Basic Investing Commercial

ElSegundo LongBeach Tor
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ance
BASI
CREALEST
ATEI
NVESTMENTGUI
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PARTONE
OUR MISSION
We are dedicated to helping our clients realize financial independence
and achieve retirement security through conservative real estate investments.
PREFACE
We have written this guide for a much neglected audience: beginning real estate investors. The
content of this document presents the basic information that they need in order to launch a
good investment program.
Copyright 1971 by J. R. Buckingham, Investment Real Estate Broker, 333 Richmond Street,
Ste. 10, El Segundo, CA 90245. All rights to reproduce or modify this guide are withheld.
The text may not be reproduced or modified in any form without the written permission of the
author.
Revised Edition 1979.
Copyright 2003 with permission and review by J.R. Buckingham.
Completely Revised and Updated by Martin Stone, Investment Real Estate Broker, Buckingham
Investments, 333 Richmond Street, Ste. 10, El Segundo, CA 90245,
Copyright 2011 with permission and review by J.R. Buckingham.
Completely Revised and Updated by Christopher Stone, Investment Real Estate Broker,
Buckingham Investments, 320 Pine Ave, Ste. 609, Long Beach, CA 90802
TABLE OF CONTENTS
Introduction 5
Selecting Your Investment
Appraising Property Value
10
Calculating Return on Investment
15
Purchasing Your Investment
21
Selling/Exchanging Your Investment
24
Ensuring Investment Success
25
Sample 10-Year Projection
28
Why is Buckingham Investments Different?
32
basic real estate investment guide
NOTES
INTRODUCTION
In our careers in investment real estate and as individual real estate investors, the
most frequently asked question has been Are there any good, but simple, books
which explain the basic principles of real estate investment? Unfortunately, we
do not know of any! There are in existence many books on appraisal, real estate
taxation, and other specific areas of real estate. These, however, do not seem to
meet the needs of the typical real estate investor or the investor who does so as a
secondary source of income.
We have prepared this guide in the hope of filling this need. We would like to say,
however, that this guide was not written to replace, in any way, the advice and
services of attorneys, accountants, real estate agents, or any other qualified real
estate consultants. At some point in your real estate investment program, you will
no doubt require the professional services of these people. They are, for the most
part, well worth their fees.
We have not made an attempt, in this guide, to present the reader with all of the
advantages and disadvantages of real estate investment. The content of this guide
presents only the basic information and tools that beginning investors need in
order to launch a good real estate investment program. As you proceed with your
investment program, you will learn all that is necessary through your association
with agents, other investors, escrow agents, etc.
The chapters in this guide are structured to give you the ability to:
1. Select your type of investment
2. Appraise your investments value
3. Determine your annual return on invested capital
4. Purchase your investment wisely
5. Sell/Exchange your investment for maximum return
6. Avoid pitfalls that are common in investment real estate
Now, lets proceed.
SELECTING YOUR INVESTMENT

There are four main considerations in the selection of your real estate investment:
1.
Type of property
2.
Current return needs
3.
Availability of capital
4.
Total investment program
These considerations form the guidelines which fully determine what to buy, how
to buy, and why to buy real estate.
type of property
For the purpose of this guide, we can classify property into two broad categories:
(1) unimproved property and (2) improved property.
Unimproved property is property that is land only. This ranges from vacant lots in
residential communities to large plots of raw acreage.
Improved property is property with some kind of building(s) on it. Such property
includes residential income property (duplexes through apartments) and
commercial/manufacturing property.
Your selection of property depends to a high degree upon (1) the degree of risk
you are willing to make with your capital, (2) your desired cash flow, and (3) the
amount of time and effort you are willing to devote to your investments. Consider
the following general advantages and disadvantages for each kind of property.
Unimproved Property
Advantages:
No management required
A chance of extremely high appreciation
Disadvantage:
Highly speculative
No return on investment until sold
Improved Residential Income Property

Advantages:
Good return on invested capital
Strong value appreciation
Good Tax Shelter
Good availability of tenants
Disadvantages:
Management is required
Improved Commercial/Manufacturing Property

Advantages:
Long term tenants
Limited management required
Consistent return on investment
Good value appreciation
Disadvantages:
Limited availability of tenants
Limited financing available
We do not generally recommend investment in unimproved property to beginning
investors. Investing in raw land is too speculative. No doubt many have made
money in this area. Often, however, they invest their capital with a degree of risk
we would not care to take without considerable information about the property.
The problem is much of this information is not readily available to the investor.
Conversely, a good investment in improved property can be clearly seen before
you purchase. Tenants pay your property costs, buy your equity, and put money
in your pocket!
CURRENT RETURN NEEDS

