Actually, a money losing investment IS still an investment, it's just a crummy one. The old joke in the real estate trade is "how do you make a million dollars in real estate? start with three million and know when to quit" We're in an interesting time for Real Estate Investors. The market has tanked and the bubble has burst. Market times are trending out to more historically typical time frames and the days of buy it, paint it and sell it 3 months later for an additional $100k are gone. The rookie flippers have gone home...many of them have even gotten haircuts (and some got their hat, shirt and ass handed to them) and sold their properties with little or no profit...I can introduce you to many who are going to LOSE quite a lot of money...piles of it. The last few years have seen some tremendous wealth created as even the stupidest of "investors" was treated well by the rising tide that floated all boats, but believe it...the same market forces are being brutal to those who don't apply sound investment analysis to their purchases. I'm not saying that you can't make money in the current and coming market. I'm saying that you are advised to treat investing in real estate like the business activity that it is...real estate doesn't ALWAYS go up any more than the price of General Motors or IBM does...if you don't remember the blood that ran in the streets in the early nineties find someone who DOES. Have them explain what happens when prices drop generally AND your equity is wiped out AND the property is worth less than the balance on the mortgage AND you have to sell. If you don't need to sell, it's not an issue, but if you are planning on the value of a piece of real estate to rise to give you your profits...you could get a nasty surprise when it comes time to sell. Add in your carrying costs and the costs of sale and the picture gets even grimmer. And it's not just buyers who seem to be blind to reality, I commonly see Realtors endorse purchases that are dead-bang LOSERS from the start. I've even had one Realtor tell me that "real estate always goes up". She was 28 and had been in the business less than two years. Groan. It is a time for caution for investors as they go about their business and the savviest of them apply good solid cash flow and return on equity analysis. Call me if you want to determine if a property has the potential for an adequate return to justify the risk. It's an easy calculation to weed out the clear losers and once they are ruled out the work of crunching the numbers to get a good read on the possible winners is well worth the effort. So who will be making money in the next few years? As always it is an option to add value...the smartest investors have always done this...it is the definition of investment. Add square footage to a tiny home and it becomes more universally desirable. Get building entitlements for raw land and that acreage gains value in excess of the costs to get there. Subdivide raw land, make building lots out of a 20 acre parcel and you are adding value. Completely rehab a fixer that you got for the right price and you are adding value. Convert an apartment building to For Sale condos and you're adding value...the point is that the days of just buying and sitting on it and hoping that the value will rise short term are behind us...that's not investing, it's speculating. Adding value takes capital in the form of money for down payment as well as for carrying costs and for interim outlays. It's a business and a business plan will expose the strengths or weaknesses of your project.
The upside of the current market is that there are investment opportunities that are unbelievable...homes can be had that rent for more than their cost of ownership...that makes them GREAT investments, POSITIVE CASH FLOW investments. The next two years will be a time of massive profits for those who have cash or the ability to finance a property!
If you are thinking about investing I invite you to schedule a meeting with me. We can determine if what you propose is a smart move and get started to reaching your goals...real estate really is a great way to build wealth but it can skin you alive too. Let's get together and get you started the right way. Remember, If it doesn't MAKE YOU MONEY, it's a loser as an investment. The old timers in this business call negative cash flow properties alligators...they'll eat you alive. |