The Beginner’s Guide to
Real Estate Investing
Answers to Common
Questions about Investing
in the Real Estate Market
Are you looking for a good investment opportunity? Maybe you’ve been contemplating investing a little of your savings, but just aren’t sure where to go or what to do with your money.
Many people traditionally turn to the stock market or mutual fund market for investments. But there’s another investment opportunity that some don’t consider: investing in real estate. Before
you say “I don’t have the kind of money to invest in real estate” consider this – more people are iinvesting in real estate than ever before.
Why Invest in Real Estate
Why are so many people investing in real estate? There are a number of variables that make real estate investing one of the hottest investment trends in the last ten years:
; Interest rates dropped dramatically and have remained at record lows; and
; The resale market is incredibly active with a strong demand for single family home
But the most compelling reason for real estate investment popularity is the incredible profitability and return on investment. Real estate offers a better return on investment than the average return of stocks or bonds. In fact, real estate investments may yield twice the profits of comparable stock iiinvestments over the same time period.
Real estate investments defy most market trends. Stock market prices and profitability are influenced by national economic conditions – employment or inflation rates can send the market iiispiraling. Real estate will hold its value, and even increase, despite the overall market trends.
Investment in real estate is not just the domain of moguls. Almost anyone can invest in real estate, regardless of budget. Opportunities exist from the small residential investment to the serious commercial investor.
Many investors find real estate appealing because it represents a tangible commodity. Unlike other investments, with real estate you have a physical property; something you can see, improve, and change. There’s less anxiety and unpredictability than the stock or bond market.
There are a number of real estate investment opportunities available. The right investment may depend on your budget, or your interest in involvement with the property.
Some of the options for investing include:
; Real Estate Investment Trusts (REIT) or Real Estate Mutual Funds
; Purchase of single family homes, condominiums or town homes for rental income.
; Purchase of property (either land or house) for immediate resale.
; Investment in commercial real estate for rental income.
; Purchase of duplexes and four-plexes.
Starting Small – Gathering Information
How does one begin investing in real estate? Because real estate is a complex business governed by laws and regulations, mistakes can be incredibly costly. Fortunately, there’s an easy way to
find information about investing.
Many investors participate in real estate investment groups. The National Real Estate Investors Association offers chapters in most major cities. These groups offer interested investors a wealth of information. By attending a few meetings, you gain insight into the market in your city, learn all about zoning laws, how to negotiate prices successfully, how to develop tenant relations, and much more. You can find an investment group in your area by contacting www.nationalreia.com.
There are a number of options for investing, some higher risk than others, some more affordable than others. Let’s explore these options and the payoffs and risks associated with each.
REIT – Real Estate Investment Trust
A simple option for investors is to begin investing through a REIT, a Real Estate Investment Trust. REITs are similar to a stock – when you purchase a REIT share, you essentially purchase a stock
in part of a company that exchanges or invests in real estate, either through the purchase of property or mortgages. You can invest in REITs either by buying shares directly on an open exchange or by investing in a real estate mutual fund.
REITs invest in large scale properties – shopping malls, office complexes, apartments, warehouses
and hotels. Profits from these investments, either from rental income or sale of the properties, are distributed back to the share holders in dividends. REITs offer profits with limited risks, but they also offer little personal control. Often the dividends are reinvested into the funds for purchase of additional property, leaving share holders with little say in the investment.
Unlike traditional real estate investment, with a REIT you can easily invest in the market and liquidate your investment, simply with a call to your broker or through your web-based exchange.
Bottom Line: REITs offer investors an opportunity to pursue real estate on a small scale with minimum risk. It allows investors to be involved in the market without concerns of managing the property.
There are options for investors willing to take a more hands-on approach to the real estate market. Let’s take a look at some of those options.
Buying Land or Property for Resale
Purchasing properties for resale is one of the most popular investment practices. With rapid increases in appreciation (13.6% in 2005, according to NAR) more and more investors are jumping into the resale market. These investors planned to sell property within a few weeks or months of original purchase, resulting in the term “flipping”.
This practice has received a lot of attention in the last year. In fact, several television networks are carrying TV shows showing property buyers making renovations to homes in hopes of quick sales and big profits.
