Join the Game, But Know the Real Estate Investing Rules

By: Phoebe Chongchua: The Wall Street Journal Online
It seems like the dream job - buy real estate, sit on it until the price goes up enough and then sell it off and walk away with a nice profit. The frenzied market we've been experiencing is luring many people to invest their hard-earned cash in the business of real estate.

While prices soar in many cities, the vision of an overnight success is dancing in new investors' heads. The idea of making a quick buck is drawing wannabee investors to real estate seminars, the internet, open houses, and cities all over the country where cheap property can be snatched up.

In New Orleans, speculators, both experienced and inexperienced, are hoping to turn a profit by purchasing land before the redevelopment of the city begins.

"If you had a crystal ball you could become a millionaire because it could be something that will have phenomenal windfalls or it could be something that will never come to fruition," says radio host Norm Bour of The Real Estate and Finance Show.

An unrealistic expectation is a problem that causes many newbie investors to decide to give up on real estate before they have a chance to turn a profit. They often think that buying a fixer-upper will be an easy project to take on and then turn around and sell. Sometimes that's the case, but often there are many challenges that beginning investors don't consider. Cabool, Missouri resident, Matt Peterson, his brother-in-law and father-in-law recently finished fixing up a foreclosure home they purchased in Ava, Missouri.

"I had built my house, my father-in-law had built his, and my brother-in-law had built his. We thought we could go in and fix this up a little bit, but it wasn't that easy," says Peterson.

Peterson says it took them longer than expected - about six months to finish work on the 4,500-square-foot house that is more than 100 years old.

Now, in hindsight, Peterson says he'd do a little more research before buying a property and he'd consider using experts to get the job done.

"I would look a little closer at the property and the potential it had for profit and factor in contracting all the work out. I mean I can do some of it but with the job that I have now, I don't have the ability to work five days a week on a house [when] the payoff comes later when we sell the house. I need to be able to support my family. I would look at trying to contract it all out if I were to do it again," says Peterson.

He also says that he'd try to have a buyer in mind for the property. The property that he just finished has still not sold, although it is being rented with a rent-to-own agreement.

"[I would] look immediately to sell; maybe have a buyer in mind and make sure that he has the financing lined up beforehand. We kind of had trouble with that on this project. [The tenants] said they wanted to buy the house but they haven't been able to secure the financing so they're still renting," says Peterson.

Real estate attorney and author, William Bronchick says common sense and education are the most important tools in real estate investing.

"J Bronchick says there are three basic tips that will help beginner investors not lose money. First he says, when deciding what property to buy, go with a single-family home.

"Single family homes tend to be pretty hands-off and the tenants tend to be a little more responsible than the apartment type tenants," says Bronchick.

His second tip is to buy houses that are slightly below the median price because that market tends to be less volatile.

"Let's say the median price in the city is $250,000, if you look at $350,000 or $450,000 houses, those are the people who are middle class, gainfully employed, white- collar people," says Bronchick.

But the people living in $200,000 homes and under are the working-class people who typically make $10 to $15 per hour. If there was a job-related market crash, the higher income families might be forced to take a step down in house size; so there is typically a good pool of renters for the slightly-below-median-housing market even in a challenged economy.

The lower income bracket usually can find work.

"There are always jobs for those people. If they can't wait tables they'll get a job doing something else; so there is always going to be an income for those people in almost any market," says Bronchick.

His third tip is to buy in major metropolitan areas rather than purchasing property in undeveloped, suburbs or vacation areas. Bronchick says population trends show that people are looking to be in cities and areas that are centrally located and developed, especially because of the rising gas prices.