You can learn a lot about investing by following the long-term strategies of those who have done well.
Real estate investments are no exception. As a hard asset, real estate is a good way to hedge against inflation, reap tax benefits and get rates of return that are often a lot better than what you’ll see in stocks and bonds.
What kind of real estate investment is right for you? Rental real estate is a popular option, but it requires some hands-on work. You have to be prepared to work on houses and deal with tenants (or pay someone to do these things for you). This is essentially your small business, and it will take up a lot of your time so you will have to work smarter, not harder.
Many successful investors concentrate in one market or one high-dollar property. If you can afford the risk (and can stomach prolonged periods of potential depressed prices), this could be where you make the most impressive long-term real estate profits.
Real estate developers and investors across the country are more or less in agreement that the following strategies should guide real estate investment in 2013:
- Look for infill locations. These are sites in urban areas already inhabited by young professionals with established shopping patterns. Focus especially on properties near mass transit and commercial areas near “hot” neighborhoods.
- Invest in environmentally responsible commercial space. Tenants these days are willing to pay more in rent if they get “green,” energy-efficient designs.
- If industrial facilities are your game, focus on important distribution centers with ports and airports nearby. As the economy improves, these hubs will generate more business activity.
- Invest in geographic areas you’re familiar with. In other words, stick to places where you know the demographic and economic conditions. The next best solution, if you absolutely must invest in other markets, is to partner with someone who does know the region.
- Occupancy levels in low-cost apartment properties will level off in the next couple of years in many markets. So barring unique mitigating factors, you should probably avoid low-income rental units. Some investors will make money providing low-cost housing, but for most of us it’s just more trouble than it’s worth.
- Invest in the redevelopment of obsolete infill properties. This includes renovating vacant strip malls, aging office parks and warehouse properties. Many of these spots have the location you need, they just need to be spruced up and filled with attractive retail options to lure shoppers.
As with any other investment, timing is crucial. We’ve seen American housing markets go from “correction” to “stabilization” to the early stages of recovery. A revival is expected next, and investors who accurately predict when it hits will be the ones who make the most. Approach your real estate investing as long-term strategy. You’ll need to hang on to your properties during times of depressed values, although holding costs (property taxes, loan payments, etc.) must be factored into the investment.
Real estate investors have to be comfortable with market cycles that stretch for years or even decades. Some areas of the country saw 25 years of consistent growth, followed by at least six years (so far) of bear markets. It is important to recognize that the cycles exist, so failing to diversify your long-term real estate investments could be a disaster.
Investors who took on debt in order to acquire more and more properties in hot markets have taken a big hit as those property values have fallen in the past few years. Many fortunes made “on paper” have dwindled to nothing. These investors could have preserved some of their wealth by putting money into conservative investments. Investors who kept money in safe havens during the boom times now have capital to leverage in the buyer’s market. “Leveraging,” if you didn’t know, is just a way to control a property and maximize potential earnings. A common example is a home mortgage in which the buyer puts a down payment of, say, 20 percent. That down payment is “leveraged” to acquire 100 percent of the home, with the mortgage lender footing the bill for the other 80 percent. Taking on this kind of debt—judiciously, of course—can allow you to grab some great deals while prices are good.
Real estate isn’t booming again—not yet, anyway. But it will be. Many investors are already flirting with risky decisions, but the investors who have done well in the last two years have preserved their assets in conservative holdings (such as debt instruments) and by leveraging borrowed capital. Tread lightly, and tread wisely, but a bold step or two into the recovering real estate market could pay off big for you in the long run.