To Own a PROFITABLE property. . . 

You have to make a SMART purchase offer !

The bottom line in owning income property SHOULD be the bottom line!

Here's how to determine the way to the best bottom line using the program

"$mart REAL ESTATE INVESTOR"

When you decide to buy income property, there's lots to choose
from! Investment real estate comes in many varieties... Single
family homes and condominiums for rental; Duplexes, fourplexes
and smaller apartment buildings; Larger and more sophisticated
apartment complexes; Retail store buildings from free standing
single units to strip centers to full blown shopping centers;
Office buildings from single occupancy to multiple tenancies;
plus a wide variety of  heavy commercial and industrial
buildings and centers.

If there were only one kind of investment property it might be a
bit simpler to make your investment decision. But, because there
is such a wide variety available and each type has so many
different characteristics to consider, real estate is a very
tough market in which to intelligently invest.

Without doubt, the single most difficult problem facing a
potential investor is how to effectively evaluate a given piece
of property based on the information typically at hand when he
or she is considering making an offer. 

A potential buyer will typically have the listing information
given him by the broker involved (or by the seller) and  of
course, the results of a personal inspection of the property.

How about the financial considerations ? All he knows is what
the broker or seller has told him... The "Listing
Information"... after that, he's on his own !

To illustrate the problem, suppose you have $100,000.00 cash you
want to invest someplace to get the best return commensurate
with the risk factors involved.

To begin with, you call your bank and ask them what kind of
return they will give you on a Certificate of Deposit. Off a
printed sheet, available for all to see, they will quote you
"today's" rate or "Yield" on your invested cash plus the
frequency of compounding and the true annual yield including the
compounding. They will also quote you on every other kind of
account that they offer and tell you about the comparisons of
features offered.

Now you call any of the Mutual Fund companies. Each of them will
insist on sending you a complete booklet explaining all of the
features, risks, kinds of stocks held and the returns and yields
that the fund has paid during the past year and over each of the
past five or more years.

You then call your stock broker, inquiring about buying a stock
or bond and he will pull up on his computer complete records on
the past  financial information, performance and yields of
virtually any kind of investment he sells.

Please notice... all of this information is available BEFORE you
make a decision to place your money.

	With real estate it's a bit different...

First of course, real estate IS a different kind of investment.
It IS more complicated than a bank account or a stock and, it
offers features that these other kinds of investments do not. 

But, the fact is you NEED the SAME kind of reliable information
about the potential investment BEFORE you make a decision ! This
is where getting information in the real estate market  breaks
down. There simply has not been any easy way to arrive at the
various performance factors you need to know about BEFORE you
make the offer to purchase a property. 

As a shining example, you can get the "yield" on virtually any
other kind of investment with a phone call but ask anyone in the
real estate industry to quickly quote the "Yield" you can expect
from a given piece of property and they'll look at you like
you're crazy! 

In fairness to the people in that profession, they're right...
it can't be done... at least not without them having a lot of
information, not just about the property but about you as the
investor as well. And then, only after hours of tedious work
with pencil, paper and a financial calculator.

Most investors and real estate people have their own shortcuts
to arrive at an estimate of the returns they can expect from a
property. Unfortunately, like most shortcuts, these can only
give approximations, (and sometimes not even very close
approximations) instead of the usable, reliable and accurate
answers that you NEED.  

Let's face it, we're talking about MAJOR cash investments here,
running into hundreds of thousands of dollars... We're not
simply buying a new car ! Investments of this size and nature
NEED all of the expertise you can gather and yet I've seen
investors anguish more about which model of a new car they would
buy than how to structure a major real estate purchase!  

What makes these kinds of answers so difficult is that every
piece of property is different and every potential buyer is also
different... AND, a real estate investment, to be sound,  MUST
mesh the property factors and information together with the
factors unique to the buyer !

In other words, the exact same property operated exactly the
same way  can furnish a DIFFERENT "yield" for two different
buyers, based on each of their own tax positions and how they
set up and finance the property when they buy it ! 

Further, in an intelligent real estate investment, there is MORE
to it than just the "yield". To illustrate, one buyer may have
very little in investments except the property he is considering
purchasing. He may be concerned primarily with the "cash flow"
the property will throw off since he expects that cash flow to
help pay his living costs.

The second buyer is in a higher tax bracket, has a number of
other investments and really does not want any more cash flow.
What he wants to do is to shelter some of his other highly taxed
income while the property appreciates during the holding period.

