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November 12, 2011

Is this the time to buy real estate as an investment?

Today”s article “Are You Ready to Be a Landlord?” in the Wall Street Journal discusses why there is an interest in buying investment properties.  The article outlines some of the traps and things to be considered before investing in real estate.
Shortly after leaving a national CPA firm I gave presentations before a local chapter of the National Association of Real Estate Investors (NAREI).  I kept in touch with the group and provided services (at this time I had a full service CPA firm) to some of its members.  
The leaders of this chapter stressed a do it yourself approach to real estate investments.  The emphasis was on sweat equity.  They tended to manage the properties themselves and do much of the maintenance and improvements themselves (the sweat).  As many had successful businesses and careers, much of the work was done at night or on the weekend.  Those that followed this formula had lower expenses and generated more cash than those that used outside managers and trades people.  When the real estate market turned down, real estate is cyclical, many of these people were able to weather the downturn.
Some were highly leveraged and were forced to liquidate the properties when real estate values dropped.  These investors tended to use available cash and credit to buy other properties.  Some people liquidated their stock and bonds and mortgaged their homes and businesses to increase their real estate holdings. One highly regarded group bought each property using little or no cash.  Each new property was bigger and more expensive.  When the real estate market dropped, their house of cards quickly fell.  That was not too different than what we are seeing now.  May be the lesson learned then were forgotten, not learned by the next generation of real estate investors or ignored because this time was different.  
Not accurately judging their cash flows and anticipating things that could go wrong were other common errors.  These were the properties without sufficient cash to operate or meet the cash needs of the unexpected.  Some were so blinded by income tax benefits that they ignored cash flows.   
Some did not make income from their properties but from speakers fees, seminar fees, books, etc. 
This time the economic climate is worse.  We need to remember the lessons as we move forward.  We also must recognize and understand our own unique situation to be able to plan for the future.  Once we know where we are financially and what we need, want and wish for in the future can we identify actions that will improve the probability of bettering our financial situation.  
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