This is a guest post by Owen Johnson.
The introduction to the entire series…read this first.
THE WEEKLONG SERIES OF REAL ESTATE BASICS
1. The Real Scoop on Real Estate
2. Starting Down the Real Estate Investment Path
3. The Transaction Mechanics
4. A Primer on Real Estate Agency
5. Leveraging Yourself to Grow Your Wealth
6. Management Infrastructure
7. The Week in Review
So, you want to join the ranks of the landed gentry?
That’s great! Real estate can be one of the most rewarding investments that you can make. You’ll often hear people spewing forth stories of returns in the hundreds and sometimes thousands of percent! With returns like that why doesn’t everyone invest in real estate? Good question.
There are many types of real estate investments, but the most accessible to folks just starting out is a “buy, hold/rent, and sell” type of investment. To explain why everyone is not rushing out and investing in real estate, here are some of the realities:
1. Starting to invest in real estate takes time.
Real estate mechanics(what it takes to buy, hold, and sell a property) are much more involved than the mechanics of other investments like stocks and bonds. To be successful, you should really spend a lot of time learning. Modern Real Estate Practice is a nice, thick 300 page book that real estate professionals read before taking their licensing exams. I recommend that every real estate investor read it. It will save you money.
2. Real estate is a very local business.
Successful investment in real estate takes local market research. Just as you should research a company before buying its stock, you should research a locality at all levels(state, city, county, sub-division, street, house) before buying real property.
3. It’s hard to make serious money without serious leverage.
The power of real estate is in leverage. Leverage in real estate is just like trading stocks on margin. You get a loan and you secure it with a mortgage on the property you are buying. This loan increases the risk of your investment because you have to make monthly loan payments. At the same time the loan dramatically increases the return or loss of your investment because you have a lot less cash in the deal and therefore appreciation or depreciation have a more dramatic effect on your ROI. Understand mortgages and the mortgage system, and you will be way ahead of many other investors.
4. Real estate can be very illiquid.
Real estate has real transaction costs. Where you can spend about $20.00 to buy and sell a stock. You will typically spend 3% of the loan amount to buy a residential property and up to 6% to sell one. In normal markets where real estate is not appreciating at 20% per year, it takes time to earn back these transaction costs. A rule of thumb is 3-5 years.
5. Real estate can be real time consuming.
Unlike a stock, where you buy it and read about the company in the news while sipping your morning coffee, successful real estate investment takes time. The time spent doing relatively mundane tasks like finding tenants, fixing leaks, paying bills, etc., adds up. Don’t get into real estate investing without planning to spend that time.
6. You are in control.
When you invest in a stock, you are betting that the company, and sometimes more importantly, the company’s CEO and management team, is working to grow your investment. When you invest in real estate, you are hiring yourself as CEO. The responsibility is yours to make sure things like keeping a property occupied gets done. This control is what allows you to be better than all those other investors and is one reason why high returns are possible.
To sum things up, real estate is a great investment with significant potential for high returns, it’s a great way to build wealth without having any to start with, and it’s a a pain in the ass compared to stocks.
Real estate is a great investment for some and a horrible investment for others. If you think it might be for you, or if you don’t know which category you fall into, continue down the rabbit hole and follow your gut. Perhaps even cut your teeth on a small project or team up with friends so you all can learn without too much risk. Lots of theory, little action. Here are some things you can do now to get started:
- Go to a local real estate website or Realtor.com and do some quick searches to determine the price range of the type of property you’d like to buy. Don’t obsess about small details, just get a feel for the different types of properties out there(2 vs. 3 bedroom), sqft, etc. From this, pick something interesting. You probably aren’t going to buy what you pick, but it will give you something real to talk about when you are speaking with vendors.
- Call a friend and schedule a date and time to drive around areas that you think might be interesting. Note down the addresses of properties that look interesting.