12 FATAL SINS REAL ESTATE INVESTORS MAKE

By Fred Reilly, American Attorney and English Solicitor

Experience is essential to making a sound real estate investment. Investors can dramatically improve their investment decisions by avoiding the twelve fatal sins outlined below. Knowledge of these sins is especially important to foreign investors who must also content with the unfamiliarity of another country.

1. Paying too much. Ensure your profit margin when you acquire an investment property by purchasing at a rational price. Do not count on the market to bail you out at a later date. Many people who bought investment properties at the height of the market in 2005 are now learning the hard way that they overpaid – in some cases by tens of thousands of dollars. Seasoned investors target properties that are discounted or undervalued by ten to thirty percent. It is not impossible to identify these properties in any market, but it does take hard work, persistence and a willingness to seek the best information available.
2. Failure to practice strategic fundamentals. Investors frequently fail to formulate an investment strategy for purchasing a property. Will you be buying the property with no money down, a ten percent mortgage or should you ask the owner to hold paper? Is your intention to flip the property within a one-year period, upgrade the property to command a better tenant or change the zoning to a higher, more valuable classification? Buying an investment property because someone has touted it as “a good investment” is not a sound business strategy.
3. Falling in love with a property. I think it’s very healthy from an investment standpoint to have an attraction to a particular property for rational reasons. I am very concerned when an investor falls in love with a property because emotional involvement tends to cloud a person’s business judgment.
4. False assumptions. By doing your homework, you can substantially eliminate the tendency of inexperienced investors to rely on false assumptions. Identify the factors that make the property attractive from an investment point of view, then confirm the existence and accuracy of each factor. You’ll be surprised by the number of times that your assumptions were less than perfect.
5. Failure to conduct appropriate Due Diligence. This sin is unforgivable. When negotiating the contract to purchase an investment property, include a specific time period (i.e., 30 to 90 days) to conduct due diligence. During this period, your deposit should be refundable for any reason. The purpose of the due diligence period is to confirm the status of the real property and address all issues that will impact your intended use of the property. For example, an investor with a pending contract on an apartment building should investigate zoning, construction code, density, hazardous waste, utilities, impact fees, health and safety regulations, structural integrity and related issues. In addition, the investor should review and confirm records that relate to occupancy rate, cash flow, status of current lease agreements, tenant deposits held, service contracts, status of scheduled maintenance and repairs, status of actual or threatened lawsuits and the costs of possible improvements to upgrade the property.
6. Misjudging market dynamics. The real estate market is in a constant state of flux. The economy, interest rates, supply and demand of properties, threats of terrorism, natural disasters, laws, taxes, government policies and politics are just a few of the factors affecting the availability of attractive investment properties in any given market. It’s relatively easy to place emphasis on the wrong factors and ignore the relevant factors when analyzing the investment potential of a prospective purchase. I highly recommend that you spend sufficient time researching a specific sector of investment properties (such as Central Florida condominiums or Los Angeles office buildings under 10,000 square feet) before you take the plunge. The better your understanding of market dynamics, the more likely your focus will be on the factors that really count in a specific market.
7. Misjudging appreciation. Some investors purchase real property under the misguided expectation that it can only increase in value. These investors learn the hard way that property can and does decrease in value. Optimism is an admirable quality, but it should be tempered by reality. If you analyze the sales history of properties in a specific market, you can spot the pricing trends and make good faith projections about the anticipated appreciation. I highly recommend that you compare apples to apples (like kind properties) and use a price per square foot analysis in these comparisons.
8. Misjudging cash flow. There are very few real estate investments that “pay for themselves.” A negative cash flow means that you’ll be subsidizing your investment every month. After you’ve determined that a prospective property has some investment appeal, run the cash flow numbers. Consider all potential expenditures including but not limited to mortgage payments, homeowner’s association fees, real estate taxes, insurance, utilities, waste disposal, maintenance and repair reserves, property management fees and landscaping fees.
9. Failure to assemble a team. It is highly advisable to assemble a team of professionals before you ever pursue real estate investment opportunities. Your team should include a real estate agent, attorney, lender, appraiser and property inspector. These professionals will help reduce your risk and increase the likelihood that your investment strategy will be successful. At the least, have consultation sessions with each of these professionals to explain your basic strategy and pick their brains. Seasoned professionals will have counseled countless investors before you and will be in a position to explain the most common landmines that they’ve encountered. The money that you spend on these consultations usually result in an outstanding return on investment.
10. Failure to control expenses. Runaway expenses can sour any real estate investment. Renovation work is a great example. Contractors are often over-budget and long overdue when it comes to the estimating the actual time to complete a project. If the renovation work is delayed, there’s no rent, diminished opportunities for appreciation and a high likelihood of losing money month after month.
11. No Exit Strategy. Do you intend to hold a modestly appreciating property for a long term? Or are you purchasing a speculative property in a high-growth market where you can get in, make a quick profit and get out in one year. Prior to purchasing an investment property, formulate an Exit Strategy so you have a clear-cut plan for the future. Once you’ve formulated an Exit Strategy, don’t make the mistake of being trapped by it. As circumstances change, you should revisit your Exit Strategy and determine whether new conditions justify a different approach.
12. “Get Rich Quick” schemes. Real estate investment is hard work and requires persistence. Most people who fall prey to “Get Rich Quick” schemes are unwilling to pay their dues in a field that demands it. If it sounds too good to be true, there’s ample reason to be suspicious. If you can’t resist the temptation to pursue potential “Get Rich Quick” schemes, investigate thoroughly and do everything within your power to reduce your risks.

