|
An All-Weather Strategy to Real Estate
Investing
Despite some positive stirrings in real estate in various
parts of the country, it's wise to take cautious steps when
strolling back into the investment property market that was so
overheated just a couple of years ago.
A good first step is consulting with a tax or financial
adviser, such as a CERTIFIED FINANCIAL PLANNER™ professional,
who can help you assess your own financial situation before you
begin. Getting your own financial house in order first is
critical.
Some thoughts:
Remember that real estate investment is part of an overall
financial plan. Investing in real estate requires specific
tax, spending, budgeting and people management advice. Based on
your other assets and your overall financial plan, investment
property might be a worthy goal, but only if it fits your
investment strategy and if you're willing to put the time and
effort into creating a successful business.
Don't spend until you study. If you don't have an
intimate knowledge of neighborhoods, rental rates, commercial
traffic or any of a dozen more factors that make real estate
investments a particular success in one community and not in
others, don't even start. The most successful people in real
estate investment have taken the time to learn about the
properties they're buying, sensible ways to borrow and
economical ways to manage the buildings they have. Make sure you
assemble a good advisory team around you starting with your
financial planner, your tax adviser and an attorney
knowledgeable about real estate transactions. They'll teach you
and keep you from making serious mistakes.
A slower market doesn't mean a bargain market. Even
though the gains of the past 15 years aren't what they used to
be, keep in mind many sellers aren't terribly desperate to sell
and they're not dropping their prices all that much. Make sure
you take the time to study a particular market not only for
gains in price, but for stability in rent and overall quality of
the property and neighborhood you're examining. You might hear
about a downtrodden neighborhood ready to "turn," but
that rotation might take years — start slow and pick properties
with the best chance of appreciation.
Home ownership is not real estate investment. If
you're thinking about leapfrogging from one residence to a new
one in hopes of huge gains when the market returns, give
yourself a reality check. An investment is something you can
sell when the moment is right without any hesitation. Is that
something you can really do with a home you've grown comfortable
in? When the market goes up or down, we don't necessarily think
of dumping our principal residence. There are emotional ties as
well as physical ties to a home — whereas real estate bought as
an investment must produce income during ownership or a profit
at the time of sale without exception.
Real estate is not an automatic ticket out of financial
trouble. Some people have gambled their way out of debt by
buying distressed properties and reselling them at a profit.
They're the lucky ones — and after hearing so much about the
"flipping" phenomenon, many of those success stories
might be apocryphal. Be aware of your risk tolerance at all
times.
Enter the foreclosure market carefully. With all the
reports of sub-prime borrowers losing their homes in recent
months, don't think those foreclosure numbers will automatically
provide you with a can't-miss opportunity in real estate. Taking
advantage of the foreclosure market is both a learning exercise
and an emotional one. It takes time to learn all the correct
avenues in a community toward investing successfully in failed
properties, and actual contact with families losing their homes
can be wrenching even if you do know what you're doing.
Foreclosure and pre-foreclosure investing is not for the
faint-hearted.
Cash is king. During the white-hot real estate market,
people were buying and selling property for little or no money
down because lenders were willing to take that risk. Today, in a
higher rate environment, that's definitely changed. While many
successful real estate investors choreograph borrowing
seamlessly into their strategy, cash is an important decision
for down payments and covering ongoing expenses. This is where
your advisory team comes in.
Keep your credit report clean. Only borrowers with the
highest credit scores will find the best lending deals if they
need to borrow. Make sure your credit report is clean before you
enter the market.
July 2007 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
|
