HOW TO GET STARTED WITH INVESTING IN REAL ESTATE
It’s about to get real. In June, 2022, US inflation reached 9.1%, a 40-year high. It’s no secret that the stock market has a severe case of the hiccups, so right now, investing in general may seem a bit daunting.
And then there’s real estate.
Like the saying goes, they aren’t making any more of it, although today that is not exactly the case: land use is changing all over the USA, and areas which one were the location of larger, older structures are rapidly being re-purposed for residential building to meet the current housing shortage.
How and where to begin depends primarily upon two things: your available capital, your risk-tolerance. Beware of something called “leverage,” which means using debt in the form of other people’s money, along with equity in the form of a down-payment, to purchase an investment property: swift changes in the market may take you by surprise.
Reality TV shows often tell the story of individuals who are “flippers,” and these shows, edited like a high-speed chase or gangsta shoot-out, make the process look exciting. But here’s the catch: make sure that the property has intact, intrinsic value, meaning that you won’t need to make significant repairs or upgrades to take the property to market. The property needs to ready to go, and this is the appeal of flipping: your capital is only tied up briefly, and you’ll get a quick return if all goes well. With props to Elvis, all you need is a strong heart and nerves of steel.
If you’re more interested in buy-and-hold properties, real estate gurus recommend looking into rental property as your first real estate foray. You’ll generally see the greatest return if you stick around to invest and manage the property, versus flipping. Rentals typically are abused properties, since tenants don’t feel any pride of ownership. To make this arrangement desirable for you, DIY repair skills are a must, since even the gentlest of tenants occasionally need to have an appliance repaired or replaced. A fresh coat of paint between tenants will make the unit rent faster, and at a higher asking price. Ditto for replacing tired curtains or tattered blinds, and ripping out nasty carpeting and replacing it with easy-care parquet flooring. To make a rental purchase productive, you’ll also need a cash stash for emergencies that arise on the property, including a random month where the unit is vacant while you’re making improvements.
A more secure approach to owning rental real estate is investing via a Real Estate Investment Group (REIG). This is a group lease arrangement in the investor’s name, and investors pool their assets to guard against occasional vacancies. The company manages the units, handles maintenance, advertises vacancies and checks out potential tenants, all for a percentage of the monthly rent, of course. Joining a REIG requires substantial capital to get started.
A variation on this is the Real Estate Investment Trust (REIT). These are public companies. An REIT may own an apartment building, hotel, office, or warehouse. When you buy into a REIT, you purchase a share of these properties. It’s similar to investing in a mutual fund, except that instead of stocks, a REIT deals in real estate. This can be lucrative in two ways. First, REITs make regular dividend payments to investors. Second, if the value of the REIT increases, you can sell your investment for a profit. Forbes advises that the dividends from an REIT “…are frequently higher than many stock-based investments.”
Where to buy? Where else? California.
California’s population of 40 million makes it the fifth-largest economy in the world at $2.7 million. Whether your interests are tech, entertainment, or almond-growing, the Golden State stays smokin’-hot, and not just because of global warming and wildfires! Rents reach for the stars, and new development does encounter some resistance against urban sprawl and “Californication.” So, investors approach existing structures as solid gold.
Fewer and fewer people in Southern California can afford to buy a traditional home, according to Auction.com, with Los Angeles at the top of the heap in terms of inventory shortage and corresponding elevation of mortgages and rents. For instance, in 2018, Angelenos spent 75 per cent of their income on housing; the recommended percentage is 30 per cent. This equates to more Angelenos, as well as millions of residents in other counties, seeking rentals instead of properties to purchase.
In addition to state residents in need of reasonable housing, Southern California draws vacationers and visitors from around the world like moths to a cashmere sweater. They come for the sun, surfing, shopping and show biz, so consider investing in a property which can be an appealing rental, using Airbnb or similar service to generate income.
As always, they key is research. If you spot a property that you think you can flip, investigate fully before pulling the trigger. For example, a neglected house in a rough section of town may be slow to turn, even though it has great old hardwood floors and a big backyard with orange trees.
When considering joining an investment group, talk to someone who is in the group for their perspective. Better yet, talk to an attorney who knows this terrain. Only rarely does real estate decline in value (storm-battered Gulf cities are an example). But making your fortune requires expertise, so remember that investing in real estate is not big-stakes “retail therapy.” Choose wisely, buy slowly.