A prospective investor must always bear in mind that while real estate can be a highly profitable form of investment, it can also prove quite risky. Often there are many variable factors which affect the value of a property, and these factors are not always obvious even to experienced eyes. It is sometimes difficult to appraise the value of a given property accurately, and mistakes in appraisal can be costly. Another potential drawback to investing heavily in real estate is that an individual who ties a large amount of his capital up in real property and then has a sudden need for cash may well find it difficult to sell and realize cash quickly without incurring considerable losses.
There are some general rules and pointers which provide a valuable checklist of things to do—and not to do—for anyone who is thinking of making an investment in any kind of real estate.
1. Make a thorough study of the real estate market and its prospects in your area before you buy. Naturally, you should seek to buy when prices are low and the indications are that values will rise. Always take into consideration such factors as the rate of population increase and the general prospects of business in the area. There is no quicker way to lose money in real estate than by investing it in property located in declining areas.
2. Know or learn as much as possible about every aspect of the particular use to which you intend putting the property you wish to buy. In other words, don’t buy a house unless you’re certain that it’s suited to the requirements of your family and that it’s well built. Don’t plan on having a house built unless you know something about building—or at the very least until you’ve found an architect and a building contractor in whom you have complete confidence.
Don’t consider buying, say, a motel unless you know enough about motel management to have a fair chance of operating it profitably—or again at the very least, until you know enough to efficiently supervise anyone you hire to run the motel for you.
3. Deal only through licensed and reputable real estate brokers. Beware the fast-talking, high-pressure real estate salesman who promises everything—verbally. He is probably a fly-by-night who doesn’t much care what he sells you or anyone else.
4. If you buy a property with a view to improving it or building on it, be certain that you have adequate capital or are able to obtain adequate financing to complete the project.
5. If at all possible, always obtain at least one impartial, third-party appraisal of any property before you buy it.
6. If buying a building of any kind—be it a Cape Cod cottage, 1000-room hotel or Willow Run-size factory—have it inspected carefully by qualified and disinterested architects or builders before entering into any building commitments. If buying an existing income property such as an apartment house, have the owner’s books checked by a disinterested accountant. If the owner of the building or the income property balks at such inspections, look out.
7. Whether you’re in the market for a cabin site or a skyscraper, shop around widely and cautiously. Unless you happen to run across an irresistible bargain you must snap up immediately, take your time about making up your mind. Don’t allow yourself to be stampeded into paying any deposits or binders until you’re absolutely certain you’ve found the property you want. Remember that the purchase of real property usually involves heavy capital investment; don’t take unnecessary chances with your money.
8. Make certain you have the best available legal advice before signing any agreements, contracts or other documents. To avoid misunderstandings, it is always best to have an attorney translate the “whereas”-studded fine-print clauses into coherent everyday English. Even seasoned real estate investors sometimes fail to have this done—and the ensuing squabbles between buyers and sellers usually wind up in courtrooms.
9. Always insure the title to any property you buy. Even the most meticulous title search may fail to turn up all the pertinent facts about the history of a property. The cost of title insurance is negligible. The expense of fighting a lawsuit over a clouded title can be staggering.
10. Once you’ve bought your property, treat it as a long-term investment, not as a short-term speculation. You’ll find that—99 times out of a hundred—you’ll make much greater profits that way. In fact, if you wish to make money in real estate, always think in terms of investing and never in terms of speculating.
* Source: How to Be Rich by J. Paul Getty