DISCLAIMER: This article and its content are intended to provide general information on legal topics and shall not serve as a solicitation for services in any jurisdiction where prohibited by law. This article is not, nor is it intended to be used as a substitute for legal advice. You should consult an attorney for individual advice concerning your own situation. Sending an email to the owner of this website, and receiving any response thereto, does not, in and of itself, create an attorney-client relationship.

© Copyright 2007 by Fred Reilly. All rights reserved.

INVESTING IN AMERICAN REAL PROPERTY IS NOT AS DIFFICULT AS YOU THINK*

By Fred Reilly, American Attorney and English Solicitor

* This article originally appeared in International Residence Magazine (Spring 2007), the official publication of the Moscow International Property Show.

Do you dream of owning a mansion, condominium or investment property in a prestigious American market like Beverly Hills, Las Vegas, Miami and New York? Or maybe a vacation home near Florida’s subtropical beaches. It’s not as difficult as you may think.

Over the past two years, I’ve participated in the Moscow International Property Show four times. Some Russians are surprised by my presence – why would an American attempt to sell United States property to Russians? I will be the first person to say that United States real property isn’t for everyone. But for the sophisticated international real estate investor, the United States represents one of the most stable, prestigious and profitable markets in the world.

The purpose of this article is to correct five of the most common myths that I’ve heard while discussing American real estate with international investors.

Myth #1: The American government places severe restrictions on the ownership of property by international citizens.
Reality: There are very few restrictions on the ownership of United States real property by international investors. The few restrictions are basically governmental reporting requirements for analytical and statistical purposes. There are no residency requirements or prohibitions against foreign ownership of real estate like those imposed by some countries. An international investor can take title to United States property as an individual or in the name of a legal entity (corporation, partnership or limited liability company).

Myth #2: The United States real estate market is only for the wealthiest international investors.
Reality: America has many luxury markets where multi-million dollar homes are the norm. But many middle-class international investors are surprised to learn how some of the most vibrant American markets are within their financial reach. Here are three prime examples that highlight how affordable some markets really are. The median price for a single-family home in Orlando (the number one tourist destination in the world) is $264,110. The median price for a single-family home in Miami is $371,660. In addition, the median price for a single-family home in Los Angeles (which has a very large population of Russians) is $533,740.

Myth #3: Financing is not available. An international investor purchasing American property must pay the entire purchase price at closing.
Reality: American banks will finance an international investor’s purchase of real estate. Typically, the international investor would be expected to make a down payment of 20 to 30 percent of the purchase price and the bank would provide a mortgage for the remaining amount due. For example, an international investor purchasing a $ 2 Million vacation home in Beverly Hills would be required to pay $400,000 at closing and obtain a mortgage for the remaining $1.6 Million. The investor then repays the mortgage by making monthly payments over a 15 to 30 year period.

Myth #4: It is very difficult for an international investor to manage an American investment property.
Reality: Foreign owners typically hire professional management companies to maintain their property. For example, it is commonplace for the owner of an oceanfront condominium to hire a property management company to handle the business affairs. The property manager can find tenants, collect the rental payments, make repairs and monitor the property for a foreign owner. The cost of these property management services range from10 to 15 percent of the property’s monthly rental payment.

Myth #5: It is impossible to obtain a visa to travel to the United States.
Reality: Obtaining a temporary business or tourist visa to the United States is not as difficult as you think. The United States Embassy in Moscow processes applications for temporary tourist or business visas. The Visa Services section of the Embassy’s website (http://moscow.usembassy.gov) has both English and Russian explanations of the procedure for obtaining a visa. The procedure is relatively simple. A Russian investor who wants to visit the United States to investigate a potential property should obtain a letter of invitation from their American real estate broker. When applying for the visa, the Russian applicant must demonstrate that they do not intend to immigrate to the United States and intend to return to Russia. The application fee for a temporary business or tourist visa is $100. Once your visa application has been submitted, you must schedule an interview. The typical wait time for a visa interview at the United States Embassy in Moscow is 14 days.

