How to Invest in Real Estate


  • Introduction

    • No doubt you’ve heard of “get-rich-quick” schemes regarding real estate. Leaving aside the credibility of those claims, it’s important to know that you’ll more likely “get-rich-slow” with real estate. Like most industries, the real estate market rides an infinite cycle of boom and bust. It’s quite possible to become wealthy by investing in real estate, but most likely, only if you weather the cycle long enough to make a worthwhile profit. This can take many years. In the meantime, you might consider playing the lottery. Below are some practical ways to make money in real estate.

  • Diversify

    • There are several ways to invest in real estate, not all of which actually involve buying property (see subsequent sections). However, regardless of the route you choose, don’t put all of your money in real estate. Consider making other investments, so that your future livelihood is not at the mercy of the real estate market. The process of spreading around your investments is called diversification. Here are several ways to do this:
    1. Invest in different sectors.
      • In popular usage, a sector is a portion of the economy, categorized according to specific industry, such as the real estate sector. Before you sink money into real estate, consider setting some aside for other investments as well.Consider putting some money into precious metals, or pharmaceuticals—anything that seems to have good prospects and whose performance is unrelated to that of the real estate market.
    2. Invest internationally.
      • It may sound unpatriotic, but if you view the domestic economy as a basket, it makes sense. If the US economy tanks and the Australian economy stays afloat, you’ll be in better shape than your neighbor if you’ve invested in both. Brokerages, including online, discount brokerages like E*Trade and Scottrade give you access to investments in foreign economies. Also, have a look at Kiplinger.com’s article, “Investing in Foreign Real Estate Goes Mainstream.”
    3. Invest in a mutual fund.
      • A mutual fund is a sort of investors’ pool. Your money is combined with that of hundreds, or thousands, of other investors and then tied into an array of different securities, depending on the specific mutual fund. There are real estate mutual funds, but it might be wise to invest in one that’s diversified outside of the real estate sector as well. For more information, see How Do Mutual Funds Work and How to Choose a Mutual Fund.
    4. For a more detailed run down on diversification, including other ways to diversify your portfolio, see How to Invest.

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  • Property

    • Buying property, or course, is the most common way to invest in real estate. Even if you’re thinking of just buying a bare plot of land, hanging on to it and selling in the far future, there’s far more to buying property than the actual act of purchasing it.


Planning

    • Property is the last thing that should be an impulse-buy. Make detailed plans, or you may end up losing more than you hoped to gain.
    1. How long do you expect to keep the property?
      • While a long term investment is likely to bring higher returns, it will also cost more in repairs.
      • The average asphalt shingle roof lasts around 15 years, but costs thousands of dollars to replace.
      • Pipes will need to be replaced, not to mention plumbing repairs, cracks and leaks—the list goes on.
    2. How will you use the property?
      • Primary residence: If you plan to live on the property, you’re likely to secure better loan terms than otherwise. On the other hand, your eventual resale profit will be dampened by the cost of having to acquire a new place to live.
      • Rental: A rental property will pay you monthly dividends. Unfortunately, there’s more to being a landlord (as opposed to a slumlord) than just sitting back and watching the rent roll in.
        • For a guide to the benefits and perils of being a landlord, see MSN Money’s Do you have what it takes to be a landlord?.
      • Resale: If you want to resell a property, you’ll have to consider two important variables:
        • Condition: The Vaudeville songwriter Billy Rose once said, “Never invest you money in anything that eats or needs repairing.” A fixer-upper may have the potential to make a tidy profit—or devour your bank acccount. Before buying a home, get a thorough, professional inspection and make a rigorous calculation of repairs that assumes the worst-case scenario.
        • Timing: Some investors have made an art of predicting the way the real estate market swings. If you hope to do the same, have a look at About.com’s Secrets for Timing the Real Estate Market.

  • Researching
    • There are a number of preliminary steps to take before looking for specific properties.
    1. First, you’ll want to see what kind of property you can actually afford, if any. CNN Money has a user-friendly budget calculator on its How Much House Can You Afford? page. Enter your income, debt and other stats, and you’ll get an instant assessment of the size of the investment you should consider making.
    2. Learn about a community before investing in property there. Use Homefair.com’s City Profile Report to view statistics on the crime rate, per capita income, population and, particularly, the average sale price for homes.
    3. Read the real estate classifieds of local newspapers in areas that interest you. These can provide a good measure of the prices at which homes sell and rent in particular neighborhoods, as well as the prices of bare plots of land. To find publications according to region, see the US Newspaper List.
    4. If you’re planning on renting out a property, research the area for neighborhoods near schools, public transportation and shopping centers, which tend to be more profitable for rentals.
    5. According to Forbes, the value of real estate near colleges is more stable than in other areas. Consider investing in properties near universities, for sale or rent. See Wikipedia’s list of college towns for some ideas on where to invest. Make sure to research any of the areas that interest you.

