Now Is The Time To Start Investing In Real Estate
Posted on October 26, 2007
For all new investors, structuring your first deal is a traumatic experience. Questions run through your mind like: “What if I miscalculate the numbers?” “What if I can’t get financing?” “What if I make the sellers mad with my offer?” “What if I can’t make the payments if the offer is accepted?” And dozens more! I had these same concerns when I started investing, and you will too. Getting started investing in real estate could be compared to getting behind the wheel of a car for the first time, taking your first flying lesson or even jumping out of an airplane for your first parachute jump.
All investments have risks, and real estate is no different. The art is to minimize the risk by learning as much as possible about the property, the neighborhood, market conditions, rental demand, and other such factors that can affect the profitability of a transaction. If you err, be sure to err on the side of caution, and it will serve you well. No one ever got hurt by a property they didn’t buy.
When structuring your first deal, be sure the offer you make will work for you under your current conditions. This may mean that you have to make many offers before you have one accepted, but it is critically important for new investors to have their first transaction be a successful one. Often, you will come across deals on properties that seem too good to be true. When this happens, ask yourself, “Is there such a thing as a property that is too much of a bargain?”
Some of the best buys I’ve made seemed overpriced at the time. Some of the worst buys I’ve made looked like sensational bargains when I bought them. Over time I’ve learned that there are three elements to a strong real estate market: buyers who want to buy, sellers who want to sell, and ample available financing. When all three of these elements are present and in proper balance, a property that is priced fairly and given adequate marketing should sell rather quickly. If conditions are right and a property remains on the market long enough to force the sellers to take a low offer, it was either overpriced to begin with, or there are inherent problems that have kept buyers from making higher offers.
Perhaps the neighborhood has an unsavory reputation, and you don’t know the area well enough to realize that it’s a problem. Perhaps there are sewer or water problems that aren’t obvious when you inspect the property. Hidden negative factors like these can cause other buyers to shy away from the property. Should you purchase it and ever want to sell, you’ll find that the deal you got was only because you assumed the sellers problems. This is why it is so important to do your homework; research an area before you buy, especially if a deal looks too good to be true.
Conversely, when one or more of the elements required for a strong real estate market weakens, it can result in great deals being found on good properties that don’t have hidden problems like the ones just mentioned. Suppose you find a good deal on a property, but half of the houses in the neighborhood have “For Sale” signs on them; you should determine if this is due to a problem with the neighborhood or if it is the result of weak market conditions.
Fortunately, there is adequate information published about the real estate market to assist you in determining if a deal results from market conditions or may be caused by hidden problems. For example, I read an article during the first week of October, that home sales for the previous month were at a 7 year low and unsold inventory was at a 37 year high. That’s a pretty good indication of a strong imbalance in the real estate market and a good sign that the market is weakening and will produce some great deals.
If you plan to embark on a long-term real estate investing career, the next several months may be the best time to do so in the last 50 years. On the other hand, if you want to speculate in real estate, by buying, fixing up and flipping properties, the coming months may be the worst time to do so in the past 50 years. Long-term investors purchase properties that produce enough cash flow to pay all of the expenses and still have enough left over to pay the mortgage and provide a return on any cash the investor puts into the deal.
The best time to find deals like this are when the sales market is at its worst. The fixer uppers and flippers fare well when the sales market is red hot and they can turn properties quickly for a profit, but they often go belly up when the market cools and they are caught holding properties they can’t sell.
Here’s a tip! Don’t let all the negative publicity about the declining real estate market scare you. Now is the time to start building a portfolio of income producing properties that can build wealth and secure your retirement. There’s no need to be nervous if you approach real estate investing properly. The secret is structuring offers that won’t take part of your salary to make the payments. Investment real estate should pay you. When you have to pay for the privilege of owning it, it’s not an investment.
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