What's the best advice for a first time Real Estate investor?
“Focus on the future productivity of the asset you are considering. If you don't feel comfortable making a rough estimate of the asset's future earnings, just forget it and move on"
- Warren Buffett
Real Estate Investment is a pretty wide subject. First, you have to further define your objectives.
Is your definition of Real Estate Investment passive, with the reward coming as the Asset appreciates similar to a stock investment? Then one option is a REIT or some of the new crowdfunding opportunities. You won't see any extreme rewards with this path, but your risks are also limited to what you have invested.
Is your definition of Real Estate Investment more on the lines of development or redevelopment, i.e. taking a blank piece of land and turning it into a house, office space, or repurposing an old building? Then work with a developer and learn all you can. To do well as a developer takes a lot of skill, effort, and connections.
Is your definition of Real Estate Investment buying, fixing, and selling? Then keep in mind holding costs (taxes, insurance debt service) and remember that no one can say with certainty that how the market will perform going forward.
Is your definition of Real Estate Investment creating a job for yourself by bootstrapping a portfolio of properties as rentals and living off the income of rentals? Decide early what geographic area and type of property you want. Always remember that commercial Real Estate is different from residential Real Estate and that single-family homes are different than apartment complexes. It is impossible to have a thorough understanding of multiple areas and segments well enough to truly succeed.
This requires effort as you need to make sure the numbers work for you in a given area and a given type of property. Get all the numbers - the actual rents in the area, vacancy rates, taxes, water, insurance, and remember that maintenance and reserves for upgrades in older residential properties can be a lot.
If the area you chose seems to work, get out and learn everything you can about it, including any future changes that may be in the works by the government or commercialization. If the major employer in the area is failing, housing value and rents may fall. If they are building a new shopping centre or stadium, values and rentals may rise. Make sure you choose an area that you are comfortable physically being in. If a neighbourhood makes you nervous, the chances are that you won't get out there and do what you need to do to succeed.
If you find you have been looking into the wrong area or segment of the market, change now rather than after you invest.
To avoid all the hassle, you can partner with an experienced Real Estate Wealth Management company that has worked with the type of investor that you want to become. They should be able to present case studies, a plan of action, and financial modeling tools to assist you. The company you choose should also have a methodology for making assumptions about different investment scenarios and a network of trusted experts to support your strategies. Real Estate investing requires building a strategy and team to produce projects and profit. If a company can’t back services up with data, documented processes, expert knowledge, references, and a broad set of business skills and tools, you should move on.