Welcome to Baton Rouge Real Estate Investors Association.

Tuesday, October 23, 2007

An economist with the Associated General Contractors of America warns that material and construction labor costs should both increase in 2008. Ken Simonson, who is with the AGC, says that a banner year for nonresidential construction has caused labor and supply costs to go up. At the same time, the worsening slide in homebuilding and problems with credit markets are threatening commercial and government construction. "Retail, suburban office and local government construction are especially affected by the drop in homebuilding, home sales, and property values, respectively," Simonson says. "Tighter lending standards and financial-firm layoffs will trim construction of offices and other income-producing properties, such as hotels and warehouses."

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There are many gurus out there that contend that real estate is a panacea where you cannot lose money.^[ Although this is false, there are a number of advantages to investing in real estate.

The first big advantage is that it is an extremely expensive product. Each sale you make generates more profit potential for this reason.

Leverage, or the ability to borrow based on the value of the property, is probably the second greatest advantage. It is much easier to finance real estate than any other product. While investing in most assets requires the purchaser to have the full purchase price available for the asset, in real estate investing, one only needs to have a fraction of the purchase price available (like 5%, 10% or 20%) as a down payment. Therefore, real estate, although incredibly expensive, is still easier to buy than say, a piece of industrial equipment of the same value.

Local advantage is rarely discussed but it stands to reason that you know your neighborhood better than a real estate investing expert would if they were in another part of the world. This creates an advantage the beginner can exploit in his market.

The bulk of the worlds assets are in real estate.

One way a beginner can get started in real estate investing without taking on any personal risk is to 'bird dog', or hunt for good deals, for another more experienced investor. This allows the beginner to learn to find and recognize value.

RETURN ON INVESTMENT

In investing, the cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage.

It is often used to evaluate the cash flow from income-producing assets. Generally considered a quick napkin test to determine if the asset qualifies for further review and analysis. Cash on Cash analyses are generally used by investors looking for properties where cash flow is king, however, some use it to determine if a property is underpriced, indicating instant equity in a property.

Suppose an investor purchases a $1,200,000 apartment complex with a $300,000 down payment. Each month, the cash flow from rentals, less expenses, is $5,000. Over the course of a year, the before-tax income would be $5,000 × 12 = $60,000, so the cash-on-cash return would be