There are several shows on television that feature people buying properties and then flipping them after minor repairs. Many people make a profit doing this, but if you really pay attention, you will often only see what the house could make the owners. The shows often leave out when and for how much the home sold for.
Many of the richest people in the world started out in real estate. That’s why real estate investment is so popular. But what are some essential things you should know before jumping into real estate?
- Know how market timing works.
This means that you need to not only research how market cycles work, but that you need to sit back and watch them for yourself. The fact is that markets go up and markets go down. A lot of successful investors aren’t looking for a three-month buy and flip. They buy when the market is low and sell when it is high.
- Know how to analyze real estate numbers.
You have to be able to identify all of the factors that are affecting your profit.
There are four major parts of real estate investing: cash flow, appreciation, loan reduction and tax benefits. You need to understand how the four factors work together to produce a rate of return.
Real estate isn’t simply making you a profit when it appreciates. And it isn’t necessarily losing money when it depreciates.
- Know the economics in your area.
You have to look beyond the simple growth of the neighborhood you are investing in to the overall health of the city, state and country. For example, if interest rates are rising, you need to understand that borrowers are being cut out of the market.
The six aspects of economics you must understand are: mortgage interest rates, affordability indices, supply and demand, demographic information, commercial real estate and the job market.
It helps potential investors to take classes in both macro and micro economics. Macro will help the investor understand the large forces that impact real estate, such as recessions, national interest rates, war and demographics.
Micro will look at individual sectors and focus on the local real estate market, such as local disasters, local recessions, unemployment rates, supply and demand, new housing starts, housing for sale and types of vacancies.
There is a lot that you need to know before you jump into being a real estate investor. Yes, if you are just buying and fixing up and selling one house, you have the potential to make money. But if you plan to do this as an investment, you need to obtain the necessary education. Otherwise, you are gambling with your money.
By Andrew Watson