Originally Published 2007-10-29 12:06:26
My post a couple of weeks back about a real estate investment opportunity I was pondering generated quite a few responses from folks asking both specific and general questions. "Where do I start" was one I received often, and so I'll attempt tackle that one today. Follow these rules, and you'll be well on your way to thinking like an investor.
This article is written with real estate investing in mind, but it's relevant for any investment vehicle.
Rule 1: Always Keep Your Eyes Open.
Remember when you were in the market for your first car? Remember how, for the entire year before you hit that magic dollar amount or that milestone birthday, you noticed every car on the road?
By the time you actually drove away in that vintage masterpiece of slightly-used mobile bliss, you could quote the going price for every vehicle in your price range, couldn't you? And quite a few outside of your price range, too.
Well, if you're in the market for an appreciating asset, like a stock, a house, or a business, then you should have keep your eyes peeled with the same amount of passion you dedicated to studying slightly rusty Camaros. (And for the record, I'm afraid, dear, that designer handbags are not an appreciating asset, even if you can get your money back selling it on ebay.)
With that in mind, if you're looking to invest in real estate, you need to be paying attention to what's going on in your area. "For Sale" signs should make your head turn and pique your interest. The "Homes For Sale" freebie at the supermarket should be on your coffee table (or, perhaps, the bathroom, if that's your preferred learning spot). And you should already know what you can afford, both in terms of what the banks think you can afford and what you can actually cover if you quit your daily Starbucks habit and cook at home more.
Rule #2: You Are Not Allowed to Fall in Love
Philosophers, Paul of Tarsus, and the work of Michael Bolton are all probably coming to mind now. I'll wait while you find "When a Man Loves a Woman" on your iPod. Go ahead, it's ok. Your headphones are on. No one will know.
Ready? Well, before I lose you to the tear-inducing bridge, please re-read Rule #2. You Are Not Allowed to Fall in Love.
It doesn't matter what the counter tops look like. It only matters that you can rent it profitably.
It doesn't matter what the interest rate is. It only matters that you can make money on the deal.
It doesn't matter how many places you've looked at before, after, or dreamt about. It only matters that a beneficial deal can be forged.
It doesn't matter who you're buying from, what the floors look like, how much the place costs, what your mother-in-law thinks, whether the air conditioner works, why the gutter leaks, or how much you love the oak tree in the front yard.
It doesn't matter that you're proud of the home. It doesn't matter that the backyard is perfect for Fido. It doesn't matter that the address matches the last four digits of your phone number. It doesn't even matter that you can or can't afford it.
If there's money to be made at low risk, buy it. If there's money to be made at high risk, but you can stomach it, buy it. If there's money to be made at a return you can't earn from somewhere else, definitely buy it. Now.
If you want to buy it for any other reason, don't. This is an investment. It is weighed by one factor, and one factor alone: profitability. If you aren't making money on the deal, then you're being an idiot.
Now I'm going to give you one exception to this rule. You can buy whatever house you want to if you're living in it yourself. But, remember: your primary residence is not an investment. You'll make money on it, yes. It will be the single biggest purchase you make for consumption, yes. It's a great tax write-off, yes. But, like your vintage Camaro, you're buying it because you love it. You're buying it based on emotion. It produces no income and is not purchased with value in mind. Any value judgment you place on the home's future value is irrelevant. That is nothing more than your rationalization for spending the resources.
Buying the biggest home you can afford is not a wise investment. It's showing off. (Doing so is perfectly acceptable... just don't lie to yourself about it.)
Allow emotion to influence your investments, and you'll lose your shirt.
Rule #3: Ask For More
Would you rather have an income property worth $1 million dollars (US), free and clear, rented, and producing income?
Or would you rather have $1 million dollars in cash?
If you want the house, I'm glad you're interested in real estate investing. Keep reading.
If you want the cash, congratulations, because cash is king.
If you said "it depends", you're right. Maybe there's some strange circumstance that makes the income property incredibly attractive. Perhaps it's throwing off an abnormal amount of cash, for instance, and the appraised value is grossly understated as a result. By the way, how's that economics degree working out for you in the job market?
But the simple answer is cash. All other variables being equal (in this case, the appraised price being accurate), it is always cash. With $1 million in cash, you could buy a house free and clear that appraises for $1.1 million. You might even find a motivated seller of a home worth $1.2 million that will sell for $1 million in cash. Or you could buy 5 homes that appraise for $1.1 million for $1 million dollars each (negotiating for the discount) with 20% down.
Buy 5 at a 10% discount as I've suggested, and you've immediately turned that million bucks into 1.5 million. That's a 50% return in only a few months, boys and girls.
Keep those comments and questions coming...
On 2007-10-29 23:47:52 Shane said:
#1 puts you in the game. #2 keeps you from going broke but #3 is king because it depicts the kind of outside-the-box thinking necessary to get great returns
On 2007-10-31 15:30:00 Beth S. said:
Recently found your site, not sure where to put this, you seem up on your sales tools: Radical Spark (www.radicalspark.com) says they have this very cool web app, I hear people talking about it at conferences, speculating. I talked with a developer at the Ruby East conference in PA who said he was working on something *really* cool and I'm very curious as to what this is... Any idea what these folks are up to? Thanks.
On 2007-11-03 21:12:35 Johnny Fuery said:
Duplicating the same basic message and posting it in hundreds of blogs to create buzz kinda leaves a bad taste in my mouth.
I can't say I completely disapprove (and, indeed, will leave this comment live), but I'd prefer if you just asked for a plug. If you gave me an incentive, like a free trial, a link back, a discount for my readers, etc., I'd probably be delighted to help generate buzz for you.
On 2008-01-10 20:44:53 Kenric said:
About your question. Here is huge factor you didn't mention. If you had a $1,000,000 property free and clear. How much cash do you really have? To turn it into cash you need to sell and pay taxes.
At the very least you'll probably give up 6% on realtor commissions and closing costs. You really have $940,000. If you made money on the sale, you can drop that down to below $900,000. You've lost 10% of your worth just to convert it into cash.
If you had $1,000,000 in cash, you have $1,000,000 to use as you please.