Barton Reeder, Attorney and Counselor - Partial Introduction to Becoming a Real Estate Investor

BARTON REEDER

Attorney and Counselor at Law
Tele: 214-938-1823 Dallas, Texas Fax: 972-398-0493

A Partial Introduction to Becoming a Real Estate Investor

1. Why should I invest in Real Estate? What does a lawyer know about wise investing?

I cannot tell you why you should invest in real estate, only you can decide what you want to put your money into. I also will not tell you what is or is not a "wise investment," because I cannot predict future returns, nor can anyone else. I can tell you that many people have enjoyed very good returns on their real estate investments in the past.

Whether you should invest in any kind of real estate depends on numerous factors. Let me outline a few questions you should ask yourself before investing in real estate.

    1)    Do I fully understand what an investment in real estate entails? Do I have experience in constructing, maintaining, or operating rental property? Will I be more comfortable owning residential, commercial, or industrial rental property?
    2)    How will I maintain the property? Do I have the time, ability, and interest to perform routine maintenance? Do I know how to handle emergency situations, or whom to call to handle them?
    3)    Should I hire a management company to handle the operation of the property? How much will that be worth to me?
    4)    What are the legal risks to me personally? Will more than my investment be vulnerable if something terrible happens? Should I attempt to limit my liability by forming a corporation, limited liability company, or limited partnership to be the legal owner of the property?
    5)    Do I know, or am I willing to learn, about the government regulations and laws concerning rental property?
    6)    Do I have a plan to renovate or rejuvenate the property? How will I attract new tenants? How will I deal with unruly tenants? Do I have the patience and savvy to compel tenants to pay in full and on time? Can I keep the books myself, either by hand or with a computer-based accounting system?
    7)    Am I willing to risk a moderate amount of risk for the projected return on this type of real estate investment? Would I be more comfortable sharing the investment with someone else, to lessen the risk and responsibilities? Instead of buying individual properties, should I invest in a fund that owns and operates real estate holdings?

2. I thought real estate was a "safe" investment. The asset I invest in is an actual "thing" and has tangible value, not just what the "market" says it's worth. Isn't that more secure than buying stock whose value can vary dramatically day-to-day?

Real estate investments don't typically have wild swings in short time periods (like tech stocks), but do rise and fall in value over time. The real estate market tends to lag behind the rest of the local economy by several months, going both up and down. Because rental property's value is usually determined by the price of rent, changes in the going rate of rent can cause significant changes in a property's value, even though the building and land are in the same condition as a year earlier. If new construction or a business downturn increases the amount of vacant space in the area, prices are pushed down by the increased competition. If office space is "tight," then rents usually increase as tenants are willing to pay more for the same amount of space.

While the general trend for rent is to increase, rent may remain the same or even drop over a period of several years.

3. Why would anyone ever lower the rent? Any landlord knows that reducing the rent can only reduce net income.

Because collecting reduced rent is still better than collecting no rent for the same period. Reducing the revenue of the property will inevitably reduce net income, but reducing net income from $15,000 to $10,000 is wiser than stubbornly refusing to reduce the rent and thereby reducing net income to $0. Many factors go into making the decision whether to raise, lower, or maintain the rent; objectively analyzing the situation and making the most rational decision can be very difficult for many people.

In some situations, rent can be lowered without reducing revenue if expenses are also reduced. For example, if a warehouse owner has been providing various services as part of the lease, and the tenant believes he can provide those services himself cheaper than the owner can, the owner would probably be willing to reduce the rent in exchange for eliminating those services. Converting the lease from a "full-service" arrangement (such as in office buildings) to a "net-net-net" arrangement (such as in many warehouse properties) can simplify the owner's obligations with no effect on net income.

4. What factors should I consider before investing in a particular property?

Everything. Any information or circumstances associated with the property in any way may be turn out to be the controlling factor. Much like buying a company's stock, you should investigate everything you can about a property before investing either your hard-earned money or borrowed money. Imagine what your investment would be worth if, three months after investing in an office building, the undeveloped meadows down the street were selected as the location for a sewage treatment plant.

5. Where can I get information about a particular property?

There are many sources of reliable information, both formal and informal, as well as unreliable sources. County land records, tax rolls, city/county officials, a local realtor, a title company you've worked with in the past, the Internet, neighboring owners, appraisers, the property's developer/builder, even the current owner - any or all of these may be useful in researching the value and history of a property. What anyone else says he would pay for the property means nothing if you don't know or understand how he got to that number. Don't assume that because someone told you something or gave you a "hot tip" that the information is certain. Confirming "facts" from uncertain sources is simply another part of the research.

Most importantly, however, hiring someone else to research the property is much like having someone else do your homework and then hoping you can pass the "test." On this test, though, failing may mean losing substantial money, time and opportunities.

Click here to see some of the links I use frequently for doing some of the necessary research on property.

All web sites (and the information on them) are merely reference tools, however; they are not sufficient to base any investment decision upon. As mentioned above, more than a little research should go into making any such decision. If you are having trouble figuring out what you need to know or how to proceed, please contact my office for help.