How can I invest in real estate?

August 26, 2006 2:29 PM

I have a few questions about real estate investment.

I'm exploring the possibility of becoming an investor in commercial or residential real estate. I've read the papers, so I know that the real estate market may be facing a significant correction soon. That doesn't seem to me to be necessarily a barrier to investing in RE, though. So: how do I get started in investing in real estate? Can I make a good living doing this (legally) without a broker's license or being a realtor? What kind of money am I going to be forced to put up? What are the barriers to commercial RE as opposed to residential RE? What are some books or websites that can get me started? Can I realistically expect to make a good living doing this part time, or will doing it full time be necessary? Ask Mefi has a ton of questions on various RE topics, but I want to reach out to the community for a primer.

posted by arimathea to work & money (13 comments total)

First you need to figure out what you want to do with your properties. Do you want to flip them (buy low, sell a bit higher later), rehab then flip, rent them, tear them down and sell the land? You'll also need a healthy starting pot... don't listen to those infomercials that say you can buy with little to nothing down and walk away with $10,000 after closing. It just doesn't work that way. It's doable, but takes a lot of hard work and research. You also need to be weary of money pits (despite how cute you thought the movie was).
posted by bjork24 at 2:38 PM on August 26, 2006

rehab = renovate
posted by bjork24 at 2:39 PM on August 26, 2006

I've always favoured REITS, or Real Estate Investment Trusts myself as vehicles to get exposure to property.

There are several risks associated with real estate investment, for example, operational risk and concentration risk. A REIT turns over operation of the property to dedicated management, and can diversify your investment money across multiple properties.

In terms of horizons, as long as you're approaching real estate - or any investment - from the long term, you'll be fine. It's folks that try to trade into and out of the market that have problems. And yes, you're correct - we're in for a sharp correction in real estate values so the longer you can side on the sidelines building up cash the better.

REITS are attractive from the viewpoint of funding as well, as you can purchase as little as one share. Or as much as you can afford. Come across $10K and good luck trying to invest that sum into real estate. No problem with a REIT, as you're purchasing shares on a stock exchange.

And yes, you can make a living from investing in REITS (or any other vehicle that pays regular dividends). The usual rules apply as they do to any investment - start out slow, with only money you can afford to lose. NEVER get greedy, if it looks too good to be true it probably is. Diversify your positions - that is, don't put all your money into any single investment.

And, most importantly, always reinvest cash flow generated by your investments (REITS) into other, cash flow generating investments. It builds up remarkably fast over time.

Best of luck!
posted by Mutant at 2:51 PM on August 26, 2006 [1 favorite]

Ignore the Primer by reklaw above.

But start out small. Yes, there's a correction coming up. But that's good news to you, because lower prices mean bigger profits.

Commercial real estate is usually a lender's term referring to properties five units or above. You should start with residential real estate -- a fourplex or below, or a condo. You'll get a "residential" loan, which is much easier than a commercial loan.

To make money in real estate, you need to concentrate on cashflow -- income from rents. For heaven's sake, don't start out by flipping. This is a dangerous strategy, and bankrupts many. Buy your small fourplex or twoplex, and try to achieve a cashflow that pays your debt service and leaves you a little net on the side.
posted by Gordion Knott at 2:51 PM on August 26, 2006

The trouble is that investing in 'real estate', as you guys call it, is far, far too often seen as a get-rich-quick scheme, when in reality it's more of a get-a-moderate-profit-occasionally-but-also-risk-disastrous-losses scheme. And investing in a bubble is probably the worst thing you could do.
posted by reklaw at 2:55 PM on August 26, 2006

Along the lines of what Mutant suggested, you can invest in a mutual fund that contains lots of REITs, allowing you to own pieces of real estate all over the country. This provides diversification that can reduce the risk of investing in only one piece of property or even one trust.

For example the Vanguard REIT index fund has had an annualized return of over 15% per year over the last 10 years. Of course past performance is no guarantee of future results.
posted by JackFlash at 3:09 PM on August 26, 2006

I have no intention of getting-rich-quick, my question is how do I make it a career (or a side career).
posted by arimathea at 3:18 PM on August 26, 2006

I have no intention of getting-rich-quick, my question is how do I make it a career

To become a career investor of any kind, you must either 1) have a shitload of capital, or 2) leverage yourself to the hilt and get really lucky.

Which were you interested in?
posted by trevyn at 3:29 PM on August 26, 2006

I have some capital to leverage, but it seems like much of the game of real estate is not putting up all the money yourself, right?

I guess my point is, there are plenty of folks who seem to have made it big investing in real estate. In most of the cases i'm aware of locally (friends of friends), they didn't put up a whole lot of money, or didn't have a whole lot of money in the first place. They're either buying properties to rent and covering the investment through the rent money (typically an unusual proposition) or flipping properties they buy on the cheap (which they're buying with either a loan using their capital as a down, or with their capital completely). I can probably get an introduction to these folks, but it's unlikely they want to share all their secrets or that i'm going to build a relationship with them quickly enough to have them mentor me in the trade. On top of that, they're not in commercial real estate at all, which seems like it might be more protected from the bubbles in the market.

We seem to be arguing real estate here as a choice of investment vehicle rather than answering the question, which has more to do with whether you can make money in a down market (logic seems to indicate this to be true), and how (can you invest in real estate without a significant ($20,000+) capital outlay or a broker's license).

I'm not particularly interested in REIT; i'm more interested in being directly attached to the field as opposed to viewing it through the windows of managers.
posted by arimathea at 3:38 PM on August 26, 2006

There's a TV show on TLC called "Property Ladder" documenting people flipping properties, along with tips and such. Most of them are first-timers, so it would be good way to get that inside view.
posted by smackfu at 3:57 PM on August 26, 2006

If you're talking about flipping properties, the whole "not putting up a lot of money" situation usually means the person gets a mortgage on a property with no money down, does some renovations, and sells it again before the first mortgage payment comes due. I just handled a closing where the buyer was doing just that. Not easy, to be sure, but it can be done. Particularly if you're just looking to make a small amount, as you would be on your first few flips, and don't need to any major renovations to the place.

As far as "secrets" go, on one of the many flipping tv shows I've watched, one of the more successful flippers had this strategy: approach a reliable contractor, tell him you plan to buy, reno and flip X number of properties over the course of the next year, and that if he does a good job on the first one you'll use him for all the rest. If all goes well, you'll have a team in place who can bang out renos quickly and for a predictable cost.
posted by schoolgirl report at 4:29 PM on August 26, 2006

To answer one of your questions specifically, you never need to be a broker or realtor to buy properties for yourself or sell properties you own yourself. The main reason why many RE investors and developers qualify themselves as brokers is because many other brokers are reluctant or unwilling to do business with non-broker-represented properties.
posted by MattD at 5:32 PM on August 26, 2006

If you have a little time to spare, get a broker's license, or at the very least, a Realtor license. It's not difficult (I got mine when I was 18), not terribly expensive (it cost $500 for the class, and $100 for the test back in '98), and it will allow you to access your local MLS and give your credentials some extra padding... and you can also get a lockbox key, which means you can look at houses on your own, without being pressured by an accompanying real estate agent.
posted by bjork24 at 7:43 PM on August 26, 2006