How to figure out if you're ready to take the plunge, and what you should do first.
Your best friend flips houses, your uncle has a growing portfolio of commercial properties and your parents are renting out their old home to a family who just moved to town. Are you the only one not making money from real estate?
Not quite, but you could be missing out on an opportunity at the perfect moment.
It’s a unique time for real estate investment as interest rates remain near historic lows following a housing crisis that began at the close of 2007 and a subsequent recession that wreaked havoc on residential and commercial real estate for the duration of the economic downturn. With real estate prices throughout the nation largely back at their pre-recession levels, investors have been bringing inventory left vacant in 2008 or 2009 back to the market and finding occupants.
“Areas that were hit by foreclosures or blighted areas, people are now coming back into and reinvesting,” says Charles Tassell, chief operating officer of the National Real Estate Investors Association.
Real estate investing site BiggerPockets.com partnered with turnkey real estate investment company Memphis Invest to produce a National Survey of Residential Real Estate Investors in 2012, concluding there are about 28.1 million real estate investors in the country spending a total of $9.2 billion on real estate renovations. Thanks to those renovations, consumers are now seeing move-in ready homes and rehabbed apartment buildings – along with rapidly rising home sale prices and rents.
What's more, the Bankrate Financial Security Index Survey released last week revealed 54 million Americans consider real estate to be the preferred cash investment for funds not needed for more than 10 years.
If you’re one of the tens of millions who think real estate is a better place for your money than stocks or other investments, it might be time to get off the fence and get started.
Here are five things you can do to make sure you’re ready to invest, plus some tips on how to get started the right way.
Educate yourself first.
If you’re unfamiliar with the nuances of real estate transactions, not to mention the real estate market you want to invest in, become an expert before you put up any capital.
Depending on the type of investment you intend to make – commercial or residential property, house flipping or owning and managing a property with tenants or even short-term rentals – get a full understanding of what’s involved and whether you can handle it.
“It’s nice what they show on television, but there’s a whole lot of details and paperwork that come along with that. And that’s where the mentoring and partnering come into play – people can really help you out,” Tassell says.
Take your time.
Real estate is a major investment, so don’t make any decisions until you feel confident in the deal.
In January, Wells Fargo released a Wealth Planning Update, “Investing in Real Estate in Today’s Market,” which noted that low interest rates in previous years have been essential to attracting investors to real estate.
Seven months later, one of the authors of the report, Scott Bennett, real estate advisory specialist for Wells Fargo Real Estate Asset Management, says the expectation that interest rates would rise this year has changed, as the Federal Reserve does not foresee increasing rates in the immediate future.
That gives investors more time to carefully consider their decisions.
“If anything, it’s given people the opportunity to look a little more closely at the opportunity they’re considering because there’s not this deadline of interest rates rising,” Bennett says. “We’ll probably stay in the low interest rate environment for the near term anyway.”
Making the right friends can make a huge difference when you’re starting a new business venture, which is why Tassell says connecting with a local group or association can help you get past square one with real estate investing. Nearby groups can usually be found through a search online, and they may have member dues as well as non-member events.
Tassell has one warning, though: He advises against one-time events by house flipping or investing “gurus” who offer tricks of the trade but no local knowledge or continuous help.
“Those tend to leave people with empty wallets and information they don’t know how to implement, whereas a group provides both education that takes time to answer the questions you actually have, is applicable locally, and typically you can build mentoring and networking partnerships – and those are essential when you’re going into real estate,” Tassell says.
Bennett also recommends working with a qualified real estate advisor. “It gives you an opportunity to invest wisely, gives you an opportunity to invest alongside with a professional group, and it gives you an opportunity to learn the business alongside a professional team while you’re investing at the same time,” he says.
Consider the options.
Determine what kind of property ownership will be best for your money and where you should invest.
While investing in property in your local market may seem like the go-to option because you’re familiar with the area, selecting an outside market may be better for your bottom line.
Peter Abualzolof, co-founder and CEO of real estate investment data analysis service Mashvisor, notes an investor from New York City who may not have the capital to invest in high-priced New York properties could focus on a smaller, less expensive market. This could mean going into suburbs or noncoastal markets that are flourishing, such as Denver or Austin, Texas, where property is a bit less expensive but is seeing consistent, strong gains. This only works, of course, if you study the market and know its nuances first.
“[Investors] can potentially find a property for a lower cost at a higher return or potentially purchase multiple properties for the same budget with a higher return,” Abualzolof says.
Put your eggs in other baskets.
Both before and during the investment process, keep an eye on costs and your investments elsewhere. The last thing you want to do is put everything in you have into a single real estate deal.
Bennett often works with Wells Fargo clients who have larger portfolios, with real estate serving as a portion of their overall investments. You should have varied investments outside of real estate to help offset declines in certain asset classes – if real estate takes a dive, for instance.
“We look at [real estate investment] as an opportunity to diversify a portfolio,” Bennett says.
Additionally, while short-term real estate investments like house flips might seem tempting, holding onto real estate for longer periods and riding out hiccups in the market tends to give you better security in your investment.
Tress Realty Group compiles some of the best real estate news, tips, and information for buyers, sellers and investors.