Getting Started in Real Estate Investing

Many people would like to invest in real estate.  Housing prices have plummeted; rates are at historic lows.  You can actually buy cash-flow investment property in California!  It’s a great time to buy real estate.  But how do you get started?

There are several ways to invest in real estate.  You can buy investment rental property, or purchase in an interest in an investment company.  You can buy single family homes, apartment buildings, REOs, fixer-uppers, or even raw land.  Or, you can purchase tax liens, options, or notes.  Thanks to the credit crunch, you can also invest by loaning money secured by real property.  There are several strategies, such as:  “buy and hold,” “leveraging,” “flipping,” “wholesaling.” for maximizing profit:  flipping, “buy and hold,” leveraging, wholesale contracts.    For the new investor, it’s like learning a new language.  There are literally dozens of books and articles in the library, the bookstore, and on the Internet – it can seem very overwhelming!

A word (or two) about risk.  All real estate investing involves risk.  There is no such thing as a “risk-free” investment.  You can learn to manage risk, and take steps to reduce risk – you cannot eliminate it.  Each individual has their own personal risk tolerance level.  While getting started, consider what would happen if you lost your entire investment.  As you gain experience and confidence, your tolerance for risk will probably increase, along with your ability to reduce the risks inherent in any investment.  An important element of risk management is to avoid problems, whether they are of an economic or legal nature.

There is not enough room here to explain everything you need to know about real estate investing, but a few pointers will help you get started.  I strongly recommend new investors should attend real estate investment seminars, talk to other investors, and read books and articles on real estate investing.  Learn the language.  Consider a low-risk, short-term investment and try it.  You will learn more “by doing” than anything else.

First Step:  Make a Plan.  The most important step is to consider both your personal and your financial goals, and develop a Plan.  A good Plan will focus on your goals.  Goals must be realistic.  Your plan should be flexible, and contain an exit strategy.  Be sure to have a Plan before you write your first check!

Your financial goals should support your personal goals, not the other way around!  Determine where you want to be in a few years down the road:  in a new home; retired; or not worrying about the kids’ college tuition.  Your financial goal should be to earn enough to help you reach your personal goals, plus a little extra for emergencies.  Remember, good investment plans take time – there is no single perfect investment, despite what some promotional ads try to make you believe!

Second Step:  Do your Research.  You don’t need to be a genius to make money in real estate investing, but you need to be smart.  And you can get smarter.  Again, I recommend that you attend real estate investment seminars (like SJREI) and talk to other investors.  Warning: Be wary of motivational seminars that try to sell you investment products, books, software programs, and CDs.  Listen.  Learn.   But don’t buy everything they sell -or say!   Invest in real estate – not gimmicks!

Remember, there are many different types of ways to invest in real estate.  Focus on those that you understand and are comfortable with.  When you are getting started, avoid complicated schemes, and stick to simple.  Achieving a level of comfort and success with one type of investment activity or another requires practice and patience.  Smart people learn from their mistakes.  Really smart people learn from other people’s mistakes!  (Hint:  everyone makes mistakes.  Try to make small ones, not big ones!)

As you learn more and gain confidence, you may choose to modify your Plan.  Make adjustments to keep your Plan realistic and achievable.  Establish a realistic timeline for your financial goals.  Modify your Plan to help ensure that your Plan will remain current and relevant.  For example, you might choose to modify your plan to invest out of state, or to team up with other investors.  The key to survival is adapting to a changing environment, and a smart investor must be prepared to adjust their investment strategy in response to changing economic conditions.  Remember: It is important that your Plan include an exit strategy.   In addition to doing Research on your strategy and a more specific investment proposal, you should develop a reliable “team” of professionals you can rely upon for timely, relevant advice.  Most successful investors have a team of tax specialists, real estate agents, attorneys and other professionals they work with on a regular basis.  They are often well-worth the cost of their services.  You can use the knowledge you gain from your professional advisors over and over.  The rate of return on your investment in professional advice is priceless!

Other steps to take:  Research the market and local conditions.  Fact-check information you get at seminars.  Remember: If it sounds too good to be true, it probably is!  Don’t rely on obsolete  information.  A lot has changed in the past two years – check the dates.  Learn as much as you can about the local market, demographics, and conditions.  Get local information:  use the Internet, but don’t rely on what you see online.  Find local newspapers, churches, and realtors, and talk to someone “on the ground.”

Finally, as part of your research, don’t forget to make sure the investment is consistent with your financial and personal goals.  If not, STOP.  Ask yourself:  “Will this investment get me closer to my financial goals?”  If the answer is “No,” step back slowly from the checkbook!  If you don’t have enough information to answer the question, you need to do more Research, modify your Plan, or find a new investment.

