On Doctors Investing in Commercial Real Estate

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Want a good way to build wealth? Own commercial real estate -OR-not!

By Rick Kahler CFP® http://www.KahlerFinancial.com

Rick Kahler CFPReal estate is one of the largest asset classes in the world. The family home is the largest asset many middle-class Americans own. And real estate makes up a significant portion of the net worth of many wealth accumulators.

Direct Ownership

Directly owning real estate is not an investment for the faint of heart, the armchair investor, or the uneducated. Most wealth accumulators would do well to leave direct ownership of real estate to the pros and invest in real estate investment trusts (REITs) instead.

Some Guidelines

Still, the lure of investing in a tangible asset like real estate is enticing for high risk tolerant investors who need a sense of control and interaction with their investments. If you are among them, here are a few guidelines that may keep you on a profitable path.

1. Don’t attempt to purchase investment real estate without the help of a commercial real estate specialist who is a fiduciary bound to look out for your best interest. Engage a Certified Commercial Investment Member (CCIM) with years of training and experience in analyzing and acquiring investment real estate. To find a CCIM near you, go to http://www.ccim.com.

2. You will sign a disclosure agreement that will tell you who the Realtor represents. Be sure the Realtor you engage represents you and not the seller, both parties, or neither party.

3. Never trust the income and expense data provided by the seller’s Realtor. While a seller represented by a CCIM will have a greater chance of supplying you with accurate data, most will significantly understate expenses and overstate the capitalization rate. Selling Realtors often understate the average annual cost of repairs and maintenance. I estimate this annual expense at 10%.

4. Another often understated expense is management. Many owners manage their own properties, so the selling broker doesn’t include an estimate for management expenses. They should. Real estate doesn’t manage itself, ever. You will either need to hire professional management or do your own management (always a scary proposition). Even if you do it yourself, you have an opportunity cost of your time, so you must include a management fee in the expenses. Most small residential apartments and single-family homes will pay 10% of their rents to a manager.

5. You must verify all the costs presented to you by the seller’s Realtor. Demand copies of at least the last three and preferably five years of tax returns. Research utilities, property taxes, legal fees, insurance costs, repairs, maintenance costs, replacement reserves, tax preparation, and management fees. As a rule of thumb, expenses will average 40% of rental income on average-aged properties where the tenants pay all utilities except water. Newer properties may have expenses as low as 35%, while older properties can be as high as 50%.

6. By subtracting the vacancy rate and stabilized expenses from the rent, you will find the net operating income. This is the income you will put in your pocket—assuming the property is paid for. By dividing the net operating income by the purchase price, you will find the return you will receive on your investment, called the capitalization or “cap” rate. In Rapid City, for example, the cap rate tends to be 4% for single-family homes, 5% to 8% for duplexes to eight-plexes, and 8% to 12% for larger residential and commercial properties.

Home for Sale

Assessment

Yes, Physician-investors and all of us can build wealth with real estate. You just need to educate yourself, work hard, start conservatively, think long-term, and be prepared for lean years. This is not a quick or easy path to riches.

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Conclusion

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6 Responses

  1. Commercial Real Estate

    Five RE deals for hospitals.

    http://www.healthcarefinancenews.com/news/5-real-estate-wins-hospitals

    Charlie

    Like

  2. A new wave of U.S. mortgage trouble threatens

    U.S. borrowers are increasingly missing payments on home equity lines of credit they took out during the housing bubble, a trend that could deal another blow to the country’s biggest banks.

    http://money.msn.com/saving-money-tips/news.aspx?feed=OBR&date=20131126&id=17143860

    Remy

    Like

  3. On Real Estate

    Great investment advice. I would also tend to suggest buying any real estate during its downward pricing trend.

    For instance, a property purchased after the housing bubble in 2008 would tend to have built up equity much quicker.

    Another suggestion is the location of the property where the rent and vacancy rate can be affected greatly. And, as with any investment, it is the best to get yourself as familiar with it as possible.

    Ken Yeung MBA
    [Certified Medical Planner™ candidate]
    http://www.CertifiedMedicalPlanner.org

    Like

  4. New FINRA Rule Seeks Reliable REIT Valuations

    FINRA just proposed new guidelines for how fees and performances of non-traded REITs should be disclosed in an effort to give investors a better understanding of these products.

    http://wealthmanagement.com/real-estate/new-finra-rule-seeks-reliable-reit-valuations?NL=WM-07&Issue=WM-07_20140205_WM-07_909&YM_RID=marcinkoadvisors%40msn.com&YM_MID=1448107&sfvc4enews=42&cl=article_4

    Ann Miller RN MHA

    Like

  5. A Real Estate Case Model

    If you know today’s current real estate market and lending situation you can probably guess the frustration, and heartache of buyers trying to conform to a bank’s frequently unusual and confusing list of rules and regulations.

    Here’s a perfect example.

    Let’s call her Carol. Now Carol is an excellent investor. She has worked at the same job for 10 years, in the same field for over 20 years. When she went to Countrywide, who are stringent on their guidelines, she was an instant approval.

    Unfortunately the house was not. It was built in 1947 and was lacking a crawl space and vapor barrier underneath it, along with many other small easy fixes in order to qualify for a loan. It was the only house in the town she grew up in, which she could afford. My mom-in-law was devastated at the news.

    Just about this time she sold their huge 65 acre property to downsize into a residential home. They had made some money on the deal and wanted to invest it.

    They arranged to tour the home Carol wanted, thought it was cute and a very good investment.

    Their new investment of $90,000 would go to purchase the property, for $70,000 and $20,000 would go to repairing the property up to bank standards. They agreed to a 5 year balloon payment and interest only payments of $565.

    Six months later Carol completed the required work and is enjoying a wonderful house. She was smart and made the changes before she moved in. Now the house is completely ready to refinance into a traditional loan. Not only did she save and older home from being demolished, she improved the whole neighborhood, and her investors are making lots of money!

    Steven Hale

    Like

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