By Patrick Barta
Special to RealEstateJournal.com
Question: I have a $450,000 mutual fund portfolio, which is now down to $300,000 with the way the market has been going. I want to start investing in real estate. What do you recommend I do? Should I start off by buying a house, living in it for a year, and then renting it out? I am enrolling in a real-estate course, and I hope to make real-estate investing my career. I am 25 years old. What's the best way to get started?
-- Name withheld
Answer: So you're ready to dive into real estate. What's the first thing to do? Get a reality check.
Making a living by investing in real estate isn't as easy as it might seem, and if you're looking for something that's going to give the kinds of easy returns that stock-market investors rode in the late 1990s, think again. Establishing a career in real-estate investing requires a lot of work.
"You don't just say, 'Hey, I'd like to do accounting,' and go to a few seminars, and become an accountant," says Russ Whitney, author of "Millionaire Real Estate Mentor" (Dearborn Trade Publishing, 2003), a real-estate investing book. "Real-estate investing is the same."
That said, if you're willing to put in the time, owning real estate can be a good way to make a living. You should start by doing as much research as possible. Read as many books as you can get your hands on. Attend as many seminars as possible. And talk to as many real-estate investors as you can find. They're easy to locate: Most major cities have real-estate investing clubs that meet regularly. (To find contact information, try the website for the National Real Estate Investors Association: www.nationalreia.com. Another good website, www.mrlandlord.com, has chat rooms for investors and lots of other helpful links.)
You'll also want to contact at least one real-estate agent who specializes in investment properties. While most realtors focus on buyers who are buying properties to live in, some cater to buyers who plan to rent out the properties, and they can pass along lots of intelligence about the amount of rent owners are charging, and what investors are paying to buy rental units.
Often, however, the only way to learn is from experience, especially since many of the people you'll be contacting -- including even some realtors -- won't necessarily have your best interests at heart. Books will preach get-rich-quick strategies and seminars will promise huge returns, but there's nothing like putting your own hard-earned money on the line to learn the risks and rewards of owning a house or an apartment.
If you don't already own a home yourself, you'd be smart to buy one. You'll learn a lot about the mortgage process and the economics of owning real estate, and you can always rent it out later once you've learned more. Or, you could buy a duplex or triplex, and rent out the units you don't use. That way, you can keep an eye on the other properties while using the rental income to help offset your monthly housing costs.
Once you're ready to start buying more properties, you'll need to do some serious thinking about what kind of investor you want to be. If you're handy with a hammer, you might want to focus on properties that you can fix up, boosting their value in the process. But if you're not keen on getting your hands dirty, or running a contractor's crew, you might want to stick to apartments or houses that are ready to rent. Also, do you intend to hold on to the properties for the long term, or flip them for a quick profit? It's usually wiser -- and easier to make money -- if you hold the properties for a long time. But many real-estate investors have made good returns by buying properties that are undervalued for some reason -- perhaps the owners are divorcing and have to sell -- and then quickly reselling them to another buyer.
Whatever you do, though, don't do it lightly. Buying and selling real estate without doing a lot of homework is like going to Las Vegas without knowing how to play cards. The more work you do, the more you'll improve the odds you'll come out ahead.
-- Mr. Barta is a staff reporter for The Wall Street Journal. His "House Talk" column appears every Friday exclusively on RealEstateJournal.com.