Real Estate Articles

Article / Updated 03-22-2023

Investing in rental real estate that you’re responsible for can be a lot of work. Think about it this way: With rental properties, you have all the headaches of maintaining a property, including finding and dealing with tenants, without the benefits of living in and enjoying the property. Unless you’re extraordinarily interested in and motivated to own investment real estate, start with and perhaps limit yourself to a couple of the much simpler yet still profitable methods discussed here. Find a place to call home During your adult life, you need to put a roof over your head. You may be able to sponge off your folks or some other relative or friend for a number of years to cut costs and save money. If you’re content with this arrangement, you can minimize your housing costs and save more for a down payment and possibly toward other goals. Go for it, if your friend or relative will! But what if neither you nor your loved ones are up for the challenge of cohabitating? For the long term, because you need a place to live, why not own real estate instead of renting it? Real estate is the only investment that you can live in or rent to produce income. You can’t live in a stock, bond, or mutual fund! Unless you expect to move within the next few years or live in an area where owning costs much more than renting, buying a place probably makes good long-term financial sense. In the long term, owning usually costs less than renting, and it allows you to build equity in an asset. Think carefully before converting your home into a rental If you move into another home, turning your current home into a rental property may make sense. After all, it saves you the time and cost of finding a separate rental property. Unfortunately, many people hold on to their current home for the wrong reasons when they buy another. Homeowners often make this mistake when they must sell their homes in a depressed market (such as the one that existed in many areas in the late 2000s). Nobody likes to sell their home for less than they paid for it, so some owners hold on to their homes until prices recover. If you plan to move and want to keep your current home as a long-term investment property, you can. But turning your home into a short-term rental is usually a bad move for the following reasons: You may not want the responsibilities of a landlord, yet you force yourself into the landlord business when you convert your home into a rental. If the home eventually does rebound in value, you owe tax on the profit if your property is a rental when you sell it and you don’t buy another rental property. You can purchase another rental property through a 1031 exchange to defer paying taxes on your profit. Real estate investment trusts Real estate investment trusts (REITs) are entities that generally invest in different types of property, such as shopping centers, apartments, and other rental buildings. For a fee, REIT managers identify and negotiate the purchase of properties that they believe are good investments, and then they manage these properties, including all tenant relations. Thus, REITs are a good way to invest in real estate if you don’t want the hassles and headaches that come with directly owning and managing rental property. Surprisingly, most books and blogs that focus on real estate investing neglect REITs. Why? I’ve come to the conclusion that they overlook these entities for the following reasons: If you invest in real estate through REITs, you don’t need to read a long, complicated book on real estate investment or keep coming back to a blog. Therefore, books often focus on more complicated direct real estate investments (where you buy and own property yourself). Real estate brokers write many of these books. Not surprisingly, the real estate investment strategies touted in these books include and advocate the use of such brokers. You can buy REITs without real estate brokers. Blogs and websites aren’t much better as they are often run by folks selling something else like a high-priced seminar or other direct investment “opportunity.” A certain snobbishness prevails among people who consider themselves to be “serious” real estate investors. These folks thumb their noses at the benefit of REITs in an investment portfolio. One real estate writer/investor went so far as to say that REITs aren’t “real” real estate investments. Please. No, you can’t drive your friends by a REIT to show it off. But those who put their egos aside when making real estate investments are happy that they considered REITs, and have enjoyed annualized gains similar to stocks in general over the decades. You can research and purchase shares in individual REITs, which trade as securities on the major stock exchanges. An even better approach is to buy a mutual fund or exchange-traded fund that invests in a diversified mixture of REITs. In addition to providing you with a diversified, low-hassle real estate investment, REITs offer an additional advantage that traditional rental real estate doesn’t: You can easily invest in REITs through a retirement account (for example, an IRA). As with traditional real estate investments, you can even buy REITs, mutual fund REITs, and exchange-traded fund REITs with borrowed money. You can buy with 50 percent down, called buying on margin, when you purchase such investments through a non-retirement brokerage account.

