The bursting of the real estate bubble has created an oversupply of vacant and abandoned homes. Housing values have tumbled and today, it's a buyer's market.
I asked Linwood Smith, a real estate agent with McMullan Realty in Cleveland, Ohio, is this the time to buy real estate as an investment?
"It's a good time, if you have cash and you know what you are doing. However, if you think you are going to get in and make a fast buck, you will probably end up losing your shirt."
Houses for sale are plentiful and the values are down, however, the availability of credit to investors is tight. According to Smith, "In Cleveland, you can find a decent investor property for $5,000, but you might need $20,000-$25,000 to make it rentable. Cash is king and you have to be able to hold the property until the overall market turns around."
Real estate investing is a "hands on" business. Successful investors understand the process of finding and negotiating deals; financing the transactions; upgrading the property; renting and/or holding the property and finally profitably selling the property.
Understanding how to deal with buyers and sellers, lenders, contactors, tenants and various others in the real estate industry is critical to success.
Educate yourself — before buying any property, go to the library and read about 20 books on real estate investing. Buy books and tapes on the subject and talk with other investors about their experiences.
Focus on a market area — pick an area that you want to invest in and look at 20 to 30 houses in that area before making a serious offer. By doing so, you will learn the neighborhood, property market values, rents, types of tenants, and more.
Small is good — although apartment buildings may look attractive, some of the most profitable investments are in one to four unit properties. There are a limited number of buyers for large properties and they are professional investors, looking to buy at wholesale prices. Also, in today's high cost energy environment, avoid properties with central heating systems.
For your initial real estate investments, consider working with a partner. Having a partner may allow you to share the investment costs, the workload and the learning experience. Additionally, partners can help bolster each other's confidence and decision-making. When considering a partner, look for someone with a similar temperament, similar investment goals and someone who is willing to share the financial burden and workload.
Insulate yourself — have separate checking and bookkeeping systems for your real estate business and personal accounts. Additionally, have a separate phone line for use with tenants and prospective buyers and sellers.
Finally, make sure you have adequate property and liability insurance. Understand your portfolio — real estate investing is more than just adding an asset class in a portfolio. Real estate can impact a family's personal risk profile, tax liability and estate planning.
Successful real estate investors understand the total impact of their investments on their overall financial situation. Real estate investing is not for everyone. It is a "hands-on" investment that requires a broad set of management skills. However, in today's market, for those with cash to invest and a lot of sweat equity, real estate investing can be a financial game changer.
Michael G. Shinn, CFP, is a registered representative and investment adviser representative of Financial Network Investment Corporation, member SIPC.