Real Estate Realist

Investment property a great move

By Nicole Cassett

Two years ago, any residential real estate investment plan was a good plan. Investing was as simple as buy any house; do nothing for one month (or maybe replace the carpet and slap on a coat of paint); list the house; wait for buyers to offer to pay more than the list price; sell the house (affectionately called the “flip”). Not today. The unchecked appreciation of Arizona real estate over the last few years was a market anomaly. In its wake, economists and business people are not sure what will happen next.

Although the future of the market is uncertain, one thing remains constant—people are moving to Arizona and job creation continues at the rate of 100,000 new jobs per year. And all the new workers need places to live. Houses are still selling and leases are still being signed (albeit at a slower pace than recent years). If you want to invest in residential real estate, it will help to have patience and nerves of steel. And unlike the golden days of 2004 and 2005, investing in real estate is far from foolproof. In fact, investing is risky. You must think ahead and have a plan.

1. Make a match. Because every investor is unique like every piece of land is unique, first answer this question: What kind of investor are you? Are you risk-tolerant or risk-averse? Is this investment going to be your focus or your distraction? Will you make improvements to the property or invest only your down payment? Do you prefer an income flow or a long-term investment with a back-loaded pay-off?
   
   Once you make a list of your characteristics as an investor, start brainstorming about the kind of investment you want to make. For example, if you are risk-averse, preoccupied by another commitment, investing only a down payment, and want a modest income from the property, think about investing in a rental property. Decide how much debt you can comfortably handle. Look for clean, well-maintained homes in strong rental areas. Consider using a leasing company to manage the property. The increased expenses may be justified by the reduced demand on your time.
   
   Bottom line: The right real estate investment is the investment that matches the investor.
   
   
2. Form an entity and make a map. The earlier you ask questions, the better. For the most part, an investor only has one chance to properly set up an investing business entity or follow IRS transaction timelines. Talk to accountants, lawyers, and successful investors you know.
   
   First, learn about structuring the investment. Think about forming a business entity before entering into a purchase contract. Most often, a limited liability company is the best vehicle for a novice investor. Do you want to invest alone or with partners? If you want to invest with partners, carefully outline material provisions and plan for contingencies. If a roof needs to be replaced, who will pay for the expense?
   
   Second, although real estate investments provide significant tax benefits (in addition to more traditional benefits), the IRS rules are complicated and difficult to navigate. Map out a long-term plan so that you comply with IRS timelines. For example, if you plan on rolling your investment from one property to another, learn the rules of 1031 tax-deferred exchangesm where missing a deadline means missing out on the entire tax benefit.
   
   Bottom line: Maximize tax benefits and avoid liabilities by planning ahead.
   
   
3. Start looking for property and forget about what it looks like today. Look for a property that fits within the criteria you identified earlier. When you look at properties that have potential, figure out how much time and money you would need to make the property viable for your purposes. Can you fit modifications into your budget?
   
   Also, remember to be objective. If you want a rental, do not worry about whether you want to live in your investment residence. Think about your target renter.
   
   A few years ago, one of my family’s properties was an eyesore at best. Today, after selling some of the unimproved land to a fledgling hotelier who was willing to take a chance in a transitional neighborhood, we own the rest of the property free and clear. Plus, the neighborhood is turning and the rental value of our remainder has tripled.
   
   Bottom line: Great investors are often called visionaries because they are able to look at properties objectively.
   
   
4. Minimize variables. In real estate investments there is one major unknown: the future of the market. In algebra, the goal is to solve an equation by minimizing the unknown variables. Apply this lesson to investing by scouring all available information.
   
   Thanks to technology you can access valuable information from a computer. Local news Web sites, like www.azcentral.com, list residential properties for sale and for rent. Rather than looking only for properties for sale, look at advertised rentals. Your competition is giving away secrets!
   
   After you’ve found your short list of properties (or during the diligence period of a purchase contract), search for more details. For aerial pictures of a property, try Maricopa County’s Interactive Maps at www.maricopa.gov/Assessor/GIS/map.html. This site has information about zoning and local transportation. Also, you can get a bird’s-eye view of the expanded neighborhood. If you plan to market a property to out-of-town golfers, are there nearby golf courses?
   
   If you’re interested in a computer-generated comparative market analysis, try www.zillow.com. Zillow provides information about previous sales and market trends. If you plan to make significant upgrades to a property, will the expanded neighborhood support higher prices?
   
   Although there is nothing online that can accurately predict future conditions, online tools are a perfect complement to other references, such property neighbors, local business owners and city planners.
   
   Bottom line: Use online tools to supplement other research and eliminate guess-work about the past and present.
   
   
5. Check in. As a final check, before earnest deposits become non-refundable, reevaluate your expectations. If you still feel like you can reach your goal, present your plan to a trusted confidant.
   
   If you have come this far and your plan still shows signs of weakness, start over without hesitation. Every day plans are redrawn and real estate purchase contracts are cancelled. Rather than considering your time lost, consider it time invested. Next round, you can work more efficiently.