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TOP TEN “RULES OF THUMB” FOR THINKING REAL ESTATE INVESTORS

by Marge Coffing ©2014

Do you want to be “thumbs up” with your investments…instead of “all thumbs”? The following “Rules of Thumb” are guidelines or generalized rules to help bring a rational perspective to your investment activities.

The expression rule of thumb means a rough or guesswork estimate based more upon experience than precise measurement. For example, the grocery store manager might say “… as a rule of thumb, 3 out of every 4 shoppers leave their shopping carts in the parking lot.”

There are two theories about the origin of this expression. The more logical theory is that it comes from the frequent use of the lower part of the thumb (roughly equal to one inch in the average adult male) as a crude measure device.

However, some authorities trace the phrase to a practice once common among brew masters. In the older days when beer was truly beer, the chief brewer sometimes tested the temperature of a bath of brew by dipping in his thumb. This technique was neither so accurate nor so hygienic as a thermometer check would be but, based on the brew master’s long experience, this rule of thumb should tell him how well the brewing was proceeding.

Rule #1    Don’t be Greedy

Investment real estate is exciting – and what gets the heart pumping even faster is finding out the size of the check that you can bring to the bank. While skillful negotiation can increase the yield on our efforts, sheer greed can chill opportunities for buying, fixing, renting, and selling.  When you’ve created an excellent opportunity for profit and the desperate seller feels you’re squeezing every last dime from the situation, you’ll hear a “no”, or helpful after-the-fact relatives will find a way to exclude you from the opportunity.

When a buyer gets the impression that you single objective is your profit, they’ll often find another house where they can “work with” the seller. A game plan of “me first” might result in the fattest profit for you the first time around, but in the long run, when you leave enough on the table for everyone, you[ll find your table keeps being refilled…and the referrals will keep flowing. 

Rule #2    Buy Lower than your Means

Do you like to sleep at night? Remember that Murphy’s Law was written for real estate investors, especially those unfortunate enough to have more money than sense.  The “Proud Peter” approach to purchasing gives your ego a boost to be able to drive by the prettiest, or most costly property on the block, or where you got the “best deal” by underestimating problems. And to buy it, you’ve scraped together every last dime of this year’s savings as well as your kid’s lunch money for the next two years.  What do rally have? No cushion, no contingency fund, no thinking person’s approach to investing. Give yourself a break…and your investing future a chance.  Don’t spend every dime you have.

Rule #3    Use conservative Estimates  For All Projections

You may not think it’s fun to temper excitement with numbers, especially after you’ve inspected a property, you’ve driven the neighborhood and you like what you see.  But knowing whether a property makes sense after six months or six years is the basis for investing penny one on day one.  If projections are handed to you as a buyer, check the assumptions on which they are based. Do the projections show a range…a “worst-case” as well as a “best-case” scenario? Who’s in charge of your calculator? Your wallet next year?

Rule #4   Be Honest with Yourself About What You Know…And What You Don’t

If you have a background in construction, you may be able to fix your properties in a flash and do cost estimates easily on renovations, but know nothing about how to manage tenants effectively. If your background is in finance, crunching numbers comes without sweat but the idea of needing to negotiate for a property brings on goose bumps. Since many different skills are necessary, and…  YOU CAN’T KNOW ALL THAT YOU NEED TO KNOW, and YOU DON’T EVEN KNOW ALL THAT YOU DON’T KNOW, seek the advice of experienced investors, hire the perspective of professionals, and go to seminars. Be practical and pragmatic; buy your education the easy way.

Rule #5    Know Your Purpose and Stay Focused

Properties have different characteristics, and may lend themselves to different approaches (particularly single family home investments). What is your purpose with THIS property at THIS time? Are you going to fix it and resell? Or flip it to someone who does the fix? Or keep it for 5 years as a rental and then sell? Or keep it for your grandchildren’s education fund? Knowing what your purpose is and staying focused on that will affect every decision you make – from helping to determine what kind of paint you’re going to use , whether to change the doorknobs or windows, whether to refinish the floors, put in used carpeting, or invest in more expensive but more durable flooring. Since every decision has a price tag attached, ask yourself whether that purchase or process will be cost effective, given YOUR purpose with the property. You may compare notes with someone who will approach things differently, but you’re the one in charge of your focus.

