 Since I’m in the middle of some very significant transitions, I’ve been extremely busy over the last two weeks, and my last article, much like this one, was something I had typed out on my cell phone while I was flying a while ago, so admittedly it was a little too technical and somewhat half hearted. I was also candidly told so by my own family members who were kind enough to be honest with me about their opinion. Today’s article is also one I had typed out a while back, on real estate, when a reader had emailed me seeking advice on what to do with a property he owned. I hope it will prove useful to you as well. I should get back to writing fresh articles after next week. Till then, these archives will have to do.
Some call it property, others call it real estate; whatever you call it, you need to know how to profit from it. The biggest mistake that many people make is that they think of property investments as “easy money”. That’s a big misconception. If any way to make money ever was easy, everyone would be making tones of it. Investing in real estate is just as much of a business as is running a shop or a manufacturing plant. You need to keep your costs low, maximize your revenue and most important of all add value to your tenants/customers. And just like any business, you must differentiate from your competition to survive in the long run.
Before you get started, think about what your ‘product’ is. I’m assuming that you already have a plot ready upon which you plan to construct. First things first; Is the building viable? Try to find out what the most efficient use of your land is, and check for zoning restrictions before your set your heart on an idea. The next stage is to talk to an architect and a construction contractor on your options to maximize your return. It’s important to shop for the most cost effective contractor (without overly sacrificing on quality). Then talk to several banks to see what your financing options are. You need to know how big of a loan you can take and how many years it will take to pay it all off. Do you have to put any money down from your pocket? You also may want to talk to a mortgage broker, (I do understand that another lady who writes for this paper is a mortgage broker) since they will be able to find a loan with the best terms possible for you.
Apart from the construction side of things, there are crucial calculation you must make before getting into such a high stakes game. Flipping (buying a property with the sole intention of selling it) is never a good idea, unless you have a 100% confirmed buyer and a confirmed seller, and you only hold onto the plot for a short period of time. If you don’t believe me, ask the thousands of bankrupt Americans who tried the same thing a year or two ago. Tides can change overnight, and if you’re timing is off, you’ll be stuck making monthly payments on a property you really can’t afford to hold onto. If you plan to rent the property out, analyze the market rentals, and determine a realistic expected market rent you can receive under “good” conditions. Under such conditions, how much will you have to contribute towards your mortgage every month as a cash top-up from your pocket? (ie. Repayment – Rental Income = Cash top-up). Can you afford this on your current income? Will you be able to afford this for the duration of the loan? Next, determine what your rental revenue will be if market rentals were to crash or your building was only 50% occupied. This should be your worst case scenario. If that were to happen, would you be able to afford the extra cash top-up?
The bottom line of the whole property business is that if you invest with your head, and not with your heart, you’re sure to make prudent decisions and analyze possible outcomes in much greater detail. The more prepared you are, the better.
This week’s article was just a brief introduction on the subject, and I’m always glad to help people that would like to get into the investing world, whether in stocks, bonds, real estate or raw business. Be sure to email me if you have any questions.
Quote of the day: “It's tangible, it's solid, it's beautiful. It's artistic, from my standpoint, and I just love real estate.” - Donald Trump
Arjun Parameswaran is the executive vice-president of the Astutant Group, Florida, USA, a director of the R.D.P Group, Botswana and an administrator of the R.D.P Foundation, a Botswana centered charitable foundation. He can be contacted at
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Read more and post your comments online at www.arjunparameswaran.com
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