Article / Updated 03-22-2023

Even though your home consumes a lot of dough (mortgage payments, property taxes, insurance, maintenance, and so on) while you own it, it can help you accomplish important financial goals: Retiring: By the time you hit your 50s and 60s, the size of your monthly mortgage payment, relative to your income and assets, should start to look small or nonexistent. Lowered housing costs can help you afford to retire or cut back from full-time work. Some people choose to sell their homes and buy less-costly ones or to rent out the homes and live on some or all of the cash in retirement. Other homeowners enhance their retirement income by taking out a reverse mortgage to tap the equity that they’ve built up in their properties. Pursuing your small-business dreams: Running your own business can be a source of great satisfaction. Financial barriers, however, prevent many people from pulling the plug on a regular job and taking the entrepreneurial plunge. You may be able to borrow against the equity that you’ve built up in your home to get the cash you need to start your own business. Depending on what type of business you have in mind, you may even be able to run your enterprise from your home. Financing college/higher education: It may seem like only yesterday that your kids were born, but soon enough they’ll be ready for an expensive four-year undertaking: college. Of course, there are alternatives. Borrowing against the equity in your home is a viable way to help pay for your kids’ higher-education costs. Perhaps you won’t use your home’s equity for retirement, a small business, educational expenses, or other important financial goals. But even if you decide to pass your home on to your children, a charity, or a long-lost relative, it’s still a valuable asset and a worthwhile investment. The decision of if and when to buy a home can be complex. Money matters, but so do personal and emotional issues. Buying a home is a big deal — you’re settling down. Can you really see yourself coming home to this same place day after day, year after year? Of course, you can always move, but doing so, especially within just a few years of purchasing the home, can be costly and cumbersome, and now you’ve got a financial obligation to deal with. The pros and cons of ownership Some people — particularly enthusiastic salespeople in the real estate business — believe everybody should own a home. You may hear them say things like “Buy a home for the tax breaks” or “Renting is like throwing your money away.” The bulk of home ownership costs — namely, mortgage interest and property taxes — are tax-deductible, subject to limitations. However, these tax breaks are already largely factored into the higher cost of owning a home. So, don’t buy a home just because of the tax breaks. If such tax breaks didn’t exist, housing prices would be lower because the effective cost of owning would be so much higher. I wouldn’t be put off by tax reform discussions that mention reducing or even eliminating home-buying tax breaks — the odds of such changes passing are slim to none. Renting isn’t necessarily equal to “throwing your money away.” In fact, renting can have a number of benefits, such as the following: In some communities, with a given type of property, renting is less costly than buying. Happy and successful renters I’ve seen include people who pay low rent, perhaps because they’ve made housing sacrifices. If you can sock away 10 percent or more of your earnings while renting, you’re probably well on your way to accomplishing your future financial goals. You can save money and hopefully invest in other financial assets. Stocks, bonds, and mutual and exchange-traded funds are quite accessible and useful in retirement. Some long-term homeowners, by contrast, have a substantial portion of their wealth tied up in their homes. (Remember: Accessibility is a double-edged sword because it may tempt you as a cash-rich renter to blow the money in the short term.) Renting has potential emotional and psychological rewards. The main reward is the not-so-inconsequential fact that you have more flexibility to pack up and move on. You may have a lease to fulfill, but you may be able to renegotiate it if you need to move on. As a homeowner, you have a major monthly payment to take care of. To some people, this responsibility feels like a financial ball and chain. After all, you have no guarantee that you can sell your home in a timely fashion or at the price you desire if you want to move. Although renting has its benefits, renting has at least one big drawback: exposure to inflation. As the cost of living increases, your landlord can keep increasing your rent (unless you live in a rent-controlled unit). If you’re a homeowner, however, the big monthly expense of the mortgage payment doesn’t increase, assuming that you buy your home with a fixed-rate mortgage. (Your property taxes, homeowners insurance, and maintenance expenses are exposed to inflation, but these expenses are usually much smaller in comparison to your monthly mortgage payment or rent.) Here’s a quick example to show you how inflation can work against you as a long-term renter. Suppose you’re comparing the costs of owning a home that costs $200,000 to renting a similar property for $1,000 a month. (If you’re in a high-cost urban area and these numbers seem low, please bear with me and focus on the general insights, which you can apply