Real Estate Investing Lesson
As some of you might already know, all of the attorneys at Anderson Business Advisors have owned and operated small businesses and are real estate investors. I believe that it is impossible to adequately advise folks on subjects with which you have no “real life” experience.
When talking to prospective clients, I am often asked if I invest in real estate and, if so, where? The answer to the first question is obviously “yes”. The answer to the second, I will give you in a moment.
If you have watched one of my DVDs or attended one of my live events, you will have heard various stories of my life as I grew up in a family that invested heavily in apartment buildings and other real estate investments. I have seen it all from tenants heating their apartments by turning up the gas oven to people who leave their garbage behind and then sue because you threw it away.
As a result, I am a cautious investor. For much of the run up in the real estate market, I sat on the sidelines patiently waiting for prices to come back down to a point where, as my father taught me, property will cash flow. This isn’t to say I didn’t make any purchases, but the ones I did make occurred after careful analysis of the potential investment. So in answer to the second question, where to invest, is “it all depends”. Typical attorney answer, right? Actually, I believe the most important aspect of real estate investing is choosing the right market for your preferred form of investing. Do you recall the three rules of real estate investing? Location, Location, Location.
I see many people make the same mistake over and over when it comes to investing – applying a market to a strategy and not a strategy to the market. This may sound like more attorney double talk, but what I am actually referring to is the practice of finding a strategy that works with your lifestyle and then finding the market that works for your given strategy.
I can tell you from experience that finding the right market takes work. It requires researching a number of different factors pertinent to your chosen investment strategy. Then taking a trip and actually beating the pavement to get a feel for the area you plan to work in. The internet can only provide so much and I firmly believe that street sense is crucial to successful real estate investing no matter what your strategy may be. If you do not have the time to “hit the pavement” then you better know someone you trust that can. There simply is no replacement.
So as the reader you might be thinking that I did not really answer the second part of the question – “where do I invest?” The answer is actually simple: I invest wherever my investment strategy will bear fruit. I prefer long term investing for cash flow. For example, my personal residence is in Gig Harbor, Washington, a suburb of Seattle. You might think that I would own some investment property in my local area, but I do not. Why? I do not like my return on investment on properties in my area. In order to find great cash flow properties in Seattle, you must have the time and ability to rehab a property; otherwise, your return will not justify your investment. I have the knowledge, but not the time, so I look elsewhere.
I travel often for business, so it should come at no surprise that I own several properties spread across 4 different states. In each instance, I would research the market I was traveling to and then take some extra time before or after work to explore the area. If I liked what I saw and my gut (yes, I do believe in trusting your instincts) told me it was a good place to invest, I did. Thankfully, I can say that the real estate drop did not hurt me like it has so many others. I attribute my success to the two principles I laid out: (1) apply the market to the strategy, and (2) find an investment strategy that works with your lifestyle.
Here are a few helpful resources that can help you evaluate a potential market as well:
- Use http://www.ofheo.gov to find market appreciation data.
- Use http://www.huduser.org to find market rents. Rents vary by neighborhood in each city, and huduser.org just gives you median rents.
- Use http://www.rentometer.com for rental trends and average rents for housing.
- Use http://www.bestplaces.net to look at median home price, median income, percentage of properties that are tenant occupied, vacancy rates, projected 10 year job growth, unemployment.
- Use an online calculator to figure out what your mortgage would be, add on estimated property tax and property management fees to see if market would likely cash flow. http://www.yourmortgagecalculator.com might be helpful.
- Use http://www.housingpredictor.com to find good information data on where a market is likely to go next year with regard to appreciation/depreciation with explanations on why the prediction is given. This site will help you understand market cycles. There are also some good articles and other links that may be useful.
- Ues http://www.melissadata.com lookups to find out how many homes sold this month in your market zip code. Is the market stable, in decline, or picking up?
Posted by Clint Coons, asset protection attorney, Seattle, Washington