There are smart reasons to invest in real estate, and then there are
dumb reasons. The truth is, for example, that we can’t know for sure
whether what’s happening in real estate right now is the bottom of the
market or not. Just like further down the road, after the dust has
settled and people have long moved on past this financial crisis and its
many causes and consequences, a new real estate bubble could very well
form.
But if you’re investing for the “right” reasons – and you know your risks – chances are your investment will be a good one.
1. “Property Will Always Go up in Value”
Don’t believe this dangerous myth! Japanese real estate at the close of
the century and American real estate today indicate that buying because
“it has to go up” is one of the worst reasons to do so. Hoping for – or
worse, expecting – a price rise is speculation. Make sure the investment
makes great sense from a positive-cash-flow perspective first. Then if
the property falls in value, you’re still “right side up” on your cash
flows. Consider any appreciation to be simply icing on the cake when it
comes to speculative real estate investing.
2. Truthful Real Estate Investment Advice: Don’t Believe Everything You Hear or Read
Sellers and real estate agents ultimately want you to buy that property.
So what they’re telling you is most likely the rosy scenario, not the
actual scenario. If the property has been a rental, ask the seller for
his Schedule E form from his taxes. It’ll show his ACTUAL revenue and
expenses, or at least the ones he reported to the government. What you
can expect to earn is somewhere between what he reported to the IRS and
what he’s promising you.
3. Speculating versus Investing
Buying a chunk of land and hoping it goes up in value is SPECULATING.
Buying a property to collect high income in the form of rent is
INVESTING. Investing is a much safer (and smarter) way to go.
4. Getting Started in Real Estate Investing with Residential Property
It’s easier to understand, purchase and manage than other types
of property. If you’re a homeowner, you’ve already got experience here.
And you’re the boss. Start close to home, so you can stay on top of
things.
5. Where To Buy
There is – as you probably know – a widely held belief that the three
most important factors involved in real estate success are “Location,
Location, Location.” But real estate expert John T. Reed
(www.johntreed.com) actually says there’s MORE profit in less desirable
locations. Reed looks for what he calls a “double-digit cap rate.” As an
example, if you net $1,000 a month in rent on a $100,000 investment,
that’s $12,000 a year, or 12% of $100,000. That’s a double-digit return
that year or a double-digit cap rate. The catch is that this is NET rent
or rent AFTER expenses. Some people in the business suggest that 5-10%
is more likely, even after doing your homework.
Conclusion: there are no get-rich quick schemes here, and THAT is
plain, simple real estate investment advice you’re not likely to get
from the real estate industry.
