If the people who gave real estate investment advice were accountable for their advice, there would be less people giving advice. Most real estate "experts" are not experts. They are unscrupulous salespeople earning fat commissions selling dud "investments".
When real estate is booming, investment success stories are also booming. Properties bought as little as a year ago are reputedly being resold for huge profits. It seems so good for the lucky few, but it can make the rest of us feel that we've missed out. And this makes us easy prey for the "investment experts" - the charlatans who peddle advice like the snake-oil merchants who once peddled miracle cures. There are no miracle real estate investments - but there are plenty of dangerous traps, especially during boom times.
Here is some SAFE ADVICE about real estate investment today.
GOLDEN RULE
One of the golden rules of investment is "Buy in gloom, sell
in boom." Before you invest, have a look at the market. Is
it boom or gloom? There's the clue. Another saying is, "When
rates are HIGH, it's time to BUY." Interest rates are low.
Another clue.
THE TWO
REASONS TO INVEST
The two reasons for investing are GROWTH - the amount by which a
property goes up in value; and RETURN - the amount you receive while
you own it.
The "experts" say real estate "always goes up". Often they quote "10 percent increase per year". They tell you that the wealth of millionaires is in their real estate investments. They won't tell you about the auction of the Gold Coast penthouse in 2001. It's highest bid was $1.31 million. The owner paid $4.2 million for it in 1996. And they won't tell you about the investor who paid $1 million in 1982 and sold for $960,000 in 2001!
Millionaires often become ex-millionaires because of real estate. And thousands of small investors wipe themselves out with dud real estate investments.
THE GROWTH
SUMS
Make sure you check the past capital growth of a property against
similar properties in the same location. Same location means same
STREET or same BUILDING! Check the prices of family owned homes
NOT investment properties. Do NOT fall for the trap of believing
graphs showing a constant increase.
As for the return, you should be seeking at least SEVEN percent gross. If the property is worth $200,000, it should rent for $14,000 a year. From the rent on your investment you have to allow for mortgage payments, rates, insurance, maintenance costs, agent fees and a vacancy allowance. If you don't do the sums on gross returns before you invest in real estate, you will have to endure the pain after you invest.
If the sums look terrible based on return, it's probably NOT the time to buy.
PROTECT
YOUR FAMILY HOME
Be wary of any "expert" who tells you to use the equity
in your home as a deposit for another home. Sure, lots of people
do it and yes, it can look good on paper. But the whole purpose
of investing is to give you MORE security. And security is owning
your family home with no mortgage. Your family home is precious.
It should be sacrosanct. Your home's equity is your greatest asset.
It is also the greatest target of real estate "experts",
shonky salespeople and lenders who lick their lips at the thought
of having a slice of your equity.
Yes, there are stories of those who buy millions of dollars of real estate by using the equity in one property to buy more properties. They seem really smart. But how many have been around for a long time? Such strategies are a boom fad. The 'keep-borrowing advice is coming from two types of people - young self-proclaimed seminar experts and those earning fat commissions from "investment" sales. You will be far safer to take note of the older and wiser investors - those sneered at by today's "experts", but those who have been around for a long time.
THE SAFE
INVESTORS
The safe real estate investors do it this way: They work hard. They
always SAVE their money. They are obsessed with saving. They buy
a family home and work hard to pay it off. Once their home is fully
paid, they NEVER borrow on it again. They just save more money.
When they have a big enough deposit, they buy another property -
usually in their local area.
They make sure that ALL the costs - mortgage payments, rates, the whole lot, is covered by the rent from the property. This way, if they lose their jobs, they are safe. They are always playing it safe. They keep saving and buying, saving and buying, usually for many years. Sure, they break the investment rules of the "experts". But here's the irony: these investors are worth a lot more than most "experts'. There's a clue here. Do these investors buy in the boom markets? Rarely. They save. And wait for the gloom.
FINANCIAL
SECURITY.
If you think this advice is too conservative or it will take you
too long to acquire wealth, then perhaps you should ask yourself
WHY you want to invest in the first place. Keep asking why and you
will keep coming back to the same answer - you want to be financially
secure. Well, there are few short-cuts to financial security. If
there were, then most real estate "experts" would not
be earning their money as "experts", they'd be using the
strategies they tell you about.
Before an "expert" asks you to buy property, ask to see the expert's personal financial statements with evidence that their wealth comes from the same source they are advising you to use. This will shake them. They will probably tell you that such information is "private and confidential". But the words private and confidential are often synonyms for embarrassing and disgraceful.
You see, it's almost certain that the real estate "expert" encouraging you to make your fortune in real estate is aiming to make his or her fortune from you. Be careful, especially when real estate is hot. It is easy to get burnt.
GET ADVICE.
If you want to buy an investment property, remember this: DON'T
SIGN ANYTHING until you receive independent advice from a lawyer
AND a valuer. Make sure that both of these people have NO CONNECTION
with the "experts" advising you to buy real estate. Thousands
of people collectively lose millions of dollars by ignoring this
advice. But, there are thousands more who are making the right decision
by taking this advice. So, take THIS advice to an independent person
- someone with a track record of successful and safe real estate
investing and someone who has no financial interest in your investment
purchase.
NEXT: The Conclusion - PART FOUR - HOW
THE CRASH WILL COME