Because the motivation of each buyer is so different you might
think that they should both be considering entirely different
investments. The interesting aspect of investment real estate is
that the exact same piece of property may be able to solve both
of their problems, IF it is set up properly at the time of the
purchase. 

The critically important thing, however, for the investor is
that he MUST be able to find the answers to a number of
questions buried in all of the details if  he is to properly
evaluate a given property. And, once the property is selected,
be able to tailor the purchase of that property to best suit his
own individual investment and tax needs... and he must do this
BEFORE he draws up the offer to purchase.

As an example, the kind and terms of the financing can make a
dramatic difference in the realized yield the property will
generate as will even a small change in the down payment. These
are things that are well within the scope of items that the
BUYER has control over BEFORE the offer is submitted. But, once
the offer is submitted and the seller accepts, the terms, GOOD
OR BAD, are locked in and to accomplish a change may be time
consuming, expensive or even impossible.

The problems stem from the fact that even a fairly
straightforward real estate investment is complex and requires a
number of calculations and decisions to determine how the
particular property compares to others that may be available. 
In short, buying investment property IS complicated !

When you buy other kinds of investments than real estate, you
judge them based on the amount of return you can expect for your
invested cash.  You've never bought a Certificate of Deposit or
opened a Savings account because it had a new paint job or was
located in a good neighborhood. Certainly the quality of the
bank had to be secure but after that, it was the "yield" that
decided where you placed your money!

Why should investment real estate be any different? 

	The real answer is... it shouldn't!

Unfortunately, too many buyers are unduly influenced by the
appearance of a property, its location, the kind of
neighborhood, the amount of parking and any number of other
physical characteristics. Yes, these things are each important
to the overall evaluation of the property BUT, they shouldn't
get in the way of the REAL reason you are buying this kind of
property in the first place... the YIELD! A parcel of income
property should be purchased to generate the best possible
"yield" on the cash you invest. "Pride of Ownership" is a
consideration probably best saved for your home buying decisions.

This is not to suggest that we all become "slumlords". There
are lots of those kinds of buildings around that don't produce
as good a yield as you can expect from a well purchased, well
maintained and well  managed building in a reasonably good
location.

Certainly, the appearance of the building is important. But
principally  because that appearance may attract and hold a
better caliber of tenant who may pay more rent. Similarly, the
neighborhood and the amount of parking may contribute to this
same factor. However, if this "pretty" building won't generate
the same kind of a return as  one in a not quite so good
neighborhood or that may need a coat of paint,  then a thinking
investor should not let the appearance get in the way of his
investment decision... the bottom line.

There are a number of factors that can affect the yield you can
expect from your property. Unfortunately, some of them can
inadvertently get locked in at the time you make your offer to
purchase. Once locked in by the sellers acceptance, it can be
costly to rectify or change them.

For example, factors that can have an effect on the yield might
be: the purchase price; the amount of the down payment; the
number and conditions of the purchase money loans; the loan
interest obligation; the gross income scheduled; vacancy
factors; scheduled owner paid expenses; the period of time the
owner expects to hold the property before selling it; the
buyer's tax bracket and individual income and tax requirements;
plus a number of lesser considerations for both the property and
the buyer.

About now you're probably saying "For Pete's sake, I already
know that these things can affect my yield"...  Well, maybe, but
have you always calculated them to determine just HOW MUCH
effect they may have? And, BEFORE you made the offer?  Unless
you are unique, probably not!

First, not a lot of investors know exactly WHAT their true yield
really is. Frankly, until recently it was very tough to
calculate an accurate yield on the invested cash in a property.
Beyond that, virtually no one even attempts to try to go through
the myriad calculations to see the effects of changing the
holding period, the loan interest or any of the several other
things that will affect yield.

Consider if you will: You are in a negotiation to buy a small
apartment house for , say, $1,000,000. and expect to use a
$250,000. down payment. (Please note: The following figures used
for the example are very conservative and so the percentage of
change is also conservative. If your building or the one you are
considering for an offer shows a better ratio of profitability
then the "percentage gains" shown will also be more dramatic.)

You can expect to borrow a new 1st loan for $750,000. at 7% for
20 years. (for the sake of our example, we'll assume that here
are no points or loan fees to pay on the new loan) You estimate
that the ratio of building improvements to land value is about
65%. You expect to hold this property for 12 years before
selling it; you feel that inflation is running at about 2.5% per
year and you're in a 33% tax bracket. 

Given these and the other factors of the property, the before
tax Yield you can expect from this property calculates to 8.627%
per year.

