Although many investors get an increase in potential profits in real estate, that doesn’t mean that all properties increase in value enough to warrant the commitment.

“Some people buy real estate expecting it to appreciate a lot over time,” says David Reiss, law professor and research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “But it can be risky – even foolish – to pay so much for a property that you lose money operationally just because you think it will appreciate.”

The wisdom of real estate therefore applies as it would with equities, commodities or any other class of investment: the variables are many, the offers not to be missed few. So where should the savvy money go? And how does real estate fit into your overall portfolio?

Here, experts and observers delve into the essentials that should guide your decisions, as well as ways to guide your financial forays into success.

Know your market well. If you’re paying market price for an investment property, you probably won’t see particularly robust returns. “It will make a comeback in the market, and if you want to do better than that, you have to pound the pavement,” Reiss says. “Look for deals that are underpriced for one reason or another. And you won’t know which deals are underpriced unless you have a good idea of ​​the price of the properties.

Luxury houses may hold a key. In 2014, the S&P/Case-Shiller National Home Price Index for single-family homes rose about 4.5%. But Frank Symons, executive vice president and chief operating officer for the western region of Sotheby’s International Realty, reports that luxury homes appreciated 8% in the same year. He cites Sotheby’s Global Luxury Residential Property Report 2015. “This is a healthy return on investment at a time when residential real estate continues to recover,” notes Symons. “As the recovery continues, the rate of appreciation may accelerate.”

Turnkey properties can unlock returns. With a turnkey investment, you buy a fully checked and refurbished property with tenants and a property manager. “It’s a bit like buying a pizza to take away. All the ingredients are there, and all you have to do is buy,” says Scarlett Tassone, vice president and mortgage banker at PrivatePlus Mortgage in Atlanta. The downside is that compared to other tenant properties, “they’re not as lucrative and a bit more expensive,” she says.

Free vacation homes. Just because you can relax in a leisure residence does not mean that the benefits will recreate. “Vacation homes are nothing more than a fancy retirement and low-income option,” says Kurt Westfield, managing director of WC Equity Group, based in Tampa, Florida. “Depending on the season, they have the ability to generate decent returns, but the vacancy and holding costs associated with generally high prices tend to equate to a less than stellar rate of return.”

Give REITs a chance. A property investment fund is a company which owns, develops and redevelops real estate assets. “Exchange-listed REITs and REIT funds offer low liquidity and investment minimums,” says Mike Papierski, national real estate practice leader at Chicago-based Northern Trust Company. REITs, in particular, offer great diversity. Just be aware that “performance tends to align more closely with stock market performance and may not correlate with actual property values,” says Papierski. Overall, he recommends a 15% cap on real estate exposure in a portfolio.

Rental caveat. Yes, you can make money with rental properties. But if you have little gaming experience, expect a steep learning curve. “Physical properties require expertise and intensive management, even with investment grade properties,” says Papierski. “If the owner doesn’t have the expertise, they will have to hire someone to take care of the rental and day-to-day management.” And these costs generally represent between 4 and 8% of gross rents.

You could go back to flip houses. In this form of investing, the goal is to get short term and sell properties at a markup. And while many investors make money this way, a lot depends on the neighborhood you’re buying and selling in, as well as the hidden costs associated with renovating the property that can lower its net return. “This type of real estate investing involves more risk than owning rental properties,” says Rebecca Pavese, financial planner and portfolio manager at Palisades Hudson Financial Group in Atlanta.

The vacant property is a mixed lot. Vacant properties can have huge potential in a gentrifying neighborhood or if the land is in the path of a proposed water and sewer line. But investors will pay both when buying and when selling. “As a development game, these have a huge one-time advantage,” says Westfield. “But capital gains tend to be a barrier. Personally, I avoid it.

Increase your profit potential with an investment of time. Real estate development, management and administration often requires an army of specialists. But if you’re good at repairs, bookkeeping, or showing a vacancy to potential tenants, you can waive the fees associated with hiring a helper. “Depending on your availability and skills, these might be trade-offs worth making for you,” Reiss says.

It’s not just what you rent, but who rents. Veteran Atlanta real estate agent William J. Golden, who works with RE/MAX Metro Atlanta Cityside, shares how his old rental home turned into a house of horrors. A tenant painted an entire room black; another housed a motorcycle stolen from the property. And when Mr. Motorcycle wasn’t scanning the mail of wealthy locals, he was allowing his cronies to squat there. Lesson learned? Examine your tenants carefully and check on them frequently. “I swear this house was cursed,” Golden said. “Interestingly, we had bought the house from a psychic, so I wish she had told us what was in store for us.”


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