Article 1: How to Value Any Piece of Real Estate ("Real" Real Estate Investment Advice for Today's Investor)
Article 2: Where to Find the Best Return on Real Estate Investments (How To Invest Wisely in Real Estate)
Article 3: The Key to Getting Started in Real Estate Investing (Know Your Risks)
How to Value Any Piece of Real Estate ("Real" Real Estate Investment Advice for Today's Investor)
by Dr. Steve Sjuggerud, Advisory Panelist, Investment U
When I'm considering real estate VALUE, whether it's a real estate stock or a property, there are two value rules: - Don't pay too much for the earth, and
- Don't pay too much for the business.
Don't pay too much for the earth is simple. For a real estate STOCK, I don't pay more than a 10% premium to the market value of the properties. And when it comes to buying a HOUSE, you'd better think long and hard before you'd consider paying a 10% premium to comparable values in the neighborhood. Some of the best real estate investment advice out there-and often the hardest to come by-is to buy property at a 20% discount. If you're not too picky, it's actually not hard to do (if you're willing to do a little sprucing up after buying). The second value rule regarding real estate investment advice is also simple: Don't pay too much for the "business." Just like a stock, look at the P/E ratio… "The P/E ratio? Of real estate?" You're probably thinking I've lost my mind…I haven't. A lot of real estate out there has "earnings" - it's called rent. While real estate prices can fluctuate in the short run, in the long run, property prices are significantly driven by rental values. If you look at the "Price-to-earnings" ratio of your property, you can learn about your home's true "intrinsic" value… As a good real estate investment rule of thumb, net rents in real estate (by "net," I mean after expenses) have averaged about 1% above Treasury bonds (that's the way it's been with real estate stocks since 1990). The Treasury bond is at 5.15% as I write, so we might guess that the nationwide average net rent is 6.15%. (6.15% is the "earnings-to-price" ratio, so we need to find the inverse of it for the P/E of your house.) If that "1% above Treasuries" rule is correct, that means the "fair" value for a home now, based on net rental earnings, should be a price-to-earnings ratio of 16. Where I live, that means the big gains in real estate so far have just brought us up to FAIR value now - there's still plenty of room to run before things get overpriced. However, the same can't be said for some other cities nationwide. According to the June 10, 2002 issue of Forbes, Boston real estate sells for 38 times net rental earnings. And San Francisco is around 30 times earnings. These markets make New York, at a P/E of 20, look downright cheap. Chicago, at a P/E of 17, looks cheap compared to the majors. Just like stocks, as you might imagine, real estate property values vary widely. How can you figure the P/E for your property? Forbes suggests the only real way to know: "To get rental data for homes comparable to the one you're buying or selling, check with the relocation department of big real estate agencies." You've got to know what the comparable net rents are to your property. This is all a very rough guide. Once you've figured your P/E, it may be very different from the current nationwide fair value P/E guess of 16. If your P/E is low, you may have gotten a good deal, or you could collect high rents from your place. If your P/E is twice as high as 16, my advice is that you ought to consider selling…
The tricky thing about selling real estate is that real estate is not liquid. Unlike stocks, where we have the luxury of being able to sell whenever we want and the luxury of trailing stops to get us out exactly when we want out, in real estate, it's not so easy. You unfortunately need to be a good guesser, because you actually need to sell into an "up" market, and buy in a down market. While this can't be done successfully on a regular basis, you can improve your chances considerably by doing what works in the stock market as well. The P/E ratio is our value indicator in our 1-2-3 Model in the stock market - and I found that you NEVER make money in stocks over the long run when the P/E of the market is above 17. While I don't have the data on homes, the number may be very similar.
Where to Find the Best Return on Real Estate Investments (How To Invest Wisely in Real Estate)
by Mike Palmer I recently met a commercial real estate investor, Hal Morris, from Georgia. Hal has earned his living from real estate investments for the past 16 years, and he's focused primarily on commercial real estate for the past 11 years. I asked him how to invest wisely in real estate, and we eventually got to talking about his experiences in different areas of the country. Hal told me about an interesting discovery he's made over the past decade. He said he's found, as a general rule, that his returns on commercial real estate get better as he moves inland, from the East and West coasts. In Washington, DC, for example, a decent return for office space might be 8.5% to 9%. In an area of Western New York, a 12-14% return is not uncommon. In other words, you're likely to find better valuations and better returns if you look in the less-visible middle sections of the country, and avoid the high-profile coastal metropolises.
The Key to Getting Started in Real Estate Investing (Know Your Risks)
by Dr. Steve Sjuggerud
There are smart reasons to invest in real estate, and then there are dumb reasons. The truth is, for example, that we can't know for sure whether what's happening in real estate right now is the formation of a "bubble." It's the first thing you must question if you're getting started in real estate investing, and the one issue you'll continuously address. But if you're investing for the "right" reasons - and you know your risks - chances are your investment will be a good one.
While the topic of real estate investing is just too big to cover in one short note, I'll cover some of the major points that you've got to keep in mind…
1. Speculating versus Investing
Buying a chunk of land and hoping it goes up in value is SPECULATING. Buying a property to collect high income in the form of rent is INVESTING. When you compare investors who speculated in Nasdaq stocks in 2000 (and lost it all) to those who invested in bonds and smartly collected income, the difference in risk between speculating and investing is obvious. Investing is a much safer (and smarter) way to go.
2. "Property Will Always Go up in Value"
Don't believe this dangerous myth! Property prices in Japan have fallen by 75% over the last decade - about the same amount that Nasdaq stocks have fallen since 2000. Hoping for - or worse, expecting - a price rise is speculation. Make sure the investment makes great sense from a positive-cash-flow perspective first. Then if the property falls in value, you're still "right side up" on your cash flows. Consider any appreciation to be simply icing on the cake when it comes to speculative real estate investing. 3. Getting Started in Real Estate Investing with Residential Property
It's easier to understand, purchase, and manage than other types of property. If you're a homeowner, you've already got experience here. And you're the boss. Start close to home, so you can stay on top of things.
4. Truthful Real Estate Investment Advice: Don't Believe Everything You Hear or Read
Sellers and real estate agents ultimately want you to buy that property. So what they're telling you is most likely the rosy scenario, not the actual scenario. If the property has been a rental, ask the seller for his Schedule E form from his taxes. It'll show his ACTUAL revenue and expenses, or at least the ones he reported to the government. What you can expect to earn is somewhere between what he reported to the IRS and what he's promising you.
5. Where To Buy
There is - as you probably know - a widely held belief that the three most important factors involved in real estate success are "Location, Location, Location." But real estate expert John T. Reed (www.johntreed.com) actually says there's MORE profit in less desirable locations. Reed looks for what he calls a "double-digit cap rate." As an example, if you net $1,000 a month in rent on a $100,000 investment, that's $12,000 a year, or 12% of $100,000. That's a double-digit return that year or a double-digit cap rate. The catch is that this is NET rent or rent AFTER expenses. My parents have had rental properties for decades. And off the top of his head, my father suggests that 5-10% is close to what really happens, even after doing your homework. Conclusion: there are no get-rich quick schemes here, and THAT is plain, simple real estate investment advice you're not likely to get from the real estate industry.
Find more Real Estate Investing Education articles and Real Estate Secrets from Dr. Steve Sjuggerud and Mike Palmer. Additional Investment U Archive Articles: | 
