Real Estate as an Investment

Real estate has long been a favorite avenue for building wealth, generating income, or diversifying investment portfolios.

Why?

Among all investment pursuits, real estate is often the most consistently safe place to put your money.

Property investments, particularly those in the residential housing sector, pay huge dividends when markets are good. When markets are down, there remains money to be made. And even when times seem most arduous — such as the case after September 11 or the 2008-2009 financial crisis — real estate bounces back remarkably well.

Plus, as is the case with the recent COVID-19 pandemic, residential investment can surprise and reward savvy investors at a time when they least expect it.

With that in mind, let’s explore real estate as an investment and review a few basic principles you should know as you begin your investing journey.

Create goals for your investing

Before making your first residential real estate investment, establish your goals.

Are you a deep-pocketed investor looking to build a real estate empire? Or are you a novice hoping to create a little wealth or generate some income?

Maybe you’re interested in acquiring a piece of a vacation property. A place that is yours, but one you can rent out when you’re not there. Perhaps you want to start where so many other successful real estate entrepreneurs have: buying and renovating homes and flipping them for profit.

Beyond those aspirations, is your investing a short-term side project? Or do you aspire to carry your initiatives far into the future?

Whatever your particular ambitions are, you’ll need to set your goals and then begin building a pathway for success for achieving those goals.

Though it seems daunting at first, it’s really a matter of identifying what you hope to gain from your real estate investing and the time and money you’re willing to spend to reach your objectives.

In many cases, investors hop into the property arena to have fun. Similar to investors who buy stocks not to make money but to support a specific brand, real estate offers the same outlet. To buy low, sell high, or explore a personal passion.

Whatever your motivating factors — financial, emotional, a bit of both — by first determining your intentions for the investments, you’ll ensure a satisfying journey later on.

Develop a niche

Your specific goals will determine your strategy and how you ultimately approach your real estate investments.

At its basic level, there are three types of investments in the luxury residential segment: new construction, renovation, and rental property. Here’s a quick primer on each.

• New construction

Custom, or spec house, construction is building a house strictly for the purpose of selling it. It is equal parts risky and lucrative.

To be successful, the homes you build must feature the most desirable amenities and finishes in the most desirable locations. It requires a lot of legwork to identify those can’t-miss opportunities. It also comes with tremendous pressure. Missing on a spec home will leave you with a considerable loss.

The upside, however, is that if everything comes together, your return on investment (ROI) could be huge. You also have some flexibility with your approach. You can either build and occupy the property until sold or build and list it during the construction. The most significant risk with spec houses is time. Luxury builds can take anywhere from eight to 12 months to complete, sometimes longer. Make sure you’re building in a hot market that doesn’t cool off quickly.

• Renovation

Perhaps the most popular form of real estate investment is buying neglected or distressed properties, renovating them, and then selling at what one hopes is a considerable profit. Flipping, as it’s better known, is big business for starter and mid-tier single-family homes. You can purchase these homes at a deep discount and net a substantial profit, even with modest upgrades.

Luxury homes prove more challenging, but they can produce much larger dividends. While usually better cared for, simple tweaks in an upscale property — fresh paint, updated fixtures and appliances, new floors — can command multiple offers, especially if you upgrade a house in a popular established neighborhood.

Additionally, your time frame for returns is shorter with renovations, anywhere from three to six months. However, the commitment to researching homes and markets where a flip makes sense is more demanding.

• Rentals

For the buy-and-hold types, rental properties offer the best property investment experience. To achieve any amount of success requires commitment, but this type of dedication can lead to steady income and the potential for long-term wealth building.

Ultimately, this investment is the simplest. You buy, hold, and rent, preferably in an area with a consistent demand for housing (or with vacation properties, destinations with a steady stream of visitors). Your rental rates cover the monthly mortgage and additional costs, such as maintenance or third-party management fees.

To generate the most income, a renovation element may be necessary to improve a home’s appeal.

Research your markets

Real estate is a gamble of sorts in that you never know exactly when a market might get hot and lend itself to investing. That said, you can arm yourself with enough insight and market data to make wise, informed decisions.

For example, at the onset of the pandemic, many predictions had residential real estate bottoming out. After all, who would want to buy or sell a property during a pandemic?

Turns out, everybody.

While there were scant initial indications that a sustained buying streak would commence (one that continues nearly 18 months later), a few signs were there. The high urban infection rates, combined with businesses and dining and entertainment options shutting down in densely populated areas, led people to seek refuge in the outer suburbs. In hindsight, it makes sense, and many investors throughout the country had the foresight to take advantage of the situation.

You should take the same approach when deciding on markets you should target. No, you can’t predict the future, but you can identify areas where job opportunities are on the rise. Or find those communities where exemplary schools prove a consistent draw for families. Or spot districts with underserved housing needs or places where new development may be saturating a market.

Whenever possible, dive deep into the details, especially if you’re trying to build a portfolio of luxury investments. A new Amazon warehouse might bring jobs to a community, but they won’t be the kind that increases demand for high-end housing. A new regional or corporate office is a different story. Not only will it bring professional, white-collar jobs to an area, depending on the firm, any number of peripheral businesses may also come along with it.

Timing is another crucial factor to consider when investing in a residential market. For instance, when Amazon announced its new HQ2 headquarters for northern Virginia in 2018, it came with the far-reaching potential of adding upwards of 25,000 white-collar jobs to the market. In 2019 and 2020, roughly 2,000 were added, with even more coming by 2023 when the construction of new office space is completed. A wise investor will research and study when to time their purchases and sales to make the most impact.

Pay attention to both significant shifts in the broader real estate market and minor changes that occur on a local level. The better you can plan the right place and time to make your move, the more fruitful your investments.

Partner with the right professionals

Based on your commitment to long-term property investment, you’ll want to develop connections with those professionals who can assist with managing and expanding your portfolio.

Specialists, including a CPA, lender, and a tax or real estate attorney, provide much-needed guidance on the finer points of every investment, both pre- and post-transaction. If you plan to build spec homes or flip houses, a trusted list of contractors will make those projects far more manageable. For rentals, it may be worthwhile to employ a respected third-party management company to oversee the day-to-day details of your portfolio.

Most critically, partnering with an experienced real estate professional will ensure you target suitable investments from the very beginning. Savvy agents possess the tools and knowledge to pinpoint properties, land, and specific markets where your investment dollars make the most sense. They’ll also come with their own set of contacts and specialists to assist you as you build your portfolio.

If you plan to start small or your investment is meant to be a side gig, trying to do it alone is an all-consuming process. A little help never hurts and will often provide you a greater ROI down the road.

Ready to explore the best of western Los Angeles County real estate? Contact the Kathleen Rasmussen Team today to commence your home investment journey. Kathleen and Erin’s years of experience and expertise will help you navigate the luxury real estate market in and around the Santa Monica Mountains, from Agoura Hills real estate to Calabasas homes for sale.