Rule # 6   The Lower the Property Value, The Greater The Potential Cash Flow

Some properties in modest, stable neighborhoods will not appreciate greatly in your lifetime or mine. They will continue, however, to provide decent, affordable housing for years to come. And…rents will increase faster than property values in these neighborhoods. So if your purpose is to hold rental properties long term, invest in the least expensive neighborhoods where you feel comfortable and where you like the type of people who live there, since your monthly expenses will be lower than the rent you can expect. As property values climb, the ratio of rent to value decreases, and you are less likely to be able to cover monthly expenses with the rents coming in.

Rule # 7   The Lower the Property Value, The More Management-Intensive

Net cash flow is greatest per square foot in a rooming house, but so is the intensity of management required to keep that cash coming in. A well-managed single-family house in an appreciating neighborhood with good schools brings in less cash flow, but has fewer problems. You need to decide for yourself what kind of cash flow business you want to be in.

Rule # 8    The Higher the Property Value, The More Profit You Need

This rule is all about risk.  What’s your comfort zone when your money is going out and no money is coming in for the immediate future? If you have a vacancy for two months in a $50,000 value home, your cost out of pocket for mortgage expenses is far less than what’s necessary on a $150,000 value home. If you’ve rehabbed a kitchen completely in an $80,000 home for resale, chances are you’ve spent far less money than rehabbing a kitchen in a $380,000 home. While that resale house is sitting out on the market waiting for the right buyer, how comfortable are you with the amount of your money at risk?

Rule # 9    For Rehabs, Double The Time and Double The Repair Costs

Experienced investors will tell you that until you’ve actually started the work on a rehab project and seen the full extent of the problems, you really don’t know exactly what the total time will be, or what the rehab and holding costs will be.  For a less experienced rehab investor, remember to be very generous in your estimates in order to stay out of trouble.  This rule of course is directed more toward single-family homes than a multiple unit building. 

Rule #10   Each $1 Spent In Cash Down Payment Deserves At Least $1 More in Equity Discount

Cash is king.  If you’re giving a down payment, bargain hard with the coin of the realm to get steep discounts.  Some people want $2 in value for every dollar given at closing – others even more.  Since cash is the most easily understood commodity, make sure that sellers understand the inverse relationship between cash paid out and purchase price.

This information is provided as a service to increase your knowledge as a real estate investor. Always consult your legal advisor or your accountant for any technical questions best handled by a professional in those areas. Marge Coffing will provide customized assistance but will not tender legal or tax advice.

Written for real estate investors (both accidental and purposeful) by Marge Coffing, a full-time investor for many years who has been nationally recognized for her real estate investing seminars and publications. She is available for individual consulting on an hourly basis, for mentoring classes, and joint venture opportunities.  If you have questions or comments, contact Marge at:

(727) 210 5905        Mariel Company LLC PO Box 5143, St. Pete Beach, FL 33737

Email: margecoffing@gmail.com

Website: http://www.SpotlightTampaBayBeaches.com

 


 

Are You a Risk Taker?

by Marge Coffing © 2014

Everyone’s different – and we all approach the issue of risk differently. Take a good look at yourself – who you are, what makes you tick?  The field of real estate is full of risk – it’s like a ride on a roller coaster. (It can go up, it can go down…it’s always an adventure. What do you think about, what do you worry about? What are you trying to achieve?)

Whenever you try something you’ve never done before, there’s a chance you might not succeed.

Perhaps you just retired from a corporate environment, or got downsized. So you’re thinking about a new career. Maybe you’re younger with big plans and big visions about what you’d like to attain. Perhaps you’re been investing in real estate for a while and always done things on your own, but an opportunity has come up that requires more money than you feel comfortable investing by yourself, or more time and attention than you have to spare.