to higher-cost areas.) Buying at $200,000 sounds a lot more expensive than renting for $1,000, doesn’t it? But this isn’t an apples-to-apples comparison. You must compare the monthly cost of owning to the monthly cost of renting. You must also factor the tax benefits of home ownership in to your comparison so you compare the after-tax monthly cost of owning versus renting (mortgage interest on up to $750,000 of mortgage debt and property taxes up to $10,000 worth per year when combined with other state and local taxes are tax-deductible). The figure does just that over 30 years. As you can see in Figure 10-1, although owning costs more in the early years, it should be less expensive in the long run. Renting is costlier in the long term because all your rental expenses increase with inflation. Note: I haven’t factored in the potential change in the value of your home over time. Over long periods of time, home prices tend to appreciate, which makes owning even more attractive. The example in Figure 10-1 assumes that you make a 20 percent down payment and take out a 4 percent fixed-rate mortgage to purchase the property. It also assumes that the rate of inflation of your homeowners’ insurance, property taxes, maintenance, and rent is 3 percent per year. I’ve assumed that the person is in a moderate federal income tax bracket of 24 percent and about half their mortgage interest and property taxes are effectively reducing their tax burden. In the absence of having enough such deductions to be able to itemize deductions, federal income tax filers now qualify for larger so-called standard deductions. If inflation is lower, renting doesn’t necessarily become cheaper in the long term. In the absence of inflation, your rent should escalate less, but your home ownership expenses, which are subject to inflation (property taxes, maintenance, and insurance), should increase less, too. And with low inflation, you can probably refinance your mortgage at a lower interest rate, which reduces your monthly mortgage payments. With low or no inflation, owning can still cost less, but the savings versus renting usually aren’t as dramatic as when inflation is greater. Recouping transaction costs Financially speaking, I recommend that you wait to buy a home until you can see yourself staying put for a minimum of three years. Ideally, I’d like you to think that you have a good shot of staying in the home for five or more years. Why? Buying and selling a home cost big bucks, and you generally need at least five years of low appreciation to recoup your transaction costs. Some of the expenses you face when buying and selling a home include the following: Inspection fees: You shouldn’t buy a property without thoroughly checking it out, so you’ll incur inspection expenses. Good inspectors can help you identify problems with the plumbing, heating, and electrical systems. They also check out the foundation, roof, and so on. They can even tell you whether termites are living in the house. Property inspections typically range from a few hundred dollars up to $1,000+ for larger homes. Loan costs: The costs of getting a mortgage include items such as the points (upfront interest that can run 1 to 2 percent of the loan amount), application and credit report fees, and appraisal fees. Title insurance: When you buy a home, you and your lender need to protect yourselves against the chance — albeit small — that the property seller doesn’t actually legally own the home you’re buying. That’s where title insurance comes in — it protects you financially from unscrupulous sellers. Title insurance costs vary by area; 0.5 percent of the purchase price of the property is about average. Moving costs: You can transport all of your furniture, clothing, and other personal belongings yourself, but your time is worth something, and your moving skills may be limited. Besides, do you want to end up in a hospital emergency room after being pinned at the bottom of a staircase by a runaway couch? Moving costs vary wildly, but you can count on spending hundreds to thousands of dollars. (You can get a ballpark idea of moving costs from a number of online calculators.) Real estate agents’ commissions: A commission of 5 to 7 percent of the purchase price of most homes is paid to the real estate salespeople and the companies they work for. Higher priced homes generally qualify for lower commission rates. On top of all these transaction costs of buying and then selling a home, you’ll also face maintenance expenses — for example, fixing leaky pipes and painting. To cover all the transaction and maintenance costs of home ownership, the value of your home needs to appreciate about 15 percent over the years that you own it for you to be as well off financially as if you had continued renting. Fifteen percent! If you need or want to move elsewhere in a few years, counting on that kind of appreciation in those few years is risky. If you happen to buy just before a sharp rise in housing prices, you may get this much appreciation in a short time. But you can’t count on this upswing — you’re more likely to lose money on such a short-term deal. Some people invest in real estate even when they don’t expect to live in the home for long, and they may consider turning their home into a rental if they move within a few years. Doing so can work well financially in the long haul, but don’t underestimate the responsibilities that come with rental property.

