Investing in Real Estate

339 Pages·2009·2.15 MB·English

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INVESTING
in
S i x t h E d i t i o n
G W. E , PhD
ARY LDRED
JohnWiley&Sons,Inc.
iii
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Copyright(cid:1)C 2009byGaryW.Eldred,PhD.Allrightsreserved.
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Investinginrealestate/GaryW.Eldred.—6thed.
p.cm.
Includesindex.
Rev.ed.of:Investinginrealestate/AndrewJ.McLeanandGaryW.Eldred.
5thed.2006.
ISBN978-0-470-49926-9
1.Realestateinvestment—UnitedStates. I.McLean,AndrewJames.
Investinginrealestate. II.Title.
HD255.M3742009
332.63(cid:2)24—dc22
2009023124
PrintedintheUnitedStatesofAmerica.
10 9 8 7 6 5 4 3 2 1
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CONTENTS
Prologue:InvestinRealEstateNow! xix
Acknowledgments xxvii
1 WHY INVESTING IN REAL ESTATE PROVIDES
YOU THE BEST ROUTE TO A PROSPEROUS
FUTURE 1
22SourcesofReturnsfromInvestmentProperty 3
WillthePropertyExperiencePriceGainsfromAppreciation? 4
WillYouGainPriceIncreasesfromInflation? 5
EarnGoodReturnsfromCashFlows 6
MagnifyYourPriceGainswithLeverage 6
MagnifyReturnsfromCashFlowswithLeverage 7
BuildWealththroughAmortization 7
OverTime,ReturnsfromRentsGoUp 8
RefinancetoIncreaseCashFlows 9
RefinancetoPocketCash 10
BuyataBelow-MarketPrice 10
SellatanAbove-Market-ValuePrice 10
CreatePropertyValueThroughSmarterManagement 11
CreateValuewithaSavvyMarketStrategy 11
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vi CONTENTS
CreateValue:ImprovetheLocation 12
ConvertfromUnitRentalstoUnitOwnership 12
ConvertfromLower-ValueUsetoHigher-ValueUse 12
SubdivideYourBundleofPropertyRights 13
SubdividethePhysicalProperty(Space) 14
CreatePlottage(orAssemblage)Value 14
ObtainDevelopment/RedevelopmentRights 15
TaxShelterYourPropertyIncomeandCapitalGains 15
DiversifyAwayfromFinancialAssets 16
IsPropertyAlwaysBest? 16
2 FINANCING: BORROW SMART, BUILD WEALTH 18
TheBirthof“NothingDown” 18
ShouldYouInvestwithLittleorNoCashorCredit? 19
What’sWrongwith“NoCash,NoCredit,NoProblem”? 20
Leverage:ProsandCons 22
WhatAreYourRisk-ReturnObjectives? 27
MaximizeLeveragewithOwner-OccupancyFinancing 28
Owner-OccupiedBuyingStrategies 28
CurrentHomeowners,Too,CanUseThisMethod 29
WhyOneYear? 29
WhereCanYouFindHigh-LTVOwner-Occupied
Mortgages? 30
WhatAretheLoanLimits? 30
HighLeverageforInvestor-OwnerFinancing 32
HighLeverageversusLow(orNo)DownPayment 32
CreativeFinanceRevisited 32
AreHigh-LeverageCreative-FinanceDealsReallyPossible? 38
WhatUnderwritingStandardsDoLendersApply? 39
Collateral 40
Loan-to-ValueRatios 40
RecoursetoOtherAssets/Income 41
AmountandSourceofDownPaymentandReserves 41
Capacity(MonthlyIncome) 42
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CONTENTS vii
CreditHistory(Credibility!) 43
CharacterandCompetency 44
CompensatingFactors 45
AutomatedUnderwriting(AUS) 46
3 APPRAISAL: HOW TO DISCOVER GOOD VALUE 47
MakeMoneyWhenYouBuy,NotJustWhenYouSell 48
WhatIsMarketValue? 48
SalesPriceDoesn’tNecessarilyEqualMarketValue 49
SoundUnderwritingRequiresLenderstoLoanOnly
AgainstMarketValue 50
HowtoEstimateMarketValue 51
PropertyDescription 52
IdentifytheSubjectProperty 52
Neighborhood 52
Site(Lot)Characteristics 59
Improvements 60
TheCostApproach 61
CalculateCosttoBuildNew 61
DeductDepreciation 61
LotValue 62
EstimateMarketValue(CostApproach) 63
TheComparableSalesApproach 64
SelectComparableProperties 64
ApproximateValueRange—SubjectProperty 65
AdjustforDifferences 65
ExplaintheAdjustments 66
TheIncomeApproach 67
IncomeCapitalization 69
NetOperatingIncome 69
EstimateCapitalizationRates(R) 72
CompareCapRates 72
TheParadoxofRiskandAppreciationPotential 73
CompareRelativePricesandValues 74
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viii CONTENTS
ValuationMethods:SummingUp 74
AppraisalLimitingConditions 75
ValuationversusInvestmentAnalysis 76
4 MAXIMIZE CASH FLOWS AND GROW
YOUR EQUITY 77
WillthePropertyYieldGoodCashFlows? 77
ArrangeAlternativeTermsofFinancing 79
Decrease(orIncrease)YourDownPayment 80
BuyataBargainPrice 82
ShouldYouEverPayMorethanMarketValuefora
Property? 83
TheDebtCoverageRatio 84
NumbersChange,PrinciplesRemain 85
WillthePropertyYieldProfitableIncreasesinPrice? 85
Low-InvolvementversusHigh-InvolvementInvesting 86
CompareRelativePricesofNeighborhoods(Cities) 87
UndervaluedNeighborhoodsandCities 88
BeverlyHillsversusWatts(SouthCentralLosAngeles) 88
Demographics 89
Accessibility(Convenience) 90
Improved(Increased)TransportationRoutes 90
Jobs 91
Taxes,Services,andFiscalSolvency 91
NewConstruction,Renovation,andRemodeling 91
Land-UseLaws 92
PrideofPlace 93
SalesandRentalTrends 93
SummingUp 95
5 HOW TO FIND BARGAIN-PRICED PROPERTIES 96
WhyPropertiesSellforLess(orMore)ThanMarketValue 96
OwnersinDistress 97
The“Grass-Is-Greener”Sellers 97