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Real Estate : Real Estate News Last Updated: May 14th, 2012 - 22:24:01

Is The Real Estate Boom Really Over? - Part II

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Another important question you should ask is: How does long-term strategy work in comparison to non-real estate investments? In the stock market, certain stocks are referred to as growth stocks. Generally, this means that the stock's value is expected to increase over time. If you buy shares today and the estimate of future price growth is right, your investment will grow in value steadily over many years. You would not be concerned with the day-to-day fluctuations in stock value.
The same is true when you invest in growth-oriented mutual fund shares. The company's management buys shares in companies considered to be good growth stocks. If the mutual fund's management is right, your shares will grow over time.

With either direct purchase of stock shares, or mutual fund shares, you depend on the quality of management to achieve your goals. With many different choices on the market, you accept certain risks in the selection process, and that is always a part of the investment equation. These same risk elements apply to real estate as well. You always accept risk when investing, and real estate, like other alternatives, comes with specific risks. In real estate, these risks include these three possibilities:

1. The property investment may lose value or fail lo appreciate according to your expectations. All investments contain this risk. Even insured savings accounts can deteriorate when interest rates are lower than inflation. The basic market risk is the best known and, for most people, the primary form of risk. It is fair lo say that in most regions, real estate has to be held long enough for appreciation to occur and the real risk is that you don't know in advance how long that will be.

2. You may not be able to find tenants, or to charge rents adequate to cover your monthly expenses. When a large number of rentals are available and relatively few tenants, market rates level out or drop. In order to avoid vacancies, you might have to reduce rents. The opposite is true in periods of high demand. With too few units and many tenants, your market rates will rise.

3. Your tenants may not pay the rent that is due or may not care well for the property. 

In real estate, tenant problems are frustrating because such problems force you to confront matters at once or lose money. Invariably, that means dealing with people who are having problems beyond the landlord-tenant relationship, or who are immature and irresponsible, or who simply want to avoid paying the agreed-on rent. Proper screening and review, and checking of references, reduce these problems dramatically and should be requirements of landlording. These basic risks are not the whole story, but they are major considerations when you are evaluating the possibility of investing in real estate. These problems will not seem as formidable until you actually buy a property and begin managing it. With patience, caution, and maintenance, property will appreciate over time when it is carefully and intelligently selected. You will also learn by experience how to screen tenants, set fair rents, and con-front problems before they turn into crisis. Just as parents learn on the job, so landlords have to discover the problems that arise with tenants and learn how to avoid those problems in advance.

Risks are manageable, as long as you are aware of them. A common mistake is to look for ways to eliminate risk, when in fact smart investing calls for awareness and risk management. Some risks can be mitigated. For example, buying fire insurance protects you against a loss of a rental home; not to carry such insurance would be to assume more risk than you can afford. You need to evaluate the different types of risk involved with investing in real estate, and then determine how much risk and what kinds of risk you are willing to assume. The speculator is willing to take the risk that the real estate market might not support the strategy of buying and selling homes in a short period of time. If the speculator's timing is off, the strategy will result in a loss, or the property will have to be held for longer than intended.

Most people begin their real estate investments by studying and comparing prices. You should always keep in mind the risk rule in real estate: The greater the risk, the lower the price. For example, real estate in a poor location will naturally cost much less than real estate in a prime location. The risk in such a case has to do with potential for appreciation. The price in the poor location is less likely to rise at the same rate as prime property's and in fact, could even fall. As average market prices rise, the tendency is for better-than-average properties to rise faster than average, and for poorer-than-average homes to lag behind. 

Good investing requires foresight. In addition to estimating and calculating the risks and potential profits, you need to become adept at identifying the good and bad points about all of the factors affecting price and value: location, timing, and local economic conditions (now and in the future). This is exactly the same type of analysis all investors need to per-form. 

However, instead of studying financial statements of companies and looking at market index trends, the real estate investor has to be able to read social, political, economic, and demographic trends within a city and region. Certainly, speculation is one alternative, but that profile doesn't fit with most people in terms of available capital, financial goals, or market expertise. The main focus here is in showing you how to get started by buying one or two rental houses, then build up equity while managing property and coping with tenants, and ultimately create a profitable investment for your future financial security.

Long-term investing requires a commitment longer than two or three years. In fact. long-term generally means 10 years or more, because it takes that long to create seasoned real estate. As you make monthly mortgage payments and as property gradually increases in value over time, seasoning occurs.


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