Cheat Sheet / Updated 12-12-2022

Successful real estate investing requires smart decisions. To start investing in real estate quickly and easily, ask a few important questions, discover different ways to invest in residential property, and build an effective real estate team.

Article / Updated 08-16-2022

Many real estate investors pick inspectors as an afterthought or simply take the recommendation of their real estate agent. But inspect the property inspectors before you hire one. As with other service professionals, interview a few inspectors before making your selection. You may find that they don’t all share the same experience, qualifications, and ethical standards. For example, don’t hire an inspector who hesitates or refuses to allow you to be present during the inspection or won’t review the findings with you upon completion of the inspection. The inspection is actually a unique opportunity for most property owners and, because you’re paying, we strongly recommend that you join the inspector while he’s assessing your proposed purchase. What you learn can be invaluable and may pay dividends throughout your entire ownership. When an unscrupulous contractor later tries to tell you that you need to completely replumb your property, you can recall that your property inspection revealed only isolated problems that can be resolved inexpensively. (Of course, inspectors, especially ones who aren’t good, can make mistakes, so you should also dig into discrepancies raised by different real estate–related people. In other words, get a second opinion.) About half of the states now have a license or certification requirement, whereas a few only have trade practice guidelines. This regulation is all relatively new because in 2000 virtually no governmental licensing or supervision of inspectors existed. Regardless of whether your state has strict licensing or certification requirements, every real estate investor needs to look out for her own interests and look for telltale signs of potential problems. Red flags include inspectors who are affiliated with a contractor, offer a special discount if you call who they recommend, or credit their inspection fee toward work. Only consider full-time, professional inspectors. Hire an inspector who performs at least 100 comprehensive inspections per year and carries errors and omissions insurance. Such coverage isn’t cheap and is another key indicator that the person is working full-time in the field and is participating in ongoing continuing education. Many inspectors are licensed general contractors, but not all home inspectors have designations or credentials specifically relating to inspecting real estate. One of the best certifying trade associations for professional property inspectors is the American Society of Home Inspectors (ASHI), which was founded in 1976. In addition to home inspections, many ASHI members are qualified and experienced enough to assist you with your due diligence physical or structural exterior and interior inspection of multifamily residential properties and all types of commercial properties. You can find certified inspectors and more info about the inspection process including tips and checklists at the ASHI website. Some individuals or companies adopt names that at first glance may indicate adherence to certain professional practices. For example, a fictitious but potentially misleading name is “Professional Property Inspection Association.” Do some research to find the best state or regional association and one whose qualified members adopt a code of ethics. For example, in California, the California Real Estate Inspection Association is the group that offers education and designations for real estate inspectors. Review a copy of inspectors’ résumés to see what certifications and licenses they hold. A general contractor’s license and certification as a property inspector are important, but also find out whether they’ve had any specialized training and whether they hold any specific sublicenses in areas such as roofing, electrical, or plumbing. These can be particularly important if your proposed property has evidence of potential problems in any of these areas. For example, if a property has a history of roofing or moisture intrusion problems, an inspector who’s a general contractor and roofer is an extra plus. The inspection report must be written. To avoid surprises, request a sample of one of the recent inspection reports that has been prepared for a comparable property. This simple request may eliminate several potential inspectors but is essential so that you can see whether an inspector is qualified and how detailed a report he will prepare for you. Check out the following figures for a sample interior inspection checklist. Source: Robert S. Griswold Sample interior unit inspection checklist (page 2 of 2). The advent of digital photography is a boon to property inspectors and makes their sometimes mundane and difficult-to-understand reports come to life. Select a technologically savvy inspector and require her to electronically send you her report, including digital photos documenting all the conditions noted. Recently, some inspectors have begun using advanced, non-invasive technology via an infrared or thermal imaging camera to produce images of heat radiation and identify energy efficiency concerns and electrical issues, as well as moisture intrusion scans inside walls or around plumbing fixtures. With the report in the electronic realm, it’s a simple process to email this information as needed. Although the cost of the inspection should be set and determined in advance, the price should be a secondary concern because inspection fees often pay for themselves. Just like many other professional services, there is a direct correlation between the pricing of your inspection and the amount of time the inspector takes to conduct the inspection and then prepare the report. If the inspector only spends a couple of hours at your new 20-unit apartment building, the report will surely be insufficient and your money not well spent. Finally, require the finalists to provide the names and phone numbers of at least ten people who used the company’s services within the past six months. Randomly call and make sure that these clients were satisfied and that the inspector acted professionally and ethically.