The four elements of return associated with investment property are: (1) cash
flow, (2) equity growth by amortization, (3) equity growth by value appreciation,
and (4) tax shelter benefits. Pages 10 - 14 show how to calculate your return on
each element.
Cash Flow. The formula for cash flow is rental income minus operating expenses.
Operating expenses include mortgage payment(s), property taxes, insurance,

utilities, upgrades, and repairs. Usually, investors who require significant cash flow
will significantly decrease their profit in the other three elements of return.
Equity Growth by Amortization. This occurs as the principal is deducted from your
mortgage loan balance. Typically, mortgage payments are the same each month
and are paid by rental income. These payments usually cover both principle and
interest. As you make payments, you pay off the principle which increases your
equity.
Equity Growth by Value Appreciation. When properties increase in value, you gain
equity. There are two kinds of appreciation: (1) inflationary and (2) demand.
Inflationary appreciation is the increase in property value due to the reduced

purchasing power of the dollar. Demand appreciation is the increase in property
value due to the limited supply of property.
Tax Shelter Benefits. Outside of a propertys operating expenses, there are three
major tax shelter benefits: (1) the use of the capital gains tax (2) the tax-deferred
exchange, and (3) depreciation on improvements (for details see pages 12 - 14).
By selecting a property with high tax shelter benefits, investors can significantly
reduce their federal and state tax liability.
Please note that no property will give a full return on one of these elements to the
exclusion of the others. The total return of each property will contain a certain
portion from each element.
availability of capital
As in any investment, the availability of capital (that is, money) limits the size of
your investment. The capital to purchase property traditionally comes from two
sources: (1) the investor and (2) the lending market.
The first source of capital is the investor. When property is purchased this capital
is called the down payment. Down payments generally range from 10% to 30%.
Therefore, the amount of money available to the investor limits the size of the
property he can purchase.
8
The second source of capital is the lending market. This source includes banks,
credit unions, and mortgage companies. Generally, 70% to 90% of the purchase
price is financed through these sources.
total investment plan
The single most important consideration in selecting investment property, and

probably the most frequently overlooked, is a total investment plan. Any plan,
however meager, is better than no plan at all. Nevertheless, we have found that
the more detailed your plan, the better. Any good investment real estate agent
should be equipped to develop a customized, detailed plan for you. We estimate
your chances of success in investment real estate are improved by a factor of 100
if you simply have a plan.
NOTES
Let us relay, in his own words, the story of one of our earliest clients:
At 27 years of age I arrived in California, broke except for $100 cash, a used car,
and a job as a computer technician for $430 per month. One year later with that
same $100, I borrowed $500 and began to invest in residential income property.
Originally, my underlying, but very real motive was to enter into a forced savings
plan. The plan was quite simple, but determined and clear: By the age of 35 I wanted
enough money each month from real estate to live comfortably without working. By
the age of 50 I wanted to be worth $500,000 in property equity. With the help of
Buckingham Investments, as I went along, using this plan, I improved on it by adding
details of how I would accomplish these basic goals.
It has been over 35 years since our client wrote that story for us. Now past his
60s, it should be known that he has far exceeded his investment goals and is
a very rich man. To this day, when he stops by the office, he still refers to his
investment plan.
Investing without a plan is like wandering on the sea of finance without a destination.
Even if you reach your goal, you wont know it.
Now that weve decided what kind of property to purchase, lets find out how to
appraise it.
APPRAISING PROPERTY VALUE

From an investment standpoint, the two most important aspects of property are
its value as an asset and its return on invested capital. In other words, you will
invest your money in real estate and (with improved property) obtain an annual
return on your invested capital until you sell that property.
When you sell, you will expect to recover your original invested capital plus profit
from equity growth by amortization and value appreciation. Buying at fair market
value will ensure that you will be able to recover your original invested capital plus
profit at the time of sale. If you overpay for a property at the time of purchase,
your overall return on invested capital will be reduced.
The purchase of investment properties will probably the largest dollar investment
that you will make in your lifetime. Yet there is no blue book for establishing the
value of used property. In addition, each property is unique in value. So, how do
you, as an investor, determine whether or not your property is worth the asking
price?
10
Establishing the value of property, improved or unimproved, is a very complex

task. There are, however, accepted methods of establishing value called appraisal
techniques.
In this chapter we will, in simplified form, discuss the market data approach, the
primary method for appraising improved residential income property. We will also
discuss one rule of thumb, the gross multiplier (GM).
We will give you a brief review of the two other methods of establishing value at
the end of this section. Most real estate transactions will require a professional
appraisal for the lender. The appraiser will complete all three methods to make
an estimate of value so you will get the opportunity to see all three estimates at
that time.
11
MARKET DATA APPROACH

This approach is also called the comparative analysis method. The purpose of this
method is to determine the value of a property by verifying what similar properties,
in similar locations, have sold for in the recent past.
The market data approach is not difficult and can be used with little practice by
anyone. In many communities, especially those near high population areas or
beaches, this method can be difficult to use because the property immediately
outside of those areas are of a totally different nature.
When using this method, you will be comparing indicators such as those in the
example on the next page. Furthermore, it should be noted that the farther in
time a comparable property was sold, the more you will probably have to make
adjustments for value appreciation.
Your investment real estate agent should supply you with comparable sales data
on request. This is a service any established agent is equipped to offer.
EXAMPLE
your property
similar
property a
similar
property b
Asking/Sale Price
Building Size
same same same
$375,000 $384,000
Number of Units same same same

Lot Size
40 x 130
Year Built
same same same
Income Potential
same
Condition
same same same
48 x 100
same
45 x 125
$100 more/month
Neighborhood same same same

Special Features None same fireplace
Sold Date
N/A
2 months
1 month ago
Lets assume you are looking to buy the property in the first column. Using the
market data approach, the fair market value of the property would be about
$380,000. The higher price (over Similar Property A) is justified for it has a
larger lot size and a later listing date.
12
THE GROSS MULTIPLIER (GM)

