Back to Basics Getting Started with Property Investment

Many people think that real estate investments must be made in large and complicated properties, and that just isn't necessarily true. Real estate investors often start small with residential properties close to home. I'll briefly discuss different types of properties, management issues, particular advantages and disadvantages, and getting help with your client's investments. With the exception of the list of investment properties, you can expect some state exam questions on all the material in this section.

Stopping by on the way to Grandma's house

Location is an important factor in selecting any type of real estate, including investment properties. All other things being equal, location is the principal factor affecting the value of a property. But location plays another role when selecting an investment property. I once heard a piece of real estate investment advice that I'll pass on to you and you may want to pass on to your clients: When you buy a piece of investment property (or when you help someone select a piece of property to buy), make sure it's located where the owner passes it twice a day — on the way to work and on the way home from work. This concept may be an idealized exaggeration, but you get the point. Even if the owner doesn't manage the property — in fact, especially if the owner doesn't manage the property — always knowing what's going on, not only on the property but also in the neighborhood, is important.

One of the worst stories I ever heard about a small-scale investor was about someone who bought a small apartment building in a city about four hours away from home and hired someone to manage the building. The entire neighborhood went from students and professionals to crime and drugs in a matter of only a few years and the owner never knew it. On the other hand, one of the more successful investor stories I know is about someone I know who also bought an apartment building about three hours from home. My acquaintance, however, visits the property once or twice a month and has someone in the building take a little of the management responsibility. The investment property is doing fine, but if it weren't, my friend would know about it right away. So if owners can't easily visit their property on the way to Grandma's, they need to think twice about buying it, unless they're willing to make the time commitment necessary to visit the property on a regular basis.

^ One- to four-family houses: These are sometimes called duplexes, triplexes, and quadriplexes in some parts of the country. Essentially, they're small houses with one to four apartments. New investors often purchase them, and sometimes the owner occupies one apartment and rents the others.

^ Apartment buildings: These are distinguished from the one- to four-family house by the number of units, which can be anywhere from five units to hundreds of units in a single building.

^ Large residential complexes: This term is used to describe residential developments of several buildings, each of which contains multiple apartments. These complexes can consist of several high-rise buildings or low-rise, one- to three-story buildings called garden apartments in some parts of the country.

^ Individual retail (store) buildings: These buildings house department stores or smaller stores that usually have products and goods for sale.

^ Strip malls/shopping centers: Open-air complexes of retail stores known by either of these two names often depending on whether they're a small (strip mall) or large (shopping center) group of stores. This type of retail complex is known for accommodating automobile traffic with sufficient parking areas.

^ Enclosed retail malls: This term refers to large complexes of retail stores, usually all joined together in an indoor, climate-controlled configuration. They're also characterized by extensive parking.

^ Office buildings: These buildings are used for all kinds of offices, ranging from medical to business offices.

So many choices: Examining different investment properties

An investment property can be almost any property for which people are willing to pay rent to use. I'm sure I may have left something out (lighthouses leased to the Coast Guard, maybe), but here's a pretty complete list of the different categories of investment properties.

^ Warehouses: Refers to large buildings usually used for storage.

^ Motels and hotels: Buildings that can be configured in low-rise, one- and two-story structures along the highway or high-rise buildings in a city center location are known as motels and hotels, respectively.

^ Industrial properties: This term refers to factory buildings.

^ Vacant land: This term applies to land with no buildings on it, purchased either to build something or for speculative purposes (simply waiting for the price to rise).

Land is generally not considered a good investment unless it's being purchased to build on. For more about vacant land, check out the section titled "Empty promise: Considering vacant land," later in this chapter.

You're not likely to get many (if any) questions about the real estate agent's role in advising clients about buying properties. But just in case, and so you understand what a client may ask you to do, here's some information. Very often clients who want to buy investment properties know exactly what kind of property they want and how much of a return they want to get on the property. Your role is to search out the type of property they want (see the previous list) and obtain relevant financial information so the client's accountants can check out the numbers to see if they'll get the return they want. You can find out more about how investors expect to make money later in this chapter in the section titled "We're in the Money: Making Money by Investing in Real Estate."

For investors who don't know that much about investing, you may have to provide some advice based on their expectations for financial returns and how much management effort they want to put into the investment. You can read more about how management issues fit into the investment decision in the next section.

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