What about a joint venture with someone – could that be risky? Yes, any business venture is risky. It could also be tremendously rewarding, both financially and personally. To stay alive, we need to not just face, but embrace the future. That’s our challenge – try new formats and take risks in order to get somewhere and create a future for ourselves.

In real estate, risk means the possible loss of finances or assets, or of time invested, or both. How do you really feel about taking risks? Here’s your chance to take a self-assessment and get clearer on what kind of a risk-taker you are. Make a commitment to answer thoughtfully, and write down your answers to the following nine questions.

  • What best describes your feelings about investing?
    1. _______ better safe than sorry
    2. _______ moderation in all things
    3. _______ nothing ventured, nothing gained
  • Which is the most important to you as an investor?
    1. _______ steady income
    2. _______ steady income and growth
    3. _______ rapid price appreciation
  • An investor friend has excitedly told you about a good deal, but you’ve never heard of the neighborhood. What would you do?
    1. _______ pass on it
    2. _______ get more information
    3. _______ trust your friend’s judgment
  • You’ve won a contest. Which prize would you select?
    1. _______ $5,000 in cash
    2. _______ a 50% chance to win $10,000
    3. _______ a 20% chance to win $100,000
  • You found a good deal on a rehab house, and if you handle it yourself you know you will make a lot of money but that it will take a long time. What should you do?
    1. _______ Tell someone else about it and get a “bird-dog” or referral fee
    2. _______ plan your time and your funds wisely and do it yourself
    3. _______ joint venture with somebody you don’t know who has done other houses in

that neighborhood

  • The stocks in your 401K and statement have gone up 20 %, but you have no further information. What would you do?
    1. _______ Transfer out of the stocks and lock in your gain
    2. _______ Stay in the stocks for more gain
    3. _______ Transfer more money into stocks because they might go higher
  • The stocks in your 401K have dropped 20% since last quarter, but the market experts are optimistic. What would you do?
    1. ________ Transfer out of stocks to avoid losing more
    2. Stay in stocks and wait for them to come back
    3. Shift more money into stocks because if they made sense before, they’ll be a bargain now.
  • Would you borrow money to take advantage of a good investment opportunity?
    1. never
    2. maybe
    3. yes
  • You inherit a $100,000 free-and-clear house in a great neighborhood, appreciating faster than inflation, but it has deteriorated. Rental net would be $1,000 a month without fix-up, or $1,500 with fix-up which you can finance. What would you do?
    1. sell the house
    2. rent it as it is
    3. fix it up and rent it

Now’s the time to add up your points. Each “a” is worth one point, each “b” two points, and each “c” is worth three. Compare your total score with the following ranges:

9 to 14 points:   You’re a conservative risk taker

15 to 21 points: You’re likely to be a moderate risk-taker

22 to 27 points: Chances are you’re quite an aggressive risk-taker

Are you surprised at what your score was? Or was it a confirmation of what you already knew about yourself?

What kind of a risk taker are you? Are you more conservative than you thought? Are you moderate, middle of the road? Or are you truly aggressive? Are you surprised by the result? Or did you confirm what you already thought? If you are going to be a partner with someone in a joint venture, with what kind of a partner would you be most comfortable? Someone who thinks the same way you do? Or perhaps, if you’re on the conservative side, you might like to partner with someone who is more aggressive than you, who is more comfortable with taking bigger risks. Remember  – anything is ok. The important thing to remember is that you know yourself, your strengths and weaknesses, your preferences, your likes and dislikes….and then act accordingly.

Remember this – to get what you want, help someone else get what they want or need, so they can return the favor, and you can both be winners.

Written for real estate investors (both accidental and purposeful) by Marge Coffing, a full-time investor for many years who has been nationally recognized for her real estate investing seminars and publications.  She is available for individual consulting on an hourly basis, for mentoring classes, and joint venture opportunities.  If you have questions or comments, contact Marge at:

(727) 210 5905        Mariel Company LLC PO Box 5143, St. Pete Beach, FL 33737

Email: margecoffing@gmail.com

Website: http://www.SpotlightTampaBayBeaches.com