What confounds me the most about REALTORS® is why they do not own investment property. Warren Buffett famously said, "Invest in what your know", and what we should no best is real estate. In fact I have a new one hour class I am teaching in Oklahoma on an introduction to real estate investing. In the class I will give basic information, definition of terms, and resources that can further ones understanding. Even though I have enough positive cash flow to pay all my bills and live very comfortably I am still buying more and have my goals set on two more condos in Florida and two single family homes in Oklahoma City. Let me point out a few simple highlights to investing in real estate:
A good buy is not always a good investment: Just getting something undervalue is not the whole picture. Equity is a great thing but cash flow is just as good and more predictable. One factor you need to understand is, is it a good rental area as well as what is the supply and demand of that area. If a neighborhood is 20% or more rental that could be the reason for what you thought was a deal. When you factor in maintenance and management you need to also look at vacancy. So what looks good on paper can be killed by a 20% vacancy, repairs, and low rent.
Know your terminology: At the end of the 4th quarter of 2016 we were trying to fund our defined benefit plan and it wasn't looking good. The year before we were getting a 6% to 7% yield on our stocks but last year 4% was looking like the max. I will get to risk assessment in just a minute. When I do a seven year internal rate of return which is your total return as long as all your money stays in that investment, it is typically 18% to 19% per year even with sales cost. Considering we can buy without commission involved as well as spotting equity our return can be even larger. When you ad in write offs like depreciation and 1031 tax deferred exchanges this number can reach 30% in many markets.
Risk Assessment: Every time you put out money for something there is always a risk factor. I'm not a gambler so I don't think of Motley Fool as the go to place to find riches. My wife and I are conservative with our money so we don't put everything on red when they spin the wheel. Always look at the downside because it can happen. remember 2007-2008? At least that is the way we think. As someone who is about to turn 70 risk is something I think about everyday in a lot of ways. So for me paying off homes is my idea of a good time but for some of you who are 35 maybe not so much. Remember that with only one investment property that is vacant you have a 100% vacancy rate so using leverage to build a portfolio based on 20% to 25% down may be worth the risk for you.
The Rest: Not wanting this post to be like War and Peace just a few other thoughts and the first one is property management. If you are successful and insanely busy a manager is worth the expense. Even if you want to manage on the monthly basis hiring a professional manager to vet you tenant can be the best money you can spend. You probably also want to think locally but maybe go out of state. I know that areas like Texas, Oklahoma, and New Mexico for instance are extremely landlord friendly. In Oklahoma we can evict in two to three weeks time and other states are similar. Get some education also because just because you can do well with buyers and sellers doesn't mean you know investment. My personal opinion is that every REALTOR® should take the CRS 204 course, Creating wealth through investing in real estate. I am sending a new hire of mine to Tulsa in September for this and taught by one of my favorites, Chris Byrd. So learn the terms, invest wisely and conservatively, and as they said in Hill Street Blues, let's be careful out there.