The American Education Institute

Once you’ve decided to pursue real estate investing, you have to find the right real estate.  That is, now that you’ve decided to make real estate investments, the thing you’ll need to do next is locate those properties in which you will want to invest.  To do this successfully, you’ll also need to know what kind of property to buy.  You must first be sure that the property is profitable.  You do not want to end up with a “white elephant” or, worse, an “alligator.”  The former is an undesirable property that no one else wants; the latter is property with negative cash flow.  This type of property can quite easily “eat you alive.”

You will find there are many different types of property available in today’s market;  single or multiple-family houses, condominiums, apartment buildings, and even entire complexes consisting of many houses, condos, and/or apartment buildings.  There’s townhouses, row houses, coach houses, cabins, cottages, beach houses, and houses converted to apartments and even many apartments combined into one single-family housing unit.  The possibilities are endless, and this is just residential property!  Commercial and industrial properties are also available, as is vacant land.

In every case, however, you need to decide which properties are going to be profitable for you.  Once you decide which property types will work best for you and your own particular situation, you will be better able to begin the search for those properties. 

NOW, ABOUT THAT VACANT LAND

Sure, you can say something like “they’re not making any more land” and believe that buying up vacant lots is a sound investment, but land won’t earn you a dime while you own it—unless you’re lucky enough to lease it profitable for farming or gardening.  Vacant land generally only makes money when you sell it and, unless you can work a real quick turnaround sale, your chances of creatively financing a land deal that produces a positive cash flow in the meantime is almost nil.

Some ways to make money in the long run with regard to v acant land are, perhaps, the following.  The may be ble to buy a vacant tract of land, subdivide it into residential (or other) lots, greatly raise the price of each, and then make a nice profit by selling them off.  You could also buy the land and develop or “improve it”, which means to build on it.  This is what most builders and land developers do for their stock in trade, and it generally gets into much tradework.  In general, what often happens withland speculation is this:  a person makes an investment in vacant land, leaves it lay for quite a few years, and then sells if for twice the price originally paid, all the while thinking this is producing a great Return On Investment (ROI). Your chances of making big money on an investment like this are probably one in a hundred.  If inflation doesn’t “eat” this deal, then taxes and maintenance over the years undoubtedly will.  Yes, maintenance.  You might have to mow, clear snow, remove litter, excavate, install drainage, and even put in access roads or sidewalks or who-knows-what else your local laws may require.

These are real expenses, and you do not have any income to offset them.  On the money you invested up front, you’re losing interest year after year.  Instead, you are probably paying interest on the money you initially borrowed to make the purchase in the first place.  In addition to real estate taxes and maintenance costs, you can also look forward to liability (and possibly other) insurance costs, special assessment costs, and (eventually) selling costs.

Inflation, which was just alluded to above, actually amounts to a cost as well–an indirect expense.  Whenever you do eventually make the sale on your vacant land, the cash you receive will be worth less than the money you invested when you bought it.  In fact, the total average yearly expenses for owning a tract of vacant land amount to 15% to 20% of your original costs to buy it.  Obviously, if you can’t manage to sell the land for at least twice what you bought it for–and within three to five years’ time–you’ve just lost money whenever you do sell it.  Unless you have some serious evidence that you can indeed sell vacant land for at least double your purchase price and quickly, do yourself a favor and don’t buy it.

Dr. Eric T. Martin / 100% Financing When Buying Real Estate / 5-2-09