The #1 question or comment I get about real estate investing.
The answer is "It can be, but doesn't have to be".
It really depends on the skillset of the person doing the investing. Kind of like if you were asked to remove your own appendix - if you know what you are doing, like this guy, everything can turn out great; but if you don't....
Unfortunately, what I see too often is people who don't know what they don't know buying real estate. And to be 100% honest, that was me when I started out in the 90's.
Everyone knows the saying "Buy low - sell high" is the way to make money in real estate, but it's easier said than done. Most amateur investors jump on the bandwagon too late and really try to "buy high - sell higher". Sometimes it works out and the market keeps going up, and sometimes it doesn't work out...
On the plus side, time is pretty good with real estate to fix errors. If you enter the wrong market, over time, if you can survive the negative cash flow, you may end up doing ok and you may have learned some things.
There are ways to minimize your risk, however. Here's a few:
Buy low. Seems pretty obvious, but everyone else who is not a good real estate investor will tell you "real estate is dead" when prices are low. EXACTLY the time to buy. It takes a little bit of courage to do this
Buy a better class. With real estate, you can buy single-family homes, condos, commercial, raw land, and more. I choose to focus 100% on multifamily because it is safer. According to an ex-CMHC underwriter (who knows these things) banks consider the house you live in the safest. Next is multifamily. That rental condo.... number five! Multifamily holds it's value during down turns better and it's a great hedge against inflation.
Understand what drives up prices. It's really economics 101 - supply and demand. If you are not keeping tabs on net migration and housing starts, you really have no idea if prices are going up or down. When there's net migration to the area you want to buy in and housing starts are not keeping pace, it's a great time to buy. I stay on top of these numbers and a lot more. I've learned to separate the valuable news articles and reports from the junk and I fact check with other people in my network. You need to be doing this if you want to minimize risk. Unless, of course, you're the type that likes to take out your own appendix...
Be in it for the long term. Even if you mess up, time can fix a lot of buying mistakes. I focus on buying (or building) properties with a strategy of keeping them. I don't do flips. I focus on long term, slow, boring, safe, wealth creation. The saying goes "Don't wait to buy real estate; buy real estate and wait!".
Stress test. Run scenarios like:
What happens if vacancy rates go to 10%?
What happens if mortgages climb to 8%
What happens if I need to replace the roof?
Answering these questions forces you to come up with a plan B and if you can't you just don't buy. It avoids you getting caught up in the hype.
I really believe real estate investing can be low risk, but it takes work and being picky about what you buy. It takes knowledge. The kind that often costs thousands of dollars to get. It takes a lot of other things too, but lack of knowledge is really what makes real estate risky for many.
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