Cheat Sheet / Updated 03-24-2022

Interested in adding Canadian real estate to your investment portfolio? Give yourself a head-start by brushing up on your real estate terminology, discovering how to identify profitable properties, and knowing where to turn for reliable help online.

Cheat Sheet / Updated 03-10-2022

Use this handy Cheat Sheet to learn how to sound like a pro real estate investor (even if you’re just getting started.) Then keep it on hand to make sure you’re staying on top of every commercial property you acquire!

Article / Updated 03-07-2022

Buying a home is most people's first foray into the world of real estate. However, real estate can also be a good place to invest your money and see a profit. More people invest in the stock market than invest in real estate (beyond the home in which they live). Some reasons for this are due to misconceptions. These misconceptions also cause some investors to see less-than-stellar returns on their real estate investments. Here are common real estate misconceptions followed by why they are wrong: You need to be wealthy. Although it's true that you need money to play the game of investing in real estate (for a down payment), you don't need millions or even hundreds of thousands of dollars to get started. A five-figure ($10,000+) savings balance provides a point of entry into good investment properties. You need to be a high-income earner. So often in the news we hear about the Donald Trumps and other big-income earners as the ones making big bucks investing in real estate. But there's no reason you need a million-dollar-plus income to invest successfully in property. You don't even need a $100,000+ income. Many folks begin investing in real estate while earning modest wages or salaries. You need to have connections and know the "right" people. You should certainly have a team of competent real estate professionals and contractors and suppliers, but anyone can assemble such a squad. You need to be lucky to make big money. A little bit of luck is always welcome of course, but the key to making money with real estate investing is to do your homework. Find the right property in the right location, acquire that property at a fair price, and successfully manage all of your properties well over time. It doesn't matter who you rent your property to as long as you keep the property occupied. Real estate investors often overlook or downplay the importance of tenant selection. Properly preparing the property to attract the most qualified prospective tenants and then targeting your advertising to that target market are the first two steps to increasing your odds of finding a qualified tenant. You want to look for tenants who will stay for the long term, treat your property with care and respect, and essentially make your mortgage payments for you and build up your equity. It's not worth investing in real estate unless you buy can a large property. False! Most people who invest in real estate get started with small, less costly properties. Bigger and more expensive properties typically come many years down the road. The collapse in real estate prices before and during the 2008 financial crisis shows real estate isn't a good investment. Real estate, like stocks and other ownership-type investments, goes through cycles. But if you do your homework and buy solid properties at fair prices and manage them well over time, you should earn solid returns. Also, keep in mind that values of different types of properties in various locations don't all move in lockstep. The best way to make money in real estate is to buy and flip properties, especially if you can renovate them. Holding a property for a relatively short period of time ensures that your transaction costs of buying and then selling will consume a large portion or even all of your profits. Also, your profits may end up being taxed at higher tax rates for shorter holding periods. Once you own several properties, you can enjoy sitting back while the profits roll in. Wrong! Managing rental properties and doing it well takes time and resourcefulness. There are no shortcuts, especially if you want to avoid unpleasant surprises and make the most of your properties. You should always buy small properties to add to your holdings and continue to manage these multiple rentals. Acquiring small properties to begin your real estate investing career certainly makes sense, and you can do quite well over many years. But at some point, you should seriously consider selling some of the smaller properties and consolidating your real estate holdings into larger properties. Take the equity you have built up over time in the small properties and use it to purchase medium to larger properties. By selling several smaller properties and buying a larger one, you can take advantage of the economies of scale that a larger property offers. With larger properties, either you can manage them or you can hire professional management if you want to avoid the day-to-day headaches often associated with tenants, maintenance, and upkeep.

