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How to Successfully Invest in Real Estate

How to Successfully Invest in Real Estate

The following is the eleventh of a series of weekly articles in which Sheryl will provide overviews of investment options that offer alternatives to bank accounts. Last week's article covered conservative mutual funds. As with any investment that's not an insured deposit account, there are risks. Some may feel that these risks are worth it for the chance of higher yields. The focus of these articles will be on conservative investments that may appeal to a few savers who want a chance of higher yields and minimal risk.

There’s something so appealing about real estate. You can see it, touch it, it’s real. That’s not to say investing in real estate is simple though. There is no such thing as a guaranteed investment and that goes for real estate too. There are risks whether you purchase land, a residential rental, commercial or vacation properties. However, there is also the potential for handsome rewards.

Here’s how to come out on the winning side of any type of real estate transaction.

"Investing in real estate is one of the oldest investing strategies people have used. Everyone gets it. Most people like owning a physical asset," says Rahul Uppal, founder of TheHomeSites.com.

Then too, unlike stocks where you are a passive investor, you can actually influence the value of the real estate you own. For example, you can do a gut rehab of the property and increase its value significantly.

While for sure you can lose money with real estate, "It’s highly unlikely that the value would go to zero," says Uppal.

However, before you go looking to stake a claim somewhere, there’s much to do.

Check your commitment

What are your goals? What is your time horizon? "Make sure real estate is something you really want to be involved in. Unlike most other investing vehicles, like the stock market, real estate is not at all passive. Most investors will spend a good bit of time and effort visiting properties, putting in offers, negotiating sales, managing renovations and then dealing with tenants. Even if you plan to hire most of the process out, you’ll still need to find, vet and oversee these folks who are handling your properties, points out J. Scott, author of, The Book on Flipping Houses: How to Buy, Rehab, and Resell Residential Properties. If you’re going to DIY, be prepared to deal with screening and selecting tenants, minor repairs, collecting rents, and more. "Can you really stomach this?" asks Alan Zunec a Century 21 Bamber Realty realtor.

Line up financing

"Too many investors don’t start to think about their financing options until they find a property they want to buy. Then they find themselves in a race against time to figure out how they’ll pay for the property. Find a great mortgage broker or loan officer before you start looking at properties. That way, when you find the deal you’re interested in, you can pounce on it," says Scott.

Moneycrashers.com financial columnist David Bakke is a big fan of investors putting at least 25% down in order to get the lowest interest rate, if they can’t pay for the property in cash.

Understand the numbers

"Analyzing real estate deals isn’t rocket science, but without a basic understanding of the numbers, it’s easy to make decisions that you’ll eventually regret. It’s important to remember that there are a lot of expenses owning real estate long-term that are often overlooked," says Scott. Taxes and insurance quickly come to mind, but there are also property management costs, maintenance costs, capital expenses, loss of rent due to vacancy, turnover costs, repairs when tenants leave, utilities when a unit is empty, lawn care, snow removal, and the day when your house needs a new roof, just for starters.

there are a lot of expenses owning real estate long-term that are often overlooked

"Understand market conditions and market values. Paying too much for a property can be the difference between a huge loss and a huge gain. Know where to seek education and knowledge. Professionals in the marketplace can be a great source," says Kurt Westfield, managing director of WC Equity Group.

Veterans of the industry are often happy to mentor new investors. Reach out to local investors, read blogs online. "Many people have stood where you stand now, learn from them," says Chris Crook, a real estate investor who runs, investingisland.com.

Don’t go it alone

"My life with rentals became much more enjoyable when I assembled a team – plumber, HVAC, carpenter, painter, attorney, and accountant. Something comes up, I make a quick call or email and my ‘team’ takes it from there,’ says Deb Tomaro, a broker associate with RE/MAX Acclaimed Properties.

Keep emotions at bay

Think long-term. "True value lies beyond today’s rent roll. Better quality locations represent more durable income streams since it will always be easier to replace tenants," says Steven Bettinger, CEO of Acquire Real Estate. Be mindful of the risk/reward balance. "Higher returns are generally less secure. They’re great while they last, but need to be considered in the context of potential decline," says Bettinger.

Be patient

"You should not try to get rich by a week from next Tuesday. It takes years," says Craig Turnbull, author, Crowdfunding Real Estate: The Next Generation of Real Estate Investing. It also takes persistence. "It may take months or years to save for a deposit. It may take a while to select the right property. Never buy the first one you see."

Stick to what you know

"People tend to make better investments if they stick to what they know and understand," says Bettinger.

Tomaro tells her clients and herself to develop a business model of sorts and play it out, whether that means focusing on student rentals in an university town or rural properties. "It doesn’t really matter what your niche is, but having one makes investing easier. You get to know one market really well. You know what a ‘good deal’ looks like, what a ‘good tenant’ looks like. I had a friend who had all kinds of investment properties, storage units, commercial, subsidized, student rentals. He was spread thin and didn’t really know any of the markets very well. He lost them all to foreclosure," says Tomaro.

