Start small

By: J. David Chapman/September 12, 2019

The most common question I receive is, “How do I get started investing in real estate?” The first thing I do is explain the pros and cons of real estate investing before giving ideas on how to do it. It is not for everyone.

First, the advantages. It’s the only investment I am aware of that you are able to use other people’s money, known as leverage. With 10% to 30% down, a bank, lending institution, or private party will provide the rest of your funding. Next, if purchased and managed properly, your property can offer tremendous opportunities for profit. An ongoing stream of income we call cash flow.

A second type of income you can harvest is appreciation. If the value of your property has gone up and you decide to sell, your profit is called appreciation. Remember, even though you aren’t buying in hopes of selling to earn a quick profit, you should always have an exit strategy in place. There are also tax advantages granted to real estate investments. Whether it is the rehabilitation of historical buildings or low-income housing, tax credits may be available. A tax credit is deducted directly from the tax you owe. You also get an annual deduction for depreciation, which is typically a percentage of the value of the property that you can deduct as an expense against revenues. Finally, some gains from the sale of real estate can be postponed indefinitely as long as the proceeds are reinvested in other real estate.

I would be remiss if I didn’t mention a few disadvantages when it comes to real estate investments. First, it takes time and patience. Offers, counters, appraisals, inspections, and financing all take time. Second, after purchasing real estate, it can be difficult to convert to cash in a hurry. For the same reason buying requires patience, selling may require even more. Lastly, real estate may be the most time-consuming and difficult class of investment to manage. It takes daily management, including maintenance, vacancies and troubled tenants.

So, there’s the reality of real estate. My advice is to start small. There is a lot to learn, which means mistakes will be made. When starting out, it’s less costly to make mistakes on smaller properties with smaller amounts of money at stake.

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).