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.
"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.
"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.
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.
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.
"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."