In our previous post in this series, we looked at why you would consider investing in real estate and the ways it can be done. Now we’ll examine one of those ways in more detail – direct investing.
Invest Carefully and Knowingly
Direct real estate investing, which means actually owning (and perhaps operating and maintaining) the property, can be highly rewarding. However, before you go buying or flipping the property you’ve been eyeing, it’s important to understand the potential pitfalls and risks of direct real estate investing first. It’s different than the “reality” presented on television!
In fact, direct real estate investing is very much do-it-yourself (DIY). You own the decisions and outcomes, good or bad.
The DIY nature of direct investing also means there is often limited information available and limited bandwidth to get more. Thus, direct investing tends to be hyperlocal in both focus and scope.
With direct investing, there is no professional investment management team to help. That could mean improper due diligence (or none at all). Nothing’s stopping anyone from just jumping in to real estate investing. And when the unprepared dive in to direct real estate investing, they usually learn many lessons, some of which can be expensive.
For instance, real estate investors need to know direct investing is often highly illiquid. The value is tied up in the property. So, if a quick sale is required to access funds, a discount may be in order.
And those who think the property manager will just handle everything are being naïve. There absolutely is oversight required on a monthly and annual basis.
Why Go Direct?
The cautions above are not meant to scare you off direct investing, but to prepare you. Done right, direct real estate investing offers several positives.
For instance, substantial market inefficiencies can be captured. Foreclosures, estate sales, tired landlords, inherited properties and unsophisticated sellers all present opportunities to acquire assets below market value. And remodeling costs are often lower than the gap between the purchase price and market value.
Another benefit is that sometimes it takes little or no money to start. While this method is over-hyped in the media, it’s possible to obtain property for as little as a 3-percent down payment or less. There can also be substantial “non-traditional lending” capital available, so investors don’t have to use their own money.
One of the best features of direct real estate investing is it offers three ways to profit, potentially all at the same time. A property could appreciate in market value. There could also be cash flow from rental income, which offers tax benefits as well. Lastly, paying down leverage (generally at fixed rates) adds value.
DIYers may love direct investing because of the “hands-on” opportunities it provides. For instance, beginning investors could move into a starter home, make repairs themselves, rent the home out, and repeat the process as desired.
Direct real estate investing can also be a part of a retirement plan. Savvy thirtysomething investors could set up a portfolio with 20- or 30-year mortgages, which would be fully paid off by retirement age. The properties could then be sold (if appreciated) or rented for retirement income.
Lastly, direct real estate investing offers the most control. Want to steer the ship? You make the calls, decide the strategies, and so on.
A Word on “Flipping”
This post would be incomplete if it didn’t address “flipping” real estate – buying properties, making rapid improvements, and selling quickly.
We’ve all seen the television shows. Flipping is easy, fun and profitable.
Sure, it can be all those things. But, it’s not always easy, fun or profitable. A substantial number of flippers lose money.
It’s all about the numbers. If you get the comps or rehab costs wrong, you could be sunk. One thing that is often overlooked is the “carry cost” of flipping – the interest, utilities, lawn care, insurance, taxes and other expenses paid while the house is being flipped.
This isn’t to say you should avoid flipping. We would simply recommend partnering with others on a flip or two (or more) before going full-on DIY as a flipper.
And that’s good advice in general – if you want to invest in real estate (or anything for that matter), educate yourself first and seek help as needed. You don’t want your dreams of profits to end up in the dirt due to avoidable mistakes.
Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.