We certainly live in times of economic uncertainty. Not only at the macro level but the micro aspect, as well, considering that the big economic picture directly affects individuals’ lives. Volatility is the term used by most economists and finance managers and that simply means risk. So the big question for most people is how to position themselves during such risky economic times and what can they do to protect what they worked so hard for? A small group however is more geared towards how to profit from the opportunities that are offered by an economic crises.
I have thought long and hard on the subject of real estate. It is true that prices have dropped tremendously since the bubble burst and it may be an understatement to say that a large group of Americans have been hurt by such an event. Real estate today is in a freezing mode for most potential buyers yet it’s keeping busy a very few that continue to have success with it. I am not surprised because the national media had done a good job of putting Americans in a panic frenzy. But I’ve always been a non-conformist and looked much deeper into assessing the scenario so the first thought that comes to mind is what are those few that find success in real estate today know that the rest of the people don’t? No matter in what investment arena we focus on we’ll find the unwritten rule that a good opportunity exists ONLY until the majority of the people find out about it. Once too many people have discovered it the opportunity loses its value.
One of the things politicians and mass marketers have in common is that they know most people act based on emotions. A politician knows how to make his constituents “feel good” while he/she makes promises (that in many cases are not kept). A TV, radio or Internet commercial is designed to turn a viewer into a buyer. It doesn’t matter if the buyer has a need for the product, it matters how he/she “feels” owning the product. So was the idea of “home ownership for all” promoted by the government, politicians and banks not long ago only to find out that not everyone is fit to own a home just like not everyone is fit to be a doctor. I don’t want to cross the boundary into the political arena so I’ll get back to my original point and keep it simple. Emotions are not facts. Acting or reacting based on emotions is different than acting based on careful evaluations, factual data, and logic.
Investing in real estate is not a glamorous event. I won’t tell you that you’ll wave the magic wand and without any effort you’ll be rich. Now, you may not have to work on doing repairs, collecting rents, or necessarily deal with tenants, but nevertheless there’s effort to be put in planning, budgeting, and managing the managers.
Without planning there’s no reason to even consider investing in anything. A plan is what everyone should have, and experienced investors know this better then anyone else. Sure, plans would have to be adjusted based on factors that often arise but that’s no excuse for not implementing one. Planning is like homework. It gets done you move forward, if it doesn’t get done…well, you get my point!
So what does planning entail? To start with it helps to know where and what you’ll invest in. Are you going to stay in your own backyard or are you going to explore the idea of going in other places of the country? Are you going to invest in houses, apartments, or other type of property? Real estate today is not like ten or more years ago. Technology has made it so much easier to diversify your investment portfolio whereas staying strictly in your neck of the woods may limit your opportunities.
The idea that the property has to be located in your town is viewed by the pro’s like the idea of insuring the stock you invest in has to be of a company that is located close to you. I am convinced that if you are invested in stocks or mutual funds you don’t care where the companies are located as long as they make you a profit. So if you trust a stock broker or a commodity broker to invest for you there must be a good reason to invest through him. Same applies for real estate and you’d have to insure you use a good property manager.
Is it going to be cash or financing? Will you use an IRA to acquire the property? Is it going to be a LLC, LLP, or a corporation in which you’ll take title? If you need financing are you equipped to even qualify for a loan? Do you have enough capital to invest in real estate? You may not know all the answers but that’s why associating yourself with worthy professionals may be a good start. All this takes time and effort and keep in mind that tough times have always made investors more resilient. Barriers insure that only those driven and focused stay on the path and become successful while the rest quickly give up the idea. You see, I am not here to make you “feel good”! Consider it a good dose of reality. After all not everyone is an Olympic champion, right?
Oh yes, just because you have a manager, a maintenance crew, or an accountant it doesn’t mean that you’re off the hook. You still have to watch and question, when necessary, their actions. Going back to my example of trusting your stock broker I hope that you often ask why he’s investing your money in whatever ways he is. You should do the same with your property manager. How does he/she screen potential tenants? How do they handle tenants in default? If they handle repairs for you and your rents pay the bill would they give you a copy of the repair bill? These and so many other questions are important. You may not have to roll up your sleeves and start painting a property but you’ll want to know what’s right and what’s not right. For example, you wouldn’t want to pay $500 for changing a door-lock.
When the manager sends you the monthly report you should have a good knowledge of how your rental income is being distributed to pay for management, taxes, insurance, and maintenance items. By the way, you’ll also want to make sure you have the right insurance coverage for the best premium. Even with a manager, an accountant, or any other professional, know that it’s not their job to shop for you. If you want to save money on insurance then you shop for the best insurance company.
In the end you may say “so if I have to know or learn so much, if it’s not glamorous, and it doesn’t make me feel good why then should I invest in real estate?” I sure hope that this really is not going through your mind. If it is I can honestly say real estate – or any other investment – is not for you. But again not everyone is fit to be successful even though everyone has the same opportunities. If you’re not discouraged by everything that I shared with you then you may be one of the few that has what it takes to become the investor that you envision.