Investing in Real Estate

It is clear that people having specialized knowledge in an area can do well investing within that expertise, but to invest outside their area of expertise without the guidance of an expert in that area can be detrimental to their financial health.


As a general guide, experienced investors with a proven track record have several traits

  1. They invest time and study into their investing on a regular basis
  2. They follow experts in the area they are investing in
  3. They determine their own investing parameters

Any kind of investing, including real estate investing will yield varying results based on strategies used and the skill used to apply them. Allow me to list various strategies in descending order of expertise required by the investor:

  1. Purchase and self manage property
  2. Purchase property and contract property management
  3. Joint venture with a real estate expert, you put up the money and the expert closes and manages the property
  4. Participate in a Syndicated investment strategy. These may be
    • Limited Partnership
    • Share structures
    • Bonds (and participating bonds)

It is important to note that none of these strategies are wrong, or even necessarily inherently better than the other. Strategies are measured against the needs and expertise of the investor. It is the interplay of these elements of the investment that determine what kind of success the investor will experience. This type of analysis and understanding is required for all areas of investing and real estate is certainly no exception.

Purchasing property for the purpose of flipping is a separate strategy from what we are discussing here. It is viable in most economic times and requires a considerable expertise to execute well but is outside the realm of this discussion. For our purposes we are specifically examining strategies involving the purchase of apartment buildings for the purpose of rental.

Benefits:

Real estate is a somewhat sedate market. Wild fluctuations in value are a rarity and only come within the context of huge external influences . The key long term real estate indicators are well known and well understood by sophisticated investors. Always invest into a growing market. Throwing money into a market while it continues to wallow at the bottom is only speculation.

GDP_Graph_1

This illustration depicts with uncanny accuracy, the cycle followed by real estate. It is also an accurate predictor of workforce migration which of course means people. People, especially those migrating, will rent upon arrival and probably for at least two years before looking at purchasing. Some never purchase. A stagnant or shrinking GDP will lead to a reversal of the cycle over a predictable period of time based on how rapidly the GDP shrinkage occurs.

Real estate investing is inflation resistant. As mortgages are reduced and rents increased, a well managed property will continue to generate more and more revenue. At a time when the future ability of government funded programs are in question, this remains a viable means of providing for one’s own future or the future of loved ones and charities.

The safest investing is when hard assets are the underpinning of that investment. Real estate not only qualifies as a hard asset, it meets one of the most basic human needs, the need for shelter. Regardless of economic conditions, people need shelter. While in extreme circumstances rents may decrease and vacancy rates rise, there is always a need for housing and ultimately, a well managed property will weather the storm and come back to continue earning good returns.

As a bonus, most hard assets are only subject to gains or losses based on appreciation or depreciation of the asset. Real estate is unique in that it not only appreciates (most of the time) but it also generates cash flow while it is being held. Well managed real estate portfolios are designed to provide a healthy cash flow along with whatever appreciation can be gained.

Fundamentally, the goals of any investor include security of the capital, cash flow and good returns. Well managed real estate meets this  investment acid test.