With the right set of knowledge and skills it can be
By Dana Anspach
Is real estate a good investment? It certainly can be. I’ve seen many people secure a comfortable lifestyle by building a portfolio of real estate, and I’ve seen others lose their shirt, and everything else to go with it.
It takes knowledge, skill, intuition, and guts to invest in real estate. If you have these things, and you do it right, I think real estate can be a great investment.
Knowledge
Like any profession, to be good at it, you have to know what you are doing.
You can turn real estate investing into a profession that allows you a lot of free time, but it takes years, and patience. There are lots of seminars you see advertised on how to invest in real estate; some are decent, some are just going to cost you thousands of dollars for a lot of pretty binders. If you are serious about turning real estate into a good investment I’d recommend you read all of John T. Reed’s books on real estate investing. Start with How to Get Started in Real Estate Investing.
I have also read many of Robert Kiyosaki’s books including Rich Dad, Poor Dad and Unfair Advantage. I like his books in the same way that I like pep rallies. They get you fired up and excited, and I do advise reading them, but I don’t think they present an objective view of what it takes to make good real estate investments, whereas John T. Reed’s books have usable knowledge.
Skill
There are numerous ways to invest in real estate.
Some speculate, looking for a piece of land they can flip, or a house they can remodel and quickly sell in a rising market. Others consistently look for income producing properties; either commercial office space, apartments or duplexes, or residential homes they can rent out.
You have to assess your skills to determine how to go about it.
Those with close ties to the development plans for their city may have a knack for spotting attractive pieces of land. Those with contractor contacts may be able to get remodels done at a discount.
Many of the financially independent people I have worked with built their real estate portfolio through income producing properties. This requires a long term view and the ability to crunch numbers. There are several things to consider before you buy rental property, such as a vacancy rate. Your property is unlikely to be rented 365 days a year, year over year. People forget to factor things like this into their calculations and can thus overstate their expected income.
There are also record keeping requirements and tax considerations to investing in real estate. The rental real estate tax deduction works for some – but it is not free money. Depreciation may help shelter some current income from taxation, but depreciation is recaptured later so it is not a free lunch.
Intuition
There are two sayings about real estate that most of you have heard. The first one is “location, location, location.” It’s true. You have to have intuition about what areas of town might become popular, and which areas to stay away from.
In a slow economy, rental real estate in solid locations will remain in high demand. Don’t jump into buying a piece of property unless you’re familiar with the area.
Also, don’t confuse intuition with enthusiasm. When real estate was booming in 2004 through 2006 lots of people jumped right in. Interestingly enough, many of the real estate gurus I know were quietly starting to sell about then. Their intuition, combined with skill, told them to exit out and sit on the sidelines for a few years.
Guts
The other saying is that “real estate takes deep pockets.” This is true too. You’ll have property taxes to pay, times where a rental property may be vacant and you still have a mortgage to pay, as well as repairs that need to be done.
In addition, leverage (borrowing to buy) can be an effective strategy to building a real estate portfolio.
With rental real estate when you use leverage you are buying an asset with someone else’s money. This is great – but it does require risk. And too much leverage can be dangerous.
In 2009 – 2011 I watched several friends who used too much leverage lose all their properties. The economy slowed, a few of their renters moved out, their other income sources went down, and they didn’t have the cash flow to keep paying the mortgages and wait out the economy. They didn’t have the deep pockets that were needed.
Buying a property to flip takes guts too. The property might not sell as quickly as you thought it would. Then what do you do? Hang on to it and wait – or sell it a lower price? Guts have to be combined with knowledge, skill, and intuition to be effective.
Bottom line: I think real estate can be a good investment if you go about it the right way. If you want to use real estate to build a steady source of retirement income, you need to be patient and systematic as you build a portfolio of income producing properties.
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