It’s 6:00AM, and two Chicago policemen are sitting at O’Hare International airport talking abut real estate and personal finance. More specifically, they’re talking about the investment choices they’ve made.
In addition to his retirement portfolio (half in growth and equity funds, half in Fidelity’s Magellan fund), one of the cops likes real estate as an investment. Over the years, he’s bought multi-unit buildings (which he says are a “pain in the butt, but a great investment”), rented the units, managed them, and enjoyed reasonable appreciation and a good enough cash flow to send two daughters to college.
But the days of easy real estate investments have passed. The policeman lives in a neighborhood on the northwest side of Chicago and complains that the same appreciation has made new acquisitions almost impossible. That’s not to say he’s quit looking. Or that he isn’t buying. He is, but only on his terms.
Residential real estate investments have generated an excellent return on investment for many savvy investors. The key to their success is simple: know your strengths and weaknesses as an investor, manager, buyer and seller; buy value when you see it; and, plan in advance how your real estate assets will help your financial portfolio.
-Know Your Strengths and Weaknesses. Rarely do two individuals look at a single investment in the same way. Some folks like risk. Others like steady, if unremarkable returns. Some people like holding stocks. Others prefer to watch the marke’s every move, trading back and forth to increase returns. Some people will move their bank accounts across the street to take advantage of a 1/8 percent increase in interest income. Others think the paperwork isn’t worth the effort.
Investors look at real estate from different perspectives as well. Almost any type of property may be bought and leased, but you should think about how involved you want to be with your purchase before you buy.
If you’re the kind of investor who wants to micromanage your real estate, if you want to be there day in and day out fixing things, then consider purchasing a multi-unit building. The tenants are bound to keep you hopping.
If you don’t have the skills, time or interest for that kind of investment, consider purchasing a condo in a building that employs engineers to fix things like stopped toilets and leaky sinks. If you like to do some of the hands-on stuff, but don’t have a lot of time, consider purchasing and fixing up or purchasing and renting single family homes. If the property is in good shape to begin with, you should be able to limit your renters’ complaints.
The condition of a fixer-upper should match your skills as a contractor/handyman, and take into account the time and money you have to spend. Beginners should look for a home that needs simple cosmetic improvements, such as new paint, carpet and wallpaper. Those more advanced may want to tackle stripping woodwork, refinishing floors, and replacing bathroom fixtures. Don’t take on more than you can handle, or you’ll quickly find yourself bogged down by missed deadlines and details, both of which will siphon off profits quickly.
-Buy Value When You See It. Spend the time it takes to really know your market before you purchase investment property. In addition to knowing about the property, neighborhood, services and school district, you should know what the standard market rents are, how many rental units are available, how quickly they turn over, if long leases (2, 3, and 4 years) are common, and whether or not you need an agent to handle your rentals.
Once you know these details, apply your knowledge to the various opportunities you see. Take the time to calculate the numbers, determine profit and loss, and how positive or negative the cash flow will be, and for how long. After seeing enough properties, you’ll begin to get a feel for value in a particular area, and will gain the confidence to purchase the appropriate investment vehicle when you see it.
-Plan For Your Real Estate Assets. One of the biggest mistakes real estate investors make is to not understand ahead of time how they want their real estate assets to function. The property you purchase should reflect whether you decide you want long-term cash flow or short-term appreciation, or whether you decide to build up equity as quickly as possible or use excess cash as down payments for other real estate investments.
Here, too, different investors harbor various philosophies. The Chicago policeman favors paying down his mortgage as quickly as possible to avoid paying unnecessary interest and to quickly build positive cash flow. Others like to put as small a down payment on the property as possible, and use extra cash to improve it.
Whichever way you go, one thing is clear: If you’re going to purchase real estate as an investment, go into it with your eyes open, not your wallet.