Investing in Real Estate

By Barbara S. Reeves ABR, CRS, e-PRO, RECS and Fine Homes Specialist, Associate Broker

Turn on any financial news program and at some point you'll hear the experts extolling the virtues of diversification. Real estate has long been considered a conservative, long-term strategy to growing wealth. While some seasoned real estate investors make it look easy, to be successful, beginners should follow some basic principles.

• Learn all you can. Consider attending a seminar or talking with individuals who are experienced in real estate investing. If you don't know anyone in your area, check out the National Real Estate Investors Association's website: www.nationalreia.com or www.mrlandlord.com. Before committing your cash, you should have a fundamental understanding of real estate. For example, be aware that, in general, investment properties are not liquid investments. Barring exceptional circumstances, real estate does not sell at a moment's notice. It could take days or months to sell a property, depending on the strength of the market in a particular region.
• What are your financial goals? It is possible to make a lot of money. However, you need to determine how hard you are going to work to do it, and how long you intend to keep each property. With each investment unit, you'll need to take into account cash flow, appreciation, equity, and depreciation. Talk with your accountant about tax liabilities and benefits.
• Consider cash flow. You'll need to have enough capital on hand to cover any short-term losses due to vacancies between tenants, repairs, property management, taxes, mortgage, etc.
• Start small. Look into buying a single family home or a duplex. Leave large apartment buildings and commercial properties to the pros.
• Inquire at the local Chamber of Commerce about companies relocating into or out of the area. Company movement is one indicator of demand for rental and/or office space.
• Find a property that will be in demand when you are ready to resell. Look for a moderately priced home on a quiet street with three or four bedrooms, two bathrooms, and a garage.
• Research the property. The most common way first-time investors lose is by failing to investigate a property thoroughly. Look beyond the front door. Investigate the reputation of the school district, the crime rate, and plans for expanding a nearby highway or developing vacant land. Ask a local real estate professional about the area, its history, and how fast (or slowly) properties are moving. Find out the tenant demand in that market.
• Inspect the home you're considering for signs of water damage, such as stains on the ceiling and crinkling or gathering wallpaper; open and close every door and window; and check all electrical sockets by plugging in an appliance. Get an independent home inspection, roof inspection and termite inspection. Unexpected repair costs can eat away resale profit. Because even the best inspection can't always predict problems, try to set aside some of the rental income for unexpected repairs.
• Spend time driving the streets of the community noting the condition of other properties. Are lawns maintained? Are roofs in good shape? Are homes kept up?
• Be ready to make fixes quickly and respond to the renter's needs. If you're not prepared to be a hands-on landlord, consider hiring a property management firm.
• Find a real estate professional who has experience in investment properties in your market. They can pass on valuable information about rental prices in your market and the sale prices of other rental properties in the community.

Remember, investing in a property is much different than living in one, and while emotion and attachment can be prime motivators when it comes to homes, it is return on investment that counts when investing in real estate.