Don’t Let Your Real Estate Investment Fall Into a “Black Hole”
By Laury Adams

            Money in real estate certainly provides diversification in one’s investment portfolio.  People often forget they do have an investment in real estate if they have equity in their home.  Popular publications and real estate moguls featured on TV convince us that we can easily harvest profits by buying properties for investment purposes.  Of course, Donald Trump is a great example of how this can happen.

            Investing in real estate can take many forms.  Perhaps the easiest way to make this type of investment is to buy shares of a REIT, real estate investment trust.  These shares are traded on the stock exchange and it’s easy to find the annual performance record by checking various Internet sites.  Other forms of investing in real estate might be through a partnership, joint venture, etc.  However, it is common for investors to buy real estate as an individual investor. 

            Owning real estate as an individual investor is a business and should be treated as such.  There is a “knowledge base” that is essential.  Read books.  Take real estate classes. Talk to others who have been long-time property owners.  The information you gain from the above sources will prove to be invaluable.   Answers to the questions that follow will prevent your investment in rental properties from falling into a black hole. 

1. Have you written a business plan?

 

2. What is your purpose for buying investment property?  If it is truly an investment, you will be looking for profits and protection of your principal.  This will require making projections using realistic assumptions.  In any investment, there is an emotional component along with the financial.  Don’t let the former dominate the latter. 

3. How much time and money do you have to devote to this investment?

 

4. What is your market?  Who is inclined to rent from you?  What kind of tenants do you want?  How will you find them?

5. Are you purchasing for the right price?  What are the selling prices for comparable properties?  

 

6. What is happening to the value of properties in the area where you are buying?  What is expected to happen in the next years?  Remember “buy low, sell high” not only applies to stocks, but to rental property as well. 

7. There are two types of projections you must make for at least the first three years—worst case and best case scenarios.  Have you done cash flow projections and tax projections using Schedule E of the 1040 federal tax return forms?  Do you know about depreciation?  Do you know about recapture at the time of sale?  Be sure to consult your CPA and any other professionals you are using. 

 

8. How much work will you do yourself—showing the property to prospective tenants, cleaning the property when tenants move, making repairs, etc.  If you hire managers, cleaning services, or brokers, how does this figure into your financial projections and cut into your profits?

9. Do you have an emergency fund and enough cash to cover unexpected expenses? 

 

10. When you get into this investment, how and when can you get out?

11. What are the “opportunity costs?”  What are the other opportunities for using the money that you plan to put in this investment? 

 

If you choose to have your property managed, remember you are the final manager.  Money never manages itself.  You must evaluate performance of a real estate investment as you would a stock portfolio.  Make it profitable!

Copyright 2008 Laury Adams