Real estate investing is a popular way for the average individual to build wealth away from their regular job. It is easy to understand why…they see some people doing quite well over the long run as real estate investors.
Keep in mind though, because many people are interested in building wealth with real estate, just as in the stock market, there are many unscrupulous vendors and salesmen out there willing to exploit that desire. Just check out all those infomercials about real estate and you’ll see many of those people pitching expensive courses on how to invest.
It has been my experience as a commercial real estate appraiser since 1989 to come across many people who have tried and failed at the business of real estate investing. The reasons are numerous.
First, though, let’s look at the positives of real estate investing, if done right…
Why Invest In Real Estate
When done right, investing in real estate can provide a solid stream of income. If you do your homework properly, you can purchase a property at a reasonable price with an opportunity to increase rents so that all of the property expenses AND mortgage interest are covered and then some.
If you are a savvy buyer, and able to purchase properties, and then add value, you can leverage your equity with more purchases. The more you are able to do this, the more income you will ultimately have each month. At some point, you’ll be able to quit your day job and just focus on your real estate investments.
Real estate, over the long run, tends to appreciate in value. Therefore, you’ll not only have the ability to enjoy a steady income stream, but also the potential for capital gains.
Real estate also tends to be a solid investment during periods of higher inflation.
There are many pitfalls though. I’ve seen plenty of examples of investors who ended up over extending themselves, and then lost it all through bankruptcy and foreclosure.
The bottom line is that real estate investing should not be viewed as a get rich quick scheme. The most successful investors I know did it over a long period of time by hitting a lot of singles, and occasionally hitting a home run…similar to many successful stock market investors.
Here are a few key tips to help you get started if you choose to develop an income stream through investing in real estate…
Focus on one type of property for a few years
There are many options when it comes to investing in real estate…you can buy land, single family homes, multifamily properties, offices, stores, warehouses, etc.
For the novice, buying a residential rental property is probably the safest bet, since most people have paid rent at one time or another in their lives, and most people understand the typical expenses involved in operating a residence.
If you choose to start investing in real estate, you should pick one type of property, and become an expert investor in that property for at least a few years before considering other property types. If you are just starting out, and don’t have a lot of money to invest, your best bet will be residential real estate.
You can choose to invest in single family homes as a landlord or a house flipper. You can actually do the same with any property type…buy for the income or for the capital appreciation from adding value, and then selling.
With that said, stay away from the temptation of moving on to a different property type too soon. I’ve seen more failure among people who just bought random investment properties instead of becoming an expert in one property type for a while. Here’s a list of 10 lethal mistakes made by real estate investors.
Commercial and industrial real estate requires much more knowledge, so be prepared before you spread out into those sectors.
Become a market expert BEFORE buying your first property
What I mean by this is that you should learn everything you can about a market before you buy any type of property.
One mistake I see by some of the purveyors of real estate investing courses online is the use of “rules of thumb” for evaluating a property.
There are no rules of thumb. You need to treat each property differently, and you need to know your market well.
One rule of thumb I’ve seen in regard to multifamily properties is the “50%” rule. This rule suggests that operating expenses, including vacancy, will be about 50% of potential gross rental income. So, if you have an apartment building that should generate $50,000 in income, then you would assume expenses would be 50%.
Unfortunately, this is a huge generalization. You need to learn your market first, and find out everything you can about a property second. Then you can make a decision to make an offer or not.
This 50% rule may or may not account for the fact that one neighborhood may have a higher vacancy rate than another, or may have much higher property taxes than another.
It may also not account for the fact that some buildings will have all utilities separately metered, while some may not have ANY utilities separately metered. This rule will also not account for any deferred maintenance that will need to be addressed.
So, when I talk about becoming an expert in your market, you should know where the good school districts are located, what are the property tax rates, what are the market rents, what are the typical property expenses, etc.
Final Thoughts
It is clear that investing in real estate can be an excellent source of income when done right. But, this particular stream of income involves more work than some of the other choices, and it can also be complicated and messy.
I will write more extensively about real estate investing down the road, due to my experience and expertise. My personality is not well-suited for this particular stream of income…I am simply too impatient. So, I’ve never invested in anything more than a residence. However, I’ve conducted nearly 2,000 appraisals in my career, and I’ve dealt with wildly successful investors and a number who’ve gone bankrupt. Therefore, I know a thing or two about this topic.
If you truly think you’ll enjoy this particular business, you’ll find some great info and insights on this blog down the road.
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