Real Estate Investments
Clients often ask me my thoughts on direct investment in real estate and to evaluate individual projects in which they have an interest in investing. While this is outside my realm of expertise, the amount of financial exposure, lack of diversification, and often unpredictable risk associated with owning individual residential or commercial property have lead me to create this list of items to consider. While this is not an all inclusive list, and is no substitute for due diligence, it summarizes some of the issues my clients have learned the hard way.
· It does not matter what a property once sold for—A million dollar property on sale for $450,000 is a $450,000 dollar property—period.
· Buy for the dividend—Do not buy a property for potential appreciation. Hopefully it will appreciate, but if it does not cash flow, do not buy it.
· LLC—If you can’t put it in an LLC, don’t buy it.
· Insurance—Properly insure the property. Be sure to employ a competent property and casualty insurance agent to help with this.
· Inspection—pay for an inspection from a good inspector (even on a brand new property). Walk away if it doesn’t check out.
· Lease Document—Have a real estate attorney draft your lease. This small expense up front may save you a large expense later. Also, read the lease and make sure you agree with it. Read it from your perspective as landlord.
· Management—either budget your time and money to fix problems or factor in the cost of a management company. Oftentimes, if this is factored in fairly, the deal no longer looks appealing.
· Other risks—taxes, floods, dropping rental rates, dropping real estate values, vacancies missed inspection items, bad renters, wear and tear, meth labs, etc…etc. Are you willing to take on this headache? If so, buy it!