Since the housing bubble burst and a severe national recession quickly followed, the news has been filled with stories of foreclosed homes, the collapse of new home construction and banks struggling to survive. But amid this bad news, there is a silver lining.
Realtor Diane Petersen Schline says: "The negative news surrounding the real estate market is exactly what makes it the best time to invest. (Mortgage) rates are at record lows and have been for an extended period of time."
Glenn Dickson, an active real estate investor and president of Complete Property Services LLC, a property management company, adds, "Because of the foreclosures, you can buy properties today at considerable discounts to what their already depressed values are." With a few tips, the inexperienced can begin successfully investing in real estate.
* First, investors should educate themselves about buying property. Schline says, "Each buyer has a different level of knowledge, so be realistic with yourself about what you are truly capable of doing."
Dickson says there are a variety of programs that teach real estate investing, but the best place to start is a local real estate club. "You can meet people doing this, learn what works and what doesn't," Dickson says. But when deciding whether to invest with a group, Schline cautions: "Any situation that involves multiple parties automatically creates a breeding ground for problems, so trusting your partners is an enormous aspect of the future success. The advantage, of course, is that the purchaser needs less cash upfront."
* Second, an investor should decide on an investment strategy.
Dickson says: "There are two ways to make money in real estate: the slow way and the fast way. ... The fast way is to buy, fix and sell." Schline calls this strategy "high risk, high reward," and Dickson dislikes this strategy because a property that doesn't sell quickly won't turn a profit. Schline prefers the slow way, and Dickson agrees: "Where you can buy and hold, you should be able to participate in the market's recovery over the next few years."
* Third, an investor should pick a type of property to buy. Dickson advises against condos because they tend to lose value faster and appreciate slower than houses, and condo association fees can reduce your profit. Although Schline says that "variable expenses for maintenance may be higher with a standalone home."
* Fourth, pick a location to invest in. Schline says, "For an investment property, (location) can be the difference between vacancy and no vacancy, and that can be the ultimate game-changer." Dickson suggests looking for neighborhoods that are economically robust and have a low percentage of foreclosures because that will translate into "a more stable tenant base that takes better care of the property (and) pays better rent." Schline also advises investors to investigate the neighborhood's development plans that might affect views or access to public transportation, for example.
Finally, an investor must select a specific property. This decision all comes down to income (rent) versus expenses (carrying costs and the costs to make the property ready for renters). Carrying costs can include mortgage payments, taxes, insurance, special assessments and utilities. The investor or a property management company must also handle occasional maintenance.
Make-ready costs include such things as repairs, painting and replacing old appliances. To receive a higher rent more quickly, both Dickson and Schline recommend hiring a contractor to complete these jobs quickly and professionally instead of doing them yourself.
A key to profitable real estate investment is buying at the right price. Dickson aims to buy property at 75 percent of the property's estimated market value once it has been made ready, but that figure can rise if investors are competing. Experienced investors and realtors can help a beginner make accurate pricing assessments. Of course, after buying a property, investors should always have a thorough inspection performed on the property.
The sad state of the real estate market can mean good news for investors if they buy intelligently, quickly prepare the property, and attract and retain renters. If done correctly, the property should generate a steady profit. Perhaps it's time you considered adding real estate to your investment portfolio.