Wednesday, 14 March 2012

Investing in Real Estate: Doing the research

This is Part 2 of the Investing in Real Estate series which I'm posting on this site. Part 1 was a brief overview of real estate investing.

The first thing an investor who is not experienced in real estate should do is get out and do as much research as they can. There are 3 core steps in this research process (and each of them answers a separate question):

  1. Is real estate the investment I am looking for?

  2. What are the characteristics of the market I am looking to invest in?

  3. What sort of property am I looking for?

1. Is real estate the investment I am looking for

In researching this topic you are really thinking about your whole investment strategy. Things that need to be considered are things such as where your skills lie, where your interests lie and what your investment portfolio currently looks like and what you want it to look like.

At this point in the process ignore the real estate specific investment books / websites / information (and also ignore books dealing specifically with stocks or starting your own business). You are looking for generic investment information and any book that covers real estate investment as part of a broader portfolio should be included in this first stage of your research.

Note that some of the core benefits of real estate investment (in some jurisdictions) are tax / legislation driven. For that reason if you are an Australian investor ignore all investment books written for the American market and conversely if you are American / British the tax and regulatory regime in Australia is very different to your home market.

2. What are the characteristics of the market I am looking to invest in?

Related to the point above. Once you have decided that real estate is the type of investment you are interested in the next thing to do is get specific real estate books that relate to your home market. The real estate markets in different countries (and even different regions within countries are very different)

For example in the United States real estate is primarily a yield investment characterised by relatively low capital growth, high capital expenditure and a high level of involvement by the landlord. Conversely in Australia investing in real estate is a low yield, high capital growth and (potentially) low level of involvement by the landlord. The above comparison is over-simplified and there are variations within any market but it serves to illustrate the point that you should not be looking at information outside your target market.

There are some great research facilities available. For Australian investors the somersoft property forums are one of the best research tools available. Take what they say with a grain of salt because for the most part they are pure property investors who believe the market can never go down but when discussing the relative merits of investing in different areas the information is invaluable. No doubt there are similar websites available for other markets as well (even if you're not from Australia I recommend visiting the site to see what a quality property investment forum looks like).

3. What sort of property am I looking for?

In evaluating this question and looking to research individual properties you need to consider what your budget / personality and skill set is like.

If you are a handy person who does not have a great deal of available funds you may want to consider a cheaper property that requires extensive renovations. If, however, you are like me and are useless with your hands and no real interest in managing your property you want to get a property that does not require much maintenance, that will rent easily. Your free cash flow / tax situation will also determine what sort of properties you are looking for. Negative gearing allows higher earning individuals to buy more expensive properties which have the potential for higher growth but which earn a very low yield in the meantime while lower earning individuals who do not get the same tax break may want to consider a cash flow positive property with lower capital growth potential.

How does the above affect the research you do? It affects it in 2 ways:

  1. It affects the types of materials that you research. If you're not a handyman and useless at renovations then don't research things relating to this. If you can't stand the process of building a house then don't get into development. You need to research the type of property that works for you

  2. In looking for individual properties look for the ones you identified above. If you are going for high growth / low yield then look at inner city areas etc.

Summary / Warnings

Given the amount of money you are likely to commit to a physical investment property do not skip on the research - it will save you money and there is a lower chance of unexpected surprises. All of the research steps above are necessary and should not be considered optional.

My big warning is beware of spruikers. For some reason the property industry seems to be full of them. Beware of people that tell you that the property market is always going to rise and that they will show you how to make 'risk free' money or how to 'reduce your risks'. Also beware those that tell you techniques that work in other markets will work in yours too. The golden rule in all finance is especially true in the real estate market: there is no such thing as a free lunch

1 comment:

  1. Love this blog, keep up the great work wish you all the best!!!

    Real Estate Investment