Information, Tips and Advice on Real Estate Investing

homeguides.sfgate.com
by Mary Gallagher, Demand Media

For your first project, start small.

Investing in real estate can be rewarding and lucrative. It can also be demanding and financially challenging. To make sure you end up on the right side of the equation, you’ll need to do ample research, work steadily and have patience. Although the historical appreciation rate for real estate hovers over 8 percent, it is an annualized figure--that is, averaged over a long period of ups and downs. Contrary to some advertisements, real estate investment is not a get-rich-quick scheme.

Leverage and Appreciation

 

A key to real estate profitability is the one-two punch of leverage and appreciation. With most investments, a dollar invested is a dollar subject to appreciation or interest. In real estate, a dollar invested translates into four or five dollars subject to appreciation. This is because you only have to make a down payment on the investment and you obtain a mortgage for the balance. Appreciation, however, is on the value of the property, not on the value of your investment. If you invest $200,000 in a stock and it goes up 8 percent, you will have earned $16,000. If you invest $200,000 in a house selling for $1,000,000 and it appreciates 8 percent, your profit will be $80,000. While sometimes it makes sense to purchase a property quickly with all cash, you will make more money over the long term by finding properties ripe for appreciation through leverage.

Carrying Costs

 

During periods of double-digit appreciation, it is easy to get caught up in sales prices and to forget carrying costs. Investors who made that mistake going into the housing bust ended up going broke. A building’s carrying costs are the monthly expenses required to maintain it: mortgage, insurance, taxes and utilities. When you look at buildings, figure out what the carrying costs will be and then survey rents by reviewing rental listings and talking to other landlords. You want to walk away from buildings that won’t rent for at least their carrying costs, and instead focus your attention on properties that could rent for well above their carrying costs. Even if you are going to flip the property, its ability to bring a good rent will make it attractive to both potential owner-occupiers and landlords.

Plan B

 

While you control the price you pay for the property and how much you put into it, you have no control over the market. Market conditions don’t change dramatically overnight, but they can change enough between the time you buy and the time you sell--enough to double, halve or erase your profit. For this reason it is important to have a back-up plan. If you were planning on a quick flip but the market changed before you could list the house, and you made sure when you bought the building it could rent for more than its carrying costs, rent it out for a year or two. You’ll increase your profit, and the profit will be subject to capital gains rates instead of the usually higher ordinary income rates. If during that year or two the market appreciates substantially, you might consider keeping the building for a longer period and taking money out through a refinance for your next deal.