Real Estate Investing Risk, Rewards, Do's and Don’ts
I remember it like it was yesterday... A gentlemen walked into my real estate office and stated, "I heard you worked with real estate investors." After acknowledging that yes, indeed I did, his next comment was, "Great, I want you to teach me everything you know about real estate investing." The reason this stays so fresh in my mind is it is a question I hear all the time. With half of the investors being new to real estate, it is obvious they want to know what to do. While it is impossible to sit down and share every nuance I have learned in 35 years of investing, we can certainly touch on some basics.
Do copy what the most successful investors do.
while most people are busy doing as everyone else is doing, successful people are tracking best markets as they understand Location is paramount to sustainable investments.
Do know exactly what you want from the investment and what type of investment property you wish to buy.
Many people simply say they want a property that makes them a lot of money. These people will want a 4-plex today with high cash flow and tomorrow will want a single family home with great appreciation potential. The day after will be something else. Seasoned investors who know what they want, are specific in their objectives and do not get caught up in chasing the next shiny object. They chase the property that is within their strict investment criteria, period.
Do not follow the herd.
This may quite possibly be the best advice on this page. There is a saying “ It is lonely at the top.” The metaphor of course suggest that few people make it to the successes they desire and I believe this is because they are busy trying to do what everyone else does. The competition is greater here and all too often people get wrapped up in auction fever (where they want to win a competing bid for property) and they wind up paying too much for a property and buying at a time when the market is overheated because they are busy following the herd.
Don’t invest based strictly on low cost of property.
Everyone loves a great deal but as seasoned investors know a great deal has little to do with the purchase price and more to do with the rate of return and the sustainability of the return to give a higher overall yield to the property
Risk in investing comes from a lack of a plan. Hope is NOT a strategy. If you have a plan and stick to the plan and keep informed with the local market conditions, you eliminate most of your risks. Often people make an investment purchase and hope it will make them lots of money.
Seasoned investors eliminate their concerns because they have done their diligence up front and are confident in what returns they will get over time.
Purchasing property with limited controls:
The reason many investors like investing in single family property is it maximizes the controls they have over the property. Their expense as an owner is taxes, insurance, (perhaps a mortgage) and limited repair expense as tenants typically are responsible for all utilities, and yard maintenance.
As you buy multi family properties you often get into having to provide utilities to your tenants and have no control over how much they consume, limiting your ability to know your cash flow. Investing in things like condos you have condo associations, etc. with these you have no control over what they charge and how often they increase monthly dues which of course removes your controls.
- Positive cash flow: Money left over after all expenses are paid from tenants rent Deductions: seasoned investors know this better than the new investors. This is a hidden benefit that seasoned investors consider as part of their overall income projections. Investment property has some of the best investing deductions available to investors.
- Equity Build up: as the tenant pays down your mortgage, a portion of this goes to paying down the principle of the loan which of course is building equity.
- Appreciation: when a prudent investor is diligent in his/her purchase the appreciation is pretty much a given.
- Leverage: Only real estate allows you to finance your investment. When you purchase a property for, let’s say $100K, and you only have to use 20% or $20K of your own money and still get the benefits of a 100K investment, you have leverage. When used wisely leverage can be a very wonderful thing.
Over leveraging yourself can be counterproductive. It is for this reason buying property in investor advantage markets is paramount.