The gross multiplier approach to property value is not considered an appraisal
method per se. Nevertheless, it is useful, in the investment selection process, for
determining whether a property is in line with the gross multipliers of other local
properties.
There are two kinds of gross multipliers: (1) current and (2) potential. When
evaluating property, it is a good idea to consider both. The current gross multiplier
is calculated using the current rental income. The potential gross multiplier is
calculated using the rents a good property manager (you!) should be able to get.
Often, in terms of monthly rental income versus monthly operating expenses, the
difference between a very profitable property and an unprofitable one is simply
the property manager. Look at the following example. Based on the current gross
multiplier, the property appears to be a poor investment. This is because the
current gross multiplier is higher than that areas average gross multiplier. After
analyzing the propertys potential gross multiplier, however, it is seen for what it
really is: an excellent investment.
NECESSARY FORMULAS
Yearly Rent
= Monthly Rent x 12 (months)
{ Total
Gross Multiplier (GM) = Propertys Asking Price

Total Yearly Rent
Areas Average Gross Multiplier
13.4
Propertys Asking Price
$400,000
Current Monthly Rental Income:
$2300/month
Potential Monthly Rental Income: $2850/month
NOTES
13
CALCULATIONS

$2300 X 12 - $27,600 (Current Total Yearly Rate)
$400,000 $27,600 = 14.5 (Current GM)
$2850 x 12 = $34,200 (Potential Total Yearly Rent)
$400,000 $34,200 = 11.7 (Potential GM)
As mentioned above, this is an excellent example of how managing a property well

can significantly change its investment outlook.
cost of reproduction
This is the what would it cost if I built it todays method. Basically, you establish
value by pretending to buy a comparable lot at todays value and then build a
used building to match the existing building. (dont worry we dont have to price
used lumber).
To establish value by cost of reproduction, you consider the land and buildings as
separate entities. You can set the approximate value of the building by having a
measuring tape, pencil and paper, and the numbers. To establish land value you
will use the same approach as you used in the comparative analysis approach.
Shop!
capitalization of income
This is the what would I make on my money, if I bought the building for cash
method. Basically, you establish value by comparing the return on your money
invested in the building with todays going rate of investment property return.
To determine value by Capitalization of Income, you need to know the
Gross Annual Rental Income, Annual Operating Expense, and the current
capitalization rate.
Weve selected our property and determined its value. Now its time to calculate
our return on investment (ROI)
14
CALCULATING RETURN ON INVESTMENT

Once you have established the value of your investment property, your next
concern is to determine the anticipated annual return on invested capital.
initial investment
Since we consider the purchase of a property an investment, we refer to the

down payment as the initial investment. The initial investment is the amount
of capital that investors use to purchase an investment property. Remember, the
bank finances the rest. When determining our return on investment, we must first
determine the size of that investment.
example
Throughout this chapter, we will use the following property information to

calculate the return on investment. In this case, the investment consists of a
20% down payment.
Property Price:
$400,000
Initial Investment: $80,000
return on investment
Your annual return in real estate will be composed of four elements;

1. Cash Flow
2. Equity growth by amortization
3. Equity growth by appreciation
4. Tax shelter benefits
Using the property in the example above, we will calculate the return for each of
these four element. On page 15, we will put each of the individual returns together
and produce a simple ROI statement.
15
CASH FLOW

Cash Flow = Rental Income - Operating Expenses
Rental income includes all the rent a property produces. Operating expenses
include all the expenses a property incurs. This includes mortgage payment(s),
property taxes, insurance, utilities, upgrades, and repairs.
example
Yearly Rental Income
$36,500
Yearly Operating Expenses
-34,200
Yearly Cash Flow
$2,300
EQUITY GROWTH BY AMORTIZATION

Equity growth by amortization is the amount of principal paid off each year on
your mortgage loan. This phenomenon of growth income assumes that the value
of real estate remains at least constant over time. Our data indicates this to be
valid assumption.
To illustrate, lets examine the equity growth by amortization for the first year of
this chapters property.
necessary formula
Yearly Equity Growth

by Amortization
=
Property Price:
Monthly Principle
Payment x 12 (months)
$400,000
Initial Investment:
Mortgage Loan Balance:
$80,000
$320,000
5%
Mortgage Interest Rate:
$1,333.33
Monthly Interest Payment

Monthly Principle Payment:
$384.50
Total Monthly P & I Payment
$1,717.83
16
Calculation $384.50 x 12 = $4614 (Yearly Equity Growth By Amortization)
EQUITY GROWTH BY VALUE APPRECIATION

