“How-to” Approaches to Real Estate Investment–What Should We Make of Them?
There are different ways investments in real estate can be approached.
The “how-to” approaches to investment are those popular nontraditional approaches taught by gurus who emphasize a slightly different aspect on the way to riches in real estate investment.
The “how-to” or nontraditional approaches to real estate investment typically involve a basic theme: exploiting weaknesses in the real estate investment market.
For example, these approaches rely upon finding investment property that can be upgraded and a profit made from exploiting that potential. The idea is to find rental properties that can then be renovated and marketed at a higher value.
Similarly, when properties are under rented, the approach calls for renegotiating leases at prevailing market rates to enhance cash flows and ultimately, market values.
Finally, some nontraditional approaches involve specialized techniques for financing or marketing the property to maximize its value and hence, profit the entrepreneur-investor.
Gurus, of course, have their own “how-to” real estate investment strategy, but each includes a real estate investing flaw–most approaches do not balance the favorable aspects of investing with the obvious risks involved. Little is said, for example, of the dangers of negative financial leverage–borrowing funds at a cost higher than their return or business risk.
Moreover, the time value of money is ignored, and because the analysis is usually based on one year of cash flows, no change in income streams over the holding period is commonly taken into consideration.
In other words, one of the most important points about real estate investment is what most “how-to” proponents neglect to teach.
Real estate investing requires attention to both favorable and unfavorable aspects of any given investment opportunity. Risks must be balanced with rates of return. This involves looking at quantity, quality, timing, and durability of the cash flows over the anticipated holding period.
Simply put, real estate investing involves more than buying “handyman” specials or finding older owners who might finance the sale of their property, though they should be considered if one is lucky enough to stumble across one.
No, real estate investment requires more than market exploitation to be consistently successful–it takes a specialized knowledge of investment analysis for a unique investor who is in a unique investment situation.
Author: James Kobzeff, July 17th, 2007
