Investment Property Basics for the Real Estate License Exam - dummies

Investment Property Basics for the Real Estate License Exam

By John A. Yoegel

You can expect some Real Estate License Exam questions on investment properties. Many people think that real estate investments must involve large and complicated properties, and that isn’t necessarily true. Real estate investors often start small with residential properties close to home.

Investment property management issues

One of the biggest decisions you first must make is whether to invest in real estate at all. Secondly, you have to select the kind of property in which you plan to invest. How you plan to manage your property is an important issue in making this decision. The two basic choices are managing a building yourself or hiring a manager.

This decision usually is based on the investor’s competence and experience with the kind of building, the building’s location, the amount of time you have available for management duties, and whether the investment produces enough income to make hiring a manager possible.

Many investors start by investing in small residential properties (such as one- or two-family houses) close to home. They’re usually familiar with residential properties, and the close proximity enables them to keep an eye on the property so self-management may be feasible. Moreover, these kinds of investments usually don’t provide enough income (at least initially) to pay for outside management services.

On the other hand, someone who never has owned an office building before and has no familiarity with the needs of people who rent office space probably will hire a professional manager. Because an office building is used primarily during the day, providing on-site management during business hours may be necessary. An office building is also more likely to generate enough income to support a property manager’s salary.

A real estate agent may be asked to advise a client about property management issues and possibly recommend a property management company. The agent should try to understand his client’s need and experience as well as possible, make recommendations with the understanding that any decisions lie with the client, and always recommend at least three reputable companies.

Know when to get help with an investment property

Investing in real estate is an important decision. Locating the right property for investors and selling investment properties is something you’ll be doing as a real estate agent. Knowing what you don’t know is as important as knowing what you know. Good advice is crucial to making the right investment decision and maintaining that investment.

The three people who need to be consulted in making real estate investment decisions are a real estate agent (that’s you), an attorney, and an accountant. These professionals need to be consulted as early in the process as possible. Check out the roles of an attorney and an accountant. Make sure you always refer your clients to these professionals as soon as possible.

Consulting an attorney is important any time you buy property, and doing so becomes even more important whenever you’re buying property with a partner or several other people. An attorney can help set up the proper organizational structure for an investment. You may also want an attorney to review any leases that exist in the building you buy.

The use of a good accountant likewise is crucial because of the tax implications of owning investment property. The point to remember is that the value of the tax benefits derived from the same building sometimes varies from one owner to the next.

Some not-so-good news about investing in real estate

Investing in real estate is a great idea for several reasons: Over time real estate values tend to at least keep pace with inflation if not exceed it; properties often generate annual returns (income) on the investment; and investors can take advantage of tax benefits that may not be available in other investments. However, investing in real estate also has a few disadvantages. Here are three of them:

  • Real estate isn’t considered a liquid investment. Unlike stocks or bonds, it takes time to get your money out of a real estate investment.

  • Real estate investments usually require substantial amounts of cash as a down payment, despite what the no-money-down gurus say. Reserve cash is also needed for unexpected repairs and vacancies.

  • Real estate investments usually require some level of management and involvement in property management decisions, too.

  • Real estate investments don’t always turn out to be profitable. All investments carry risk; real estate is no different.

Although an agent wants to present the investment property in the best possible light, the important thing is to provide the potential buyer with factual data on current income, local vacancy rates for that type of property, and the physical condition, if known, of the property. You can guarantee very little about an investment unless you happen to have a really good crystal ball.