Bodie, California Ghost Town - Photographer: Jon Sullivan
It can be tempting to consider buying real estate as an investment, i.e., not as your primary residence, especially given the recent wave of foreclosures, but the prudent investor will want to carefully evaluate the risks involved.
The July 17, 2007 MSN Money article Real-estate investors’ 10 big mistakes contributed by bankrate.com is a good place to start. One of the big mistakes is to follow the advice of so-called real estate investment gurus who may be more interested in selling you advice and products than in your investment success.
How to Avoid Getting Scammed by Real Estate Investment “Gurus” at associatedcontent.com offers more cautionary advice and includes a link to real-estate investor John T. Reed’s reviews of real-estate investment gurus. Note that John T. Reed doesn’t recommend Laurel Langemeier and posts an unfavorable review of her book The Millionaire Maker. Laurel Langemeier is the guru Heather got her advice from, as Holly remembers in Financial Organizing Soap Opera Episode #3.
The National Association of REALTORS® has a an excellent Field Guide to Investing in Real Estate with links to articles, analysis & tools, eBooks and other resources.
In 10 Things I’ve Learned in 4 Years of Real Estate Investing, Moolanomy shares solid tips from his own experience, including the idea of using expected rents to determine the value of the home. I agree with Moolanomy that cash flows should drive valuations, not expected market appreciation.
If you’re tempted to buy a property in foreclosure, check out A flood of foreclosures, but should you invest? at MarketWatch.
Owning Rental Property or Owning REITs at Bad Money Advice makes the point that if you hire a professional management company to manage your rental property for you, then directly owning rental property is comparable to owning shares in a REIT (Real Estate Investment Trust) such as Vanguard REIT Index Fund Investor Shares (VGSIX). The article explains that if you compare returns after management fees of a rental property to the returns of REITs, REITs offer comparable returns with less risk because they hold a diverse portfolio of all types of properties.
Stay tuned for upcoming Financial Organizing Soap Opera Episode #4: Owner-Builder, in which Heather dons a leather tool belt and plaster dust mask.
{ 3 comments… read them below or add one }
i haven’t invested in real estate but i would like to start soon. Posts like this really help in keeping new investors from falling into deep pits
This is good to know. Any articles I can find on buying foreclosed properties is helpful. Although, for my husband and me, it would be our primary residence, not a rental.
But I am curious, what if you purchase a rental property in a vacation spot that you one day intend to live in? For instance, purchasing a retirement home that you rent during busy holiday seasons? I’m just curious. I often wonder if it would be a better investment to buy in a less pricey area, like a remote mountain village, that one day my husband and I could move to, like Idyllwild, CA. Just a thought!
I would treat a property you do not intend to live in until some point in the future as primarily a rental property investment, so it should make sense from that standpoint. The purchase of a vacation home is different in that you usually expect to occupy a vacation home as a residence at specific times during the year, thereby reducing rental income. In both cases, you need to determine whether the rental inflows cover the expense outflows. In the case of a vacation home, it’s important to consider lifestyle impact, e.g., feeling obligated to spend all of your vacation time in one place (to justify expenses), spending time needed to pack and unpack for vacations and stock/close the home, and dealing with maintenance issues from a distance. If the vacation home is a 2nd home, there are fewer tax benefits.