Monthly Archives: May 2018

Home Seller Should Read Before Hiring a Real Estate Agent

Before you hire a real estate agent, read the answers to your most important questions.

Will a property I sell myself be at a competitive disadvantage compared to properties sold by real estate agents?

No-and in many ways, you’ll have an advantage. First of all, today’s buyers find their homes on the Internet on their own time. If they like your home, they’re going to contact you no matter what-and the odds are good that they’ll be happier dealing with you than with an agent. It is no secret that a huge number of homes are not selling and expire before the agent ever gets the home sold. Do a Google search and you’ll see the amount of training material the real estate industry offers to teach their agents how to persuade sellers to renew their listings for a year. There is no magic in what a real estate agent does.

To give you an example of the advantages of selling your home yourself, think about signs. When you list with an agent, they get to place a mini billboard in your yard that includes a tiny bit of advertising for your home and a huge amount of advertising for their company. The whole industry should have moved on to customized signs a long time ago-but they haven’t. You’ll have a significant advantage by tailoring your on-the-ground marketing plan to your home, including your FOR SALE sign.

Do homes sell for more when listed with a real estate agent?

That’s what the National Association of Realtors funded by real estate agents says, but there’s no independent data to support their statistics. If a real estate agent tells you they can get you more money for your home, ask them to bring you a buyer; if they can’t, they need to leave you alone to sell your house. Far too many listings handled by agents expire, unsold.

An agent’s opinion is not going to get your home sold. It’s easy for people to make guesses and conjectures, but to win in today’s market, you have to deal with hard facts.

How much time and effort is this really going to take?

It takes about as much time to sell your house as it takes to plan a long vacation. The marketing side requires the most time up front, but once you’ve gathered your facts, it shouldn’t take you more than a few hours to get your marketing plan started. You’d have to gather that same information for an agent, if you used one. And the process has been streamlined for you on sites like simpleandsold.com.

If you’re skeptical, take the amount you’d pay in commission to a real estate agent and divide it by the number of hours it takes to plan a vacation. The result should help you see that time you put into selling your house will be time well spent.

A real estate agent told me it would be dangerous to sell my own home, since I’d be letting strangers in my house all the time. Should I be worried?

Unfortunately, you’re going to have to let strangers in your home to sell it. But you would have to do this with or without a real estate agent, so this is almost a moot point. Remember that you can open your home any way you want: you can take down information for safety purposes; you can schedule your viewing appointments so that you won’t be alone in the house; and you have the right to stop the process if you ever become uncomfortable with a person’s presence. This is something even real estate agents face.

Do I need to use a Multiple Listing Service (MLS) to get the exposure I need for my home?

First, you should understand what MLS is. It was not designed as a marketing venue for homes; rather, it’s a simple way for brokers to negotiate compensation with each other, so that Real Estate Agent A can tell Real Estate Agent B, “Sell my listing and I will pay you X.” Period.

My local MLS, which was named #1 in the country, is still way behind the times. It allows me to upload approximately eight tiny (two-by-two-inch) pictures and about three sentences of description. I’m not even allowed to link to anything. How is that a viable marketing tool?

Look at Zillow, Trulia, and Yahoo! Real Estate and you’ll see how much the MLS has been eclipsed. It’s become just an outdated method for real estate agents to protect their turf. Some systems are not even Mac compatible.

With Simple and Sold, you can put your home up for viewing on hundreds of websites, and you can add up to thirty-six large, high-definition photos in your listing. You can have paragraphs of description about your home. You can attach listing brochures and other files, which interested buyers can view online or download. You can add background music or a voice-over about your property’s features; you can provide links to area schools and anything else you want.

What is the NAR?

NAR stands for the National Association of Realtors, the lobbying group listed at #4 on opensecrets.org’s list of political heavy hitters. It’s the organization about which Joe Nocera of the New York Times once wrote: “You have to wonder sometimes what they’re smoking over there at the National Association of Realtors.”

According to Bloodhound Realty Blog, The NAR has stayed under the radar while doing a monstrous amount of damage to the economy, the housing market, and most importantly, the consumer. Bloodhound Realty Blog states (this blog does a great job of exposing the NAR), “It was the NAR that lobbied for each law and rule change that resulted in the housing boom, the sub-prime lending catastrophe, the wanton bundling of fraudulent loans, the ongoing subsidization of the secondary mortgage market, etc. The villain behind all the villains in the collapse of the American economy is the National Association of Realtors.”

