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Real Estate Buying and Selling
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As with any other investment, an understanding of the principles — the basics — is critical to success in real estate investment. How are real estate prices determined? What are good sources of funds? What about expenses? Should you use professional help? Let's now look at these, and other, vital principles of real estate planning.
1: Location
Location is the absolute and essential key to real estate investment and planning. It is so vital, in fact, that real estate experts say the three most important factors relating to real estate are location, location and location. Knowing the direction in which a city is growing, the site of an important new public or private project, the next "hot" area for development or rehabilitation — all these and many more locational factors are crucial to successful investing in real estate.
The investors who have lost money in real estate almost invariably did so because they chose the wrong location. The building may have been of high investment quality. It was just in the wrong place to realize the benefits of the market.
2: Best-use evaluation
The price of real estate is determined by its most valuable use. Some real estate in a major city might be suitable for growing crops. It is highly unlikely, however, that any land would go into this use. A higher return is available if it is used for office buildings, apartments, hotels and department stores. When land is not being put to its most productive use, there is a strong incentive for someone to acquire it and transform it. If it is acquired at a price determined by a less-profitable use, a gain accrues to the person who transforms it. This process tends to keep real estate in its most productive use. When buying and selling real estate, always evaluate it in terms of its highest and best use.
3: Government influences
Government actions can be so critical to a real estate investment that it's imperative you stay as informed as possible about what local, state and federal agencies might do next. You can turn a huge profit if you buy property near a new government installation, such as a military base, highway exit or rapid-transit terminal. But government actions can also hurt certain property values: New York's tough rent-control laws, for example, caused many property owners to literally abandon their buildings because there was no longer any way they could operate the structures profitably.
4: What makes land valuable
Appropriately located land is only a small part of the total land mass of the United States. Land must be capable of development or agricultural use to be valuable. It must also have access to utilities, be accessible by highway or other forms of transit, and be clear of dangerous elements, such as flooding. The supply-and-demand factor in real estate discounts property that doesn't have these characteristics, so only a small portion of all U.S. land is in demand as investment property. That means the value of land that is attractive to investors is likely to increase.
5: Long and short term price movement
Short-term movements in the value of a property are sometimes very different from the overall long-term trend. During the 1930s, for example, real estate prices plunged along with everything else. It took years before property values in many parts of the nation returned to their pre-1930 levels. More recently, prices flattened out or even dropped in areas that saw high price run-ups and overdevelopment in the 1970s and early '80s.
6: Bargaining
As with most other investments, it pays to shop around and bargain when you're looking for real estate. If you pay too much for a property, your return will be less or you might even lose money. Similarly, you should make every effort to get the best price for property you decide to sell.
It is also important to remember that the deals that are successful meet the needs of both the buyer and seller, and the object is to structure the many variables in the transaction to satisfy both sides. Price is only one of many variables, and other terms such as down payment, length of escrow and seller-provided financing may be just as important as the price.
Assume that everything is negotiable. Know which terms you want and what you can compromise on (such as price, for example) and which terms the other party must compromise on (such as the amount of down payment or date of escrow, for example) in order for you to get the best terms and the deal to meet the needs of both parties.
7: Borrowing
Buying real estate is an expensive proposition. If you insist on paying all-cash, your investment choices will be severely limited.
You can greatly enhance your purchasing power and maximize your return by using real estate as security for mortgage loans. Many financial institutions will lend you more than 80 percent of the purchase price of a residential or commercial property, and the seller may provide even more attractive financing terms.
If you've fully evaluated a possible acquisition and believe you can realize a higher rate of return than the cost of borrowing, don't be afraid to borrow heavily — providing, of course, that your cash flow will be adequate to meet the terms of your repayment schedule. This leaves you more money to purchase other property. On the other hand, you probably shouldn't purchase a property if it won't offer a return that's at least two or three percentage points above your borrowing costs.
When borrowing money to finance a real estate purchase, it's important to consider the amount you will borrow, the length of time you'll have to repay it, and the interest rate you'll be charged on the Loan. All three of these factors are negotiable; if you can't get satisfactory terms from one lender, you might be able to get them from another. Also remember that you may want to pay off the loan if circumstances permit, so try to get a loan that doesn't include a prepayment penalty.
It's also important to consider the fees you'll have to pay in order to get the loan. Such fees usually include closing costs, points, insurance, property taxes and charges for escrow services.
Closing costs are fees you must pay for negotiating the loan. They cover the legal and appraisal expenses the lender incurs in arranging your loan.
Points are fees sometimes paid to the lender for granting the loan — an inducement to the lender to make the loan. A point is one percent of the loan amount. Two points on a $100,000 loan would be $2,000 ($100,000 x .02 = $2,000). Three points on a $40,000 loan would be $1,200 ($40,000 x .03 = $1,200).
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