Cheat Sheet / Updated 03-01-2022

Foreclosure investing is complicated and risky. I’ve seen individual investors lose tens of thousands of dollars at a single auction simply because they had no idea what they were doing. You’re smart to study up on the process before putting any money on the line. This Cheat Sheet will get you up to speed in a hurry on foreclosure investing and help you steer clear of some of the major pitfalls. However, I strongly encourage you to study up on the foreclosure process in the location (state and county) where you choose to invest, and hire an attorney with foreclosure experience to cover your back, at least for your first few investment properties.

Article / Updated 09-20-2021

Passive income is the key to building real wealth. Think of passive income as another name for yield (the money you make on an investment). What makes it passive is that, after it’s up and running, the investment requires minimal input from you for the income, or yield, to keep coming in, month after month. In other words, you invest some of your time and money upfront, and you get money back in return on a regular basis. Your money starts working for you, not the other way around. Sounds good, right? When people think of making money through real estate, their first thought is often capital growth (for example, buying a property for $200,000 and selling it six months later for $270,000). That’s a solid approach to making money, and capital growth projects certainly can make up part of any portfolio. If you’re going to treat your property portfolio as a business, you need to think about income, as well as capital growth. Investing for income tends to be less risky and more reliable than capital growth — because money in the bank this month, and next month, and the month after that is safer than relying on future growth. That’s not to say you won’t achieve capital growth alongside income. If you own a collection of rental and serviced accommodation properties, for instance, those properties will likely grow in value over time. In this way, capital growth is like a cherry on top of a delicious income sundae. Generating income from real estate is so exciting because it’s relatively hands-off compared to, say, working 9 to 5 for a paycheck. In that way, it can be described as passive income. The great Warren Buffett once said, “If you don’t find a way to make money while you sleep, you will work until you die.” So, if you like the idea of making money while you slumber (and, honestly, who doesn’t?), then the passive income mindset is for you. It’s important to note that passive income isn’t just about making more money (although that is, of course, a big attraction). It’s not about greed. It’s about rethinking the fundamental nature of work and developing the means to live life your way. For you, it may mean putting in a few hours in the morning and having the rest of the day off, or having a four-day weekend, or never wearing a suit again! In short, passive income gives you more freedom — to do whatever you want. Passive income isn’t a get-rich-quick scheme. It takes time to build up a good level of passive income. So, if you’re looking to quit your job and devote yourself to real estate full time, it may be a while before you’re comfortable giving up the security of your existing income. Examples of passive income Anything that generates money and isn’t directly tied to your effort or output (in the way of a regular job) is considered passive income. So, investing in the stock market can be considered passive income. So, too, can real estate. What’s great about real estate investing is that there are so many exciting sub-strategies for generating a regular income, including the following: Property development Rent-to-rent Houses in multiple occupations Student and vacation rentals If you think passive income ventures like these require a lot of upfront capital, think again. Rent-to-rent, for instance, requires nothing more than the first month’s rent and deposit to get started — and sometimes less than that! In this way, property can offer a fairly low-capital route to passive income. This is why I believe real estate is probably the most achievable path to passive income for the average person on the street. It can create serious wealth, too, if done right. Pros and cons of passive income Here are the pros and cons of passive income, as this author sees them. On the plus side passive income gives you: More time and freedom: Assuming you build up to a level of passive income where you no longer have to work 9 to 5, you have much more choice in how you live your life and more time for the things you love. Better work-life balance: You can be there to take the kids to school and pick them up at the end of the day, and manage your real estate investments when it works for you. The ability to indulge your passion — and your talents: Concentrating on passive income has allowed me to invest in projects that genuinely interest and excite me. You can spend time on the parts of the business you find most interesting or are the best use of your time. The rest you can outsource to people who are better qualified. Passive income gives you the means to reach your full potential. What could be more satisfying than that? On the downside, with passive income: You have to take a longer-term view. Passive income isn’t about getting rich overnight. It’s about rethinking the way you work and earn money for the long haul. There’s a cost to being more hands-off. As your portfolio grows, you’ll probably have to outsource some of your workload to other people and/or invest in technology to take care of certain tasks for you. This means sacrificing some of your income to cover these costs. For me, the additional cost is well worth it because it frees me up to focus on new opportunities and profit-enhancing activities. You can’t get away with putting in zero effort. “Low” or “minimal” effort, sure. But not zero effort. You need to invest some time in your investments, both in terms of establishing your new projects and checking in on them regularly. When you’ve got a property up and running nicely, and you’re generating a regular income from it, don’t make the same mistake as a lot of investors and ignore the property. If things go wrong because you’ve stepped off the gas, you’ll have to devote lots of time and energy to get things back on track. To keep your investments on track, you’re far better off spending a little time often than spending a lot of time only occasionally.