Flipping is receiving a lot of attention, but most is over-inflation and hype. Here’s the reality: the
NAR reports that less than 3% of home buyers sell their home within a year. While most markets are appreciating at a steady rate, few markets have the truly meteoric increases necessary to profitably flip houses. In fact, only about 5% of the real estate markets throughout the nation are ivreported to be “red hot”.
Does this mean that resale investments aren’t profitable? Far from it: when more than a quarter of
real estate sales are to investors, resale investing has to be a profitable. It just requires caution and realistic expectations.
Real estate investing is one of the few investments you can make using other people’s money to
make money. You provide the down payment and closing costs and meet the mortgage obligations, but the bulk of the investment – the principal – is financed by the bank. You don’t provide the
total cash upfront, and you never face a margin call as you would with the stock market
Real estate is not a get rich quick investment, but an opportunity for steady accumulation of wealth. It requires patience and a good eye for opportunity.
Sometimes, it’s the small changes that make a real estate investment successful. MSN Money
recently interviewed Richard Davis of Trademark Properties. Davis’ firm has been successful throughout North Carolina “flipping” properties. The A&E cable network follows his business
with the show “Flip That House”. He recommends that investors keep 10 rules in mind when
investing in real estate:
1. Don’t get emotionally attached to your real estate purchase, unless you are purchasing
property to use as your primary home.
2. Your first impression is what will sell the property. If you don’t get people interested in
the outside, they won’t get out of the car to look at the inside.
3. Change is good for sales. Even small cosmetic changes draw attention to the property.
4. The easiest changes are the most obvious: paint and new carpeting or flooring. Always
5. Go back to rule number one and memorize it.
6. Start simply and then work up in scale. If you start small, any mistakes you make will be
small; that’s how you build up skills through your experience.
7. Stay away from properties with structural problems.
8. Activity attracts interest. Start marketing the property while you are still working on it;
people get interested when they see that the end is in sight.
9. Don’t get greedy. Don’t hold out for bidding wars. Set a financial goal and accept offers
when they come within your financial goals.
10. As always, go back to rule number one. It’s the most important part of success in real
Bottom Line: Investing in real estate for resale can be incredibly profitable. Real estate is only surpassed by energy stocks as the number one investment opportunity in the United States. The best real estate investment: small, three-bedroom, two-bath homes. These homes have steady demands for resale and are also great rental opportunities.
Investing in Rental Properties
The same principles that apply to purchasing resale real estate applies to rental properties: the right property, the right location, the right price, and the right expectation will guide your success. But rental properties require another factor – a willingness to be actively involved in the management
of the property.
Owning rental property has its benefits:
; There’s always a demand for rental properties, especially for single family homes.
; Renters make your mortgage payments.
; If properly maintained, your rental properties continue to bring in money; every time you
rent them, you make more money.
Of course, rental properties aren’t without their negatives:
; You are responsible for maintaining the property.
; You have to constantly negotiate and deal with tenants.
; You have to have money in reserves for maintenance, and in the event that a renter leaves
before their lease expires.
Like any other type of real estate investment, start slowly and gradually build up your properties.
Bottom Line: Rental properties are like the little engines that could. They provide a strong but steady monthly income.
Investing in real estate is one of the best ways to round out an investment portfolio. With a little skill and practice, you can begin investments that lead to a life of financial stability and wealth.
There are a number of ways to begin investing in real estate. Perhaps one of the best avenues is to discuss your options with a real estate investment professional, such as ……………… For more
information about building life time wealth, stability and comfort,
i Twenty-three percent of all home sales are investment properties according to a 2005 survey conducted by the National Association of Realtors (NAR). These figures don’t include real estate purchased as part of investment clubs or mutual funds.
ii According to the International Fund Advisors (IFA), the real estate index has gained 15.76% on average per year (from 1996 to 2006), for a total gain of 338%. The total return of the IFA total stock market index with an increase of 8.93% annually and 132% total.
iii In 2006 the median home price was $208,700, an increase from the previous year by 12.7%. In 1995, when the stock market was increasing in leaps and bounds along with the tech market, the median price was $110,000, with a rate of growth of 6.5% per year. (Information provided by the National Association of REALTORS?).
iv According to Merrill Lynch economists Kathleen Bostjancic and David Rosenberg .