Real Estate Archives

Your website has been shifting product like hot cakes, you’re staring at the big bucks and it doesn’t seem as though demand is tapering any time soon – but you’ll need a business property if you want this success to continue.

Indeed, while the web can help you reach a global audience, your market reach will always be tempered by giants like Amazon or Play. Small web companies are destined to become little more than boutique enterprises without some presence in the real world.

But finding a shop to let can help you reach a local audience and give your service a greater level of respect than a lone wolf operating from their bedroom can command.

There are, however, an almost endless number of perils and pitfalls when searching for a property. So when you’re taking on such a major outgoing, what should you consider?

Location is everything

Imagine a vintage clothing shop in an industrial park, or a funeral parlour in the nightlife district. They’re about as likely to succeed as a unicorn is likely to appear in your local branch of Morrisons.

Before you sign a lease, consider how much of your demographic will actually appear in your chosen location. More than this, know your nearest competition. Is it really worth investing in a prime city centre location when a similar, better established shop is just around the corner?

While your website will appeal to anyone making the right Google search, your business has to be able to reel in casual browser off the street. So make sure you choose the perfect location.

Sharing’s caring

As the internet comes to dominate the mind of shoppers, high street stores have been closing their doors in increasingly large numbers. Store closures trebled last year, with the retailers most severely hit being usurped by their web-based counterparts.

But some savvy businesses have figured out that they need to team up if they want to survive, by offering a service that the net can’t compete against.

Take Waterstone’s as the perfect example. Learning that their customers favour a fresh cup of coffee with their purchases, they teamed up with caffeine experts Costa to share their retail space – and their strategy is keeping customers in-store for longer.

Take a leaf out of their book and join forces with a business to complement your own. It’s almost guaranteed to boost business.

An atmosphere that sells

Ambience is everything in a property. Do you want the cold clinical air of a chain supermarket? Or the kind of warm style that could make customers mistake your company for a sultan’s palace?

Look at your demographic to find the answer. Are they hip and happening, suited VIPs or blue-haired grannies? If you already know, you’ll be able to mould their values to your shop’s design.

For those who following my blog, you know that I roughly have $13,000 in my brokerage account (minus taxes I’ll have to pay at year’s end). An amount that I hope is quick to growth.

What’s my plan for growth over the next 4 years to break $100,000?

Save, Sell, and Invest.

Save

I would like to save $7,500 to $10,000 a year. This is a very obtainable goal. $21 a day automatically deducted from my bank account would be $7,665 in a year. This is to start in 2013.

Sell

I’m not talking about eBaying my misc possessions (although I will do this), I’m talking about selling my house. I hope to sell my home in 2013 (depending on how personal things and how the market treats me). I’m hoping to get $155,000 to $160,000 for my home. I owe $117,000 and after the dreaded 6% selling fee, I should net roughly $30,000.

This is going to be one of the largest actions in the short-term. Combine my existing $13k (minus taxes) + $30k for home + $7k saved = $50,000 by end of 2013 (hopefully).

Invest

Hoping for a 25% Yearly ROI which nets 18.75% after taxes (ignoring that later could be slightly higher taxes). Currently my performance is in excess of 50% (double my goal).

(Below the average balances assume I save $7,500 and that the balance is received half at year’s start and half at the year’s end (to reconcile the yearly ROI), this table is also assuming 25% growth rate that is taxed at 25% for effective 18.75% net growth)

**Sale of home, mentioned above +$30000.

There you have it, my master plan to get $100,000+ by age 30.

Some people who read this might think that I’m insanely greedy, but you have to understand that I view it very important to get this foundation for future growth. A 25% growth for 10 years results in 9.31x your money. Starting with $20k or $100k results in $186k vs $931k (pre-tax). Both amounts large, but one much more life changing.

As I previously said, I’m in excess of 50% this year ROI. So I decided to plug 50% return into the equation as well to see what I got, and just for the record, don’t plan on getting 50% return for the next 4 years.

 

Do We Want the Housing Market to Recover?

There has been a lot talk that the housing market has found it’s bottom and maybe even had some growth in 2012. Which raises a big question with myself, do we want a housing market recovery? Full disclosure I bought a house for $126,000 with the $8,000 government credit. I now owe roughly $117,000 on the house after 3 years of ownership (I also massively rehabbed the house).

I think the answer is no. Before you light up a brown bag of your dog’s waste on my front porch, let me make my case.

We’ve been trained to think that housing is the way to personal wealth, and it has been a fairly effective way of growing personal wealth for many families. This did not come without a corresponding downside, the effective cost of housing has increased.

Imagine a world where the cost of living in a home was half, but there was no expected growth or fluctuations. That $150,000 housing gamble now becomes a $75,000 “fixed asset.” Knowing full well this is not the world we live in, I dream of a world of stability when it comes to fixed expenses (houses, energy, etc.). Also, people who don’t see a home in the current world as a gamble, are kidding themselves. Now I understand it’s likely we will return to business as usual (3-5% yearly growth) in the near future, but housing has ultimately become a way for our country to leverage itself. We create artificial value in our homes, even when our wages are stagnant. Now a days we win by leveraging ourselves and seeing unsustainable growth. By being the guy who bought 10 years ago and has a smaller payment because of doing so. Of course this also promotes the mentality of “you don’t want to miss the boat.” You have to buy your house today to benefit from it years from now.

I’m the first person to understand how important the housing market is to a healthy US economy, but I believe one universal truth.

