Real Estate Investing - 101

Forget the Sunday morning infomercials...Forget the "I made $30,000 is 15 minutes" crowd...Forget the spinmeisters and sales gurus who claim your pathway to riches is on the next block over...Real estate investing is a challenging, yet rewarding, long-term, venture that is truly not for everyone.

How do you define investing? Do you religiously take $5 to the corner mart and buy lottery tickets every week? You know, there is an old saying that goes "I used to wonder what I was going to do if I won the lottery, and now I wonder what I'm going to do if I don't!" Do you put a little money in a savings account and watch it grow at 3.5% interest? What is your honest take on investing?

My opinion on investing is that it requires work, vigilance, educating yourself about the investment, and a keen eye for minimizing costs while maximizing profits. Oh yeah...It also takes time. Very, very few investments afford you a quick payout, and a majority of those investments require precise timing (some refer to this as luck) that even the best in the business don't always achieve.

Real estate investing is no different than any other type of investing except it affords you potential access to a piece of real property. Yes, you can get involved in a real estate trust and never see the property you co-own, but typically you will be able to drive down the street and see your investment. It is a tangible object that is subject to all of the normal wear-and-tear all of the other properties in the area are subject to, plus it will typically hold renters or leasees who will cause additional degradation of the property.

Why am I telling you this? Because if you are considering making an investment in real estate, you have to be prepared to commit to that investment for enough time for it to pay off, plus you must either be capable of handling all of the various aspects of managing the investment or put together a team to help you succeed.

There is another sage aphorism goes a little like this... "you make your money in real estate the day you buy the property". Failing to "buy it right" can doom even the best investment plan to failure as uncalculated costs, undiscovered faults, and other surprises devastate your profit. There are quite a few opinions on this particular subject, but frankly there are a number of highly precise formulas that can account for nearly every type of expense, profit, tax, or loss long before you put your name on a purchase contract. If you do not know these formulas, or how to apply them, find someone who does and can. It will quickly let you determine if you are looking at a good investment.

All investments require at least a minimal amount of work and oversight. Unless you hire a reputable property management company to handle your day-to-day property affairs, you will need to do this yourself (and...you must account for all of your expenses no matter which path you choose). Water heaters do break in the middle of the night, you know, and someone has to take that call. Keep this in mind when you evaluate an investment because these seemingly minor costs can erase your profit.

Most importantly, never forget holding costs and planning your exit strategy from the get-go. Holding costs are most prevalent in rental properties when there is a vacancy. Someone has to make the mortgage payment. For those who choose to flip properties, holding costs include everything from the electric bill to the mortgage payment while you rehab and wait to sell. Not estimating these costs correctly and sufficiently will ruin your investment very quickly.

Your exit strategy needs to be based upon accurate market projections, tax and depreciation calculations, plus using a formula to calculate what is called internal rate of return to help you determine the optimum time to sell an investment. Using the best available data, plus the input of your team, you should be able to have a clear picture of your exit strategy before you even make an offer to purchase the property. Again, failing to take this step could have an adverse affect on your investment.

There, I think I've said enough to wet your whistle. I hope if you are considering making an investment in real estate you will hear me loud and clear when I say "do your due diligence, put together a competent, trustworthy team, and make sure you have run all of the numbers before you put one word into writing on a purchase contract!" Also, you need to do a little soul-searching to ensure you are up to the challenges of owning investment property. It really isn't for everyone, and there are many, many other investment options that can provide returns completely in line with those from real estate. I wish you well in your adventures!

Joe Hayden is a real estate Realtor based in Louisville, Kentucky.  Contact him through his website, Louisville Kentucky Homes.