“The real estate licensing laws, written in their original form by the NAR, exist to limit competition in real estate brokerage, eliminating alternative sources of real estate brokerage to artificially sustain higher commissions for NAR brokers”

John Crudele of the New York Post recently stated: “The real estate industry lives by the motto: “location, location, location.” Next week it’ll be known for “deception, deception, deception.” People want the truth and the NAR is deceiving the public all to save the sacred real estate commission. Crudele also reports: “The National Association of Realtors admitted that it has been reporting bad figures on sales… Jeez! Tell the truth!… The Realtors aren’t doing the country any favors by sugar-coating their stats… and the people at NAR don’t seem to be bothered by the practice.”

Don’t most people trust real estate agents to get them the best deal?

Unfortunately, people don’t trust them. In the most recent Gallup poll, they ranked lower than bankers but higher than congressmen in terms of ethics.

In all fairness, it’s not the behavior of real estate agents that has been unethical; it’s the way their organization, the NAR, has worked to block their competition. As I see it, and as most Americans see it, competition is for the competent. You own your home, so you should have the choice to sell it any way you choose.

The NAR got a public slap on the wrist in 2008 from the Justice Department when the organization tried to stop real estate agents without a physical office from participating in MLS. The Justice Department had to sue the NAR to allow mobile, internet-based brokers-the kind who operate from laptops and Starbucks instead of fancy offices-to practice their trade.

I think the NAR should be ashamed of making taxpayers pay for this lawsuit, which (in the words of the DOJ itself) “requires NAR to allow Internet-based residential real estate brokers to compete with traditional brokers.” The Department said the settlement would enhance competition in the real estate brokerage industry, giving consumers more choice, better service, and lower commission rates. NAR is now bound by a ten-year settlement to ensure that it continues to abide by the requirements of the agreement.

Real Estate Development Project

As the 2008 recession continues to take a toll on the US economy, numerous commercial and residential real estate development projects are stuck in a holding pattern. Investors are unwilling to invest, and lenders are unwilling and/or unable to lend. Business owners find it extremely difficult to obtain financing that would allow them to develop businesses that would lease commercial units from developers, and residential buyers cannot obtain financing to purchase single-family homes or condos from developers. The general devaluation of properties, lack of equity, limited availability of credit, and the overall decline of economic conditions created a chain of events that has made it increasingly difficult for real estate development projects to succeed, or even survive within the current market. However, a number of strategies exist to help “un-stick” real estate development projects by overcoming these barriers and challenges.

The lending industry has played an important role in this chain of events as hundreds of lenders have retracted real estate development loans, refused to issue new loans, and tightened financing criteria despite the millions of dollars in “bailout” money that many of them received (intended, in part, for the purpose of opening new credit channels and lending opportunities). As a result, numerous real estate developers have been left with pending development and construction loans that their lenders are no longer willing to fund. Many developers have opted to negotiate deed in lieu agreements with their lenders to avoid litigation and foreclosure by essentially transferring the properties to the lender with no monetary gain for the developer. Other real estate developers are simply stuck in this holding pattern with properties that they cannot get funded but are responsible for concerning payment of property taxes, maintenance expenses, and debt service payments to lenders. For many of these developers, the prospect of developing their properties to generate a profit in the near future has become negligible. The expenses associated with keeping and maintaining these properties coupled with the lack of revenues generated by them has created a downward spiral effect that has led to bankruptcy and foreclosure of thousands of real estate developers in recent years.

Properties that were once slated for development of residential communities or new commercial venues that would help create jobs and improve economic conditions have been stuck for several years. Lenders typically sell these properties through auctions or a “fire sale” processes for pennies-on-the-dollar in order to get them “off of their books” as a liability and as an impediment of their funding capacities. Opportunistic investors or “land bankers” often purchase these properties and hold them for future gains in anticipation of an eventual market turn-around. Hence, these properties remain undeveloped and “stuck” for years to come, instead of becoming revenue generating assets for their communities.

