This week on my radio show, I had the pleasure of hosting Dave
Watts of For Rent Buy Owner Inc. as my guest. Dave and I talked
about the pros and cons of investing in real estate, and how to
make real estate a portion of your wealth-building
strategy.
It was amazing how much we agreed on the role of real estate as
an investment.
Dave described his strategy of helping people build a portfolio
of rental property. The strategies he advocates are nearly
identical to those I teach for building a strong investment
portfolio. As I list the key points from Dave’s comments, note the
similarities in approach:
1. Start young. It takes years to build a portfolio and to take
advantage of appreciation in value. Learn the value of compound
interest. The younger you start, the better.
2. Look for quality. Whether in houses or company stocks, always
look for well-built structures.
3. Look beyond the surface. When buying a house, don’t be overly
impressed with glitzy new, and be willing to fix up those items
that can be easily repaired. Same with stocks – don’t be overly
impressed with recent results, and be willing to purchase a company
that represents a good value for the price.
4. Buy what everyone wants. The best real estate investments are
three-bedroom houses in nice neighborhoods. The best stock
investments are companies with a large market share and products
that are widely used and needed.
5. Don’t sell what you own. Whether it’s real estate or stocks,
don’t be a seller. Selling involves transaction costs and often
means taxes to pay. Besides, the new property you are buying
probably won’t appreciate in value any faster than the one you own.
Instead, accumulate property over time, selling only when
absolutely necessary.
6. Don’t overextend yourself. You might qualify for the mortgage
on the huge house, but remember that you’ll also have to pay taxes,
insurance, utilities, repairs and maintenance on that huge
property. When managing your personal finances, whether investing
in stocks or real estate, keep some money in reserve for
emergencies and new opportunities.
7. You will experience down markets. If you invest in rental
real estate, there will be times when you must price your property
below the market to keep tenants. Likewise, there will be times
when your stock is selling for less than its value. Stay calm and
be prepared for tough times, and you will be rewarded.
8. Good people make good investments. In rental real estate,
having good tenants is the key to having a good investment. In
stocks, the sharpest stockbroker will eventually cost you money if
she doesn’t respect your investment goals. In both worlds, work
with people you can trust, keep the lines of communication open,
and your investments will prosper.
I find that most Coloradans already have a concentration in real
estate and need to balance their portfolios with other choices.
However, my discussions with Dave show that sound investment
principles apply to all investment choices.
Daniel Cook is a Certified Financial Planner(tm) with an
independent planning practice in Castle Rock.