9 Tips for Investing in Real Estate

I invested in a house to fix up and resell in western Pennsylvania and, though I'm not an expert, I wanted to pass along these tips for investing in real estate. The house my wife and I bought just had a buyer during the week the federal government voted on the bailout.

Here is what I've learned about investing in real estate and I may expand on each of these points this week:

1. Capital, cash, money must be available.

   Have money on hand before you buy something. The money may be cash in the bank, savings you've desiginated for investing and/or a loan. But you need capital . . . or you need to work with someone else who has capital. A lack of cash flow will hurt.

2. Choose a neighborhood

   Headlines on the Internet or your local paper that talk about the bad housing market never talk specifically about particular neighborhoods -- until some story runs about the 5 best cities to buy a home!

   I believe there are local economies. In California, for example, Bakersfield was doing well this year due to the previous rise in oil prices. In western Pennsylvania, I've heard many say Westmoreland County is more attractive than Allegheny County due to the local tax structures and local governments.

3. Choose an Agent who Knows Investors

   A realtor who knows the local market, and I do mean neighborhood by neighborhood, will be a tremendous asset in knowing what to look for in a home's structure and what people are looking to buy -- and at what price range. Also, a well-versed agent who knows investing will also know HUD homes. Mine was a HUD house.

4. Know Your Goals

   Why are you investing? Do you want cash short-term as in a flip -- or do you want appreciation as in buy-and-hold? There are investors who will buy and hold a property for 7 to 10 years to gain appreciation. Understand exactly why you're going to invest.

5. Work with Good People

   If you're going to "flip" a house to make short-term cash do you plan to do all the work yourself? Or some? Or none? I had a person who was a former contractor guide me through the steps in my house. He saved me money on items like siding and windows since he knew local suppliers. Instead of pocketing the savings, he told me what I had saved since he really wanted the investment to work for me. It's hard to find good people -- and retain them. Ask around with local suppliers.

6. Do Your Homework, Research Due Diligence

   You need to do homework on the market, buyers preferences, and run a budget on the house itself. Also, who is your target buyer or target renter?

   Example: my house in western Pennsylvania only cost me $ 26,000. A steal, right? It could have been a nightmare if I wasn't careful.

   My agent and the person supervising the work both told me I would have to put in about $ 30,000 - $ 34,000. I projected the market would bear $ 82,000 and up for a sale.

   I made a spreadsheet from the roof down on what would need fixing to estimate my costs.

   I flew out to see the house and we decided to put in a small bathroom on the first floor. And we got a tremendous deal on new kitchen cabinets. Nevertheless, the $ 30,000 went to $ 42,000 due to the extent of the work. Run different scenarios.

7. Learn Tax Laws

   Do you know what you'll pay for capital gains? How long do you plan to hold the property? What is tax deductible? Taxes are an expense item and I think the capital gains tax is largely unfair for small investors. However, you need to take them in to account in your overall profit-loss scenario. Taxes could work in favor for you if you have a higher income, need the write-off, plan on future income, etc.

8. Be Patient

   Making money and building assets through real estate may take a few years or longer. But be patient. It's worth the wait.

9. Join a Real Estate Club and Get Info for Free

   Get as much free information as possible and advice whether it's on the Internet or in person. Again, a good agent will help. But a real estate club can also be valuable as you learn different strategies that people use.

   Real estate is a challenging area. Yet, it's worthwhile to learn since people always need a place to live. Ignore the thought of "making millions" from it. Get one successful investment and then replicate what you did.

   As in all investments, surround yourself with people you can learn to trust who have your interest at heart. Real estate investing for cash flow now or in the future can be a good investment if you plan well.