How to invest in property in a down market

Incorporate these nine habits into your real estate investing

By Malcolm Silver
Globe Investor Magazine online, December 15, 2008

Malcolm Silver is a commercial real estate consultant and investor.

Treating real estate investment as a business rather than a hobby can make all the difference between success and failure. Here are nine simple habits that will make you a savvier investor and help you reach your goals.

1. Invest in real estate for the right reason

If your main reason to invest in property is to make a quick buck, you may as well go to the local casino, buy a lottery ticket, or look into the get-rich-quick schemes you find on the Internet. Many people are attracted to buying property because it promises more money for less work, resulting in an independent lifestyle. And it can, with dedication and hard work. It also helps if you have a passion for real estate and strongly believe that your heart and mind are in the right place to do it.

2. Draw up a business plan

If you want to make some serious money, you have to treat buying property like a business - even if it is a part-time business. You'll need to build a real-estate business plan, which will be your blueprint for success.

3. Build a team

Real estate investors are inherent risk takers, entrepreneurs and visionaries. Their focus is on the transaction and securing the property. Someone has to be by their side to deal with legal contracts, arranging financing, zoning, estimates for renovation, appraising the property, inspections, reviewing rental rates, finding future tenants, neighbourhood growth and other due diligence.

4. Understand cycles

Real estate has always been a cyclical investment. Because you cannot accurately predict when the market will rise and fall, it is important to recognize the signs of change and be ready to act at all times. For those with a cast-iron stomach, the best way to deal with cycles is to be a contrarian. Ask Warren Buffett. Stockpile capital when possible so that you can move quickly when opportunities arise, work against the trend, and be ready to act quickly when cycles begin to change.

5. Be ambitious -- and patient

If you study successful real estate moguls such as Donald Trump, you will see that they have ambition, determination, patience and a positive attitude. They usually hang in there - more determined than ever - when others throw in the towel. They learn from their mistakes, applying those lessons to succeed the next time around. Real estate investing needs a lot of stamina, and successful investors have that in spades.

6. Choose a niche

The best way to stay aligned to your overall intentions and operating strategy is to specialize in one specific area. Real estate offers such a wide variety of options - buy-and-flip short term, renovate and hold, buy stores/houses/apartments/industrial space/raw land, etc. Make sure to choose a niche you are comfortable with and then stay focused.

7. Use other people's money

No matter what type of real estate you buy, the deals are often highly leveraged. One reason is that financial institutions are more than willing to lend for such investments. However, loans can be risky, especially for investment properties. One of the best ways to reduce the risk of carrying debt is to bring on additional partners. Try to raise money before you need it so you have a pool to draw on when you need to act right away.

8. Don't fall in love

Finding the right property in the right location and lining up good lenders and partners is difficult enough when buying, but can pale into insignificance when trying to negotiate a good deal. Don't fall in love with a property or appear desperate. Work out the numbers and line up the financing in advance. Stay focused on your goal but remain flexible. Be willing to take chances, and develop a thick skin so you don't take it personally when things go awry.

9. Measure your performance

When acquiring existing buildings or rentals, astute investors look for properties that provide solid current cash flow. This should be a key factor in determining whether you buy or sell a property. Industry-wide declines in cash flow are usually a signal of troubled times ahead. However, factors other than cash flow can be equally important. Consider bringing in stronger management or knowledgeable partners to help create better numbers.

Special to the Globe and Mail