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The Real Scoop on Real Estate

Ramit Sethi

This is a guest post by Owen Johnson.

The introduction to the entire series…read this first.

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 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.

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  1. avatar
    bruce johnson

    very helpful!!

  2. avatar

    You mentioned the illiquidity and the time committment of r/e investing. It is also important to note that there are significant costs involved in just holiding r/e–taxes, insurance, debt service, etc. It’s important to understand all of the variables.

  3. avatar

    Very sobering. A good counterbalance to the real estate is easy jibber jabber. Having someone with experience write about his experiences really help.

  4. avatar
    Robert T

    Yes this is very helpful I am a teenager and just trying to get the outer views on how to start your own real estate firm.

  5. avatar

    thank you so much i am begineer in this field but wanna excel in this .information really helpful..

  6. avatar
    Alissa Gabriel

    You need more detailed information on real estate. This is a general overview and the help was very limited.

  7. avatar
    ezEstate Dubai

    The predication for 2015 is good and we looked in 1st quarter how real estate business increased. Many people are investing property business because this business gives you the higher return as compare to other investment.

  8. avatar

    Thanks for the good tips in real estate investing. I like the ability to have more control as I do not have this in my investment portfolio. I will focus on your points to do local market research, and know that I will have to spend time to succeed. I own it.

  9. avatar
    Bonnie Davis

    Absolutely informative Post. Real Estate has been on an upsurge like never before. As i was a beginner in this field , your article on scoop of real estate is very helpful. I would go for such techniques to improve my business.
    thanks for the article. keep sharing.

  10. avatar
    Tina Grant

    Your blog is very unique in every way, the tips and information in this article is great and reliable. I am in real estate business last few years. I have got lot of new information required to grow my business. Thanks for sharing these Valuable information.