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Real Estate Investment
A Professional’s Perspective
Real Estate investment has been good to me and to my family. Certainly we have attained far more than we ever expected to realize in our lifetime. It did not happen overnight and it didn’t come without a few setbacks, but I thought I would share some of the simple “Do’s and Don’ts” of investment strategies that might help if you decide that you want to travel the road of real estate investing. The Do’s • Do buy in the path of growth While this is a very general strategy, it makes sense on a broad scale. It means buy in geographic areas where growth is likely the highest. Look for regional differences such as southern states versus northern states, or on a more local level, north side counties might be growing more than the south side counties. Look to transportation arteries because they can influence people’s future choices. • Do understand what makes value Too often investors make bad choices because they don’t understand what makes value in a given market. Some items to consider might include: 1. Road frontage • Do think long term Too often investors are led into speculation schemes in hopes of quick profits. “Flipping” has become popular in real estate jargon. While it is possible to create quick profits, one shouldn’t count on it. More often than not, it takes time since overall appreciation in real estate has historically been a slow but steady phenomenon. Buying on high margin and with short-term expectations can be a recipe for losing your hard earned capital. • Do compare prices from different sources Comparison-shopping is the best way to get a real feel for the marketplace and what makes value. Be wary of dealing with only one source of information on real estate for sale. Quite often skillful dealers and agents can orchestrate what other properties they tell you about in order to encourage you to make the decision that they intend for you to make, and possibly to your peril. Check with various companies and various sources before making choices. • Do buy property that has appeal If it appeals to you, it will likely appeal to others. Sometimes we are prone to buy strictly on merits of price and forget the intangible quality of appeal. Appeal can be measured in views, or waterfalls, or large timber, or strategic location. Don’t be afraid to consider these intangibles in making your choices. • Do keep emotions in check Slick salesmen have used buyer emotions to create lucrative sales since history began. While it may be important to react in a timely manner, be wary of “limited time offers” or “you’ll never get another chance” deals. Do your research in advance so you know you are making an informed decision. • Do know what can be fixed and what can’t Many things that affect value can be fixed, but some can’t. It’s crucial to know the difference. Smart investors have always appreciated buying properties at a bargain prices because of intrinsic features that can be cured or alleviated. For example a few hours of bulldozer work can turn an inaccessible piece of property into a show place. Surveying and marking property lines can also be beneficial. A poor location cannot be redeemed and you will likely be forced to sell with the same hindrances to value that you purchased the property with. • Do understand your commitments in a purchase When investing in property, if you haven’t made a thorough investigation, you may find some unpleasant surprises after closing. You should investigate property tax liabilities, association fees, development requirements, and other hidden commitments that can affect the cost of holding your investments. • Do look at best case and worst case scenarios Too often inexperienced investors look only to the good side of investments. Ponder what is the worst likely scenario. A rule of thumb for us has always been to consider what the property would likely be used for, if it were sold today. If the answer is to be developed into a condominium complex you can pay development prices and expect that you could sell it as such, however if tree farming is the answer you should be paying tree farm prices. Keep in mind that speculation is just that, speculation. It might come to pass but it might not. • Do be a contradiction Buy when everyone else is selling, and sell when everyone else is buying. Our experience tells us that the marketplace is full of overreaction. A television announcement of a real estate bubble can push the marketplace into a selling frenzy and likewise overoptimistic predictions can push markets into wild unsubstantiated speculation. The Don’ts • Don’t Spend more than you make While this may seem more like life style advice than real estate investment advice, the vast majority of “would be” investors fail at this first step. Contrary to the pitchmen of the media, it almost always takes real money to invest in real estate. If you don’t have any cash at all, you can’t invest. Put aside some of your earnings until you have enough to make a meaningful investment. There are many in our country who make huge incomes, but still have no means to invest simply because their lifestyle always seems to exceed their incomes. • Don’t spend more that you can afford Sometimes investors are so eager to make the big profits that they think they have to invest big money. While this may be true, if you can’t sustain your investment over the long term, you may lose your nest egg and be much the worse for it. Budget holding costs to the income you have available. Better to let a good deal go, than to lose your investment. It’s much easier to lose investments than it is to make them. • Don’t buy problem property unless you have a cure Many an investor has bought a property at a bargain price because it has some glaring defect. If you have a means to correct that defect then it may truly be a bargain, but if it is something you can’t fix, that same defect may force you to sell at a bargain basement price yourself. • Don’t put yourself in a position of having to liquidate short term The investment waters are full of sharks. If you put yourself in a position of short-term sale, you may find the only buyers are those that routinely capitalize on the misfortune of others. Rarely do courthouse sales produce the highest prices paid. Expecting real estate dealers to pay market price when they know of your peril can also be quite naive. To market your property effectively, you should be prepared to wait for a buyer than can appreciate your property for its full potential. • Don’t count on income Many investment strategies involve the income stream that the property is supposed to achieve. Many times this is overstated and the costs of maintenance are ignored. Often the assumptions are incredibly naive, i.e. there are no allowances for vacancies. If the income doesn’t materialize and you count on those assumptions to make mortgage payments, you can be just another victim. • Don’t believe media pitchmen It still amazes me how many people still buy into schemes of “get rich quick” TV hucksters. These hucksters have found a way to get rich --- sell worthless knowledge to people for hundreds of dollars. These hucksters have the appealing pitch that you can be stupid, ignorant, with no cash to invest and mountains of debt, and with almost no effort on your part, you can become a real estate investor and become rich beyond your wildest dreams. While real estate investments are a great way to build wealth, and arguably the path of most of our countries wealthiest people, the way to such wealth does not come in a $200 TV course. It comes from thrift, calculated investments, and long-term thinking. While there are some people who have become rich in the short-term, they are the exception rather than the rule. You might also win the lottery, but you should have a backup plan. |
