Real Estate Investing: Five points to consider

Disclaimer: I am not an attorney. I am not an accountant. This article is not tax advice. This article is not legal counsel. This article is not investment advice. As an Oregon Real Estate Licensee I cannot promise you future profits or losses. This article is written to encourage the public to educate themselves and to seek out expert opinions as applicable to their needs. The anecdotes contained herein are based on my own subjective experiences as a professional Realtor in business through the entire housing crisis.

1: Seeing a “Foreclosure Millionaires!!!” Infomercial/Seminar doesn’t make you an expert.

Foreclosure Millionaires!!! Be Careful of Get Rich Quick
Beware of Get Rich Quick

Someone once said that “a rising tide lifts all boats” and this is certainly true for housing. Those interested in investing may be emboldened by their own or others’ early successes but be aware that high interest loans and other house-flipping tactics carry significant risk. We’ve all been up late at least once and seen the “foreclosure millionaires” infomercial at 3am but that does not make someone an expert. Friends, colleagues etc all have pet theories and tactics for real estate investing but the truth is that when housing is steeply increasing almost everyone wins and when housing goes down almost everyone loses regardless of strategy. Even experts can be wrong sometimes and nobody is immune from making mistakes. True professionals know that statistically they will make mistakes and they’ll develop strategies to hedge their bets and protect themselves.

2: When something’s too trendy, it might be peaking

Is Your Property Investment Strategy Outdated?
Is Your Strategy Outdated?

Whether it’s a hair style, clothing or real estate investment strategy: the higher and faster something peaks in popularity, the more likely it is to crash and burn. Today’s hot investment tip can become outdated over night: then you show up to school in JNCO Jeans and a No-Fear Shirt. Also, by the time someone writes a book about a way to invest in real estate there’s a chance that the opportunity may already be old news. Ask yourself: what happens if you’re the one left standing with the Hot-Topic bag when the fad abruptly ends? So, if everyone is flipping houses there may not be enough non flippers left to sell all the properties to. House-flipping might be getting too trendy at the moment and the hipsters among us were doing it before it was cool.

3: Beware of eager investors flooding the market, driving up prices

Beware of over investing in the housing market
Over-Investing In Housing

We may be experiencing a housing market where heavy investing may be contributing to unstable, rapid growth in the housing sector that cannot be sustained by the much slower economic recovery. Here’s a public service announcement to the over-eager investor: stop artificially driving up home prices. In many areas as a broker I’ve seen house-flippers outnumber owner-occupied buyers as much as 5 to 1. This high level of investor activity may be artificially increasing demand. In recent months I’ve seen a number of investor offers flake out because they were unable to sell their existing inventory (this shows that these investors are biting off more than they can chew and may destabilize the entire market). House flipping is playing musical chairs with hundreds of thousands, even millions of dollars at stake. You may get rich quick… or hit financial ruin if you’re left standing when the music stops.

4: Do you plan on renting out properties?

Are your rentals truly profitable?
Are your rentals truly profitable?

Make sure you pad your numbers for property management, maintenance, vacancies, repairs and unexpected costs. So you are going to repair your own units and be your own manager? In that case you still need to factor in management costs so you can pay yourself!!! After awhile you’ll get tired of working for free and if you’re not profiting, what’s the point? Also, you may want to take some classes on property management so you understand what the risks are and how to protect yourself. Renters can sometimes exploit the legal system (and ignorant landlords) and bilk them for months even years of free rent. Attention would-be Land Barons: Some self-styled experts incorrectly think that renting out a house to cover the mortgage payment is “cash flowing” or at least breaking even. Anyway, barely covering your mortgage through rent revenue is actually negative cash-flow when you factor in vacancies, costly repairs and other expenses. Property managers often say that you’ll have somewhere between 30—40% of the rent you earn go toward carrying costs. These carrying costs include building repair, utilities, losses from vacancy and services that the owner is required to pay. Consult an experienced property manager, but chances are if you don’t have that 30-40% margin you might be an unplanned vacancy or costly repair away from being in the red.

5: Worst case scenarios: does your “unsinkable ship” have enough life boats?

make sure you know the risks of investing in real estate
Real Estate Investing: Where’s Your Lifeboat?

Yes, that’s a shameless Titanic reference but it also rings true in the wake of the Great Recession where banks were dubbed “Too Big To Fail”. All Americans would do well to glean wisdom from our recent economic woes and plan ahead for the possibility of future fiscal hardships and unexpected losses. Every once in awhile even the best investors can and will roll snake-eyes. Unlike other investments, a real estate deal sinking could cost you all of the money you put in and then ruin your credit and have additional financial losses attach to your other assets through court judgments. Charged-off debt could then also be considered taxable income and then Uncle Sam would join the line of bill collectors wanting their pound of flesh from you. So, talk to experienced attorneys, tax professionals and financials planners to find out what the worst case scenario is. Can banks or former partners go after your personal wealth etc if things go bad? Where is your stop-loss and what is really at stake? In my career as a Realtor, I’ve seen experienced investors go from owning luxury homes and vacation properties to living in a low-end studio apartment with ruined credit and the cloud of divorce looming as well: it happens.

In Closing: Do Your Research & Be Aware of the Risks

Friends, relatives and even your favorite Realtor don’t have to live with the the fallout of your decisions. At the end of the day you are the one who reaps the profits or losses from your decisions. Always seek legal counsel from an attorney, tax professional or qualified accountant as it’s applicable to your situation. As a broker, this editorial article is written based on my limited and perhaps biased personal experiences and may not reflect your situation. I hope you use this article as a means for asking yourself the right questions so you can seek out the correct expert opinions to protect yourself and be profitable.

Best Regards,

Richard Lockwood
Real Estate Broker | Oregon Realty Company
Follow Richard Lockwood on Google+

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Should I Invest in Real Estate? Q & A With a Realtor on The Pros & Cons
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