Real Estate Articles from Inman News

Traits of a perfect real estate investment

Quantity sometimes trumps quality in rental market

Thursday, October 05, 2006

Recently, my friend moved his New Jersey offices and shared with me how difficult it was trying to sell the property, which was ideal for his company but apparently not so perfect for potential buyers. So he decided to keep the building and rent it to small-space tenants who he found were eager tenants. Although he would have preferred to sell his office building, he became a "reluctant investor" because of a slow local market for his type of office property.

After our enjoyable breakfast meeting, I started thinking about the pros and cons of various types of real estate investments, so I drew up a list of attributes of the "perfect real estate investment." What would be on your list?

Purchase Bob Bruss reports online.

Here are the 10 attributes on my list: (1) easy, affordable financing (leverage); (2) minimal property management time and headaches; (3) good appreciation in market value (profit potential); (4) income tax advantages; (5) ease of purchase and resale; (6) location within 60 minutes of my home; (7) low risk for loss of investment; (8) meets my long- and short-term investment goals; (9) at least break-even cash flow; and (10) strong demand from potential buyers and/or tenants.

Of course, no real estate investment has all those attributes. But a few come very close. This leads to the question, "What type of real estate is best?" The exact answer depends on your list of attributes or goals for your realty investments.

EXAMPLE: Suppose at the top of your list of ideal real estate attributes is "cash flow." But you don't want a full-time business, such as operating a hotel or motel, or selling real estate for sales commission income. I know several owner-operators of low-income apartment buildings who earn excellent cash flow from rents. But because low-income rentals are usually very "management intense" with frequent tenant problems such as unpaid rent and evictions, the secret of their success is owning enough rental units to hire well-paid, on-site property managers. An alternative for cash-flow realty investors is to buy middle-income rental houses and/or apartments, pay off their mortgages as quickly as possible, and then enjoy the monthly rental cash flow from the free-and-clear properties. However, getting into a position of rental properties with no mortgage payments often takes many years and forfeits the big advantages of financial leverage (controlling property with little or no cash investment from your own pocket).

There are many other potential high-cash-flow real estate investments; however, they are often a trade-off between high cash flow and high risk. To illustrate, successful real estate developers often earn high cash flow from their projects. In return, developers often take very high risks. Just look at all the Las Vegas high-rise condominium projects that have been cancelled or postponed in the last few months for various stated reasons, such as insufficient buyer demand, rising construction costs, labor shortages and oversupply from competitive projects.