So how do you “un-stick” a real estate development project in today’s economy? Many real estate development projects can benefit from various strategies that can be implemented to convert them into revenue-generating profit centers that also create jobs, facilitate the provision of needed goods and services, help improve the local economy, and enhance the aesthetic appeal of the area by improving a vacant or deteriorated property. The strategies provided in this article are described as summaries of more complex processes that require strategic planning and development tactics in order to achieve significant results; However, these strategies have been effective for the turn-around of numerous real estate development projects within the current economy. While it may not be an easy task to “un-stick” a real estate development project in today’s market due to the challenges described above, it is achievable to convert such properties into profitable endeavors by incorporating the appropriate strategies and techniques that are designed to overcome these barriers despite the current economic conditions. Following is a list of various strategies that can be incorporated for this purpose:

Strategies to “un-stick’ real estate development projects

1) Revise the existing development plan

Intricate analysis is likely necessary to determine the current highest and best use(s) for the property considering recent physical, social and economic changes within the local environment. For example, a property that was originally designed for development and sales of high-end condominium residences may be suitable today as a mixed-income apartment complex that can be developed in a phased manner to minimize the need for substantial upfront equity, to minimize risk, and to facilitate development in a staged process in correlation with the propensity of demand. The condominium development and sales model would have provided short-term profits and payoff of the development loan as the units were to be completed; Whereas the development of an apartment complex would provide long-term profits and require a long-term financing arrangement to facilitate incremental pay-down of the loan over time. It would also require ongoing property management, maintenance and marketing efforts that must be demonstrated in the revised plan. Therefore, in this example the real estate developer must be willing to change the original model and to employ the expertise that would be necessary to make the new model successful.

Numerous examples can be provided of projects that had to change their existing model in order to adapt to the recent social, physical and economic changes of their environments. The key is to determine, with accuracy, what the highest need and demand generator will be for the specific property, and to create a development plan designed to meet the demand in a cost-effective manner. A number of additional tactics are needed for the preparation of an effective revised development plan and to obtain funding, such as preparation of a strategic financial analysis and capitalization plan, operating plan, market penetration plan, etc. The tactics and format vary depending on the project.

2) Government incentives and participation

Real estate development creates temporary construction jobs and permanent local jobs. It facilitates the provision of goods and services, and production of tax revenues on local, state and federal levels. This helps stimulate the local markets and promotes financial stability for the economy as a whole. The lack of real estate development projects have the opposite effect, and have contributed significantly to the current recession. For this reason, numerous government entities have incentive programs that are intended to spur new real estate development projects for the private sector. The benefits of these programs for the real estate developer can translate into reduced project costs, additional equity that can be used to leverage financing, infrastructure improvements, use of public services, enhanced lender and investor participation, and other important advantages. This strategy requires identification of specific government programs that are available for the project, understanding of how to incorporate the programs and how to meet specific program criteria, negotiations with public officials, and strategic collaboration efforts between the parties. Numerous real estate development projects within the current economy would not have otherwise been developed, but were able to take advantage of a variety of government programs and leveraged those programs to enable their success.

3) Equity strategies

Equity is necessary to leverage senior financing; Now more than ever. Prior to 2008 the equity requirements for many lenders was much less stringent. Numerous financing programs existed that allowed projects to obtain funding at 80%-100% loan-to-value ratios because the higher valuation of properties at the time provided payback assurance to lenders. In today’s economy, however, the lending ratios are generally acceptable if they fall within 40%-65% on a loan-to-cost basis. The devaluation of properties has created a situation in which real estate developers must have substantially more liquid capital and/or other assets to pledge in order to leverage financing, however, the availability of liquid capital and assets has also decreased significantly. Therefore, the strategies for securing the equity needed to leverage financing has become increasingly more important in the development process.

Equity can be obtained from a variety of sources, including, the principal/owner, land, other assets such as properties, equipment and materials, partners, investors, contractors, service providers and other professionals. In many cases, the real estate developer is not the sole provider of the equity that is needed for the project, but the equity is assembled from various sources in order to mitigate risk for the developer and to increase possibilities for financing. In order to accomplish this effectively in today’s market, the revised development plan (described in Paragraph 1, above) should be tailored specifically for potential equity investors and/or partners, and presented in a manner designed to effectively answer most of the questions they may have. A strategic plan to identify and source potential equity investors and/or partners should be developed, and the appropriate investment agreements and documentation must be professionally prepared and presented. Recent real estate development projects have benefited from this approach and were able to secure the equity needed to leverage financing by incorporating this strategy.

