If you’ve been watching the market, you know that real estate investment has been aÂ
hot area for brand-new and experienced investors alike in recent years. The market is generally doing well after nearly a decade of slumps, and many people want to get in while the situation looks good.
However, real estate investing isn’t nearly as easy as popular cable television shows want you to believe. It’s mainly the best investors, with dedication and knowledge, who make it to the top.
Being a real estate investor is like successfully navigating a diet
If you’re trying to determine whether real estate investing may be right for you, try comparing it to a weight-loss regimen. In the diet industry, there are thousands of gimmicks that draw people in and mostly cause them to lose money.
Hopeful participants are promised a “get slim quick” solution but end up pouring money into the service without enjoying any of the benefits. The result is lost money and disappointment.
In a weight-loss program, you shouldn’t pour money into services without carefully reading the reviews and making sure the program will match your lifestyle and needs. Sometimes it will be the best solution to meet your goals, but in other cases, you’ll have to find something else.
Real estate is much the same. You mustn’t fall for the get-rich-quick schemes that dance into view. You have to study the matter carefully, become knowledgeable about the industry and spend your money wisely.
There may also be an element of having to persevere through hard times. The most difficult part of a weight-loss diet is exerting the patience and self-discipline: You have to be willing to wade through the hard times and be sufficiently patient to reap the fruits of your hard work.
If you lack the patience, foresight and discipline to lose weight, you may not have the fortitude to make profitable investments in real estate.
Know the rules
You’ll need more than a superficial understanding of what goes on in real estate investing and the purchasing process. Investors can’t hope to be a success if they don’t know the rules and how to apply them.
The first rules to master are those of the market. Being able to monitor competitive pricing, sense market shifts and know when to sell will make the difference in your fortunes. Much of this expertise will come from experience, but you can learn a great deal from independent study and talking with the experts.
There are also rules that relate to mortgage lending, negotiations, the number of loans you can take out and other financial and closing rules. Research as you go to gain a full understanding of which rules apply to your situation.
When you’re well-versed in the system, you have stronger negotiating power and are better prepared to maximize your capital.
Find your niche
Don’t assume you can waltz into the real estate investment field and enjoy great returns without initially mastering a niche. Any firm will tell you that having a niche in real estate gives you the power to market yourself more successfully, master the industry, understand and navigate the market with greater skill and increase your negotiating power.
In short, there are surer profits in a niche market, and you’ll have more fun. Some of the favorite real estate niches that investors target are:
- Raw Land: improving undeveloped land for profit.
- Water/Mineral/Oil/Gas Rights: selling raw land for the mineral rights.
- Buying and Selling: purchasing single, multifamily, duplex homes and the like at one price and selling them when the market improves.
- Real Estate Investment Trusts (REIT): investors pool their funds to purchase a property and split the profits.
- Commercial: investing in properties to rent to private firm.
- House Flipping: purchasing a home in poor condition, renovating it and selling it for profit.
Investors who are serious about expanding their career and seeing solid profits will find the real-estate niche that appeals to them and stick with it. It’s riskier to go about real estate investing in any other way.
Understand the risks
Investors would also be foolish to enter the market without recognizing the unavoidable risks. If there’s one thing the housing crisis of 2008 taught us, it’s that things can go south in real estate without much prior notice.
Though it’s usually a stable market, the chances of your losing cash remain substantial. The biggest risks of real estate include:
- Debt risks, including leverage, cap rate and debt maturity.
- Sponsor risk, which refers to the inexperience of developers, operators, lenders and other vendors.
- Tenant risk, which involves issues with the people who rent your property.
- Physical asset risk, which comes up when unexpected costs arise.
- Market risk, when your property’s price can fluctuate based on market cycles.
- Geographic risk, when property performance is affected by regional, state, city or neighborhood factors (e.g., job growth, population, etc.).
You’re likely to encounter many of these risks in your investment activities. You might even find yourself experiencing significant setbacks because of them. The essential thing is to be prepared to learn from these reversals as they occur.
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