Third step:  Action.  Invest, don’t spend, your money.  If your ultimate plan is to make money investing in real estate, invest in real estate – not in sales pitches.  Remember, there is no such thing as the “perfect” investment. When getting started, it is okay to proceed slowly and deliberately, but you need to proceed.  Take a deep breath, get going, and keep an eye on your exit strategy!

Getting started is important.  Getting started on the right foot is even more important!

Asset Protection: A Rational Approach

“You’re going to lose everything you own,” the speaker solemnly warned the audience at a recent real estate investment program.  “We live in a very litigious society,” he continued; “you need asset protection.”

Real estate investors, as a group, will flock to hear speakers talk about the need for what is commonly known as “asset protection.”  They will spend hundreds, if not thousands of dollars setting up elaborate business entities (the LLC – “Limited Liability Company” – being the most popular), in an effort to avoid “losing everything.”  Ironically, many new investors spend more money on “asset protection” than they do on real estate.  Sometimes they end up with all sorts of asset protection entities, but no assets to protect.

There is a more rational and practical approach to asset protection.  Setting up the correct business entity to allow you to achieve your real estate investing objectives is both important and necessary.  The correct entity will allow you to take full legal advantage of tax benefits and provide a structure for running the business.  Properly established and registered, the entity will allow the investor to work with investment partners, obtain financing, and provide a basis for determining the relative percentages of ownership and allow for succession and continuity for a successful operation over a period of time.  And yes, the entity will provide a measure of “asset protection” for the benefit of the principals, if the entity is properly established and capitalized, and has complied with the appropriate level of corporate formalities.

However, no form of entity is a substitute for good risk management.  The fundamental components of a good risk management program are (1) good management practices, (2) adequate insurance coverage, and (3) regular review and oversight.  For real estate investing, good management practices include using the services of a reputable, licensed, professional property management company.  The relatively small cost (usually 6 – 8%) will be more than justified by the savings from avoiding disasters.  Good management includes proper screening of tenants; regular and thorough inspection of the investment property, arranging for prompt and competent repairs, and if necessary, timely initiation of eviction proceedings.

In addition to standard form “all risk” fire insurance policies, adequate insurance coverage should include, where appropriate, flood, earthquake and other forms of disaster coverage.  I recommend that tenants be required to carry renters insurance, which can cost as little as $12 per month, but will cover the tenant’s personal belongings, relocation costs (if necessary), and injuries sustained by their guests.

Last, but not least, good risk management practices includes regular review and oversight.   “File and Forget” is not a smart way to manage anything.  Prudent owners make sure they manage their property managers, and take steps to ensure that their expectations are met.  Do not just sit back and hope the checks roll in every month.  Be proactive. Pay attention.  Ask questions.

But what about “asset protection.”  What if something “bad” happens, the tenant sues, and the investment property is in your name and not buried under an onion’s worth of layers of special entities?  What can happen?  Indeed, what DOES happen?

First and foremost, the type of liability that owners need to be concerned about involve claims resulting from personal injury, either to the tenant or their guest.  Injuries can range from a sprained ankle caused by a crack in the walkway to serious brain injury (or death) resulting from a collapsed balcony or similar structural failure.  There are also potential claims based on acts of discrimination, for example, but in terms of monetary damages, the “big ticket” issues usually arise from personal injury cases.

In such cases, the first and best line of defense is good property management, as discussed above.  In terms of avoiding catastorphic loss, investing in good prevention can yield a very high rate of return!  The next line of defense is your insurance policy (or policies), which should include comprehensive general liability coverage.  In the event of a claim, the insurance company will provide legal counsel and will pay for investigation and other costs arising from the incident.  If early settlement does not resolve the issue, and the matter proceeds to litigation, your insurance company is most likely under an obligation to provide a defense in most cases.  There are general exceptions, such as for willful or deliberate acts, and specific exceptions, such as where the policy does not cover certain types of loss unless a special “rider” has been obtained; i.e. flood, earthquake, etc.

Statistically speaking, it would be extremely rare if you found yourself facing a full-blown lawsuit with a prospect of a large jury verdict that might exceed the limits of your insurance coverage — the type of catastrophic “lose everything” outcome that promoters of “asset protection” programs use to sell their services.