4) Other lending sources

While many conventional lenders have become ultra-conservative in their approaches to financing real estate development projects in recent times, other private lending sources have evolved as viable financing alternatives for such projects. These sources often offer similar interest rates and terms as conventional lenders, or higher rates and stricter terms depending on the perceived risk. The private lending sources vary from investment groups, to international organizations, to private companies, to high net-worth individuals, and others. Identifying the right private lending group for a specific project, and the presentation format and strategy that will be implemented is critical to securing financing from these sources. Financing brokers or organizations that have existing relationships with such lenders can be especially helpful in this process.

5) Participation from team members

The current economic crisis calls for unconventional strategies that may not have been prevalent prior to 2008. Engaging the participation of professionals, contractors, service providers and material providers is an effective strategy that is more widely accepted today than in previous years. These individuals and companies become team members of the project, and provide participation in the form of services, equipment and/or materials that can be used to launch the project with reduced upfront capital requirements, and as equity to leverage financing. Many of these team members have experienced a reduction in volume of business due to the economic downturn, so today they are more willing to defer a portion of their fees until the time of funding or in return for a membership interest in the owning entity of the project. For example, an equipment manufacturer can pledge $10MM of equipment for a project, which can be used as equity to leverage financing. An architect and other consultants may agree to perform work with a portion of their fees to be paid upfront, and the remaining portion to remain in the project as equity. Numerous examples exist of projects that have leveraged equity, services, equipment and materials using this approach in recent times. It is important for team members to understand the project, believe in it, and for terms to be negotiated that favor both parties.

As mentioned earlier in this article, the above strategies are provided as summaries and examples of tactics that can be used in today’s economy to help “un-stick” real estate development projects. Each project is different. Each project requires intricate analysis and strategic planning to determine the specific strategies that can be implemented in order to make them profitable despite the economic constraints, barriers and challenges that exist today. While surviving and thriving in today’s economy may not be easy for real estate developers, it is achievable to “un-stick” your real estate development project by implementing these and other critical strategies.

Breaking Into the Real Estate Industry

The housing industry plays an important role in the quality of our lives. The industry weaves the tapestry of our lifestyles and maps the blueprint of our cities. Thus, it only makes sense to populate the industry with smart, aggressive and creative people who are concerned and responsible not just because their contracts require them so but because they are of service to the general public as well.

The market industry is not just composed of real estate agents who you think do no more than bug you with untimely phone calls or hand you leaflets. The problem lies in the fact that people are misinformed about the profession and the whole industry in general. Unbeknownst to them, there’s more to the industry than making a sales pitch. In fact, the real estate industry provides a wide range of opportunities for all sorts of individuals.

Thinking of getting into the housing market? Here are some careers to choose from after completing your online real estate courses:

1. Salesperson/Broker

Forbes.com has recently ranked the job of a real estate agent as the number one happiest job in America. Scoring 4.19 percent on CareerBliss’s rankings, survey participants deemed the job as very rewarding due to the amount of control they had over their work, flexibility and everyday tasks.

Being an agent largely involves helping people buy and sell homes. Agents or brokers are adept in carrying out the process of purchasing and selling properties, loan documentation and the policies governing the processes, saving clients their precious time and money. Through training and education, agents become knowledgeable on RE laws, fair housing law and contracts as well as various financing options available to consumers.

Different types of brokers exist in the field:

    1. Commercial Brokers
      Commercial brokers specialize in finding a market for revenue-generating properties like apartments and spaces found in malls, shopping centers, office buildings and warehouses. To qualify as a commercial broker should have a keen understanding of the investment value of properties in terms of location, taxes, and market activities.

    1. Industrial or Office Brokers
      Industrial and office brokers are in charge of developing, selling or renting out properties for office headquarters and manufacturing. Industrial or office brokers should be keen of zoning laws, tax regulations, and even property management to be able to relate valuable information on the property they’re marketing to buyers.

