The most easily overlooked source is simply the small column classified advertisements in the local newspaper. These are not the big display ads put in by the large real estate companies, but rather three- or four-line, single-column ads. The main reason why these may be a great way to find properties is that often this is the advertising method of choice used by owner-sellers who are not using a real estate agent.
Why do I like it when no real estate firm is involved? Because the chances are that the owner used his or her own resources to try to figure out the value of their property. Often they will be way above the market value, but by the same token, they will often be way below. That is an opportunity for you, assuming you know how to evaluate these properties.
Also, if an owner-seller has a sign up on their property, and they run a few ads themselves, then you will have less competition than if the property was listed with a real estate firm, as the firm would not only put a sign up on the property and run (much larger) ads in the newspapers, but they would also have the property, complete with photo, listed in their real estate magazine, in the computer system for their franchise organization, on the Web, and maybe even with a multiple listing service so that just about any agent or buyer can find it.
Finally, when you contact such an owner-seller, he will not have had nearly as many inquiries as an agent would have (had an agent been involved). So your offer may be more welcome than it otherwise would have been.
Even if a small column ad has been put in by a real estate agent, however, it is still worth pursuing: A great deal is a great deal, no matter how you stumbled across it.
One fabulous investment I came across many years ago was in fact advertised by a real estate agent as a column ad in the classified section of the newspaper. It concerned a tiny property (eighty-five square meters) on the corner of a busy intersection. It was the only commercially zoned property in a residential suburb, and had as the sole tenant a fish supply shop. The rental was $10,400 per annum, and the asking price was $59,000, giving a yield of 17.63 percent. By the time I spotted the advertisement, it was already late on a Sunday night. I phoned the number, and got the agent at home. I said to him, almost resigned: "I suppose this property has gone by now," fully expecting him to say, "Yes, and my phone hasn't stopped ringing all weekend." Instead, he replied that my call was in fact the first he had received on that property. We arranged to look at it at 8:00 the next morning.
There was nothing wrong with the property. It had high traffic flows past it, which was good for the tenant. The rent hadn't gone up for years, which was good for me (it meant that, in all probability, the rentals were below market levels).
In fact, the reason the owner was selling was that he was in poor health.
Normally, as you will see in the chapter on negotiations, I offer less than the asking price (what have you got to lose?). On this occasion, partially because it seemed such a good deal and I didn't want anyone else to beat me to it, and largely in deference to the health of the seller (who seemed to have factored that into the price in the first place), I agreed to pay the asking price.
I then went to the bank, told them I had bought a property that generated $10,400 in rent per annum, but that I didn't have a clue what it was worth. They went and looked at it, said it must be worth at least $80,000, and offered me a 70 percent mortgage.
Now, some of you will be thinking that 17.63 percent yield is good but not spectacular. My response is to remind you that I am not particularly interested in yields. With a mortgage of $56,000 (70 percent of $80,000) and a purchase price of $59,000, the total capital I had invested in this deal was only $3,000. The mortgage interest rate at the time of just under 10 percent meant I was paying $5,400 a year in interest. Because this was a commercial property, the tenant paid the outgoings (property taxes, insurance, etc.). Therefore, my net return was the rental income less the mortgage interest, or $5,000 per year. Given I only had $3,000 invested, my cash-on-cash return was in fact 167 percent per annum. In other words, I was pulling more out of this property every year than I had put into it in the first place.
What is more, the cash-on-cash return does not give a complete picture of how this property is performing, as it does not take into account extra expenses (such as maintenance) and other benefits (such as depreciation), or, for that matter, the capital growth. The internal rate of return (discussed later)
for this property was even more impressive than the cash-on-cash return.
Now, it wasn't always a bed of roses. One winter there was a particularly heavy snowfall, and the veranda was so laden with snow that the whole thing came crashing down to the sidewalk. Luckily no one was around at the time. It cost $2,500 to replace. In cash terms, that wiped out half of my profit for the year from that property (and reduced my cash-on-cash return to a paltry 83.33 percent). However, in actual fact, because most of the $2,500 cost of replacing the veranda was a repair (and therefore deductible against income) and the rest was considered an improvement over the original veranda (and therefore could be added to the capital value of the property and depreciated), the after-tax situation was not that bad, and my returns still exceeded 100 percent for the year.
To this day I still own the property. It has never had a week of vacancy, and is slowly increasing in value with time. I am the first to admit that the profits from this property would not pay for the services of a butler or the parking of a Learjet at the airport, but the whole point is that small, classified advertisements often have wonderful opportunities.
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