Editor’s note: Robert Bruss is temporarily away. The following column from Bruss’ “Best of” collection first appeared Sunday, March 26, 2006.
If you are just starting your real estate investment career and want to learn all the benefits realty investments offer, first read “Real Estate Investor’s Checklist” by longtime investor Robert Irwin. Rather than being a dull book about real estate investments (there are lots of those), this is a lively checklist of important topics every realty investor should consider before investing or deciding what type of investment property is best.
When I first began reading this unusual book, I thought to myself, “This seems like a dumb format.” But after reading several chapters, I realized what a brilliant idea it is to have boldface questions, followed by brief answer explanations of a paragraph or two. If a topic doesn’t interest you, just skip ahead to the next topic in which you are interested.
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This new book should be read with an open mind because it begins slowly with routine topics, such as how realty investors earn their profits, getting started, and evaluating the local real estate market. Although the book seems aimed at investors in single-family rental houses, Irwin doesn’t hesitate to lightly tackle other investment types such as apartments and commercial buildings.
The author asks many routine investor questions about important subjects, like the neighborhood, property condition, and potential for a profitable rental.
The one chapter that is either the book’s best or worst is “Do You Know the Property’s True Value?” Irwin, a longtime, very experienced real estate investor, places heavy emphasis on the “gross income multiplier” to determine a property’s value. He surely knows the major pitfalls of this method, namely its failure to consider a rental property’s expenses, yet he doesn’t warn why gross income multipliers should be used for nothing more than pre-qualifying a property or discarding it from further consideration.
But an especially valuable chapter, which even experienced investors might overlook, explains the importance of transaction costs when purchasing investment property. The author emphasizes expenses such as mortgage loan costs, title insurance, and attorney or escrow fees.
Irwin also highlights the property seller’s typical sales costs, especially the real estate agent’s sales commission, unnecessary broker’s transaction fee (which Irwin labels a “garbage fee”), and other incidental expenses.
As an experienced real estate negotiator, the author explains how buyers and sellers should think about cutting their transaction costs, especially by attempting to shift these expenses to the other party.
Locating the best investment properties receives heavy emphasis. Irwin even explains how to profit from the foreclosure market, especially for houses, by purchasing before or after the foreclosure auction sale.
However, the book is not without a weak chapter. Although Irwin surely knows the tax benefits of investing in real estate, especially Starker delayed tax-deferred exchanges, and how to maximize investment tax deductions, the tax chapter contains several errors that, if relied upon, could harm investors.
For example, he says an investor must complete a Starker exchange within 120 days (the tax law allows up to 180 days). Also, he says a residence acquired in a tax-deferred exchange must be occupied by the owner as a principal residence for five years before it can qualify for the $250,000 or $500,000 sale tax exemption of Internal Revenue Code 121. The correct information is, although property acquired in an exchange must be owned five years before qualifying, owner-occupancy is only required for 24 of the 60 months before sale.
Chapter topics include: “How Will You Make Your Profit?” “What Do You Need to Get Started?” “Did You Evaluate the Market Before Entering?” “Will the Property Make a Suitable Rental?” “What is the Condition of the Property?” “Do You Know the Property’s True Value?” “Where Do You Find Good Investment Homes and Properties?” “Do You Have a Good Agent?” “Do You Know What is Involved in Being a Landlord?” “Have You Lined Up Your Financing?” and “Flip Versus Serial Investing.”
As the title implies, this is a very complete checklist of important questions to be answered by prospective real estate investors. The provocative questions should raise “red flags” in the reader’s mind about possibly overlooked pre-investment considerations. Despite its slight defects, such as the tax chapter, on my scale of one to 10, this excellent real estate investment book rates a solid 10.
“Real Estate Investor’s Checklist,” by Robert Irwin (McGraw-Hill, New York), 2006, $18.95, 182 pages; available in stock or by special order at local bookstores, public libraries, and www.amazon.com.
(For more information on Bob Bruss publications, visit his
Real Estate Center).