  1. Land Brokers
    Land brokers specialize in brokering land deals for farm, residential, commercial and industrial lots. This kind of broker has a knack for looking for lands that have a potential to be developed or to generate revenues. Land brokers have to be knowledgeable about agriculture and local market economics as well to be able to successful in closing land deals.

2. Land Developer

Land developers are very important in the said industry since without them, there’s no money to be made on real estate. They conceptualize the blueprint for projects and offer a keen insight on whether a property (residential, commercial or industrial) is worthy of being developed for profit or not. Basically, they conduct site selection and cost analysis. Land developers also coordinate with construction companies and oversee the property construction. Sometimes, land developers are also involved in financing the project.

3. Office Manager

The job of a real estate office manager involves meeting with prospective clients, managing a realty or real estate business, marketing, financial management and brokerage. They are also involved in hiring real estate agents to work for a firm. Real estate managers can be self-employed or work full-time for a real estate firm.

4. Property Manager

A property manager plays an important role in-well, you guessed it right-managing and maintaining the structural integrity and usefulness of a property-whether residential (e.g. apartments, houses and condominiums); commercial (e.g. shopping centers, retail stores, offices) or industrial (e.g. factories, manufacturing plants). Their end goal is to ensure a positive cash flow for property investors and make sure they’re making most of their investments. Often times, property managers are on-call 24/7 to attend to emergencies and problems arising from the properties they handle.

5. Appraiser

Appraisers essentially evaluate property values. Their job involves assessing the profitability of properties as well as tax values, rental, insurance and accounting values. Someone who is good with numbers, has a keen knowledge of accounting and economics principles, real estate education and insight of local housing market activities are a good fit for this type of work.

6. Mortgage Specialist

Mortgage specialists help potential owners choose the right kind of loan for them. They also help businesses collect loans they’ve provided to customers. They can work for a firm or independently.

7. Copywriter/Technical Writer/Researcher

Researchers are usually part of the business development department of a real estate firm. They are either technical writers or journalists who have ventured into real estate. Brokers, developers and other types of real estate professionals depend on the data provided by researchers.

Researchers create two types of report on a prospective property: physical, which concerns the building makeup and structures; and economic, which provides forecasts or insight on industry trends, market behavior and financing.

Technical writers are involved in documenting project developments. They have to be adept with construction and planning terminology and concepts.

Copywriters are employed usually by the corporate communications department or business development department of a real estate company.

8. Urban Planner

An urban planner is someone who plans urban development with civic groups, nonprofits and state agencies to improve on the lives of the general public. They design new pathways, buildings and transportation terminals to ease the lives of the city’s inhabitants and to increase tourist receipts in the area.

9. RE Counselor

An RE counselor is not necessarily considered as a career but it is a specialty as well. Counselors are involved mostly in research and analysis and creating economic, fiscal and feasibility studies, but they also perform brokerage, management and appraisal duties. Consultants come in handy for foreigners who wish to invest locally.

10. Real Estate Educator

Real estate educators are crucial in producing the nation’s top real estate agents. They are cogs in the seemingly vast system of the housing industry, keeping it running. Without educators, the industry will be lost, don’t you think?

The Top 5 Key Benefits of Purchasing and Owning Investment Real Estate

So… You may ask yourself, why should you buy or invest in real estate in the First Place? Because it’s the IDEAL investment! Let’s take a moment to address the reasons why people should have investment real estate in the first place. The easiest answer is a well-known acronym that addresses the key benefits for all investment real estate. Put simply, Investment Real Estate is an IDEAL investment. The IDEAL stands for:

• I – Income
• D – Depreciation
• E – Expenses
• A – Appreciation
• L – Leverage

Real estate is the IDEAL investment compared to all others. I’ll explain each benefit in depth.

