Published September 28, 2012
As the national real estate market is in the news each week, and there is talk everywhere about cheap foreclosures, short sales and other incredible opportunities and deals, you might wonder whether investment real estate is right for you.
Real estate is not like other investments: Ownership takes time, energy and effort to manage, and it can be a real hassle. Remember when your kid overflowed the bathtub? Tenants’ kids do that, too! And you, as the landlord, have to deal with, fix and be involved with the issue or it won’t get resolved properly. And if it isn’t handled properly, it can become a bigger, more expensive problem.
And even if you have a property manager, you ultimately will have to be pretty involved and deal with the property if you want it to be a wealth building asset. The less you are involved, the higher the chances it won’t be a profitable experience. And that starts even before you purchase it by your doing the proper homework, research and analysis to find the properties that are good investments.
Is real estate right for you?
Since owning real estate is hard work, just like any other job, you need to ask yourself: Do I have the desire and time to manage my property? If you are one of those people who believes real estate will be easy money with little work, ask around. Water leaks, tenant issues, neighbors, etc., all come along with rental properties, and you, as the owner, will probably have to be involved. So does that sound appealing to you?
Is it the right property?
In order to find a fair deal on an investment, you need to educate yourself on what is a good deal. Far too many people buy property and just hope it will go up in value. Hoping something will go up in value isn’t a very sound — nor likely to be successful — investment strategy. Experienced property owners avoid even considering any appreciation in value and know that the good investments pay positive cash flow to you each month. And many properties are not very good investments — fancy downtown condos, beach houses, prime locations, etc. Some of those might be negative cash flow for several decades before you see, or more likely your grandkids see, the property’s first penny of positive cash flow.
Is the return sufficient for the risk you are taking?
You can earn a very low-risk long-term yield on corporate bonds or securities of 4-6 percent average per year. So even if the real estate has positive cash flow, does a 1 percent investment yield sound appealing in a very illiquid asset? You need to buy properties with better cash flow yields, and that’s harder to do than you think.
What’s the plan?
If you plan to only own real estate for 3-6 years, skip it. The chances of your earning a fair return from short-term ownership are pretty low. Sometimes people get lucky … but that lucky person most likely will not be you! If you have a short-term time horizon, it’s likely you will do better financially by skipping real estate ownership.
So if you are interested in adding real estate to your portfolio, and you can do the proper research, buy nice cash flow properties, manage those properties and own them a long, long time … then real estate may be a good addition to your investment portfolio.
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Leonard Baron is America’s Real Estate Professor – his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate buyers how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com.