Traditionally, well located properties have an average annual increase in value of
5% to 9%. The increase results from two factors: (1) inflationary appreciation and
(2) demand appreciation.
Inflationary appreciation is the upward dollar value of assets resulting from the
decreasing value of the dollar. The appreciation rate is related to the general
inflationary rate in the economy. In this way investing in real estate is a hedge
against inflation.
We believe this hedge against inflation is an essential safeguard, particularly for
those in their retirement years. Every once in a while inflation skyrockets (like it
did in 1978-81 when it increased 43 %). When this occurs, a person on a fixed
income can suffer financially.
For example, lets say a persons retirement nest egg remains $250,000 and
inflation jumps 25% in 3 years. The value of the $250,000 is now 25% less.
Unfortunately, those in or near retirement are traditionally less likely to recover
economically. The results can be devastating.
For the person, however, with investment property, inflation can be a good thing.
For example, lets say you invested $50,000 to purchase a $400,000 property.
When such 25% inflation occurs, property, from inflationary appreciation alone,
is highly likely to increase your earnings $100,000! Of course, in such situations,
the more property you own, the better off youll be.
Demand appreciation is the upward value of property resulting from its limited
supply and large demand. Well located properties (for example, those in areas
with great weather, a strong job and rental base, and which are relatively close to
major airports and nice beaches) have strong demand appreciation.
example
Lets examine this chapters property. Lets assume a low appreciation rate of 5%.

Original Property Price:
Yearly Equity Growth by
Value Appreciation (5%):
$400,000
$ 20,000
17
TAX SHELTER BENEFITS

Outside of a propertys operating expenses, there are three major tax shelter
benefits: (1) the use of the capital gains tax, (2) the tax-deferred exchange and
(3) depreciation.
The use of the capital gains tax is not something we can speak precisely about in
this guide because the laws concerning it are constantly changing. We can say,
however, that the benefits of using the capital gains tax are increasing. Professional
accountants are generally authoritative sources for tax information. A good agent,
however, follows the capital gains tax laws closely and should be of much help.
Since profits from investment property are considered investment income, you
are taxed at the capital gains rate. This is beneficial because normal income is
taxed at much higher rates and can be, up to a point, subject further to selfemployment/social security tax. Therefore, the use of the capital gains tax can
significantly reduce your tax liability.
The tax-deferred exchange is a feature of the tax code which enables you to defer
paying any capital gains tax by exchanging, instead of selling, your investment
property. We will not attempt, here, to explain the behind the scenes details of a
tax-deferred exchange. That is because, for all practical purposes, it is simply the
process of selling one investment property and purchasing another.
We will however, mention three key details for deferring tax through an exchange.
First, when you trade your investment property, you must purchase another
investment property. Second, the property you trade into must be of equal or
greater money value. Third, all of the profit from the sale of your current property
must be used to purchase the upleg property.
Depreciation is a tax deduction for investors of improved property. Remember,
improved property is that which has some sort of building(s) on it. We will not
attempt, here, to explain the theory behind it, for, as it relates to real estate, it is
an arbitrarily contrived theory anyway. For now, simply understand it for what it
really is: a special tax break for real estate investors.
Before calculating your depreciation tax deduction, you must first understand a
few details. First, you need to understand that the total value of every improved
property is comprised of two independent parts: (1) the value of the land and
(2) the value of the improvements (that is, the building[s] on the land).
Second, whenever a property is bought, the County Tax Assessor re-assesses
it, determining for you the value of each part. For tax purposes, these assessed
values, generally, remain constant for a long as you own the property.
18
NOTES
19
CALCULATING RETURN ON INVESTMENT

With that said, depreciation is calculated by dividing a propertys improvements
value by either 27.5 (for buildings with 1-4 residential units) or 39 for (commercial/
manufacturing buildings or those with 5+ residential units).
To get your actual tax savings, in real dollars, you multiply your depreciation
deduction by your combined (federal, state and local) income tax rate.
example
Lets examine this chapters property to determine the size of its depreciation tax
deduction. Well assume a combined tax rate of 25%.
necessary formulas
Depreciation
Deduction

Actual Dollar
Improvement Value
=
Savings
27.5 or 39
Combined Income
Depreciation
Deduction
Tax Rate (%)
Improvement Value (assessed) = $192,000

Calculations

$192,000 27.5 = $6981.82 (Depreciation Deduction)
$6981.82 x 25% = $1745.46 (Actual Dollar Savings)
SIMPLE YEARLY ROI STATEMENT

$2,200
Cash Flow (from page 11)
$4,614
Equity Growth by Amortization (from page 11)
$20,000 Equity Growth by Value Appreciation (from page 12)

$1,745
Tax Shelter Benefits (from page 14)
$28,559
$80,000 Initial Investment (from page 11)
$28,559
Total Return
35.7%
Return on Invested Capital (%)

20
PURCHASING YOUR INVESTMENT

To this point, you have learned the basic for determining what makes a good real
estate investment. Now comes the time to part with something very dear to you
your money! It is at this point that 60% of all persons who could be getting very
rich in real estate experience cold feet.
We are all prone to accept the value of real estate investing until the time comes
to put up our money. This is especially true for first time investors. Our advice
to first timers has always been to buy something small and buy it even if it does
not represent the best of all investments. As our clients know, after your first
investment, the rest comes easy.
Now, what is involved in buying investment property? With some minor exceptions,
the path to purchasing property is:
1.
Buyer makes an offer to purchase
2.
Seller accepts, counters, or rejects the offer
3.
Escrow opens
4.
Buyer qualifies for and obtains financing
5.
Escrow closes
6.
Title transfers
Lets look at each of these steps in detail.
21
BUYER MAKES AN OFFER TO PURCHASE

