Late night infomercials will try to convince you that investing in real estate is the best way to become a millionaire. The claims are that investors are looking at big returns with no money down. While that is unlikely, it is possible to make money in real estate.
But you have to know that this is simply an investment, and with investments come risk. If you don't know what you are doing, you could lose everything.
Investing in real estate requires planning and preparation. It could be broken into two parts: selecting your investment and exiting your investment.
Selecting Your Investment
Beginning investors should start with smaller projects. For example, Tom has been involved in real estate for over a decade now, and has invested in many commercial and residential properties. He has found that the key to his investments are to purchase real estate in a good location.
Tom began with a simple duplex close to his home, which he later refinanced to buy a four-plex. He painted and made a few changes to the four-plex, and sold it for a seven-plex. He also bought another four-plex. He renovated the units and made minor repairs and sold it for a decent return.
Tom used his experience and knowledge with real estate investments to venture outside of his normal real estate investing routine. Tom began purchasing real estate through an investment strategy referred to as tax lien and tax deed investing. One of Tom’s first tax deed investments was at one of Georgia’s monthly tax deed sales in Chatham County. Tom was able to walk away with the deed to a beach front condo on one of Georgia’s barrier islands for a fraction of its market value.
Tom also discovered that fixer-uppers really work well if you live nearby and can do most of the work yourself. This cuts your expenses considerably. Tom’s experience grew with each investment and learned to be conservative. Don't let the dollar signs rush you into anything you’re not ready for.
Whether you are looking to buy a house, a duplex or an apartment complex, you need to carefully review the property's economics. Are the rents you plan to charge reasonable? Are your expenses correct? Can you live with the cost of the mortgage? What happens when a unit is empty? Do you still have enough income?
You may not want to be a landlord and prefer to buy a house, fix it and flip it. While you can make a lot of money if you are wise, there are still a lot of issues involved. You have to look at the neighborhood, the market and the budget you have for repairs. Do you have enough money to pay the mortgage if the property does not sell quickly? What if you have to go over budget on necessary repairs? What if things are uncovered that devalues the home? What will you do then?
Large cities tend to be better investment areas than small towns because there are more tenants and buyers. Communities on freeways are attractive as investments due to the access to metro areas. Vacation resorts and beach towns are also fairly stable and generally provide a good return on investment.
Exiting Your Investment
Things happen. The economy, interest rates, job opportunities and construction trend impact every real estate investor. You need to watch the trends and keep in touch with local brokers, appraisers, investors and real estate attorneys.
No matter what you are investing in, you need an exit strategy. You need to know when you will sell, if you will take money and pay taxes or complete an IRS 1031 tax deferred exchange. Does your plan include enough money for your retirement? Will you pay off the property or refinance it and use the proceeds to buy another investment? What if the value of the home drops?
A weak economy is something you should watch. You need to know if a depressed market will pull out of it or last. This tells you when to exit. If you can't find buyers when you are ready to sell, what will you do? Can you restructure your mortgage or have it assumed by a buyer. Check out what loan assumption costs are and if financing terms change with an assumption. You should research your financing options before you make any decisions, paying attention to more than just interest rates.
You need to think well into the future. Plan for the best and the worst. If you invest with a friend, what will happen if they need to pull out? Do you have enough money to handle emergencies or will you need to liquidate the real estate?