Don’t allow these common myths to prevent you from realizing your dream of owning real estate in the United States.

DISCLAIMER: This article and its content are intended to provide general information on legal topics and shall not serve as a solicitation for services in any jurisdiction where prohibited by law. This article is not, nor is it intended to be used as a substitute for legal advice. You should consult an attorney for individual advice concerning your own situation. Sending an email to the owner of this website, and receiving any response thereto, does not, in and of itself, create an attorney-client relationship.

© Copyright 2007 by Fred Reilly. All rights reserved.

WHY SHOULD INTERNATIONAL INVESTORS CONSIDER UNITED STATES PROPERTY INVESTMENTS?*

By Fred Reilly, American Attorney and English Solicitor

* This article was originally published in International Residence Magazine (Spring 2006), the official publication of the Moscow International Property Show.

International investors consistently rank the United States real property market as the most stable and secure in the world. In a recent survey by the Association of Foreign Investors in Real Estate members, nearly forty percent of respondents ranked the United States as the country having the best opportunity for capital appreciation. This article highlights two critical factors that every international  investor should understand, five reasons why U.S. real property represents an attractive investment opportunity and three specific recommendations for getting started.

Critical Factors You Should Understand

Residency and Citizenship. The possibility of becoming a U.S. citizen or gaining permanent legal resident status is attractive to many international investors, especially those seeking to establish an investment that will serve as the basis for family relocation. For example, the L visa classification enables a foreign company to temporarily relocate a manager or executive (and family) in the United States. Later, the manager or executive can apply for permanent residence or “green card” status. In the alternate, the EB5 visa classification enables an international investor (and family) to invest $1 Million in a new commercial enterprise that creates employment for a least ten U.S. citizens.

Mortgages. In the United States, investors traditionally use mortgages to finance the purchase of real property. The mortgage concept is relatively unknown to many international investors. When a bank provides a mortgage to finance a real estate purchase, the investor normally makes a down payment of 20% to 30% of the purchase price and the bank provides the balance of the money needed to complete the purchase in the form of a mortgage loan. Then, the investor repays the loan with interest by making monthly payments over a 15 to 30 year period. By financing the purchase of a property with a mortgage, the investor can purchase a more expensive property than he is able to buy in an all-cash transaction.

Reasons Why The United States Is Attractive

There are five reasons why the U.S. property is attractive to international investors.

Currency Exchange. Favorable currency exchange rates enable investors in U.S. real property and business ventures to obtain more value for their investment when compared to comparable investments available in other countries.

Sound Returns. The United States real estate and business venture market offers favorable risk- adjusted returns and the prospect of capital appreciation which international investors simply cannot achieve in other countries.

Investment Security. International investors place tremendous emphasis on the safety and security of their investments. Many countries suffer from political instability, capital market volatility, currency fluctuations, shifting legal regimes and other uncertainties. The United States provides international investors with a safe haven.

Owner’s Rights. Ownership restrictions and limitations are almost nonexistent in the Untied
States. In other countries, non-citizens face numerous restrictions and outright prohibitions against real property and business ownership.

Diversification. The acquisition of U.S. real property and business ventures contribute to an international investor’s diversification strategy. The active and dynamic U.S. market is extremely attractive when investors consider the need for potential exit strategies.

Getting Started

Before expending time and money, I recommend that a prospective international investor consider three additional points.

Establish specific criteria for your target investment. There are a wide variety of property investment options ranging from single-family homes, condominiums or other personal-use residences to office buildings, apartment buildings and raw land. Identify your most important investment factors including the type (commercial or residential), purpose (immigration, annual return, capital appreciation, diversification, etc.), location, price range and rate of return.

As a first step into the U.S. market, consider a joint venture or partnership relationship. For example, American property developers frequently require international investment capital. By engaging in a business relationship with an established developer, it is often easier for an international investor to enter the market with an experienced partner while also decreasing the risks.

Identify an American real estate professional who can present appropriate investment opportunities and is qualified to address the issues that arise in an international transaction.

DISCLAIMER: This article and its content are intended to provide general information on legal topics and shall not serve as a solicitation for services in any jurisdiction where prohibited by law. This article is not, nor is it intended to be used as a substitute for legal advice. You should consult an attorney for individual advice concerning your own situation. Sending an email to the owner of this website, and receiving any response thereto, does not, in and of itself, create an attorney-client relationship.

© Copyright 2007 by Fred Reilly. All rights reserved.