Things to Consider Before Investing in Real Estate

This post was written by Tony. 

Real estate is a great investment, because as Teddy Roosovelt once said “you should buy land; they’ve stopped making it.” It’s a great uber-long term investment. But like any good investor, you need to realize a few important points before jumping into the often confusing real estate market.

Real estate is a highly localized investment.

Real estate is a highly localized investment. What I mean by that is that a house’s value on this side of the street may be totally different than a house on that side of the street. The factors determining your real estate’s value are highly localized, such as “how close this house to the highway, are there any good schools in this area, etc?” A good real estate investor prefers to stick to one area, that way he can get very familiar with the factors determining the value of the real estate in that area.

Know beforehand if you plan on making money off your real estate via rent or capital gains.

Before buying the piece of real estate, you must first take a look at the community. Will I make more money off of rent, or more money off of the increase of the value of the land? Certain areas are better suited to making money off of rent, and other areas are more suited to making money off of the increase in the land’s value.

Areas where a lot of immigrants live are great for making money off of rent. This is because immigrants come and go a lot, so the value of the land in that area tends to not increase over time. However, a lot of immigrants don’t understand English, so they tend to set up their own small business. Since those immigrants don’t have a lot of money, they’ll most likely rent. Hence, renting in an immigrant populated area is a way to make great returns on your real estate investment.

Areas where a lot of settled down, rich people live, on the other hand, is great for making money off of capital gains (increase in the land’s value). Rich people and businesses prefer not to rent, thus, they buy the land, which, in turn, bids up the value of the land in your real estate investments area. The prices of land in rich areas rise the most, but also, fall the most.

A real estate investment is a long term investment.

If you plan on investing in real estate, make sure you’re in it for the long term (at least 10 years). The real estate cycle lasts longer than the commodities and stock market cycles. The real estate market generally experiences 15-19 years of bullishness (increase in real estate value), and then 5-14 years of bearishness (decrease or no increase in real estate value). In a fast paced world where many investments such as stocks and commodities can fluctuate 100% in a year, real estate at most increases 25% a year. So don’t expect to double your money overnight from real estate. On the other hand, real estate is what I believe the greatest investment of all time. Eventually, all companies will come and go, so their stock price will eventually be zero. Commodities tend to under perform inflation. But if you buy and hold real estate forever, you’re guaranteed to make a lot of money in the long term.

Always sell early.

In a real estate bull market, it is prudent to sell early (not near the top of the bull market). First of all, no one can predict when a real estate bull market will end. Also, a lesser known fact amongst real estate investors is that liquidity is terrible in this market. At the first sign of a stock market meltdown, liquidity instantly freezes in the real estate market. So even if the value of your real estate has gone down by 10%, you’ll notice that there are no buyers left. A big problem that banks faced in 2009 is that no one wanted to buy the foreclosed homes they had on their hands, so technically, the value of those homes was $0. Always sell out early when it comes to real estate, that way you can avoid the liquidity crunch. You may be giving up some potential gains in the increase of your real estate’s value, but as I mentioned, you’ll be avoiding a major liquidity problem.

Make sure you have a secure source of income that you can bank on to consistently pay the mortgage.

Chances are, when you invested in the piece of real estate, you used a mortgage. Although I don’t recommend the buy and hold investment strategy for the stocks and commodities markets, buy and hold works fantastically in the real estate market. This is because real estate is a long term investment, and buying and holding works best for long term investments. But let me give you an example to make my point.

Joe bought a house as an investment for $200,000 near the bottom of the real estate bear market. He’s buying and holding; waiting for the real estate bull market to begin. However, due to the recession, he loses his job, and can no longer pay the mortgage on his real estate investment. So he is forced to foreclose. Two years later, the real estate bull market begins, and his now foreclosed investment is worth $280,000.

My point is, you may have the foresight to make the right real estate investment choices, but without a secure source of income, that foresight will not be able to create investment profits for you.

So, have you invested in real estate? What tips and tricks can you share?


Comments

Things to Consider Before Investing in Real Estate — 6 Comments

  1. I’ve known for a long time that there is money in land but I’ve never really gotten myself involved in it. Your tips are very simple to understand, which is really good for people like myself who know little about real estate investments. Thanks, they’re really helpful.

  2. As someone who is relatively new to real estate investing, I found these tips to be extremely helpful. What can you say about the upcoming presidential election? Will it affect the real estate market?

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