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Monday, November 21, 2005
The WRONG Way to Invest in Real Estate
by William Bronchick
"Real estate fever" . . . it's hit the Country like a plague. Zillions of "newbies" are hitting the bandwagon, trying to make a profit where they lost in the stock market. I meet them all the time, and many are making big mistakes!
Mistake #1: Stock Market Mentality
You'd think after losing $7 trillion in the stock market people would have learned! Nope, they are making the same mistake, which is assuming what happened yesterday will happen tommorrow. Nine of ten new investors I meet say they are interested in real estate because they saw someone else make money from the rapid appreciation of the market over the last few years. But, buying real estate solely for short-term appreciation is often a big gamble! If you buy real estate to hold for 15 years or more, the chances are you will come out on top. If you buy a property and flip it in within a year, you probably are fine, too. And, despite the risk, many people can intelligently time the "boom" of a local market (or subdivision within a market) and make a profit. But, if you buy a rental property for full market price with break even or negative cash flow, you'd better have a backup plan if the market doesn't keep going up. Investing is a lot like surfing... if you don't know how to ride the wave, you will drown!
So, should you refrain from investing if you think the market has peaked? Absolutely not! You can find bargain-priced properties in every real estate market, even the hottest. You can find low-interest rate financing that will increase your cash flow so if values drop, you still are covered. You can plan short-term (six to 12 months), because real estate markets rise and fall slowly. And, if you keep a cash reserve for your business, you won't sweat when the market tanks, because you know that in the long run, real estate markets virtually always come back.
Mistake #2: Investing Blind
You'd think after losing $7 trillion in the stock market people would have learned! Nope, they are making the same mistake, which is blindly buying real estate based on bogus advice or complete lack of education. Real estate is one of the few investments in which risk is directly proportional to knowledge. True, it has a higher learning curve than investing in the stock market, but there's no proof that having knowledge of the stock market reduces risk (just ask your mutual fund manager).
I read a comment on a real estate discussion group on the Internet. In response to an inquiry as to whether a particular seminar or training program was worth the money, someone answered, "Why waste your money on that stuff? Just use your money as a down payment and learn as you go." This is probably the worst advice you could ever give a beginner. Money for real estate deals is easy to find if you can find good deals. But, you won't know what a good deal is without having first invested in your education!
The more knowledge of real estate investing techniques, financing, acquisition, negotiating and, of course, your local marketplace, the less risky your investments will be. A bargain real estate purchase will generally always be a safe investment; a bargain stock purchase isn't - after all, who says the company you bought into will be in business next year?.
Mistake #3: No Cash Reserves
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William Bronchick has served as President of the Colorado Association of Real Estate Investors since 1996. He is admitted to practice law before the bars of New York and Colorado.
You may contact Mr. Bronchick for consultation by phone, fax, e-mail or correspondence at:
Bronchick & Associates, P.C. 2821 S. Parker Rd. Suite 405Aurora, Colorado 80014 Tel 303-398-7032Fax 303-671-0516 www.legalwiz.com
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