With the help of your agent, you will make an offer to purchase with earnest money
as a deposit. The offer will include your offering price, the terms of purchase (
including financing and length of escrow), and the time period for which your
offer is valid.
Prepare and read your offer very carefully as it can become a legally binding
contract, if accepted by the seller.
SELLER ACCEPTS, COUNTERS, OR REJECTS THE OFFER

At this point, the seller has three options. The first is to reject your offer outright.
The second is to accept your offer as presented. The third is to reply back with a
counter offer . In a counter offer, the seller modifies your offer and presents these
modifications back to you for acceptance. You now have the option to accept,
counter back, or reject their counter offer.
If the seller accepts your original offer or counter offer, you have a contract to
purchase the property.
ESCROW OPENS
When an offer is accepted, escrow opens. The primary purpose of an escrow is
to have a neutral third party who will hold your money until such time as all of
the details of the sale are complete. In addition, the escrow agent will obtain title
insurance for you, draw deeds and trust (as required), and generally act as clerk
for the transaction.
BUYER QUALIFIES FOR AND OBTAINS FINANCING

Both you and your investment real estate agent will shop for financing for the
property. We have found that different mortgage agents often have a particular
niche in the lending market. For example, some specialize in getting the best
terms for 25% down, non-owner occupied purchases. Others get the best
financing terms for 0% down, owner occupied purchases. Any good real estate
agent should be familiar with at least a few key mortgage brokers.
Once you have qualified for financing, you must obtain it. Since the lending
institution is making a relatively large loan to you, they are very much interested
in your credit score, current earnings, and overall ability to repay the loan. When
purchasing properties with 5 or more units, however, lenders depend less on your
22
personal credit history and qualifying power and more on whether the property
itself can generate a profit.
ESCROW CLOSES
Escrow agents are licensed and closely regulated. We have always found them
honest and competent. You can generally trust their work without a detailed
review of all of their activity. Of course, read all of the documents that you sign
and ask questions if you dont understand something.
Essentially, escrow coordinates all of the documentation and transfer of money.
This includes all closing costs, insurance policies, and transfer documents.
TITLE TRANSFERS
Congratulations!
You are now an investor, landlord, taxpayer, and full fledged Capitalist!
NOTES
23
SELLING/EXCHANGING YOUR INVESTMENT

Now that you have purchased your investment property, we want to prepare you
for a decision youll face in a few years. Its the decision to hold on to your property
or sell/exchange it into a larger, more profitable one. Choosing wisely, here, is
often the difference between making a few hundred thousand and amassing a
couple million dollars. Sadly, the majority of real estate investors never amass
the fortune they should have, simply because they declined to sell/exchange their
property, thereby minimizing their return.
Please understand The secret to riches in real estate is leverage powered by value
appreciation. The fact is, however, that as your property significantly increases in
value, your leverage significantly decreases. In other words, as you gain equity,
your return on that equity diminishes, thereby minimizing your return.
example
Sara bought a $250,000 duplex with $10,000 down. A few years later, it was
worth $375,000. In just a few years, because of leverage powered by value
appreciation, she turned $10,000 into $125,000! At the same time, however,
she went from being 96% levered to 50%.
Look at the simplified 10-Year Projection below. Using a low appreciation rate of
6%, it shows the results of each decision. The sale/exchange years are in gray. For
a more detailed 10-Year Projection, see pages 20-23.
The results in this table are NOT uncommon. Therefore, ask yourself this question:
Where do I want to be in 10 years?
# of Years Later
Holding Original
Property
Total Equity
Jan 2003
Selling/Exchanging
When Appropriate
Return on Total Equity

Equity
$125,000
Return on
Equity
$125,000
Dec 2003
$150,127 24%
$150,127 24%
Dec 2004
$176,748
21%
$245,550
63%
Dec 2005
$204,953
19%
$365,239
41%
Dec 2006
$234,836
18%
$482,570
31%
Dec 2007
$266,496
16%
$606,940
26%
24
Dec 2008
$300,039
15%
$772,358
31%
Dec 2009
$335,578
14%
$947,800
26%
Dec 2010
$373,231
14%
$1,133,874
23%
Dec 2011
$413,124
13%
$1,331,224
20%
Dec 2012
$455,391
12%
$1,694,043
30%
ENSURING INVESTMENT SUCCESS

As we conclude this basic real estate investment guide, we would like to suggest
five tips for ensuring real estate investment success.
1.
Never be forced to sell
2.
Purchase in an appreciating area
3.
Think ten years
4.
Use leverage
5.
Have a total investment plan
NEVER BE FORCED TO SELL

The most important key for ensuring success in investment real estate is to never
be forced to sell.
The best way to never be forced to sell is to manage your property so that the
rental income exceeds the operating expenses. By doing this, you will never be
forced to sell in any market.
One other common mistake is to purchase property with an agent who doesnt
understand real estate investment. There are many things that can go wrong when
relying on the advice of such individuals. Two significant, but common, outcomes
include (1) purchasing a property that is a poor investment and (2) selecting the
wrong financing terms. The latter error is extremely common and is a sure sign of
working with someone who doesnt understand investment real estate.
25
PURCHASE IN AN APPRECIATING AREA

