Investment - Jim's Properties

Investment Basics

For many people, their personal residence will be one of their largest investments, and by far their largest real estate investment. Many others have tried property investment, just to deal with vacant units, problem tenants, and expensive repair bills. It is hard to be successful at real estate investment as a hobby, but most people don’t have the resources or desire to make it their full time job. That’s where we can help out. We have years of experience managing others’ properties as well as our own. Our goal is not to make money as a manager, but to give you the tools, skills, and support you need to make smart decisions about your real estate investments. Just as with any type of business or investment, the first step is understanding the benefits and risks. By choosing the right type of investment style, you can take advantage of increased cash flow, a variety of tax benefits, and own something physical which will appreciate in value over the long term.

A few basic concepts to understand before you begin!

Investing is always about your ROI, or return on investment. This can come in many forms, and can be calculated short term or long term. Maybe the most important thing to you is making cash every month from incoming rent. Perhaps you are counting on a property to increase in value over a number of years, to turn around and sell it at a profit. If you pay a lot in taxes, maybe you want to take advantage of the depreciation of a building to reduce your tax liability, or maybe you want a vacation home that pays for itself through rentals. All of these can be benefits to you personally, and would be a part of the ‘return’ you receive for your investment of time and money.

In the most basic form, you invest a certain amount of money, then receive a certain amount of rent as income, and have certain ongoing expenses such as insurance and taxes. For example, if you purchase a building at $120,000 cash, which brings in $1,000/mo after expenses and vacancy, you would make $12,000/yr or a 10% annual ROI.

There are many changes you can make to this scenario to increase your ROI. For example, if instead of purchasing the above building in cash, you purchased it with 30yr fixed financing at 5.5% and a 20% downpayment, your total cash investment would only be $24,000. You have increased your expenses by $692 (mortgage payment), so you will now only make $3,696 per year. However, your yearly ROI has increased to 15.4%

Obviously with a few more variables this calculation can become infinitely complex, and there is no way to predict with certainty exactly what your income or expenses will be. However, we can apply this process to different investment strategies, and compare them by ROI. There’s a great online calculator here where you can play around with different purchase prices and rents, see the effects of different types of financing, and even look at long term plans for buying and selling property after a number of years.

Our second step then, is to understand the risks of different investment styles. One strategy may work well in one location but fail in another. A different process may only work in one specific neighborhood within a city. Understanding every nuance of every strategy is the work of many decades, but there are a number of basic strategies which may be preferred by one type of investor over another.

Types of Investors

The Flipper

Made popular by a variety of TV shows over the last decade, this can be a risky proposition, but can reap huge benefits as well. In most cases, this type of investment is most effective for people who have major renovation experience, and know exactly which neighborhoods will allow them to sell quickly to make a profit. Pros: can make a fast return and big money. Cons: Usually requires quite a bit of cash on hand, and not being able to sell can make costs skyrocket and return plummet. It is much harder to be successful at this type of investment in our local market than it was a few years ago. Note: there is a subgroup of flip-style investors who buy and sell property between another seller and buyer without making any improvements, sometimes even in closings that happen simultaneously. This requires a very specialized skill and can get very close to the grey area of ethics, and we do not recommend it except in very specific circumstances.

The Developer

There are two major groups here. The first are those who do not own the property, but gather contracts and deal with legal paperwork to develop the land, and then sell off parcels. This is more of a job than an investment, so we will be discussing a second type. These types of investors purchase large blocks of land and then break them up into smaller pieces, perhaps installing roads and sewers, and sometimes even putting buildings on the lots themselves. There are two common forms of this, the first of which are subdivisions. Sometimes the developer builds the homes themselves or coordinates with a builder, other times they just sell the empty lots once all the paperwork has been completed with the city. In general, the return on this type of development would come when the lots are sold. The second type is small commercial developments such as strip malls. Generally a developer will install buildings and get tenants in a longer-term investment strategy, and then either hire a management company or sell to another investor once the space is more than 90% occupied. Obviously these types of investment also require some very specialized skills and knowledge, and are best done with the help of a full time professional.

The Rental Owner

This option requires less individual experience and knowledge than the first two, and probably contains the greatest number of amateur or beginning investors. It generally requires less cash expense up front, and can vary widely in ROI. Working with an experienced agent is absolutely necessary to make sure you’ve accounted for all eventualities, but can be a great stepping stone into the business. It is important for investors to plan for worst-case scenarios, especially when they do not have much experience. While rentals can bring in great income during good months, being without tenants for a long period of time or the need for a major renovation can put an investor back many months and many thousands of dollars. A well thought-out investment plan can help reduce most of these risks both in frequency and in the amount of financial distress they cause. Most of the investment property we own and manage falls into this category, and there are many options available that are perfect for everyone from the novice to the expert investor. Additionally, if you get in over your head with this type of investment, there are many other investors out there, making this one of the easiest types of investment property to sell.

The Holder

And now to the type of investment requiring the least personal attention. This type often applies to land that an owner will later sell to a developer, or develop themselves. Some investors simply buy things that they think may have value in the future. This group would also apply to people who have received property from inheritance or other gifts, and simply plan to hold onto it until some undisclosed future date. If the real estate has sentimental value for you, then this may be the right option for you. However, just because you are holding property for a long time does not make it a profitable or even smart investment. Any time you are considering holding property over the long term, especially if it is not generating income, you should consider the current value of the property, and then use known factors to speculate on its future value (either to you or at sale). If you have land that you think may be in a soon-to-be-developed area, then this can definitely be a good option. However, if the land use in the area is unlikely to change for 5-10 years, we recommend looking at your options to see if a more predictable return can be earned by a different method. Then you can begin to benefit from your property right away instead of holding out and speculating about the future.

Check out our Resources Page for more reading material and calculators, or head over to the Contact Page to ask questions or set up an appointment to discuss your future in real estate investment!