How to Make Money in Real Estate

This article starts below.

The best way to make money from real estate: Buy when times are so tough that insurance companies and banks are taking possession of properties they don't want and are trying to sell them off quickly. The best places to look are regions experiencing major economic dislocations.

Indications of a good deal: No new building is going on in the area. You can purchase an older office building and rent space for, say, $9 per square foot while owners of new buildings must rent at, say, $14 per square foot or more just to break even.

How to do it

Find a general partner who can locate and arrange the right deal and will help you manage the property.

Pool funds with a group of investors to meet the purchase price, if you don't have the sum to invest.

Avoid investing in an area too far from where you live. You should be able to visit the property and return home in one day. Proximity ensures that you will visit the property frequently, and keeps you in touch with demographic changes and economic conditions.

Get invited to meetings of the local property managers' association. (It will be easy.) They are held once a month to give managers a chance to talk over common problems. You will meet many promising general partners who can help you manage any property that you decide to buy.

Picking a general partner

The importance of finding a good general partner cannot be overemphasized. You may have to talk to hundreds of candidates before you finally pick one. The general partner should:

  • Be able to buy a property at 25% under the market. To determine value expertly, the partner probably should be a member of the Institute of the Philippine Real Estate Appraisers.
  • Be willing to screen as many as 100 deals before coming to you with the one that makes sense for you.
  • Have a proven history of money-making deals.
  • Know how to manage a property effectively.

Sales commission limit: 1.5%. Typically, sales commissions can run as high as 6% to 10%. (That can amount to more than individual limited partner's equity in the project.)

To run an independent check

Get references from the partner. Call up a bank or insurance company on the list of references. Ask how they would compare the pros and cons of your prospective partner with another manager whose name you pick out of the yellow pages. You will be amazed at how much you can learn when references makes an actual comparison.

Look at some of the properties the partner manages. Spend some time with the partner. Is the person's style one that you feel comfortable with? When you ask questions, does the partner answer each one immediately? (That could be a bad sign.) Or does the person promise to check first and get back to you with a reply?

Structuring the deal

Be sure it's set up to that the general partner has plenty of incentive to work hard for you. Most general partners get quite a bit on the front end and only, say, 15% of the profits. That is the wrong way. Get the partner to invest at least 1% of the money put into the project. Give up a larger share of the profits. Recommended: 25%. This way, the general partner doesn't get paid before you do. Strategy: Pay a bonus if all targets are met after the first 12 months.

Turning the property around

It is not as hard as it seems, provided that you select basically good properties that have been neglected due to the former owner's cash-flow problems. With some spending on improvements and maintenance, you can boost tenant morale and attract new tenants.

First priority

Never entrust the management of a 3 million property to a 20,000-a-month live-in manager. Offer the manager a profit motive to discover and find solutions to problems. Suggestion: Give the resident manager 25% of every new tenant's first month's rent in addition to salary and apartment.

Interview tenants yourself. You may discover that their dissatisfaction can be easily remedied. Example: One apartment owner wouldn't change the air-conditioner filters, which meant higher electrical bills for the tenants. Indicate to tenants that major changes are in the works. Example: An office building had 80% occupancy for a four-year period. When tenants were told that a major campaign to attract new tenants was soon to be launched and that the current tenants could have first pick of extra space, the occupancy rate shot up to 95%, solely from expansion by the existing tenants.

Plan on selling the building at a profit in a few years. Sell when occupancy is up from 80% to 100%, rents are up to market level from way below, and the building is throwing off a lot of cast flow.

Excerpt from: Book of Inside Information based on Robert J. Underwood, a real estate agent specializing in turnaround real estate investments.

« Read Previous Article Read Next Article »