Any agent you work with should have plenty of investment data at your disposal.
One essential chart is that of value appreciation. You want to invest in areas which
have appreciated 5% or more on average each year over the last 40 years or so.
Particularly strong areas for investment are those which have appreciated closer
to 8% annually.
Generally, a strong job and rental base keep an area appreciating. These and other
factors make the South Bay and Long Beach perfect for real estate investors.
Where else has great weather, beaches, major airport, and no excess land in
addition to a strong job and rental base?
THINK TEN YEARS

Thinking ten years does not mean that you should hold onto the same property
for all ten years. Rather, it means that investors should actively participate in the
market for 10 years through exchanges and/or further purchases. Thinking ten
years will also minimize concern about purchasing property at the right time.
Thinking ten years requires an understanding of trend line analysis. When investing
in an appreciating area, trend line analysis will yield the conclusion that no matter
what kind of market we purchase in, we will maintain a high return on investment
given 10 years. Since real estate investors understand trend line analysis, even
down years can be seen as a blessing.
USE LEVERAGE
The secret to riches in real estate is leverage powered by value appreciation. Very
simply put, leverage is investing someone elses money at a larger rate of return
than they charge you to use it. Its a simple concept and once you understand its
power it can create a fortune for you.
Leverage allows us to invest in a $500,000 property for 0% to 30% of its
purchase price. For example, lets say someone invests $50,000 to purchase a
$500,000 property. If the property only increases in value 5% in one year, thats
a $25,000 increase. That means the investor just made 50% on his money from
value appreciation alone!
As property values increase, however, leverage decreases. The chart on page 17
shows the impact of this trend on your return on equity and, ultimately, your
potential net worth. Eventually, if you allow this trend to continue, your investment
will lose its power and potential.
26
By selling/exchanging your investment in a timely manner, you can remain wisely

levered. The basic decision to sell/exchange into a better, more profitable property
is usually the reason why some earn $300,000 to $400,000 from their real
estate investments while others become multi-millionaires.
HAVE A TOTAL INVESTMENT PLAN

The most overlooked aspect of investment real estate is a Total Investment Plan.
Any good real estate agent should be equipped to develop for you a customized,
detailed plan. It should include your motivation, long term financial goals, and
a reasonable scenario for producing your desired results. A plan allows you to
know where you are, where you are going, and when you have made it. Part of a
sample plan can be seen on pages 20 - 23. Such plans should also be periodically
reviewed, revised, and updated. If you want to create significant wealth in real
estate, then you must have a plan.
NOTES
27
SAMPLE 10-YEAR PROJECTION

YEAR 2003 PROPERTY: `123 Walton Avenue, Lawndale, CA
MARKET VALUE
LOAN BALANCE
EQUITY POSITION
ACCOUNT BALANCE
JANUARY 1, 2003
$375,000
$250,000
$125,000
$0
DECEMBER 31, 2003

$397,500
$247,373
$150,127
$5,396
TOTAL RETURN $30,523 [24.4% RETURN ON EQUITY]
CASH FLOW
$4,217
TAX REBATE
$1,179
LOAN PAYOFF
$2,627
APPRECIAITON
$22,500
[12.0 GM] INCOME
$31,25
0
$781
EXPENSES
$9,375
DEPRECIABLES
$289,091
$13,627
2ND PAYMENTS
VACANCY
ST
[5.5% IN] 1 PAYMENTS
$3,250
TH
MARKET VALUE
TOTAL EQUITY
TOTAL EQUITY
MARKET VALUE
MARKET VALUE
TOTAL EQUITY
EQUITY POSITION
ACCOUNT BALANCE
CASH FLOW
LOAN PAYOFF
[12.0 GM] INCOME
VACANCY
ST
TAX DEFERRED EXCHANGE WAS COMPLETE IN THE 4 QUARTER OF 2003

TRADE OUT OF: 1234 Walton Avenue, Lawndale, CA
= $ 397,500
TOTAL LOANS
= $ 247,373
= $ 150,127
CASH ACCOUNT
= $ 5,396
TRADE INTO: EXCHANGE PROPERTY #1
= $ 150,127
CASH ACCOUNT
= $ 5,396
= $1,501,270
TOTAL LOANS
= $1,351,143
YEAR 2004 PROPERTY: EXCHANGE PROPERTY, #1
JANUARY 1, 2004
$1,501,270
$1,351,143
$ 150,127
$
5,396
-$ 18,726
TAX REBATE
$ 14,347
APPRECIATION
$ 125,106
EXPENSES
$
3,128
DEPRECIABLES
ND
$ 86,408
2 PAYMENT
DECEMBER 31, 2004

$1,591,346
$1,336,795
$ 254,550
$
3,830
$ 9,500
$ 90,076
$ 43,787
$1,012,875
$ 10,509

MARKET VALUE
LOAN BALANCES
EQUITY POSTION
ACCOUNT BALANCE
CASH FLOW
LOAN PAYOFF
[12.3 GM] INCOME
VACANCY
ST
JANUARY 1, 2005
$1,591,346
$1,336,795
$ 254,559
-$
3,830
-$ 15,552
$ 15,208
$ 129,484
$ 3,247
$ 86,408
DECEMBER 31, 2005

$1,686,826
$1,321,587
$ 365,239
-$
9,882
TAX REBATE
APPRECIATION
EXPENSES
DEPRECIABLES
ND
2 PAYMENTS
NOTES
28
$
$
$
$
$
9,500
95,481
44,882
974,461
10,509

