The 4 Resources Needed to Invest in Real Estate

Over the last decade or more, it seems like there have been a lot of real estate investment books, TV shows, infomercials, and seminars talking about how much money can be made in real estate.  While there is money to be made in real estate, it may not be as easy as you think.  Many of these shows and books usually have a creative way to make money, but most of those creative strategies are very risky, take advantage of others, or are too time-intensive to be worthwhile.

If you want to make money investing in real estate, your strategy is heavily dependent upon these four resources:

1. Cash & Credit
2. Knowledge
3. Time
4. Expertise

Cash & Credit

If you do not have a lot of cash, your investment opportunities will be limited.  Most financial institutions will not lend money for investment property without at least 20% down payment.  Majority of auction strategies, such as buying foreclosures, require all cash. And while many real estate “gurus’ say that you can invest in real estate with no cash or credit, they are often wrong.

If you are really serious about investing in real estate, start saving up your money.  Real estate can cost quite a bit compared to alternative investments such as stocks & bonds.  At the time of this writing, average home prices in Clovis, NM are $139,000.  A 20% down payment is $27,800.

As my professor used to say, “Cash is King.”

Knowledge

If you want to invest in real estate, there are a lot of things to be knowledgeable about.  For starters, you will need to know the law.  Owning property brings with it a lot of legal responsibility.  If you own rental units, you will need to know what the law says about landlord-tenant relations.  There are a lot of myths about what you can get away with as a property owner… just because you think that you can lock out a tenant who owes you money doesn’t mean that you have legal permission to do it.

Other areas where you may need to be knowledgeable are finance, property maintenance, property management, and taxes.  Real estate can often be complicated, so you will need to have the right connections and knowledge to be able to handle the situations thrown at you.

Time

Time can often be an area that beginning investors don’t think about.  You will want to make sure that you have enough time to handle the tasks that are involved in investing.  If your strategy is to rehab houses, this is a very time intensive strategy.  If you invest in rental houses, they still require time to manage, maintain, collect rent, and more.  If your schedule makes it hard to do some of these tasks, it may be worth looking into a more passive investment.

Even if you have the time to be a good investor, it doesn’t always mean that it is worth your time.  For instance, if you can make $20 an hour on a side job, and the profit you make investing only brings in $10 an hour, your time is still better off working the $20 an hour job.  Few investors actually pay attention to the amount of time involved; all the time it takes to search, buy, market, manage, and maintain an investment property may be more than it is worth per hour.

Many big investors do well because they take advantage of economies of scale.  It often takes the same amount of effort to manage 10 houses as it does 3, so it works for them. It may be hard to make it worth it if you only have a couple of investment properties.  So, make sure to analyze the time it takes and whether it is economical.

 Expertise

Another resource to take into consideration is your expertise.  Many investors started making good money in real estate because they have a skill that they could do themselves.  For instance, someone in construction could rehab a house a lot cheaper than someone who isn’t.  Someone who is good at managing rental units can avoid the cost of hiring a property manager.  You get the idea.  The more hands-on you can get with your investment property, the less money you will spend to hire others.

You won’t make much money if you get a large loan, pay contractors to fix everything, and hire a property manager to oversee your investments, as there is not much left over for yourself.  Make sure to take into account the expertise required to invest, and exploit the areas that you can do yourself.

Photo Credit: Money” by PT Money on Flickr.

About Matthew Loewen

I'm a real estate broker in Clovis, New Mexico. I started my own company, Loewen Clovis Realty, as a way to provide my services for those that need it in the area.

Outside of real estate, I am usually biking around Clovis, hanging out with friends, reading, or attending church functions.

Comments

  1. KentClark1 says:

    I really like your tip to develop knowledge about real estate before you invest in it. That should be a rule of thumb before investing in anything. After all, it can cause some serious problems if you aren’t careful. Like you said, there are a lot of laws regarding landlord-tenant relations. For that reason, it is imperative that you make sure that you really understand what you are doing when you invest in real estate. http://darkhorsefinancial.com.au/property-investment/

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