Board Topic: Am I Crazy to Buy Real Estate?
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Am I Crazy to Buy Real Estate?

Posted by: epoole Oct 13 2004, 06:09 PM
I am thrilled to have found your website. It is just the sort of "down to earth" advice I need right now. Here's my situation:

My wife and I already own our home in San Francisco (I mention this because it is a "special" real estate market), and we have some capital to invest. I have been considering purchasing a mixed-use building or two in SF. I would rent any/all residential units, and would either lease out the commercial spaces to other businesses, or perhaps start a small (cafe) business of my own if the location was right.

Am I crazy to be thinking this? I recently read the following in another of your posts:

"Now you might think that having a website about commercial lending I would have my money in an income producing property or two, frankly while I have underwritten dozens of those loans, the fact that by nature I am risk adverse keeps me from getting into the business of being a landlord. Don’t get me wrong, I have with a couple of friends been looking at properties for a few years, but most times the sellers are asking for too much to begin with and our interest has never been large enough to start getting into serious negotiations."

I feel like I may be in a slightly different position though. We have already set aside monies to invest in more "risk averse" investments. We are considering this real estate investment as the "risk" portion of our portfolio.

So, with this is mind, I intend to seek out properties, and with the help of information like what I find on your site, calculate the level at which I would have to capitalize a property myself (eg, putting 40-60% down) to make the cash flow work for the rest of the financing. Once the building is occupied and leases are in place, move on and look for the next property, repeating until I run out of capital.

In my mind, I thought that having this capital at my disposal sort of puts me at an advantage towards my ultimate goal (which is, aggregating real estate in the SF market - I think that long term it is always a good investment).

So, can you give me a sanity check? Am I totally out to lunch here? I guess I'm looking for some advice from the perspective of someone with less captial restrictions ... does my capital make this a better opportunity for me, or not?

Thanks in advance for any reply!

- epoole

Posted by: loanuniverse Oct 13 2004, 10:01 PM

Epoole:

First, let me thank you for your kind words about my website, I am glad it might help you figure things out. We aim to please! At loanuniverse.com

Let me give you some feedback on your post:

” So, can you give me a sanity check? Am I totally out to lunch here? does my capital make this a better opportunity for me, or not?” A well thought out investment in income producing property does make sense. It even makes more sense in your situation once you look at it as a piece of a well diversified portfolio of investments.

In fact, I think that a good commercial property can probably give you a decent return with less downside than other investments. After all, there is something tangible there and this should protect your losses somewhat.

The key here is what makes “a good commercial property”. From my point of view this means at the very least:

1- Good tenants.
2- Good research {think condition / maintenance / environmental situations}
3- Good price

” … calculate the level at which I would have to capitalize a property myself (eg, putting 40-60% down) to make the cash flow work for the rest of the financing ” From the point of view of an investor, You want to go with as little equity as possible. If you could, you would want to go with 100% financing. However, no lender would want to do the loan. Therefore, you want to go with the standard which is about 75% financing for a bank lender. If you are talking about having to go with 40-60% down payment to make the cash flow work for the loan repayment, we probably have a problem in respect to pricing. Keeping some of that cash will give you more flexibility.

”… Once the building is occupied and leases are in place, move on and look for the next property, repeating until I run out of capital” If you are going to go for a building without tenants and actually look for the tenants then you are increasing the risk. If you are increasing the risk, then you have to be compensated with a higher return.

If this is going to be the first time you invest in real estate, you need to get familiar with how the capitalization rate works. You need to be able to compute “Net Operating Income”, and Debt Service Coverage. I have something about each of those topics around the website, but there are many other internet sources as well as books available in the subject.

Good luck, and keep me informed how your hunt goes.
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