Everyone wants a home to live in that is comfortable, close to amenities and close to transportation, but investing in a property has questions to answer before taking the plunge:
1. How could I benefit from this investment?
2. How could you lose with this investment?
3. What is the worst case?
4. What type of protection can I implement?
5. Do I want someone else to take/share the risk?
6. How can I improve my earning potential?
7. What is the probability of loss versus the probability of gain?
8. Exit Strategy: At what point will I cut my losses?
9. How will I collect the benefit of this investment?
10. Does this investment fit my plan?
11. Does this investment balance my portfolio?
12. Will it improve my life?
13. Compared to other opportunities, does this investment provide the best return for effort?
This is not a complete checklist, but it is designed to cover most issues that come up in real estate investing. To be sure, each investment opportunity and each individual has their own unique circumstances, but a checklist offers first-time investors the opportunity to consider the issues that can make the difference between success and failure in real estate investing. Real estate investing won’t always deliver the anticipated returns, especially if you’re new to it.
New investors will look at the past performance of the property and see the obvious attraction of buying. It is too naive to assume that you can put down a small deposit and simply reap the rewards of capital appreciation and high returns over time. There are periods of time when property prices languish and even fall. That shouldn’t deter us from moving forward.
People’s circumstances may force them to dispose of property, usually at the most inconvenient time. What on paper seemed like a good opportunity turns into a lemon and leaves you poorer for the experience. In fact, in the early part of the last boom of 2000-2004, many investors who bought at the (then) peak of the market lost their deposits. This was particularly evident in some investment ‘opportunities’ outside of the Melbourne Skyscraper Scheme.
Investing is about managing the investment process and ensuring that all factors that can contribute to a loss or risky investment are mitigated and addressed.
Benefits Management
We buy properties to increase our wealth. Wealth creation comes from increased equity. Capital growth comes from property capital appreciation and the ability to leverage your capital into other real estate investments. The actual process of building wealth involves making a profit. Real estate investment in this respect is no different than any other business activity. Profit is the difference between revenue and the cost of generating that revenue.
The profit comes from:
• Cash Flow
• Equity
• Lump Sum Cash
Cash flow arises when income exceeds investment expenses.
Investing is a learning experience. Every investment experience, whether researching or buying and owning property, teaches us valuable lessons that we can use to improve our investment skills and enrich our lives. There is much to learn in real estate investing, and like many other investment pursuits, such as stock investing and starting a business, each experience builds on the next to get better at what we do.
Real estate investing can be a deeply satisfying experience. There is great security in building wealth around bricks and mortar. We intuitively trust property…we can see it and touch it. This is very different from stocks where we have little control over the underlying performance of the business. In real estate, we can influence our results through careful research and by buying well and adding value.
These are powerful lessons for us, and each lesson can be applied even more powerfully to future actions. The gain can also be in the form of knowledge, experience, network contacts and opportunities for future investments. One of my favorite quotes is: ‘knowledge pays the best interest rate’.