What is the key to successfully investing in real estate?
Actually there are several things to consider.
First: You have to have a plan. That would consist of asking questions to determine exactly what you want out of your investments. Are you looking for a tax shelter? Are you trying to build wealth through a long range portfolio? Do you want to flip properties? Each is a different path and calls for a different strategy.
Second: How are you financing your investments? Again, the answer depends on which path you take. Let's look at each of the three mentioned.
Tax shelter - If this is the path you are following then you really need to consult with an accountant who is familiar with the ins and outs of real estate investing. I have sold properties to investors who were actually fine with a negative cash flow to begin. Again, get a competent accountant to go over your financial situation. In this path real estate is only a part of your overall financial situation. This type of investment is usually financed with an investor loan with 10% to 20% down. Your accountant can guide you on how to shape this scenario.
Long range portfolio - Here you are looking at the most stable of investments. Real estate over time is one of the most solid investments you can make. But remember, this is speaking of a long range investment strategy. Once again it's best to consult an accountant to structure your real estate portfolio since each investor will have their own specific goals. This type of investment is most often financed with a typical investor loan. Since this situation is more geared toward wealth building how you look at the numbers will be a bit different than the tax shelter path. Usually you will be looking for a positive cash flow from the start so it would also be wise to consult an experienced property manager to determine what the rent will be for your proposed investment.
Flipping - This is a field for the more advanced and experienced investor. Many investors have lost a considerable amount of money by making some wrong choices along the way. They would include, paying too much for the property initially, underestimating the amount of work to be done to flip the property or underestimating the cost of the needed repairs. Over-improving the property. A good investor does not get emotionally attached to the property or the improvements made. Spend the money for granite or fine cabinetry or flooring in your own home, not your investment properties. That is, unless it is standard for the area. If none of the neighbors have granite, don't put it in. If most do then go ahead but be wise in you selection. Remember you're preparing a product for sale. It's not your baby! The bottom line with this type of investment is to prepare a budget ahead of time and stick to your budget. There may be some unforeseen situations but that's not usually what causes the trouble. It's the attitude of "oh it's only another $100". Once you start down that slippery slope each $100 or $500 or $1,000 becomes easier and they slip by without the investor stopping to add them up. Before you know what happened your $25,000 over budget and don't know why. If you've never flipped a property before you may consider getting involved with someone who has some experience and can guide you through the first one or two. More often than not this type of investment is financed with "hard money". That is, money from private sources that tends to be a bit more expensive.
A word about financing in general. There are investor loans available from most mortgage companies that can run as low as only a 10% down payment. However, if you don't have a track record of owning rental properties you may have to qualify for the extra mortgage without counting the rental income. The other source of money is called "hard money". Hard money lenders specialize in short term loans for your real estate purposes. If you're flipping properties this will be your path. When working the numbers for your investment it's an absolute must to count your financing costs and to have a schedule for the improvements that is realistic with the numbers involved and that you stay on schedule! Of course the third alternative is if you have cash to invest. A word of caution for cash investors. It's still very important to pay attention to the numbers so you achieve your goals.
Finally, you may have heard horror stories about investors who lost everything in the "bubble". There are a couple of things to consider when investing in real estate. If you invest long term you will be relatively safe. If you want to "jump in and make a killing" you should understand the risk can be very high in short term speculation. Also, consider your location. The more stable the area financially the safer the investment. On the other hand, if you invest in an area where the economy is heavily dependent on one or two businesses you may want to look at the long term plans and prospects of those businesses. Don't be afraid to invest but always do it with eyes wide open.