  • Finding
    • For the would-be investor who’s not also a real estate agent, the internet has made finding property easier than ever. However, traditional methods of finding leads—on foot, by car, in the newspaper and even through an agent—can still be very useful as well.
    1. The aforementioned local classifieds, available through the US Newspaper List, can give you some good leads on specific properties, but make sure to cross-reference them with the price statistics on City Profile Report.
    2. Rather than waiting for property to come on the market (and competing with other buyers), consider cold-calling the numbers listed on buildings with “for rent” signs—and asking landlords if they’re interested in selling.
    3. Foreclosures can be found through real estate ads, agents, or lawn signs that specify “foreclosure,” or “bank owned.” If your conscience can accept the implications of buying a foreclosed home, have a look at About.com’s How to Find Foreclosures for details.
    4. Also, consider using a real estate agent. The real estate industry’s resident middlemen have access to a resource that most people don’t: Multiple Listing Service, or MLS, which is a national database of properties for sale.
      • You can save money by working through a discount real estate agent. This Bankrate.com article lists some discount agencies and outlines the services they offer.
      • Realtor.com is a national database listing homes for sale, run by the National Association of Realtors.
    5. ForSaleByOwners.com is a listings database that allows sellers to post for a flat membership fee, but it’s free to buyers. Try searching properties according to region.
    6. USA.gov. is a government-run site that lists government-owned properties available for sale, including homes, commercial buildings and farmland.
    7. Another good resource for real estate listings is Craigslist. After selecting a location from the mainpage, look for the heading Housing and click Real estate for sale.

  • Inspecting
    • Once you find a property that interests you and fits into your price range, there’s still plenty to scrutinize before closing the deal.
    1. Many attractive homes come with underlying problems that can cost you a great deal to fix and/or ruin the resale value. Make sure to have the home professionally inspected before buying.
    2. In some states, regulations are lax enough that anybody can call him or herself a “home inspector”. Because of this, it’s in your interest to work through the American Society of Home Inspectors, a well-established, non-profit organization. To make sure you’re dealing with a professional, use the ASHI’s tool for finding a home inspector.
    3. A home inspector will look for structural defects, pests (including termites), leaks and problems with the plumbing and electrical system. After the inspection, you’ll have an idea of whether there are any safety issues to remedy (including the presence of radon), or major (i.e. expensive) repairs to be made that would impact your ability to sell or rent the property.
    4. If you are buying a bare plot of land, there is a different set of hazards to look out for, including soil that’s too moist to easily build on, as well as slopes and other topographical features that may rule out certain kinds of buildings.
      • For a detailed guide to buying undeveloped land, see CNN Money’s The Dirt on Buying Land.
    5. If the damage to the home is mainly cosmetic, figure in the cost of renovation.

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  • Real Estate Stocks

    • If the hassle of fixing up or renting out properties is too much for you, consider buying stock in real estate development or management companies.
    1. To invest directly in the nitty gritty of the real estate industry, without having to get your hands dirty, consider stock in development companies.
      • The Motley Fool’s Real Estate Development page lists stocks for developers, with links to current stock quotes. The page also features an updated chart of the five top real estate development stocks.
    2. Even when real estate sales and development slows, there can still be a strong market for property management.
      • The Motley Fool’s property management stocks page lists stocks in this category, with links to information on their performance, as well as an updated chart of the five top performing property management stocks.
    3. BusinessWeek’s chart of real estate stocks combines listings from both industries: management and development.
    4. For a practical guide to evaluating the stocks on these lists—and making a purchase—see How to Buy Stocks.

  • Real Estate Investment Trusts
    • REITs, or real estate investment trusts, are companies that invest in real estate themselves—in property, mortgages or both—but are publicly traded as shares on the stock exchange. Because REITs invest in more than one company, investing in one automatically diversifies your portfolio of real estate investments.
    1. Forbes.com’s REIT Gold List covers 30 of the top-performing REITs (as of February 20, 2008).
    2. The Motley Fool offers a guide to choosing The Best REITs.
    3. Though they do offer a measure of diversification, REITs vary in value and volatility. In order to discern which REIT represents your best investment, see How to Buy Stocks and follow the same procedure—as its outlined on the page—that you would for choosing and buying stock.

  • REIT Funds
    • While REITs themselves offer a measure of diversification by investing in a variety of real estate companies, there is another, possibly safer way to approach diversification: an REIT fund. REIT funds are mutual funds (investment pools) which invest in multiple REITs.
    1. Investing in an REIT fund is like diversifying your portfolio on two different levels: first by investing in the companies covered by each REIT, then in the REITs covered by the umbrella of the fund.
    2. For a list of REIT funds, go to Kiplinger.com’s Fund Finder.
      • In the Fund universe field, select any.
      • Under Fund Style, scroll down and select Real Estate Sector
      • Scroll to the bottom of the page and click Submit.
    3. If you’d like to know exactly how to evaluate the performance of an REIT fund—and to invest in one—see How to Choose a Mutual Fund.

  • Conclusion
    • Property is, literally speaking, a solid investment. However, whether you choose the direct approach to real estate, or invest through a trust or mutual fund, there’s always risk involved. If you want to stay on firm financial ground, invest wisely, with plenty of planning and assessment.

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