One would be impresses with the ideas of various real estate gurus and
oracles if they offered solid proof of success among their many followers. But
not only is clear and uncontested evidence unavailable, the factual data that
does exit paints a far-from-impressive picture. We have seers who are bankrupt,
no-money-down organizations seeking protection from creditors, consent
arrangements between seers and state consumer authorities, and a host of other
problems widely reported in the media.
As an alternative, we have successful investors who have never been on
television, never offered seminars, and never been bankrupt. They're quietly at
work in very community and many have amasses substantial wealth.
How do they do it? There's no magic formula that works in every situation.
All deals are different, and it follows that each property must be approached
with a fresh viewpoint to find the most profitable, practical, and coherent
investment strategy.
The best answer seems to be that successful investors operate within a series
of 14 observations, guidelines, and principles that define their decision-making
strategies. Taken together, these considerations define a sensible, low-risk
approach to successful real estate investing.
First, the central rule of real estate is that all properties are unique. The
idea that no two properties are alike, what the real estate industry calls
"nonhomogeneity", means that even properties which look similar - such
as identical townhouses in a single subdivision - are actually distinctive.
Property prices are determined at one point in time under specific conditions
through the agreement of a particular buyer and a particular seller. At any
other point in time, with other conditions, or with different buyers and seller,
values may change. A "good" price today may represent a poor deal
tomorrow and vice versa.
Second, the purpose of buying investment property is to make a profit. If
an investor can't raise property values or increase income by fixing up,
subdividing, expanding, re-zoning, or whatever, a deal won't work. Investing is
not a social calling, and the search for profits is not amoral, immoral, unfair,
unethical, or unreasonable. Everyone, everywhere, seeks some form of personal
benefit, whether or not that benefit is measured in cash terms.
Third, real estate investing is a business. It involves loans, deeds,
brokers, lawyers, regulations, taxes, and all the paperwork and headaches found
with any business. Unless you're looking for an expensive hobby, investing must
be given the time and effort required by every successful enterprise.
Fourth, investing is competitive. There are always players in the
marketplace looking for a limited number of prime properties. Because of
competition, it's important to be prepared when solid opportunities arise, to
analyze deals quickly and to have financing information and sources in place.
Fifth, most deals are made between equals. While seers and oracles
search for "motivated" sellers, investors work within the far larger
community of people who understand that the purpose of investing is to make a
profit.
Sixth, property values do not exist in a vacuum. The market value of a
well-maintained property can fall if the biggest employer in town closes, state
funds for a roadway are eliminated, or an all-night service station opens next
door. Because external influences are important, it's necessary to keep abreast
of community changes.
Seventh, there will always be renters. Over the past 30 years we have
seen a profound change in homeownership patterns. It was once true that with one
working adult a family could afford a home. Now it commonly takes two workers in
a household. In the future, unless we radically alter our social or marital
arrangements, there will be no additional workers within the home who can
contribute to its purchase or upkeep. As homes become increasingly difficult to
afford, rental demand will rise.
What it means for investors is this: The demand for rental housing has always
been present and there is little if anything in the future which suggests that
the need for rental housing will significantly decrease.
Eighth, there are times and places where the best real estate deals are no
real estate deals. Not every community at every moment offers solid
investment opportunities. In such situations it makes sense to invest outside
the real estate field. Houston residents who put their money in something as
mundane as passbook savings accounts in the mid-1980 made more money than
neighbors who invested in local property during that period.
Ninth, real estate investing is not risk-free. Values can go up and
they can surely go down, whether measured in cash terms, after tax dollars, or
real terms corrected for inflation. No one can guarantee future values.
Tenth, investor needs change over time. At different period in our
lives we each have different needs, interests, abilities, and concerns - factors
that influence investment choices. The deal that makes sense today may be less
appealing in the future and vice versa.
Eleventh, leverage is an important investment tool. Investors look for
leveraged deals, because they create the opportunity to magnify the impact of
investment dollars.
Twelfth, different investors see different opportunities. By
definition, because there are different perceptions of value and potential,
there is a market place.
Thirteenth, investing requires give and take. There are few situations
where one side or the other can dictate terms. Real estate bargaining is best
seen as a process where all sides must receive some benefit.
Fourteenth, investing is a complex process that requires the use of
specialists. When pulling deals together, real estate investors normally
work with brokers, lawyers, termite inspectors, loan officers, surveyors,
structural inspectors, tax advisers, contractors, and other experts. To be
successful, you need the availability of such expertise.
Do these principles and observations absolutely guarantee investor profits?
No, but they at least suggest how investing can be approached with minimal risk,
maximum sanity, and the most likely chance of success.