Article / Updated 05-26-2021

Value is easy, right? It’s the price you pay for a property? Well, it’s not quite that simple — price and value aren’t always the same thing. Real estate appraisal or property valuation is the process of determining what a property is actually worth. This may or may not be the same as its price. Appraisers go under different names depending on where you are in the world; real estate appraiser, property valuer, and chartered surveyor are the most common names. The terms appraiser, valuer, and surveyor are used interchangeably. Compare price to value in more detail A property’s price (how much the property costs to purchase) can be very different from its value (what the property is worth). For example, a property may actually be worth in the region of $300,000 but the seller may have an inflated idea of its value and insist on putting it on the market at $350,000 — or he may have been guided to set the price high by an especially greedy agent who wants a higher commission. A buyer with a firm grip on valuation will understand that $350,000 isn’t a fair market comparison for that property, and refuse to cough up. But an unsuspecting and inexperienced investor could fall into the trap and end up overpaying. There are a number of reasons why a buyer may gladly pay a price that’s lower than the property’s value. The buyer could, for example, be buying a property from a family member, who is cutting her a favorable deal and pricing lower than the market value. Or it could be a distressed sale where the property is priced lower than it’s worth for a quick sale, or perhaps it’s being sold at auction and the bidding doesn’t reach the expected levels. A buyer may also be willing to pay more than a property’s market value in order to secure a particularly attractive investment in a highly competitive market. That’s right, sometimes an investor may have arrived at her own valuation that’s higher than the comparative market value, maybe because she plans on changing the use for a niche high-income strategy (like short-term rentals, for example). If, when you’re valuing a property, you’re using a different valuation method from the person doing the appraisal, you may well arrive at a different value. That’s not necessarily a cause for concern, as long as you’re sure of your own numbers. The purpose of appraisals In general, appraisals or valuations are used in a number of contexts, from dividing up assets during a divorce to taxation. But for the real estate investor, valuation is used to determine How much you can borrow to purchase a property (because appraisals inform mortgage loans) How much you should reasonably expect to pay for a property How much a property could generate in ongoing income (where income is the investment goal) How much you could sell the property for after adding value (where capital growth is the investment goal) Valuation is particularly important in real estate because each property is different. As an asset class, property is unique. When you buy two shares of stock on the same day, both shares are identical. But that’s not the case with real estate. Even two properties on the same street can be very different. In fact, even two houses next to each other, even if they’re both identical in size and layout, will vary a great deal in terms of condition, fixtures, and fittings and presentation. Their value will differ accordingly. Valuation is also necessary because most people fund their investments through some sort of financing, like a mortgage. And when you’re borrowing the money to buy a property, the lender will want to know that the property is worth what it’s loaning you. If you default on the loan, forcing the lender to foreclose on the property and sell it, the lender wants to know that there’s enough equity in the property to get its money back. In this way, real estate valuation protects the bank, as well as you. Factors that influence property value So, what kinds of factors impact a property’s value? The key factors are The size of the property: For example, it makes sense that a four-bedroom, three-bathroom house will be worth more than a two-bedroom, one-bathroom house in the same town. The condition of the property: This