Financing

• Don’t buy real estate supported by artificial interest rates.
• Don’t allow initial interest rate inducements to be the reason for buying.
• Avoid lock-ins.
• Avoid high prepayment penalties. Some prepayment penalties are obvious (such as points), and some are not as obvious (maintenance yields).
• Avoid variable loans unless the index used to determine interest rates and the annual maximum caps and loan cap are acceptable.
• Follow the treasurer’s rule: Fix interest rates as low as possible and push the maturity date out as far as possible.

Investment Criteria

Make price comparisons on all of the following:

• Price per square foot
• Income per square foot
• Capitalization rate
• Replacement costs
• Usage
• Parking, amenities, age, location, structure, and convenience of egress and ingress
• And last and least important, the gross rent multiplier

Cash flow starts at close-of-escrow and is real. Do not buy income-producing real estate based on artificial cash flow (seller guarantee). Every successful real estate investment has an economic anchor(s) that is conveniently located in the area. Identify that anchor(s), analyze it, and determine its prospects for the future.

The Wednesday edition (real estate section) of the Wall Street Journal lists hundreds of properties for sale. Obviously not all of those listings are going to become successful investments. You have to cull out the ones that fit your criteria and are going to be successful. There is no such thing as the last good deal. There will always be another good deal.

Summary

We are 78 months into the current business cycle. Looking at the past 100 years, we know that the shortest business cycle from peak-to-peak was 17 months, the longest was 128 months, and the average length was 58 months. This means we could be at the peak of the current cycle or very close to it. The result of the timing of any current income property purchase is that the new investor could be facing a downturn, a bottom, and an upturn during the next 78 months. In other words, it may be 78 months before the current peak and market values are reached again. The area and type of real estate will determine the extent of the downturn, bottom and upturn. To insure the highest probability of success, any strategy for the acquisition of income-producing real estate must include the safety checklist described here. In summary, given the right investment strategy, it is a good time to acquire income-producing real estate.

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