The “I” in IDEAL stands for Income. (a.k.a. positive cash flow) Does it even generate income? Your investment property should be generating income from rents received each month. Of course, there will be months where you may experience a vacancy, but for the most part your investment will be producing an income. Be careful because many times beginning investors exaggerate their assumptions and don’t take into account all potential costs. The investor should know going into the purchase that the property will COST money each month (otherwise known as negative cash flow). This scenario, although not ideal, may be OK, only in specific instances that we will discuss later. It boils down to the risk tolerance and ability for the owner to fund and pay for a negative producing asset. In the boom years of real estate, prices were sky high and the rents didn’t increase proportionately with many residential real estate investment properties. Many naïve investors purchased properties with the assumption that the appreciation in prices would more than compensate for the fact that the high balance mortgage would be a significant negative impact on the funds each month. Be aware of this and do your best to forecast a positive cash flow scenario, so that you can actually realize the INCOME part of the IDEAL equation.

Often times, it may require a higher down payment (therefore lesser amount being mortgaged) so that your cash flow is acceptable each month. Ideally, you eventually pay off the mortgage so there is no question that cash flow will be coming in each month, and substantially so. This ought to be a vital component to one’s retirement plan. Do this a few times and you won’t have to worry about money later on down the road, which is the main goal as well as the reward for taking the risk in purchasing investment property in the first place.

The “D” in IDEAL Stands for Depreciation. With investment real estate, you are able to utilize its depreciation for your own tax benefit. What is depreciation anyway? It’s a non-cost accounting method to take into account the overall financial burden incurred through real estate investment. Look at this another way, when you buy a brand new car, the minute you drive off the lot, that car has depreciated in value. When it comes to your investment real estate property, the IRS allows you to deduct this amount yearly against your taxes. Please note: I am not a tax professional, so this is not meant to be a lesson in taxation policy or to be construed as tax advice.

With that said, the depreciation of a real estate investment property is determined by the overall value of the structure of the property and the length of time (recovery period based on the property type-either residential or commercial). If you have ever gotten a property tax bill, they usually break your property’s assessed value into two categories: one for the value of the land, and the other for the value of the structure. Both of these values added up equals your total “basis” for property taxation. When it comes to depreciation, you can deduct against your taxes on the original base value of the structure only; the IRS doesn’t allow you to depreciate land value (because land is typically only APPRECIATING). Just like your new car driving off the lot, it’s the structure on the property that is getting less and less valuable every year as its effective age gets older and older. And you can use this to your tax advantage.

The best example of the benefit regarding this concept is through depreciation, you can actually turn a property that creates a positive cash flow into one that shows a loss (on paper) when dealing with taxes and the IRS. And by doing so, that (paper) loss is deductible against your income for tax purposes. Therefore, it’s a great benefit for people that are specifically looking for a “tax-shelter” of sorts for their real estate investments.

For example, and without getting too technical, assume that you are able to depreciate $15,000 a year from a $500,000 residential investment property that you own. Let’s say that you are cash-flowing $1,000 a month (meaning that after all expenses, you are net-positive $1000 each month), so you have $12,000 total annual income for the year from this property’s rental income. Although you took in $12,000, you can show through your accountancy with the depreciation of the investment real estate that you actually lost $3,000 on paper, which is used against any income taxes that you may owe. From the standpoint of IRS, this property realized a loss of $3,000 after the “expense” of the $15,000 depreciation amount was taken into account. Not only are there no taxes due on that rental income, you can utilize the paper loss of $3,000 against your other regular taxable income from your day-job. Investment property at higher price points will have proportionally higher tax-shelter qualities. Investors use this to their benefit in being able to deduct as much against their taxable amount owed each year through the benefit of depreciation with their underlying real estate investment.

Although this is a vastly important benefit to owning investment real estate, the subject is not well understood. Because depreciation is a somewhat complicated tax subject, the above explanation was meant to be cursory in nature. When it comes to issues involving taxes and depreciation, make sure you have a tax professional that can advise you appropriately so you know where you stand.

The “E” in IDEAL is for Expenses – Generally, all expenses incurred relating to the property are deductible when it comes to your investment property. The cost for utilities, the cost for insurance, the mortgage, and the interest and property taxes you pay. If you use a property manager or if you’re repairing or improving the property itself, all of this is deductible. Real estate investment comes with a lot of expenses, duties, and responsibilities to ensure the investment property itself performs to its highest capability. Because of this, contemporary tax law generally allows that all of these related expenses are deductible to the benefit of the investment real estate landowner. If you were to ever take a loss, or purposefully took a loss on a business investment or investment property, that loss (expense) can carry over for multiple years against your income taxes. For some people, this is an aggressive and technical strategy. Yet it’s another potential benefit of investment real estate.

