An All-Weather
Strategy to Real Estate Investing
Despite some
positive stirrings in real estate in various parts of the country, it’s
wise to take cautious steps when strolling back into the investment
property market that was so overheated just a couple of years ago.
A good first step is
consulting with a tax or financial adviser, such as a CERTIFIED FINANCIAL
PLANNER™ professional, who can help you assess your own financial
situation before you begin. Getting your own financial house in order
first is critical.
Some thoughts:
Remember that real
estate investment is part of an overall financial plan.
Investing in real estate requires specific tax, spending, budgeting and
people management advice. Based on your other assets and your overall
financial plan, investment property might be a worthy goal, but only if it
fits your investment strategy and if you’re willing to put the time and
effort into creating a successful business.
Don’t spend until
you study: If you don’t
have an intimate knowledge of neighborhoods, rental rates, commercial
traffic or any of a dozen more factors that make real estate investments a
particular success in one community and not in others, don’t even start.
The most successful people in real estate investment have taken the time
to learn about the properties they’re buying, sensible ways to borrow
and economical ways to manage the buildings they have. Make sure you
assemble a good advisory team around you starting with your financial
planner, your tax adviser and an attorney knowledgeable about real estate
transactions. They’ll teach you and keep you from making serious
mistakes.
A slower market
doesn’t mean a bargain market. Even
though the gains of the past 15 years aren’t what they used to be, keep
in mind many sellers aren’t terribly desperate to sell and they’re not
dropping their prices all that much. Make sure you take the time to study
a particular market not only for gains in price, but for stability in rent
and overall quality of the property and neighborhood you’re examining.
You might hear about a downtrodden neighborhood ready to "turn,"
but that rotation might take years – start slow and pick properties with
the best chance of appreciation.
Home ownership is
not real estate investment.
If you’re thinking about leapfrogging from one residence to a new one in
hopes of huge gains when the market returns, give yourself a reality
check. An investment is something you can sell when the moment is right
without any hesitation. Is that something you can really do with a home
you’ve grown comfortable in? When the market goes up or down, we don’t
necessarily think of dumping our principal residence. There are emotional
ties as well as physical ties to a home – whereas real estate bought as
an investment must produce income during ownership or a profit at the time
of sale without exception.
Real estate is not
an automatic ticket out of financial trouble.
Some people have gambled their way out of debt by buying distressed
properties and reselling them at a profit. They’re the lucky ones –
and after hearing so much about the "flipping" phenomenon, many
of those success stories might be apocryphal. Be aware of your risk
tolerance at all times.
Enter the
foreclosure market carefully.
With all the reports of subprime borrowers losing their homes in recent
months, don’t think those foreclosure numbers will automatically provide
you with a can’t-miss opportunity in real estate. Taking advantage of
the foreclosure market is both a learning exercise and an emotional one.
It takes time to learn all the correct avenues in a community toward
investing successfully in failed properties, and actual contact with
families losing their homes can be wrenching even if you do know what you’re
doing. Foreclosure and pre-foreclosure investing is not for the
faint-hearted.
Cash is king. During
the white-hot real estate market, people were buying and selling property
for little or no money down because lenders were willing to take that
risk. Today, in a higher rate environment, that’s definitely changed.
While many successful real estate investors choreograph borrowing
seamlessly into their strategy, cash is an important decision for down
payments and covering ongoing expenses. This is where your advisory team
comes in.
Keep your credit report clean: Only
borrowers with the highest credit scores will find the best lending deals
if they need to borrow. Make sure your credit report is clean before you
enter the market.
July 2007— This column is
produced by the Financial Planning Association, the membership
organization for the financial planning community, and is provided by
McGuire & Co., LLC, a local member of the FPA.
(Back to
Financial Planning Page)
