Where Should I Invest in Real Estate?

Many times I get emails asking me to give specific advice about investing, or I get phone calls from people who want me to tell them what to do. Well, here's my answer.

On my bookshelf I have over 25 of the latest books on real estate investing, and I've read (and understand) them all. I've listened to countless hours of training CDs. And I've invested thousands of dollars in coaching from several organizations, including Rich Dad. And the answer to the question of what to do next is this - do whatever you want.

Now I don't mean to be flippant here. Clearly, there are some mistakes you should avoid, but most of the time the choice is between one good thing and another good thing. Like should I invest in Florida or Salt Lake City or California? The best answer is of course, "All three", but what if you can only pick just one? There is a way to decide, and I'll talk about that in a minute. But investing is kind of like the Garden of Eden, "of the trees in the garden you may eat freely", except for the tree with the bad apples.

Increase Your Investment Intelligence

So where should I invest? Do I invest in condos, houses, apartment buildings or commercial? Really good questions. I'm learned some thing along the way, and just to let you know, even when I'm hanging out with very experienced investors, they keep asking themselves the same questions. That's because markets constantly change, but more importantly, the personal situation of the investor changes. In other words, as time goes by, your goals change, your net worth changes, your experience grows, and so the type of investment you're looking for changes to match. And so you see it really is impossible to give any "one size fits all" advice about what kind of investment to make.

And even more to the point, listening to other people telling you what you should or shouldn't do doesn't teach you anything. Exercising your investment intelligence muscles and trusting your own instincts is the only way to go.

Rules Of The Game

But I can give you some guidelines.

When you're first starting out, most investors go with single family residences for capital gains. That means buy 3 bedroom, 2 bath homes in areas of rapid appreciation. If possible, buy in areas you like to visit, so you can write off your trips as business expenses.

At some point (you'll know when it is) start trading some of the houses for multi-unit properties. In Monopoly this is known as "4 green houses, 1 red hotel". Units will generate more cash flow, depreciation, and leverage. This is also the way to retire, since you can't live off "break-even" properties. Sooner or later, you will have to have cash flow.

Avoid negative cash flow, except for short periods of time in highly appreciating property.

Start with small deals to get your feet wet and gain experience. Then graduate to larger properties. This is because there is no substitute for experience and building up your own financial intelligence. If you're impatient and "go for broke" you might actually succeed in getting there.

In a buyer's market, find undervalued distress properties that you can fix up. You can then refinance to get your cash out, keep the property and buy another to do it again. Or trade it for two more fixer properties.

In a seller's market, buy new construction, with occupancy as far in the future as possible. In this case, you will have instant equity when you take possession. Tie up as many properties as you can.

When an area appreciates, you'll find that the numbers don't make sense anymore, meaning it takes too much capital to achieve break-even. I call this "game over." That means it's time to find a new area to invest in. Other "game over" situations occur when the builders won't sell to you unless you live in the property, or other investors are buying up all the lots for cash so you can't buy one using a construction-to-perm loan. There's always opportunity someplace, but there really are windows that open and close in certain areas. That's another reason why you usually can't follow other investors - what I did 3 months ago, you probably can't do now, because the game is over in that market.

Risk vs. Reward

One method I've learned to use when making a decision is to weigh the risk versus the reward. If risk outweighs the reward, you don't do it. If reward outweighs the risk, then it's a go. For example, should you run a red light? The reward is you get there a minute sooner. The risk is you get a ticket, or get in a car crash and are crippled or die. So since the risk clearly outweighs the reward, you don't run the light.

Now let's talk about real estate. To buy a house in Florida, your risk is $10,000, your net worth increases each month as principle is paid down, and you get a depreciation write-off. There is no negative cash flow. The market appears to be at the beginning of an expansion cycle, and you expect the property to go up in value $20,000 next year. Should you do it or not?

How about one in Las Vegas? You can buy a new house for $280,000. With 10% down plus closing costs, your investment is over $30,000. The property will only rent for $1000, costing you $600 a month in negative cash flow even if you do interest only. Also, you believe that the market has peaked, and the chance of appreciation is low. So you're risking $30,000 plus $600 a month, and your reward is only depreciation. Is the reward worth the risk?

Investors face questions like this all the time. Should I do a 1031 exchange or should I just sell and pay the taxes? Should I buy in San Diego or Hemet? Should I buy a single family or units? By looking at the risk and the reward, you can decide which decision is right for you at this stage of your investment career.

I hope you found this article educational. If you'd like to discuss some strategies for your real estate investments, call me any time at 800-469-6391.