, local developments.
Let me give you an example. My friend, DL, bought two condominium apartments in a Miami Beach high rise three years ago, just at the beginning of construction. He bought one for himself at $375,000 and a smaller one for investment purposes at $285,000. The building was completed in about 14 months. At that time, the larger apartment had appreciated by more than 20% — similar units were selling for $450,000. And the smaller unit did even better than that. A year later, prices had moved up again. He just sold his investment property for $375,000.
Another friend I’ve talked to you about, BM (a guy who has mastered buying and selling expensive cars, watches, etc.), bought two pre-construction condominium units in our town for $265,000 each. The property is not yet finished, yet all the units have been sold. The last six were sold for more than $300,000 each. BM has made almost $100,000 in less than 18 months.
Here’s how I’ve approached this business:
I made a deal with AK. She is basically doing all the day-to-day work: the forms, the filing, the footwork, and so on. I’m putting up the money, using my contacts to make good decisions, and taking financial responsibility. We are going to buy several properties every year — but only if we can get good deals — totaling some figure. For the purposes of illustration, let’s say that figure is $800,000. This will require an initial investment on my part of between $100,000 and $200,000.
We are going to try to sell that $800,000 worth of property — when it is ready to be sold in about a year — for as close to $1 million as we can.
In addition to the initial down payment, we have to consider closing costs, mortgage costs, and marketing costs (including commissions if we use a broker) when it comes time to sell. Our goal is to net, after expenses, $100,000. If we can do it once, we will reinvest the profits to do it again the next year. By the third year, if we are successful, we’ll have taken out all of my at-risk capital and will be “playing with the house’s money.”
For this to happen, two things need to take place:
1. The local market needs to stay strong.
2. Good new properties need to be developed.
By sticking with developments in my hometown, I will have a pretty good idea about which direction prices are going in general. I don’t yet know how to determine beforehand whether individual developments are good, but several criteria seem to be obvious:
* The developer has to have an established track record and good references.
* The location has to be one that is very good or moving up.
* There shouldn’t be anything seriously “wrong” with the development (such as lack of adequate parking, proximity to the railroad tracks, etc.).
* The size of the development should be appropriate for the local market. (Neither too many units nor too few.)
I met this year’s commitment by picking up two units. One is (and again I’m using figures to illustrate) a $295,000 townhouse in a very good part of town. I bought it when the development was already half-sold and therefore already appreciated, but it felt like the unit could go up another $30,000 or $40,000 in the future. The second is a home in a development of eight units, six of which sold at $1 million and two of which (smaller and not facing the water) are priced at $500,000. My thinking is that I’m buying a cheap house in a nice neighborhood. The value of the more expensive homes will pull this up regardless of the market.
So far, the cheaper unit has gone up $10,000. I’ve just turned down $550,000 (from the developer) for the other one. So, on paper at least, it looks as if I should be able to meet my target of making a hundred grand this year from this particular part-time business. If I do half that well, I’ll probably be happy.
This gives you an idea about what can be done by buying and flipping pre-construction properties. It can be a very nice business.
It won’t work if property values are falling. And it won’t work if the particular development you choose turns out to be a clunker. That’s why it’s so important to stick to your local market — so you can truly “know” it.
You will want to decide for yourself whether properties are appreciating in your area. If so, look around and see if there are units you can buy that meet your own financial requirements.
I’m a novice at this, so I’m going to severely limit my investment. You should too. That said, wouldn’t it be nice to have a little part-time, buy-and-flip business that could give you $20,000, $50,000 — even $100,000 — a year in extra cash flow?
One great thing about real estate: It goes up much more often than it goes down. And the good properties in the good areas go up much stronger and longer than the rest.
Once again, the most important rule for beginners: Invest in what you know.
I’ve talked about profits in the simplest terms. If you want to maximize your returns and minimize your cash outlay, you’ll be borrowing money — up to 90% of a property’s sales price. Thus, you could, for example, control $100,000 worth of real estate with a down payment (and transaction costs) of as little as $15,000. Some people I know have put down even less.
The better you can judge the market, the less risk you take and the better advantage you can take of the power of leverage: borrowing most of the money you need.
Again, this isn’t meant to be a blueprint for how to go about this sort of business but rather a general explanation of how it works — its considerations and financial benefits.
What I like best about this particular form of real-estate investing is that it requires the least amount of day-to-day work. Once you’ve selected the property, the hard work is done. After that, all you do is check on the development’s progress from time to time to make sure it’s on schedule. If your hunch about the market is right, you’ll soon be selling your property for a very nice profit — because the development itself will be doing the selling for you.