The “A” in IDEAL is for Appreciation – Appreciation means the growth of value of the underlying investment. It’s one of the main reasons that we invest in the first place, and it’s a powerful way to grow your net worth. Many homes in the city of San Francisco are several million dollars in today’s market, but back in the 1960s, the same property was worth about the cost of the car you are currently driving (probably even less!). Throughout the years, the area became more popular and the demand that ensued caused the real estate prices in the city to grow exponentially compared to where they were a few decades ago. People that were lucky enough to recognize this, or who were just in the right place at the right time and continued to live in their home have realized an investment return in the 1000’s of percent. Now that’s what appreciation is all about. What other investment can make you this kind of return without drastically increased risk? The best part about investment real estate is that someone is paying you to live in your property, paying off your mortgage, and creating an income (positive cash flow) to you each month along the way throughout your course of ownership.

The “L” in IDEAL stands for Leverage – A lot of people refer to this as “OPM” (other people’s money). This is when you are using a small amount of your money to control a much more expensive asset. You are essentially leveraging your down payment and gaining control of an asset that you would normally not be able to purchase without the loan itself. Leverage is much more acceptable in the real estate world and inherently less risky than leverage in the stock world (where this is done through means of options or buying “on Margin”). Leverage is common in real estate. Otherwise, people would only buy property when they had 100% of the cash to do so. Over a third of all purchase transactions are all-cash transactions as our recovery continues. Still, about 2/3 of all purchases are done with some level of financing, so the majority of buyers in the market enjoy the power that leverage can offer when it comes to investment real estate.

For example, if a real estate investor was to buy a house that costs $100,000 with 10% down payment, they are leveraging the remaining 90% through the use of the associated mortgage. Let’s say the local market improves by 20% over the next year, and therefore the actual property is now worth $120,000. When it comes to leverage, from the standpoint of this property, its value increased by 20%. But compared to the investor’s actual down payment (the “skin in the game”) of $10,000- this increase in property value of 20% really means the investor doubled their return on the investment actually made-also known as the “cash on cash” return. In this case, that is 200%-because the $10,000 is now responsible and entitled to a $20,000 increase in overall value and the overall potential profit.

Although leverage is considered a benefit, like everything else, there can always be too much of a good thing. In 2007, when the real estate market took a turn for the worst, many investors were over-leveraged and fared the worst. They could not weather the storm of a correcting economy. Exercising caution with every investment made will help to ensure that you can purchase, retain, pay-off debt, and grow your wealth from the investment decisions made as opposed to being at the mercy and whim of the overall market fluctuations. Surely there will be future booms and busts as the past would dictate as we continue to move forward. More planning and preparing while building net worth will help prevent getting bruised and battered by the side effects of whatever market we find ourselves in.

Many people think that investment real estate is only about cash flow and appreciation, but it’s so much more than that. As mentioned above, you can realize several benefits through each real estate investment property you purchase. The challenge is to maximize the benefits through every investment.

Furthermore, the IDEAL acronym is not just a reminder of the benefits of investment real estate; it’s also here to serve as a guide for every investment property you will consider purchasing in the future. Any property you purchase should conform to all of the letters that represent the IDEAL acronym. The underlying property should have a good reason for not fitting all the guidelines. And in almost every case, if there is an investment you are considering that doesn’t hit all the guidelines, by most accounts you should probably PASS on it!

Take for example a story of my own, regarding a property that I purchased early on in my real estate career. To this day, it’s the biggest investment mistake that I’ve made, and it’s precisely because I didn’t follow the IDEAL guidelines that you are reading and learning about now. I was naïve and my experience was not yet fully developed. The property I purchased was a vacant lot in a gated community development. The property already had an HOA (a monthly maintenance fee) because of the nice amenity facilities that were built for it, and in anticipation of would-be-built homes. There were high expectations for the future appreciation potential-but then the market turned for the worse as we headed into the great recession that lasted from 2007-2012. Can you see what parts of the IDEAL guidelines I missed on completely?