YEAR 2006 PROPERTY: `EXCHANGE PROPERTY, #1
MARKET VALUE
LOAN BALANCE
EQUITY POSITION
ACCOUNT BALANCE
JANUARY 1, 2006
$1,686,826
$1,321.587
$ 365,239
-$
9,882
DECEMBER 31, 2006

$1,788,036
$1,305,466
$ 482,570
-$ 12,637
DURING THIS YEAR:

CASH FLOW
LOAN PAYOFF
[12.9 GM] INCOME
VACANCY
ST
-$ 12,255
TAX REBATE
$ 16,121
APPRECIAITON
$ 9,500
$101,210
$134,016
EXPENSES
$ 46,004
$ 3,350
DEPRECIABLES
$936,246
$86,408
2ND PAYMENTS
$ 10,509

JANUARY 1, 2007
$1,788,036
$1,305,466
$ 482,570
-$ 12,637
-$
8,832
TAX REBATE
$ 17,088
APPRECIATION
$ 138,707
EXPENSES
$
3,468
DEPRECIABLES
ND
$ 86,408
2 PAYMENT
MARKET VALUE
TOTAL EQUITY
EQUITY POSITION
ACCOUNT BALANCE
CASH FLOW
LOAN PAYOFF
[12.9 GM] INCOME
VACANCY
ST
DECEMBER 31, 2007

$1,895,318
$1,288,378
$ 606,940
-$ 12,781
$ 8,688
$107,282
$ 47,154
$898,032
$ 10,509
TH
TAX DEFERRED EXCHANGE WAS COMPLETED IN THE 4 QURTER OF 2007

TRADE OUT OF: EXCHANGE PROPETY #1
MARKET VALUE = $1,895,318
TOTAL EQUITY = $
606,940
TOTAL EQUITY = $ 606,940

TOTAL LOANS
= $1,288,378
CASH ACCOUNT = -$
12,781

CASH ACCOUNT = - $ 12,781
TOTAL LOANS
= $1,820,819
MARKET VALUE
LOAN BALANCES
EQUITY POSTION
ACCOUNT BALANCE
CASH FLOW
LOAN PAYOFF
[10.0 GM] INCOME
VACANCY
ST
JANUARY 1, 2008
$2,427,758
$1,820,819
$ 606,940
-$ 12,781
$ 13,629
$ 19,753
$ 242,776
$ 6,069
$ 138,106
DECEMBER 31, 2008

$2,573,424
$1,801,066
$ 772,358
-$
9,089
TAX REBATE
APPRECIATION
EXPENSES
DEPRECIABLES
NOTES
29
$ 8,241
$ 145,665
$ 84,972
$1,637,633

YEAR 2009 PROPERTY: `EXCHANGE PROPERTY #2
MARKET VALUE
LOAN BALANCE
EQUITY POSITION
ACCOUNT BALANCE
JANUARY 1, 2009
$2,573,424
$1,801,066
$ 722,358
$
9,089
DECEMBER 31, 2009

$2,727,829
$1,780,029
$ 947,800
$ 34,960
CASH FLOW
$ 19,789
TAX REBATE
LOAN PAYOFF
$ 21,037
APPRECIAITON
[10.2 GM] INCOME

VACANCY
ST
MARKET VALUE
TOTAL EQUITY
EQUITY POSITION
ACCOUNT BALANCE
CASH FLOW
LOAN PAYOFF
[10.5 GM] INCOME
VACANCY
ST
$251,273
EXPENSES
$ 6,282
DEPRECIABLES
6,082
$ 154,405
$
87,096
$1,575,836
$138,106
JANUARY 1, 2010
$2,727,829
$1,780,029
$ 947,800
$ 34,960
-$ 26,187
TAX REBATE
$ 22,404
APPRECIATION
$ 260,106
EXPENSES
$
6,502
DEPRECIABLES
$ 138,106
DECEMBER 31, 2010

$2,891,498
$1,757,625
$1,133,874
$ 64,976
$ 3,830
$163,670
$ 89,273
$1,514,038

MARKET VALUE
LOAN BALANCES
EQUITY POSTION
ACCOUNT BALANCE
CASH FLOW
LOAN PAYOFF
[12.3 GM] INCOME
VACANCY
ST
JANUARY 1, 2011
$2,891,498
$1,757,625
$1,133,874
$ 64,976
$ 32,829
$ 23,861
$ 269,170
$ 6,729
$ 138,106
DECEMBER 31, 2011

$3,064,988
$1,733,764
$1,331,224
$ 99,287
TAX REBATE
APPRECIATION
EXPENSES
DEPRECIABLES
TH

TOTAL EQUITY = $1,331,224
TOTAL EQUITY
= $1,331,224
TAX DEFERRED EXCHANGE WAS COMPLETED IN THE 4

TRADE OUT OF: EXCHANGE PROPERTY #2
TOTAL LOANS
= $1,733,764
CASH ACCOUNT = $ 99,287
CASH ACCOUNT = $ 99,287
TOTAL LOANS
= $3,993,672
30
QUARTER
$
1,481
$ 173,490
$ 91,505
$1,452,241

