Dear Monty: Eight great tips to ponder before investing in real estate
By Richard Montgomery
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Our country’s foundation is real estate. It is all around us, like the air we breathe. Real estate is one of the largest sectors of our economy. It is an investment vehicle with a foundation in America’s dream from the time of the early pilgrims. Our first president was a land surveyor and a real estate speculator. Real estate utilization occurs in many ways and understanding these roots help if you are considering investing in real estate.
Access to real estate investment come through a variety of mechanisms that insure the benefits and responsibilities real estate ownership can both suffer and enjoy. Often, we have experienced real estate through relatively safe single-family ownership. But for passive opportunities, sophisticated and high risk-reward stock ownership in real estate investment trusts can be considered. In between those two choices lie a multitude of options.
So what should you know?
First, look inwardly. What have your life experiences been to date? Will those experiences lead you to certain real estate sectors? What skills do you possess? Are you mechanically inclined? Are you a math whiz? Are you introverted or extroverted? Do you like to read and do research or are you more inclined to learn by doing? What vocations have attracted you? Do you have disposable income? What is your principal motivation for investing? How much time can you devote to real estate? Consider your answers to these questions when deciding the best approach to leveraging your time and knowledge to succeed in your real estate endeavors.
How to jump in
The most common methods to participate in real estate are:
Work within the industry to earn and learn; real estate sales, property management or appraisals. Observing customer behavior and internal practices in these areas provides on-the-job experience that applies for your benefit.
Take ownership or partial ownership; individually, or with a partner or partners, in a limited liability company or some similar structure. It is crucial to align your mutual goals in a partnership. Engaging a team with successful real estate experience to fill your time or knowledge gaps can reduce the learning curve and the risk.
Match your attributes with the property type
Choose the type of investment to suit your skills, financial constraints, available time and risk tolerances:
- Single-family to 2 or 3 family apartments or flats - Property information is readily available. Considered as the low end of the risk spectrum.
- Mini-storage and small warehousing - Market conditions more difficult to assess. Less intensive management considerations. Find an owner looking for an exit plan and work for him for some period.
- Larger apartment buildings from 4 to 32 unit buildings or clusters - Larger capital investment and more management. Riskier for a new investor.
- Single purpose or one user office or retail buildings - Riskier because one vacancy means 100 percent empty. Often more sensitive to location and image.
- New home construction, remodeling and flipping - Experience, construction background and the ability to make quick decisions. Higher risk.
- Strip shopping centers and larger office buildings - Higher risk in a cyclical marketplace. Stiff competition and seasoned national tenants.
- Short-term lodging from bed and breakfast to motels or small hotels - Intense management. Often seasonal and extremely competitive. Strong correlation between the number of rooms and risk.
- Warehousing and large shopping centers - Barriers to competition high. Seasoned high net worth investors or stock companies.
- Buy and hold vacant land - Intermittent low-intensity management. Long holding period common. Growth is principal investment driver. Often require cash feed.
- Land development - Considered by lenders as one of the riskiest loans. Capital intensive and often longer than expected development timelines. Sensitive to adverse changing market conditions. Not for the faint hearted.
Important points for smart decisions
Understanding how the property functions, the economic drivers and the protocols for evaluation are vital. You also have to understand customer needs and the competition facing the property you are investigating, as each property type operates differently.
Know how to value property. Valuation is a combination of following a standard step-by-step process gathering and sorting information and applying logic and reasoning skills to that information. Learning the process is the easy part. It is not enough to rely on others for value decisions. Applying your logic and reasoning can be the difference between success and failure. Real estate investing is truly an avocation where you as an investor must take full responsibility for the outcomes.
Richard Montgomery gives no-nonsense real estate advice to readers’ most pressing questions. He is a real estate industry veteran who has championed industry reform for more than a quarter century. You can ask him questions at DearMonty.com.