Understanding the Challenges of Real Estate Investing

Title: Investing is Like Riding a Bike
Article: What do walking, riding a bike, and investing in real estate have in common? All of them follow the general rule that doing something new for the first time can be quite challenging. Once you overcome those first time challenges with walking and riding a bike, your muscle memory takes over and you will not forget how to use your new skills. Unfortunately, the challenges with real estate can not be so easily memorized. Economics, market cycles, trends, just to name a few factors, all change on a continuous basis. This means that first time investors as well as seasoned investors have challenges that they must face. The good news is that challenges can be overcome, and once the challenges are managed, there is great reward for your efforts.

One of the first challenges that both new and experienced investors need to address is whether now is the right time to invest in real estate. The quick answer to this question is that it is always the right time to invest in real estate; it is just a matter of finding the right investment. However, this answer is a bit simplistic and in what the media hypes as a “softening” real estate market, some concrete information can go a long way to instilling confidence in your investment decisions. There are a lot of factors that go into making the decision to invest, but at the heart of any investment, there is a common goalmaking a profit! If we all have a common goal of making a profit, or turning our money into larger sums of money, who’s advice or trends should we take notice of? I suggest we take notice of the people that are making it happen, the wealthy.

A recent survey by Citi Smith Barney says that over half of millionaires and 40 percent of affluent investors, or approximately 25 percent of the U.S. population, believe that real estate is a good investment. And these people practice what they preach. Among the wealthy, nine out of ten own some sort of real estate investment accounting for one-third of their portfolio, and most (52 percent) report that despite a softening housing market, their real estate investments have increased over the last year.

Ownership of second homes is particularly common among millionaires (50 percent) compared with 20 percent among those in lower income brackets. Two-thirds of those who own a second home or vacation home report that the value of this investment has increased over the past year.

Although investors widely believe the housing market is an important part of the overall economy (41 percent very important, 54 percent somewhat important), and most made money from their real estate investments, eight out of ten feel the housing sector is weaker today than it was a year ago. Moreover, many expect the housing market to remain weak (28 percent) or become even weaker over the next 12 months (46 percent).

What does all of this mean?
To me this information says that while the national real estate market as a whole can be characterized as “softening,” according to wealthy investors there are still great investments out there to be found. The key of course is finding those investments, and having enough influence to negotiate terms that take advantage of the current real estate investment climate and trends.

Here are some suggestions that every investor should consider when diving into a real estate investment:

Resources. Profitable investments require capital to earn a respectable return. This may seem obvious, every investor needs to start with an honest assessment of how much money and time they are willing to commit to achieve their financial goals. Successful investors set aside specific sums, line-up financing in advance and plan to commit time as well as money to their investments. One of the first questions you should ask is how much money can I comfortably commit to an investment. The next consideration is what type of time and activity commitment to I want to make. There are varying levels of activity when it comes to investing. Do you want to be an active or a passive investordo you want to actively “flip” a house and do all the work yourself, or do you want to passively work with a group that can take the burden of the hands-on work off your plate?

Research. Profitable investments do not happen by accident; rather, they result from careful research that compares, contrasts and considers various opportunities. In the context of real estate, research means investigating real estate markets and properties: Are prices rising or falling? Is the inventory of for-sale properties growing or shrinking? Are rents strengthening or weakening? Is the population getting larger or smaller? Is the job market healthy or ailing? What is the overall economic outlook for the area? Are you prepared to make all of these decsions on your own, or would it be wise to enlist some outside assistance?

Calculate. Instinct and intuition can be important aspects of investment decisions. But successful investors act purposefully on the basis of hard facts as well as experience, knowledge and soft feelings. Smart investors do not risk money on impulse; they pause to make projections, run the numbers and weigh the risks and rewards before they invest. Be prepared to crunch numbers and make a realistic analysis of every investment.

Rely. Trusted advisors also are crucial to profitable investments. Beginners, in particular, need to find and consult experts who can help them learn more about the benefits, opportunities and risks of real estate investments. A knowledgeable real estate advisor is invaluable to help you reach your investment goals, research markets, locate suitable properties, structure and management investments, and even build wealth over the long term.

Risk. Real estate investors need to accept that investment always entails risk to earn an attractive return and that property values do fluctuate over short and long cycles. One way to reduce risk is to invest with one or more partners, though risk-sharing among multiple people has its own risks of complications and strife. Either way, experienced investors know they need to take calculated chances. They do not sit on the sidelines, unless they have good rational reasons to stay put and be patient.

Results. Savvy investors make decisions to accomplish specific investment goals. While some properties might offer the potential of both income and capital appreciation, others make tradeoffs between those two objectives to maximize one or the other. And while some properties might be ideal for short-term fix-up and resale, others might be better suited for long-term hold in an investment portfolio. Novices need to know their own goals and tolerance for risk to make investments accordingly and with confidence.