Real Estate Investing

So what about the mantra we hear from so many different real estate investing gurus? “To learn how to invest in real estate today with no money down, attend my seminar … or read this book … or listen to this tape … or watch this video …” Is zero-down investing really possible, or is it merely an appealing myth that the gurus cash in on?

For the purposes of this article, we are going to assume your investment plan is long-term renting, not short-term flipping. The short answer is yes, zero-down investing is possible. Even if you have to resort to seller financing, you could eventually own property that you could rent (but probably not until the whole thing is paid off). Banks may be a little tighter these days and you would certainly need to have pristine credit, but there was a time not so long ago when lenders happily handed over full financing. We’re reaping the rewards now with the foreclosure circus, but I digress.

The more complicated answer — and the one most people don’t want to hear — is that zero-down investing is not a practical way to invest. Presumably, with 100% financing, you don’t have a lot of cash flow. You may view real estate as a way to generate cash flow. However, unless you plan on being a slumlord, you’re going to have to fix things. The HVAC unit, roof repairs, broken windows or doors, rotting floors … the list of things that could need replacing is virtually endless. Combine that with monthly obligations like insurance, the mortgage, homeowner’s association dues and the property manager’s paycheck, if applicable, and you’ve got yourself a very small profit margin (if any at all).

Is that worth the headache and responsibility of being a landlord? You are on call virtually around the clock, because emergencies can’t wait. Furthermore, with 100% financing, your interest and monthly mortgage payments are going to be sky-high. Your rental income might be enough to cover the monthly payment, but the loan will be stretched out over so many years that you will simply be treading water. It’s certainly not a profit vehicle for you. In fact, it will probably turn into a money pit and you will rue the day you bought it. The Dough Roller blog has a great post about real-world experiences with money-sucking investment properties.

Investment real estate that is paid for in full, or at least purchased with a significant down payment of around 50% or more, is so much more profitable and practical. Don’t sour yourself on the idea of investing in real estate by ruining your first experience with an impractical strategy. This can be a great money-maker, but zero-down investing is not the way to accomplish that goal. If your cash flow isn’t great, you’re better off investing in mutual funds until your cash flow improves. In most businesses, cash is king, but especially in the unpredictable real estate investment market.

While residential real estate investing gets the most mainstream attention, commercial real estate investing is a major profit avenue in its own right. Make no mistake — both investment options can be very profitable and neither are easy. However, the best option for you depends on your personal preferences.

Here are the pros and cons of residential real estate:

PROS

-These units are generally easier and quicker to rent than commercial property.

-There are plenty of tax breaks available.

-Residential units are fairly easy to finance.

-With multi-unit housing, you can not only diversify your income to soften the blow if a tenant moves out, but you can also live on site and keep a closer eye on the property.

CONS

-With single-family property, one lost tenant is a significant blow to the monthly income.

-The lease terms are typically shorter, which means you spend a lot of time marketing and looking for new clients.

-These properties can be extremely time- and labor-intensive. Unless you hire a property manager, you are essentially “on call” for emergencies at any hour of the day or night.

Here are the pros and cons of commercial property:

PROS

-Longer leases mean more stable income.

-There are tax breaks here, too.

-Management requirements are much less demanding, and facilities are typically not open 24 hours.

Often, tenant will pay a “pro-rata” share of expenses like maintenance and upkeep or property taxes.

CONS

Downpayment requirements and interest rates tend to be higher for commercial financing.

Finding tenants can be a more difficult task.

Process of obtaining financing is much more complicated.

Ah, it’s good to be loved. It seems yours truly was the subject of a “mini-rant” over at South Beach Condos Blog. There, it was kindly pointed out that they did not like my recent post on the future of Miami real estate, and furthermore, that Miami and Miami Beach are two separate cities (not that I ever stated otherwise).

So the following list is our effort to alleviate any further confusion and save the readers of blogland from future mini-rants (OK, well probably not, but it’s a goal):

DIFFERENCES BETWEEN MIAMI AND MIAMI BEACH

1) The city of Miami was incorporated in 1896, while the city of Miami Beach was founded in 1913.

2) Miami has 362,470 residents, according to the 2000 census, whereas Miami Beach only has 93,535.

3) Miami Beach claims the beaches. Period. There are technically no beaches in Miami proper. At least, that’s the word over at South Beach Condos Blog.

4) The official web site of the city of Miami Beach appears much more colorful and user-friendly than the city of Miami’s.

5) Miami Beach remains one of the most lucrative neighborhoods in the United States, according to Forbes magazine. In fact, property values in Miami Beach have escalated 1,532% since 1990, a faster appreciation than any other U.S. market. Property values in the city of Miami, meanwhile, still pretty much just stink. The city is facing a projected 15.2% market depreciation this year as it tops the list of worst real estate forecasts among major metro U.S. markets. However, to its credit, the city of Miami is spinning the grim news into a positive thing. Foreign Direct Investment magazine named the city of Miami one of the top five most cost-effective major cities in North America for developers. That sounds about right.