Let’s look at the reality — not the hype.  It is fairly well established that close to 90% of all lawsuits that are filed will settle before going to trial.   So, if your insurance company has not been successful in resolving the claim and the plaintiff (i.e., your tenant) proceeds to file a lawsuit, the probability of the matter going to trial before a jury is 1 in 10.  Arbitration, mediation and other forms of formal dispute resolution are mandated by most State rules governing litigation.   In California, the parties are required to participate in a Mandatory Settlement Conference the week before the start of trial.  Statistics vary, but in one County, the Court noted that one-third of all remaining cases settle at the Settlement Conference, usually held on the Wednesday before the start of trial; another one-third settle on the Friday before trial, and a percentage settle even after the jury has been seated.  Again — as a statistical fact — very, very few cases make it all the way to the end of trial.  And even after the Jury renders a verdict, there are appeal procedures, that work to modify the outcome.  Many headline-grabbing jury awards are often reduced — drastically — by these types of procedures.

Real estate investors should consider the actual threat of “losing everything” in considering how best to protect their investment and their personal assets.  Sadly, many new investors spend more time focused on so-called “asset protection” measures than they spend doing their due diligence in relation to the investment itself.  Investors pay money to set up elaborate LLC entities only to find themselves locked into a bad investment with other partners they did not take time to know.  If one added up all the personal injury jury verdicts that exceeded insurance policy limits over a 10-year period in the United States, I wonder if the total amount would come close to matching the losses caused by Bernie Madoff and his scheme.

This is not to say that forming a LLC or a C-Corporation is not a good idea.  Properly done, the appropriate business entity provides the means to manage your investment assets, entitles you to certain tax benefits, and manage your investment partners.  But a business entity should never, ever be a substitute for good management practices.

Taking Stock of The Fools Advice

The Motley Fool provides a wealth of information and tips for stock market investors.  In a recent article, “Stock Market Risk Reduction,” offered some excellent tips for reduce risk in the stock market.  These same tips would easily apply to real estate investors.

1.  Be a long-term investor, not a short-term speculator.  The Fool warns that holding stock for only a short period of time is “not investing – it”s gambling.”  The same is certainly true of real estate. Building wealth in real estate takes time. Even Flippers soon realize that the real value of their business model is doing many deals over a longer period of time, some of which will make more than others. The law of averages will catch up.

2.  Increase your knowledge.  The Fool puts it well:  “The more you know, the fewer mistakes you”ll likely make.” So true!  The Fool cautions against relying on the “tips from friends or strangers.”  Many novice investors jump at prospects based on what they heard from their buddy or a promotional event they attended.  Due diligence is the process of obtaining relevant information in order to reduce the risk of loss. You need to take time to understand the market, the area, and the factors that will impact your investment. Attend a real estate investing association that provides educational programs and training, not sales pitches.  Read books and articles, and topical blogs such as those provided by The Bigger Pockets.

3.  Limit your downside.  The Fool recommends that in investing in stocks, you need to consider the valuation of the company. The same applies to real estate. Learn to assess the true value of real estate that you are considering. Experts often say you make Du kan l?se om dem alle her pa online. your money on the purchase, not the sale. Spending too much on a property, compounded by failure to control rehab costs, can quickly wipe out your return and even result in a loss!

4.  Avoid futures, commodities, option, penny stocks, shorting and margin – at least until you”ve learned a lot about them.  Good advice for stock investors! In real estate, there are numerous examples of complicated investment schemes that are extremely risky, and should be avoided until you understand and accept the risk involved. Unfortunately, there are a lot of promoters who make a lot of money selling program packages for the novice real estate investor with promises of quick riches that involve complex schemes that are at best risky, and at worst, might be illegal in some states! Stick to the basics and learn the fundamentals before you venture into the deep end!

Don”t be a Fool – learn before you earn!


Fact checking is popular sport during election season, but as psychological studies repeatedly demonstrate, people will believe what they want to believe.  There are many theories, but it boils down to this:  we’re all human, and therefore subject to human foibles.  Whether it’s attributed to selective perception or redactive devalutation (where one side simply refuses to believe anything the other side says), or whether we’re all prone to confirmation bias – where we give greater weight to information that is consistent with our predetermined beliefs and devalue or ignore evidence to the contrary – as Spock would say: Humans are illogical. Yet, we manage to function, albeit not as efficiently as some would hope.

The importance of managing our investments is no less critical than the importance of managing our jobs, indeed our lives. Making the correct decisions as we go through the day requires discipline, wisdom, and focus – not unlike the choice whether or not to have a second helping of chocolate ice cream because, well, it’s right there in front of you! It matters somewhat that you saw your photo tagged on Facebook and initially wondered who was that chubby guy, but you blame the cell phone camera and pick up the scoop, rationalizing that you’ll do an extra 5 minutes on the exercise bike in the morning. Besides, you tell yourself, you missed lunch. Logic. I crave, therefore I am.