Vacation property

A vacation property is its own beast. While much of the same considerations apply as would any real estate transaction, there are key questions to find the answers to. "Is there a management firm available to handle booking, marketing, cleaning, laundry/linen service and routine management? Having management in place can be advantageous for many owners, it makes for a more turnkey investment opportunity," says Tammy Barry, director of sales and marketing for Heritage Harbor Ottawa, a marina resort community.

Determine whether you should set up an LLC for the rental property and what are the costs associated with real estate taxes and association dues. Find out if there are there tax benefits available for owning the investment property. The list of what you need to know is long.

Consider going commercial

Jonathan Twombly, president of Two Bridges Asset Management pointed to research that concluded from 1977 to 2012, U.S. commercial real estate produced "bond-like" stability with "equity-like upside." Because properties collect rent even during downturns, $100 invested in commercial real estate for five years only during down periods would have grown to $110, while $100 invested in the S&P over its down periods would have declined to $94. "Because rents rise with inflation, commercial real estate provides an excellent inflation hedge," says Twombly.

Land mines

Investing solely in land is a whole other matter. "Land tends to solely be an appreciation opportunity, and investing solely on the hope of appreciation is akin to gambling, to me," says Westfield.

However, Robert Fuest, chief operating officer and head of investment research at Landor & Fuest investment management firm, says most of the time, land is a sound investment, "but it is also a very long term investment."

He says if the land is in, or near a somewhat new development, the investor needs to assess the growth plans from the town or city. Generally, if a town is getting larger, investors to develop shopping centers that probably will not be met with current demand, chances are the development of the community will grow over time and the investment will turn positive.

land is a sound investment, "but it is also a very long term investment."

"Knowing local politicians and how to obtain public investment records are critical to your understanding of the potential market. Stay away from areas that rely too heavily on one large corporation, especially if they have been there a while. Large companies can shutter divisions or sell them, leaving some towns devastated, and therefore your investment," says Fuest.

One advantage of investing in land is that taxes are generally lower, due to the fact that the land has not been developed, which means better tax benefits in the sense of a write-off, points out Richard Nassimi, a luxury broker.

Like everything, there are downsides, "Undeveloped land presents a monthly expense and no income. Development doesn’t always go in the right way; so many landlords can potentially lose the land to default. Another thing to consider, is the fact that the majority of banks don’t finance land," says Nassimi. In other words, if you’re not cash heavy, land is likely a no-go for you.

However, you choose to invest in real estate, think outside the box. Says Crook, "Creativity is everything in real estate. Not everyone can go the traditional 20% down route, but there are deals to be had. Learn about seller financing, wholesaling, lease options and other creative strategies. Don’t be afraid to get started."

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Anonymous   |     |   Comment #1
Real estate "investing" brings to mind for me a home I owned many years ago.  It was a nice place.  The home sat on a bit more than ten acres of pretty land.  For tax purposes that property was valued at roughly $280,000 by my best memory (no longer sure).  I paid taxes based on that valuation and they were very high (high property tax state).

There was (sadly) death in the family which precipitated need to sell my home.  I had been very much preoccupied for several years prior with the needs of the person who ultimately passed away.  During those years the real estate market shifted.  My efforts to sell lingered on with no success (no buyer) until matters became more pressing.  Finally, at wits end and as a last resort, I sold that home for $82,000.

Suffice it to say I've never had such poor fortune with any CD I ever bought.  I learned the hard way how to value real estate:

Real estate, be it a home or land or both, is worth precisely what a ready and able buyer is willing to pay . . . and not one penny more than that.

Also, unlike with CD investing, with real estate timing too often is everything.  If you hit it right there is big money to be made.  But if you hit it wrong . . . . . . . 
Anonymous   |     |   Comment #3
Sorry for your loss(es) but your story has nothing to do with the article or real estate investing. You had a home (i.e. place to live) that wasn't in a marketable area or what the article describes as a "better quality location" and you were forced to sell at a bad time due to unfortunate circumstances.
Anonymous   |     |   Comment #4
It's funny you mention that because it never occurred to me, and I did not think to put the information in my earlier post.  But that home, which still stands today, is located in one of the top ten wealthiest counties in America according to Forbes Magazine; and you can rest assured the real estate there is valued accordingly.  It has been a long time since I owned that home.  I'm not a "top ten" type of person myself, and the taxes were astronomical for me even back when I sold.  Today they are in another galaxy.

But anyway, it would be unfair to say my former home was not in a "better quality location";  quite the contrary actually.  It's just that I hit the market at a remarkably poor time.  And that's why I posted earlier.  You often hear stories about people who made a killing with real estate.  But you can lose money and suffer disappointment, too.  People need to consider that.
Anonymous   |     |   Comment #11
Regardless, your story STILL has nothing to do with  the article or real estate investing.  Maybe you missed other important points mentioned in the article.

"Understand market conditions and market values. Paying too much for a property can be the difference between a huge loss and a huge gain."


"...without a basic understanding of the numbers, it’s easy to make decisions that you’ll eventually regret. It’s important to remember that there are a lot of expenses owning real estate long-term that are often overlooked," says Scott. Taxes and insurance quickly come to mind..."