Truth: “The more available finance for something, the higher the effective price.”

Maybe it’s time we throttle back the housing market, require 20% down as a minimum and stop hoping for a large portion of our GDP to be housing based. I understand this will take the edge off our growth as a country, but I have to believe that long-term it would play out much better for average working class family. With having lower, more fixed housing prices, we can avoid the next bubble and the next collapse. We can have more money in our pockets today and not in 15-30 years from now.

But hey, let’s be honest for a minute. We are far too deep in this housing mess to ever have real reform without a massive depression. Despite my personal feelings it’s most likely back to business as usual. Massive leverage, massive gambling, and bubbles.  (Chart Below credit to Forbes.com)

One final comment: “You shouldn’t view your home as an investment” is a luxury statement. The only way you can say this statement is that you can easily absorb a 100% loss on your home or your credit score (defaulting) and it not effect your life. People should absolutely view their home as an investment. Doing anything to the contrary can potentially ruin your finances.

Don’t Buy Rental Property, It’s Not Worth It.

Buying rental property, it’s like playing a real life version of monopoly! I put the houses on the board and when the Scottie dog lands, I get big money!

The realty of being a landlord and owning rentals, not so much. There might be a Scottie dog involved, but it probably will be be an unapproved pet in one of your rentals that keeps the other tenants up every night with its yapping. Added bonus, odds are as a landlord, you can’t do anything about that unapproved dog. The tenant has rights you know, and you’ll probably have to cut off your nose to spite your face to get it resolved.

Being a landlord is filled with problems both with people and potentially financial. The bottom-line is that rentals almost are never worth the effort, especially if you don’t put a lot of money down.

I have often considered buying a rental myself in fact, but I just have no faith in people. I cannot trust people with my finances.

Do not be tempted by low interest rates. If anything, low interest rates should scare you, because if interest rates ultimately go back up 10 or 15 years from now, the equity in your property might be drained.

I’m from a family with rental experience. Everything from “My garbage disposal doesn’t work because my kid sticks his toys down there” to “the buildings on fire so I called you … not the fire department.” Even though it was my parents who owned them, the imagery of what people will do to your property is forever burned into my memory. I remember cleaning up a rental house where the children had stacked trash so high on the counter that they ended up flipping over the drawers to walk up them like steps to toss more trash on top.

Cincinnati is filled with neighborhoods (some good and some bad), and honestly I wouldn’t own a rental where I was personally willing to live. Far too often though, I find that those areas I would live in have high taxes and not high enough returns to justify getting involved. Trust me when I say, I’m the guy who runs the numbers. I have calculators, spreadsheets, and dozens of pages of paper filled with scribbles of numbers.

I think with most rentals in good areas of Cincinnati, it would be optimistic to get a 7% return with 20% down. I would also argue that there is much more give than take in that optimistic estimate.

Landlords:

  • Over-estimated what they make
  • Under-estimated their costs
  • Under-estimate how much time is spend on their rentals
  • Over-estimate their tax benefits
  • Usually forget that houses and apartments are “used up” every single year (roof, windows, furnace, etc.)
  • Usually only have major gains if the housing market is appreciating
  • Downplay that taxes, insurance, and maintenance costs increase every year
  • Commonly downplay how much opportunity cost they are losing with the equity/money they have in the rental

Let’s also not forget some of the other problems

  • You buy a $500,000 complex? If you bought it through a realtor or broker and it is the fair market value (through a realtor), you just lost $30,000 instantly (6% exit)
  • You are legally obligated and legally responsible to/for those tenants
  • If you get a bad tenant, they can wipe entire years of profitably out (and then some)
  • You are counting on appreciation, but housing could easily depreciate
  • That 3 a.m. phone call that there is no hot water (or that the roof fell in)
  • You want to avoid people? Going to have to pony up some serious dough for a good management company, that might wipe out your margins
  • You may receive worse financing if it is not owner-occupied
  • You should establish an LLC, that might not be insurable (check with your insurer)
  • You probably will need a lawyer and potentially an accountant
  • Rising interest rates = hurt your equity and overall profitability

I’m here to say, if you are young and don’t have more than 20% to put down on a rental, don’t do it. If you are determined to do it anyhow, run the numbers assuming the following.

  • Reasonable vacancy rates (be conservative)
  • Conservative maintenance costs
  • Factor in the cost of property management (this is a worst case scenario, but run the number anyhow)
  • Run the numbers assuming absolutely no appreciation
  • Factor in opportunity cost of your down payment (if you think you can get 5% return and you put down $20k, it costs you $1k a year)

Here is my view. The only way to get a good return is to own in places that landlords are hesitant to own, and praying for appreciation on your properties. That’s a lot of risk and creates a lot of “what-ifs.”

Odds are you will run the numbers and you will see only a tiny 4-10% return. I was up 12% last month and I’m currently up 10+% this month without toilets and tenants. Without transaction fees, apartment showings, LLCs, lawyers, without phone calls in the middle of the night, and without the overall headache.

If you are putting down 20% or less (and not buying in a bad neighborhood), I am confident you could beat that return in the stock market with just a little bit of knowledge.

Consider learning about writing cover calls, a conservative stock position that can easily net 10%+ a year.

In fact, cover calls are extremely similar to rentals without as much hassle. Buy 100 shares of a stock, sell a cover call and get “paid rent” every month (article to follow).

Just think twice before taking the rental plunge.

 

 

 

 

 

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