Now, suppose you offer the seller a price of $950,000. instead,
with all of the other factors staying the same except that the
loan will be for $700,000. The Yield should go up, right ? Well
yes it does... to 9.071% as a matter of fact. The problem is
that the $50,000. drop in price is a tough pill for the seller
to swallow (since he was probably asking $1,200,000. before you
decided to offer  $1,000,000.) and you may have a tough sell to
get it accepted.

Suppose instead that you stay with the $1,000,000. price but
drop the down payment by $50,000. and let's assume for the
moment that you could get a new 1st loan for $800,000. This
approach will change the Yield from the original 8.627 to 9.273%
per year and, is probably going to be a MUCH easier offer to get
the seller to accept.

Take this reasoning one step further and change your down
payment to $150,000. with the new loan of  $800,000. and the
seller carrying back a second of $50,000... Now the Yield jumps
to 10.228% per year.

Beyond the more obvious items such as down payment and loans,
there are a number of less dramatic changes to consider. For
example, get the best advice you can about the maximum ratio
allowable between land and improvements for the particular type
of property. Our example above used  65% for the improvements.
Suppose your CPA tells you that you can use 75% ? The Yield
edges up to $10.28%. Not a lot but certainly not something you
should leave on the table !

You would naturally look at the amount of the scheduled rents.
It may well be that they are at the reasonable maximum for now
but you should also look at the effects of an immediate
remodeling or refurbishing and what you could then do with the
rents. For sake of our example assume that certain of the
apartments could use refurbishing for a cost of $18,000. and
that the rentals could be increased by about $500.  While this
would increase your invested capital, it would also increase
your Yield on the new total investment to 10.849% per year.

In the same way if, by refurbishing the units, you increase
their desirability, you may well decrease your vacancy factor a
bit. Our original assumption was a 5% vacancy factor. Suppose
you could reduce that to 4% ? By itself that would increase your
Yield from 10.849 to 11.091 !

While we haven't covered all of the possibilities, from the time
we started this little experiment to our latest example we've
increased our annual yield on invested capital from 8.627% to
11.091%, an increase of 2.464% per year. Or, put another way, 

an annual INCREASE IN PROFIT of $4,445.06 per year on our
investment of $180,400.

That INCREASE alone is MORE than some banks are paying in TOTAL 
on your saving's accounts today.

Another thing you might also consider.  You've decided to hold
the property for 12 years.  While this is a decision that can be
changed at will and by the circumstances that may come up, most
people don't give it enough thought since it DOES affect their
Yield!

With everything staying exactly the same as in our example
above, simply changing the holding period from 12 years down to
8 will DECREASE the yield from 11.091% to 8.121%.  A change of
holding periods from the original 12 years up to 15 years will
increase the yield from 11.091% to 12.063%. This is a spread of
almost FOUR percent for the term of seven years (8 to 15 Yrs) 

The whole point here is that unless you look at EACH of these
considerations BEFORE you make an offer you could easily get
locked into a purchase that does not give you the best possible
return on your cash investment.

In short... the bottom line IS the bottom line! It is WHY you
buy income property to begin with.

Don't let other things get in the way of the your first and most
important decision... How do I get the most yield from my
invested cash ???

How you structure your INITIAL OFFER TO PURCHASE can  make all
the difference in the world... The difference between an "OK
investment" or a real winner!	

One last point to ponder... Some of the investor/owners who read
this may say to themselves...

"I'm not in the market for another building so why should I
care?"

The fact is that a thinking owner with one or several buildings
should be running this kind of analysis at least once a year on
each of  his holdings. He may well find that one or more of his
buildings are out of date and the "yields" are beginning to
suffer. It's easy to get tied up in all of the day-to-day
activities and get a bit careless about reviewing each property.
Can it use a "freshening up"?;  How about the rents... could one
or more be increased if some remodeling were to be done?; Is the
timing right to consider a refinancing ?; Are market conditions
such that I should consider selling  or "trading up"? 
Scheduling an "annual review" with yourself  is not a bad idea.
You might be surprised at what you'll discover.

AUTHOR'S NOTE:

The manual calculations required to determine the various
factors discussed and shown above would require hours of tedious
work and calculations. The author completed ALL of the
calculations involved in less that 5 minutes using the Income
Property Analysis Program "$mart REAL ESTATE INVESTOR"

This software program is available from:

C.T.G., P.O.Box 185 Ben Lomond, CA 95005 408-336-8401