An overpriced / "wealthy" location is rarely a better quality location, especially when it comes to investing and especially for your location given the loss you stated. Even had you had the option to rent out your property rather than sell during a market downturn the information you revealed reinforces the points made in the article of what to avoid. That said, my point that your former home was not in a "better quality location" still holds true. Feel free to add more information that never occurred to you earlier to support you viewpoint that your loss qualified as a real estate "investment" loss. Too many people think that their purchase of a place to live qualifies as a real estate investment. You are a perfect example.
Anonymous   |     |   Comment #15
Hmmmm.  Methinks thou dost protest too much.  Kindly tell us:

How long have you been selling/promoting/hawking real estate investments?

If that's not it, please consider a switch to decaf.
Anonymous   |     |   Comment #16
Nope, wrong again. Pattern? lol. Just amused by the arrogance of someone who "thinks" they once invested in real estate, lost $200k, and thinks no one can be successful at it.

Once again, RIF. Yet you refuse to read the article and maybe learn something about yourself and why you never were involved in real estate investing when you lost $200K back in the day. Please retract my previous condolences on your losses as I've dealt with your kind before and even a massive $200k lesson won't silence those like you regarding their ignorance.

Maybe you should consider switching to something stronger than coffee to wake you out of your stupor. Cheers! rotflmao
Anonymous   |     |   Comment #2
Maybe you could have rented it out?  When you sold it you then would have a long term capitol gains loss. 
Anonymous   |     |   Comment #5
Easy money in the real estate market are over. There is so much info about any property now, that you can not fool a buyer into overpriced or flipped property. Taxes, mortgage, insurance, upkeep, repairs and other costs, overweight any benefits on long run.
I quit that business long time ago and will never again go for it. You can not make money these days, the mortgage companies dictate the price and is way bellow the asking price from the buyer. They are doing it on purpose, you know, just in case the buyer defaults on the mortgage, they need cushioning of at least 20% if he or she defaults.
Anonymous   |     |   Comment #12
Many missed a small window of opportunity that just occurred a couple of years ago in select areas where long term positive cash flows could be achieved if you had cash to invest. This was especially true regarding the "Stick to what you know" points made in the article.
Anonymous   |     |   Comment #7
This isn't about investing; it's about creating a complex BUSINESS. By the way, the same "real estate" spiel is available every weekend on any number of radio channels. Sounds wonderful right up to the point the tenant craps out, the inspector shuts your project down or the bank calls the loan. Subs, by the way, take off for the opening week of hunting season so make sure that's part of your rehab plan.  
Anonymous   |     |   Comment #8
Thumbs up.  I take all your points.  But the one which for me is the most salient is your "bad tenant" mention.  We live in a probabilistic environment.  Good tenants exist, they are a joy, and they can surely contribute to one's wealth.  But the chances today of coming up with a good tenant are not, in America, what once they were.  And a bad tenant can make life miserable.  Add to that:

Law today in many American venues is SOLIDLY on the side of tenants, and vigorously antagonistic to landlords.  Tenants are far too often seen by law as poor, but honest, and as very deserving.  Landlords, on the other hand, are viewed as wealthy, money grubbing, scum.

I would never be a landlord in America today.  This is because I'm not crazy, and were a dispute to arise, I would not want to be treated by our courts as a criminal.  Also, I believe many existing landlords, who have been blessed with good tenants for many years, are unaware of their jeopardy in 2015 America.
Anonymous   |     |   Comment #9
Very True, Friend of mine has a government implanted tenant for years now, some housing vouchers are at play and he can not get rid off the tenant, must ask permission from the housing authority and give a reason for kicking them out.
Anyway, is has been 4 years now and the housing authority has been silent on the issue and he can not sell nor evict the tenant without government authorization.
Keep that in mind if you ever let someone like that be your tenant.
Anonymous   |     |   Comment #10
Very well stated.  But your last sentence is a bit misleading.  With landlord/tenant law as it is today in so many places, the landlord does not always have choice about allowing an applicant to become a tenant.  If an applicant is rejected, the landlord had better have unimpeachable reasons which will withstand court challenge.  Under current American law, landlord power is significantly reduced.  Tenants have all the prerogatives today.

I'll invest instead in CDs, avoid conflict and legal challenge, and be able to sleep at night . . . thank you very much!
Anonymous   |     |   Comment #13
They call it Section 8 housing for a reason. You'd have to be crazy to invest in that type of real estate. The "Stick to what you know" points made in the article are valid points if you want to be successful in real estate investing.
Anonymous   |     |   Comment #14
Fifty-six percent of the 3.3 million Home Equity Lines of Credit potentially resetting with higher, fully amortizing monthly payments from 2015 to 2018 are on properties that are seriously underwater

Sticker shock stalls downsizing boomers
Romulus   |     |   Comment #24
I thought comment #1 & the subsequent replies were quite well put. I don't understand why anonymous with comment #3 & others felt so angry.  The same story of ownership & loss could be told about other investments which is what always supports this site of being for those of us who buy CD's.  But with the interest rate being so low, I think many of us look for alternatives. #1 simply pointed out a downside.  Please #3 don't attack me now. Relax.
Anonymous   |     |   Comment #25
"Felt so angry!"  Now who is judgmental?