Getting information is not difficult. Making investment decisions without sufficient information is only part of the problem. The other part is understanding what information you really need. Your personal and financial goals play a bigger role in the process than you might realize, since they form the framework which helps determine more precisely what information you need to make a good decision. As individuals – and we are indeed individuals – each of us has a somewhat different focus or framework with which we process information. Just because your neighbor invested in precious metals doesn’t necessarily mean that you should, or that your decision to double-down on Facebook shares because, well, they’re so affordable right now, is necessarily crazy. Perhaps logical, but only time will tell.

The key is to develop and understand your own personal Goal, and seek out everything you can reasonably learn that will help you achieve that Goal. If an opportunity arises that will get you closer to your Goal, consider it. If the opportunity distracts or distances you from your Goal, determine if it creates a unique but unforeseen chance to achieve an even more attractive Goal – something you had not considered possible – and if not, discard it.  Warning: extreme discipline required; stay focused!

Over the course of the next two months I will be participating in and attending four separate seminar/symposium events designed to provide individuals with the necessary educational tools required to make intelligent investment decisions. I know in advance that I will be inundated with the proverbial “fire hose” of data, charts, theories, and forecasts from some very, very intelligent people. When I am not presenting myself, I plan to sit back and take it all in. But first, I will need to reflect what among the treasure trove of information I need to focus on,  mindful that I might hear or see something that will cause me to completely change my perspective.  And that’s part of the fun of going to these events – you never know what you might learn if you keep your mind open.  It’s not logical, but then, Spock was right.  Hand me that ice cream scoop!

The Cheese is Moving Again!

It”s 2012, and the cheese is moving.  Again.  And it will affect everything you do.  In the classic story “Who Moved my Cheese,” Spencer Johnson describes the plight of the characters caught in a maze who discover that their supply of cheese had disappeared.  Their dilemma — commence a search for new cheese, or wait for the old supply to be replenished — offers a wonderful parable for investors and entrepreneurs alike.   To the extent that our economic recovery is tied to job growth, the relevance to investors — indeed to everyone — cannot be overemphasized.

In a very carefully detailed case study, NYTimes authors Charles Duhigg and Keith Bradsher describes why the US lost out on the opportunity to manufacture the iPhone.  The answer is not simply that the cost of labor in China is less than in the US; the problem is much more complicated, and worth a careful read.  The story details how the need to make critical design and manufacturing changes in a timely manner required a coordinated effort involving setting up efficient supply channels, recruiting qualified engineers, and converting large manufacturing spaces in order to meet production timelines.  A key component — finding an adequate number of qualified engineers — a process which would have taken up to 9 months in the US — took only 15 days in China.  Adding to the problem is the fact that critical supply components, such as the hardened glass needed for the hundreds of iPhones, were being manufactured in the US.  But the cost and logistical complications of getting these components to the manufacturing site forced Corning to move its operations closer to the assembly floor.

Some will accurately point out that many of the product innovations created by companies like Apple do, in fact, create jobs in the US.  But the real crisis is the critical shortage of properly trained and educated individuals available to meet the demand.  We go to great lengths to urge every high school student to apply for college, and each year about this time, parents all over the country sweat in anxiety that their child will get accepted, and then wonder how to meet the ever-growing tuition demands.  But the larger crisis looms even beyond that horizon — will there be a job opportunity that will help pay the ever-increasing student loan debt There are 17,416 school supplies list registered. load?  How will the student who majors in Poetry with a minor in Philosophy find a job that will allow him or her to make those payments?

While we accept the conventional wisdom that our current economic crisis depends on job growth, and certain sectors argue against imposing taxes on CEOs earning millions and millions of dollars on the assumption that they will stop creating jobs, we miss the real point — we are not doing enough to train and prepare our youth to qualify them for the very jobs we hope will be created.  Other countries are miles ahead of us, and it explains why most of these major companies have no choice but to move their operations where they can find qualified employees.

The anecdotal story of the iPhone illustrates what has become an all-too-familiar refrain:  we would prefer to be here (in the US), but we cannot do what we do here.  To stay ahead of the innovation curve requires a combination of speed, flexibility, adaptability, and fiscal intelligence.  Sitting back and waiting for the cheese to come back is not only pointless, but could result in starvation.  Training people how to make new types of cheese would be a much more productive use of our resources.