is key because it’s how so many investors add value to a property. By renovating and improving a property, even if you’re not doing major structural remodeling, you can increase its value in a relatively short amount of time. How the property is (or can be) used: For one thing, a commercial property will be valued differently from a residential property. What’s more, various usage restrictions may also impact the value. For example, if zoning restrictions mean it’s impossible to turn a commercial property into a luxury block of apartments, then that restriction may impact how much buyers are willing to pay. The property’s location: Compare a four-bedroom, three-bathroom house with a smaller house in the same town and it makes sense that the bigger house is worth more. But things get foggier when you bring different locations into the mix. Compare that generous family home in Des Moines, Iowa, with a studio apartment in Midtown Manhattan and the smaller property is likely to be worth more. That’s because different locations are more desirable and valuable than others. Additional local factors like a nearby, highly rated public school or great transportation links can also drive up a property’s value. Supply of property: A few years ago, there was a lot in the real estate news about Bulgarian apartments. Investors were piling into the country in droves, and new apartment buildings were being thrown up left, right, and center in coastal and ski resort towns. The result? A market that ended up with way more supply (new-build apartments) than demand (actual buyers) and apartment blocks sitting empty and unsold. Compare that with, say, a sought-after coastal village location in Cornwall, in England’s beautiful West Country, where supply of properties is relatively low. Because few properties come onto the market, their value is higher than if there was a deluge of available property. Demand for property: Think back to the tiny studio apartment in Midtown Manhattan, and you can see how being in a buoyant real estate market, like New York, can impact a property’s value. In a market where there’s a wealth (pardon the pun) of motivated buyers keen to purchase property, combined with plenty of money to buy, demand goes up — and with it, market value. Who values real estate? So, who has a hand in deciding a property’s value? Depending on the circumstances, the following people may all be involved in the process at some point: Sellers: Plenty of sellers do their own homework on what their properties may be worth before they put them on the market. And, at the end of the day, it’s the seller who weighs the agent’s recommendation and agrees on the final price. Buyers: Informed buyers do their own research and analysis, and reach their own conclusions on the fair price for properties. Real estate brokers and agents: Any good real estate broker or agent knows her market inside and out, and she’ll have a really good handle on the likely value of a property. That said, it’s not uncommon for an agent to quote a higher valuation to get a seller’s business (and a juicier commission), even though this can result in an overpriced property languishing on the market for longer than it needs to. So, when an agent gives you a valuation, do your own homework to determine whether that’s a correct and fair price for your market. Professional appraisers, valuers, or surveyors: Whenever you’re seeking funding to buy a property, the lender will send a professional appraiser to value the property. (By “professional,” I mean that many countries require appraisers to be qualified and certified.) Depending on the lender and type of funding, you may have some flexibility to appoint the appraiser yourself, or choose from a shortlist of the lender’s appraisers (this is not unusual on a commercial mortgage in the United Kingdom). Many times, though, the lender will simply appoint its own appraiser, and you’ll have no say in the matter. Either way, you’ll ideally have the option of being present at the valuation. Be aware that a lender-appointed appraiser may not have a ton of experience in your type of investment; for example, he may specialize in standard residential properties rather than income-generating rentals.