MARKET VALUE
LOAN BALANCES
EQUITY POSTION
ACCOUNT BALANCE
CASH FLOW
LOAN PAYOFF
[10.0 GM] INCOME
VACANCY
ST
JANUARY 1, 2012
$5,324,896
$3,993,672
$1,331,224
$ 99,287
$ 29,893
$ 43,861
$ 532,490
$ 13,312
$ 302,913
DECEMBER 31, 2012

$5,644,390
$3,950,347
$1,694,043
$ 138,679
TAX REBATE
APPRECIATION
EXPENSES
DEPRECIABLES
$
9,500
$ 319,494
$ 186,371
$3,591,884
This sample 10-Year Projection was abridged to fit into this guide. Its contents are complements of Buckingham Investments, Inc.
This investment analysis was created specifically for this guide and is based on test property 1234 Walton Avenue, Lawndale, CA
90260.
This sample 10-Year Projection was abridged to fit into this guide. Its contents
are complements of Buckingham Investments, Inc. This investment analysis was
The data in this analysis is approximate and should only be used with a Buckingham Investments representative. It is not a guarantee
specifically
guidefinancial
and performance
is basedofon
test property
1234
Walton
or created
warranty of return
on investment.for
The this
actual resultant
this property
will depend upon
the quality
of the
property management applied and the actual values of appreciation, income/expense increase, and vacancy rate that occur in the
Avenue,
Lawndale,
CA
90260.
future. Copyright 1990, J. R. Buckingham, 333 Richmond Street, El Segundo, CA 90245.
The data in this analysis is approximate and should only be used with a Buckingham
Investments representative. It is not a guarantee or warranty of return on
investment. The actual resultant financial performance of this property will depend
upon the quality of the property management applied and the actual values of
appreciation, income/expense increase, and vacancy rate that occur in the future.
Copyright 1990, J. R. Buckingham, 333 Richmond Street, El Segundo, CA 90245
31
WHY IS BUCKINGHAM INVESTMENTS DIFFERENT?

We have helped our clients invest in real estate and achieve their goals for over
50 years. Our professional goal is to be a trusted advisor and to assist our clients
with achieving financial independence and security. This partnership of real estate
professionals advising clients has been successful because of our exclusive 3
Point Investment System. Our system is designed to inform our clients about
real estate investing and to assist them in developing their goals and a personal
financial plan before they invest. The following components allow our clients to
achieve success through this program.
OUR METHOD
Learn: We provide our clients the necessary tools to enable them to learn about
real estate investing in a simple, yet thorough and concise manner. We also assist
our clients with analysis of their local real estate market in order to maximize
investment opportunities.
Plan: We develop a personalized investment plan with our clients in order to

achieve their financial goals and a strategy to effectively implement that plan.
Invest: We actively assist our clients with the acquisition, analysis, financing, and
when appropriate, disposition of the property that maximizes their investment

plan. We provide our clients with guidance, expertise and resources so that
they can profitably and efficiently manage their properties in a manner that is
consistent with their personal financial plan and with their lifestyle.
our sincerest good luck in your real estate investment career
32
T
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ElSegundo LongBeach Tor

Appraising Property Value

Calculating Return on Investment

Purchasing Your Investment

Selling/Exchanging Your Investment

Ensuring Investment Success

Sample 10-Year Projection

Why is Buckingham Investments Different?

basic real estate investment guide

basic real estate investment guide

SELECTING YOUR INVESTMENT

Current return needs

Total investment program

Improved Residential Income Property

Improved Commercial/Manufacturing Property

basic real estate investment guide

CURRENT RETURN NEEDS

Operating expenses include mortgage payment(s), property taxes, insurance,

Inflationary appreciation is the increase in property value due to the reduced

The single most important consideration in selecting investment property, and

basic real estate investment guide

APPRAISING PROPERTY VALUE

Establishing the value of property, improved or unimproved, is a very complex

basic real estate investment guide

MARKET DATA APPROACH

same same same

Number of Units same same same

same same same

same same same

Neighborhood same same same

THE GROSS MULTIPLIER (GM)

Total Yearly Rent

Areas Average Gross Multiplier

Propertys Asking Price

Current Monthly Rental Income:

Potential Monthly Rental Income: $2850/month

basic real estate investment guide

$2300 X 12 - $27,600 (Current Total Yearly Rate)

$400,000 $27,600 = 14.5 (Current GM)

$2850 x 12 = $34,200 (Potential Total Yearly Rent)

$400,000 $34,200 = 11.7 (Potential GM)

As mentioned above, this is an excellent example of how managing a property well

CALCULATING RETURN ON INVESTMENT

Since we consider the purchase of a property an investment, we refer to the

Throughout this chapter, we will use the following property information to

Initial Investment: $80,000

Your annual return in real estate will be composed of four elements;

basic real estate investment guide

Cash Flow = Rental Income - Operating Expenses

Yearly Rental Income

Yearly Operating Expenses

Yearly Cash Flow

EQUITY GROWTH BY AMORTIZATION

Yearly Equity Growth

Mortgage Interest Rate:

Monthly Interest Payment

Total Monthly P & I Payment

Calculation $384.50 x 12 = $4614 (Yearly Equity Growth By Amortization)

EQUITY GROWTH BY VALUE APPRECIATION

Original Property Price:

Yearly Equity Growth by

Value Appreciation (5%):

basic real estate investment guide

TAX SHELTER BENEFITS