Financial Jungle

In his new book, Retire Rich From Real Estate, Dr. Marc Andersen doesn’t teach you how to flip your way to overnight sensational success. Get-rich-schemes only enrich those authors, who otherwise, couldn’t score big in the tortuous world of real estate investing. Marc is none of that. Rather, he advocates the safe and steady approach to real estate riches by using tips and tricks stemming from 2 decades worth of investing experience.

In his introduction, Marc highlights a dire U.S. Census finding where just 4 out of 10 private landlords were profitable in the year surveyed. In another study, 1 in 3 owners would not buy the same property again if given the chance, and less than half reported a profit on their investments. “The average investor in real estate is not successful and continues to make the wrong investment decisions,” Marc warns, because unrealistic assumptions are dumping investors to the poor house. However, don’t let this dampen your spirit.

To help place yourself in the top tier of all property owners, Marc outlines a series of practical guidelines in his book, which is filled with lesser known techniques (at least to me) on how to identify bargains, deal with realtors, calculate cashflow, finance the investment, screen tenants, manage properties, and much much more.

Probably the most important subject is on cash flow. The primary culprit that sinks property owners into financial hardships is the optimistic assumptions used when estimating cash flows. Is the 5% projected vacancy conservative? Will your renovation remain within budget? Is the existing landlord artificially inflating rent revenues by accepting risky tenants? Is the landlord artifically lowering expenses by neglecting maintenance? Marc recommends artificially fellow landlords in the neighborhood to ascertain the neighbourhood’s market rent. Good point. Some sellers will attempt to dress up their financial statements just prior to a sale. Always “verify, verify, verify,” and never accept financial figures from seller’s agent at face value.

The topic on valuing properties based on CAP rate is also neat. Investing based on CAP rate is akin to investing in dividend-paying stocks based on yield. Generally speaking, the lowest CAP rate has the best growth potential. Meanwhile, the highest CAP rate has little or no growth prospect. A happy medium is 1-2% above the prevailing mortgage rate so you get a balance of both good cash flow and reasonable growth. For example, ING Direct is offering 6.25% on 10-year fixed, so investors should strive for a 7.25% to 8.25% CAP rate. (I’m not sure if ING Direct charges a premium rate on rental properties.)

Sample lessons

• “For Rent” sign on the lawn is a cheap and effective way to find tenants.
• Think like a landlord, not a homeowner. Buy on highly visible areas rather than the one that’s tucked deep in the neighborhood.
• Landlording is the most unpredictable business because it deals with people. Always enforce lease agreements with descriptions of the lease, deadlines, and consequences.
• Flat paint types are easier to touch up without repainting the whole wall.
• Offer fast closing and hassle-free “as is” purchase as incentives to lower prices.

What I want to see in future editions

• Sample letters to tenants on evictions, warnings, new rules, late rents, and rent increases.
• Sample dialogs on negotiating for lower/higher sales prices, lower mortgage rates, and higher rents.

All in all, I think for anyone serious about becoming a property owner, Retire Rich From Real Estate is an essential book that is furnished with real-life solutions to circumvent real estate investing hazards.

Also check out reviews from Thicken My Wallet and Million Dollar Journey.