REAL ESTATE IS DRIVEN BY LOCAL FACTORS
by Corey Donaldson
You really want to be an expert in the nuances of the real estate market you are considering - whether you are buying a single-family dwelling, a mobile home park, or any other investment property. You want to have a local team to work with, you will need to know the tax base and the insurance costs for that particular market, you will need to be aware of the management rates and utility costs for that area, and also the economic or physical occupancy rates.
First, you need to ensure that you have developed an "All-Star team" in your chosen market for investment. It will also be important to ensure that your team is familiar and experienced in the asset class that you are purchasing Your "All-Star team" will include a real estate broker, a mortgage broker, escrow/title company, management company, and rehab maintenance services. Your "All-Star team" is critical to your success and you will want to ensure that they meet the following criteria:
- Experience - Your team needs to be an expert in their field to ensure that you are getting the best advice available. Knowledge is critical in this business and your "All Star team" needs to be the best in the business!
- Service - Your "All Star team" needs to be expedient, accountable, and make your transactions a priority.
- Cost - By using the same team members creates loyalty thus allowing you to negotiate fees to get wholesale pricing (as opposed to retail pricing) due to repetitive business.
Every market is different, and real estate is definitely locally driven insofar as how those differences are manifested. For example, the tax base can vary quite a bit from one market to another. Property tax rates in the United States can vary from .7% (i.e. New Mexico), all the way up to 3 ½% (in Florida and Texas). You need to understand what the tax base is for that property and also how it is calculated. In some markets the tax appraiser calculates the property at about 80% of the market value, where in other markets they calculate it by the actual purchase price of the property. Make sure and learn the facts before you purchase.
Insurance rates also vary considerably from state to state. In some markets there are few companies that insure investment properties which can drive up rates. For example, in Florida it is very difficult to get insurance because of the hurricane activity over past few years. Be sure that you're able to obtain insurance and that you understand what the exclusions are and what the rates will be. You will also want to get the three year history on the investment property to ensure that there were no claims filed as this will significantly impact your rates (sometimes as high as 200%). All of these factors can noticeably affect your bottom line (profitability).
When using a management company it will be extremely important to ascertain what the management company's rates and capabilities are prior to purchasing an investment property. Many times management companies will not care for your property like you will. You will need to closely manage the management company to ensure that your property is rented up expediently and that they are watching the bottom line.
Utilities can also vary tremendously from state to state for telephone, electricity, water, sewer, and gas. For example in Texas our phone bill is about $150 for basic service and in California it is $35. Water, sewer, electricity, and gas can also have a 100% pricing differential based upon the market.
Occupancy is another important factor because the occupancy rate is going to reflect what's happening in that particular market. For example, in California right now there is about 95 to 98% occupancy, but in other markets the occupancy rate could be anywhere from 70 to 85%. You want to completely understand what that property's occupancy rate is and what the physical occupancy is versus what the economic occupancy is. Physical occupancy is the number of units (or spaces) rented. Economic occupancy means whether rents are being collected on that space (i.e. the owner offering a tenant 1st month free with a 12 month lease in order to attract people to move into the property). Be sure that you understand the economic and physical occupancy about the property you are considering for purchase.
Real estate is a very locally driven market. Make sure that you understand all the dynamics of the local market and become an expert on that market prior to purchasing a property. If not, it can be a very unprofitable and challenging experience!
