How to Invest in Real Estate Safely

How to Invest in Real Estate Safely
How to Invest in Real estate Safely

Most of you know that I am a featured writer on the BiggerPockets blog, which means I spend a lot of time on BiggerPockets (not a bad idea for you either).  Last week I came across a comment to one of the articles by another blogger, a buddy of mine Mark Ferguson.  I could not believe my eyes – literally!  The comment, in so many words stated that to invest in real estate safely and successfully you must be able to predict the future – WOW!

This is one of the most wildly backwards things I’ve ever heard in my life.  To the contrary, the answer to the question of how to invest in real estate safely does not rely on knowing the future; should not require knowing the future; and if your success depends on you “guessing right about the future”, then what you are doing is not investing, but gambling.  Sure – you might guess right once in a while, but not often enough to outsmart the markets.

In fact, we can not know the future and therefore we must assume that anything could happen.  Investing in real estate safely, therefore, is a function of putting in place strategies and mechanisms that ensure success regardless of the overall market behavior in the future!  The question should not be – Will I Win?  The question should be – When Will I Win?

INVESTING SAFELY IS EASY IN REAL ESTATE

OK – it’s not easy, but it’s not very difficult either.  While nothing in this world is immune to calamity such as nuclear accident, terror act, or natural disaster in which case we are all toast, if you follow the steps outlined below you will more than likely succeed in making money in RE over time:

  1. Buy only income-producing property which makes money regardless of market valuation.  In other words, buy property whereby investment returns are a function of income and not valuation.  Who knows what valuation will do in the future?  It shouldn’t matter as long as you get your rents… But what if the rental market crashes?
  2. Buy property at such price and terms which provide for enough staying power (i.e. Cash Flow) so that in case if rental market softens you’ll be able to come down on your rents – a lot, and still be making money on a monthly spread, which will allow you to hold onto the asset.
  3. Finance property the right way, which basically means that you should finance in such a way which will not structurally force your exit, either by means of a refinance or liquidate.  This is more difficult to do the larger you grow, but it’s rather easy in the beginning – 30-year amortization.
  4. Do not trade property, otherwise known in real estate as flipping.  This strategy is based on liquidation of the asset at a certain price-point and on a certain time-frame, both of which make it highly dependant on market behavior with respect to valuation at any given time.  Flipping can certainly be done, but it requires much sophistication and willingness to loose if need be.  I am not willing to loose and neither should you. This is the domain of the few expert operators, of which you are not one…

CONCLUSION

What makes real estate so attractive is the notion that you can literally buy one silly little 4-plex, and provided you’ve bought the right kind off building in the right kind of location, you are going to be better off than the majority of the 401k/Social Security crowd.  There are exceptions to the rule, of course, and you could be unlucky enough to end up with a “tenant from hell” – sure that could happen.  But by and large, the degree of sophistication requisite to knowing what, where, and how to buy investment-grade real estate is much more accessible to majority of small investors than the degree of sophistication required for success in most other markets. At the end of the day all of us have to pick our poison, and for most of us small investors it seems rational to take a chance on real estate because if we do it the right way, we are not nearly as susceptible to the “future” as with most other investment vehicles.

Photo Credit: Danilo Arenas Ireijo (Mancha) via Compfight cc

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