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Sophisticated Investing

By Christopher M. Leporini, REALTOR® Magazine

If you’ve spent the last two years watching the market tank and still haven’t started building your own real estate portfolio, don’t wait another minute, urges Andrew McLean and Gary W. Eldred, Ph.D., authors of the just-released fourth edition of Investing in Real Estate (John Wiley, $19.95). Although many investors are already putting their money into property, the book makes a strong, statistical case for real estate over stocks even when Wall Street is on an upswing. Low dividend yields from stocks just can’t compete with the cash flow from income property, especially if you apply some leverage and benefit from appreciation, say the authors. The book’s opening chapter is heavy on financial calculations to back up their case, but if you’ve read the papers, you know that most people are already convinced.

Topics covered in the remaining 300 pages are fairly standard to any real estate investing text, but the authors take a much more sophisticated approach than most, which makes the book valuable to real estate practitioners who already have some of the basics down.

The chapter on financing is a perfect example. Instead of rhapsodizing about no-money-down investing, McLean and Eldred discuss both the pros and cons of high leverage, again with effective calculations showing the impact of various scenarios on return on investment. If you do want high leverage, the book advocates buying multi-unit properties and gaining the higher loan-to-value ratios available under owner-occupied mortgages. There’s also a comprehensive list of loan programs and options from private lenders, FHA, HUD, Fannie Mae, and a host of other sources. The chapter explores quite a few financing options, from using the equity in your own home to invest, working with sellers to negotiate a wraparound mortgage, and land contracts.

Another critical chapter that every investor should read is “Maximize Cash Flows and Returns.” Examples show how to calculate before-tax cash flows (BTCFs) and how to use this figure to determine ROI. Next, the authors work through various ways that massaging your financing can enhance return. Again, the book’s strength is its extensive calculations that show exactly what the dollar impact of each change in downpayment, purchase price, and other elements is on your return.

The authors’ also use concrete examples and calculations to debunk the “always buy in the best neighborhood you can afford” maxim. Although this may be good advice for homeowners, investors have more potential for upside in lower-cost, undervalued neighborhoods with good accessibility to jobs and transportation, civic pride, reasonable taxes, and favorable demographics.

Another chapter focuses on the way to grow cash flow through property improvement. The approach is both fiscally conservative and practical. Clean and paint first, the book advises, then look for ways to increase usable space (and rents) or to enhance the appeal of the home with larger window–preferably with a view–and more lighting.

Once you have a great investment property, the book continues your lessons in building income with a chapter on pragmatic property management. For example, say the authors, too many small property owners neglect effective position and marketing when they try to lease their properties. In a great little case study, the book describes how a small investor identified the underserved off-campus housing market in his college town, surveyed students about what they wanted most in a rental, and adapted his property to this market. Again, the idea of tailoring promotions isn’t really new to real estate professionals, but understanding how to apply it in the investment arena is still valuable.

Although the many equations and financial formulas may seem a little intimidating, the book provides a solid, sophisticated foundation for make a financial success of real estate investing.

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This post was contributed exclusively for REALTOR® Magazine.

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