There's been an awful lot of signs that suggest now is the right time to invest in real estate once again. And as any prudent investor would know, it's hard to turn a blind eye to opportunities, especially if they're right in front of you. Yet, as any experienced real estate investor will tell you, not all investment properties are created equal. Homes that might be perfect as a permanent residence, for example, might not yield positive cash flows -- and without positive cash flows, you're losing money, not making it.
But there are those properties you just cannot resist. Listings that literally take your breath away and let you dream of greener pastures when your investment turns in a hefty profit. But how would you really come to know which property you should stick to? We've prepared an itemized collection of the best and worst things to avoid or look for when you're in the market for an investment turnaround. Let's go ahead and start off with the worst:
Anything that doesn't generate rental income
These include second homes and vacation property investments. Too many people invest in properties hoping that they will go up in value. But there is an opportunity cost to having money sit in real estate that doesn't pay any income. Even if the property goes up in value, you've got to reconcile and account for all the money you would have earned if your money had instead been in the bank or in stocks and monetary placements.
Anything with negative cash flows
If you buy a "prize property" -- such as a fancy downtown condo, beach property or vacation rental -- it's probably going to be 20+ years before you get your first dime of positive cash flow. And that's just no way to invest your hard-earned money. Pencil out any potential deal ahead of time, and buy properties that pay cash flow from day one -- the moderately priced properties in non-prize areas (or at least not yet!).
Development of land is extremely high risk. There are entitlement, construction and market pricing risks, plus countless others. These investments are best left to the extremely wealthy and experienced investors who can take the chance that they'll never see their money again. Start out small with an already-built unit, then grow from there.
Condo-hotels, intervals & time-shares
These aren't even investments. There's no ability to predict cash flows, rental income or future value and sales prices. And they are very hard to resell and typically only at a fraction of the original cost. Go for something you can count on, literally. The ability to crunch numbers and project revenues is essential when you're making the move to invest.
THE VERY BEST INVESTMENTS
With all of that being said, your primary motivation for investment is certainly to generate revenues. However, keep in mind that you are taking a risk, no matter what. Based on that fact, the risk you're taking you should minimize the amount of time you need to spend attending to the property especially since as everyone knows - time is money. To accomplish this, you'll need to make some smart choices upfront when buying investment property. Your goal should be to strive to get as close as possible on as many of these optimal scenarios as possible:
Pays a Fair Cash-on-Cash Return
When you buy property you are taking money out of your liquid financial assets - stocks, bonds, CDs, what have you - and investing it into a very illiquid yet tangible asset. You were earning a rate of return on your financial assets, typically 4 or 6 percent, and you should strive to earn a fair cash-on-cash rate of return on your real estate. To do this, you need to buy cash flow-positive properties that earn you decent returns that are at least comparable, if not higher, to what you would get in return if you used your funds elsewhere.
Isn't Too Risky an Investment
All real estate is extremely high risk. Whether they are multifamily homes, condominiums, single detach, in a developing or developed neighborhood, all have much higher risk profiles than just simply buying a nice established cash flow investment property. So what you'll need to do is see to it you're making all the necessary precautions: doing the proper due diligence, analyze, test, review reports, etc., that'll make the risk a little lower, and make the decision a little lighter.
Doesn't Require a Lot of Time or Managing
Some properties just require way too much time and management to make them smart investments. Examples include vacation rentals, low quality properties in bad areas, etc. Traditionally, we would also say college rentals belong to this category, but in Boston, there's no way you can go wrong in such an investment - ask anyone. Nice boring properties rented for as long as possible to decent credit profile tenants seem to take the least time to manage. In addition, treating your tenants fairly and with respect goes a long way towards keeping good relations with them; and reducing your hassles when there is an issue you need to address.
It's the nice, boring, wholly owned, in good shape, cash flow-positive properties that are the best investments. They are out there for your picking, but it's not as simple as finding a property on the MLS and buying it. You need to do some hard work, research, read up, and make smart, educated decisions to acquire the best real estate investments!