REAL ESTATE INVESTING 101
Real estate investing isn’t rocket science. However, there are more books, seminars, and college courses on the subject of real estate investing than there are about rocket science. That could make you think that basic real estate investing is a vastly complex subject. Closer to the truth is there is so much material available because there are so many opportunities to succeed withreal estate investing.
Some estimates are that up to 60% of the all assets in this world are tied to real estate. The total value of real estate exceeds the value of all the fleets of jet aircraft and all the computer code combined with all the other assets that exist. It’s little wonder that so many people have become very wealthy by investing real estate. Or that so many people want to invest in real estate.
The almost infinite opportunities also create enormous confusion about where to begin. Just the list of opportunities would cover more space than a single article. A very short list includes commercial properties and residential homes. That by itself stretches from a singlewide mobile home to a skyscraper in Manhattan. There are also private mortgage financing, tax lien investing, and a whole lot more in the mix.
However, basic real estate investing can be boiled down to two fundamental philosophies. The first is “positive cash flow”. These properties generate more cash each month than they cost to own. The owner can depend on putting some cash in his or her pocket each month. The second fundamental philosophy is “buy and hold”. These properties don’t always have positive cash flow. What they need to have is an upside that will be profitable with time. Often this is simply an appreciation in market value. In many scenarios it’s improving the property to create positive cash flow. Of course, it can involve both appreciated market value and improve cash flow.
Every investing strategy is based on one of these two basic fundamentals. “Turn key rentals” deliver positive cash flow from day 1. “Flipping properties” is a version of buy and hold. You cannot flip the property for a profit until the market value is greater than your investment. This often means making improvements.
Investing still comes down to money. It might not be your money but there is going to be money in the deal. It could be as little as a fee for the “option to purchase” or it could be an “all cash deal”. Outside of an inheritance (which is a gift, not investing), I don’t know of any way to own or control real estate without having some money in the deal. There are hundreds of variations that can involve bartering, contingencies, or sweat equity but you’re going to have skin in the game.
Understanding the basic fundamentals is not enough to get started investing. It is the foundation to begin an analysis of any investment opportunity you are considering. With answers to just a couple of questions you should be able to determine if it is a “cash flow” or “buy and hold” opportunity. For instance, you can ask a current owner how much the monthly positive cash flow is but even a review of his/her books doesn’t assure the property will be positive cash flow for you.
When you become serious about investing, you need to perform a thorough due diligence and financial analysis. An experienced house flipper can do a rough financial analysis by walking through a house in a half hour or less. He or she can quickly estimate how much it will cost for new carpet, to remodel the kitchen, and even to put on a new roof. However, a more thorough due diligence is still needed to determine if the house is on a flood plain, has liens against the title, or has hidden defects.
Even an investor in a turn key rental needs to do his homework. The property may be generating a positive cash flow based on rental income minus taxes, insurance, and general maintenance. However, that doesn’t mean it will have positive cash flow when he factors in a mortgage and a property manager. An investor should also have an emergency reserve to pay the insurance deductible in the event a storm blows half the roof away.
Real estate investing is a great way to build wealth and/or generate income. As long as you understand and follow the fundamentals. You don’t need to know everything there is to know about real estate. But you do need to do some research. There are thousands of books on the subject and if you are near a major metropolitan area, there is likely a free seminar this weekend covering at least one investing strategy. Your best approach is becoming familiar with a few strategies before deciding on a specific strategy. Once you decide on a strategy, make sure it has a foundation based on one of the two basic investing fundamentals. When you are considering a specific investment property, always conduct a thorough due diligence and financial analysis based on your personal situation.
Certainly, you have something you can add to real estate investing 101? Please leave your comment.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for ten years. He also draws upon 37 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.