How Real Estate Is A Smart Investment For Entrepreneurs

From the fictional Lex Luthor to the very real Donald Trump, real estate has often been considered a ripe investment opportunity for successful entrepreneurs. But what differentiates a smart real estate investment from one that's going to turn into a disaster?
06/20/2016 11:56 am ET Updated Jun 21, 2017

From the fictional Lex Luthor to the very real Donald Trump, real estate has often been considered a ripe investment opportunity for successful entrepreneurs. But what differentiates a smart real estate investment from one that's going to turn into a disaster? What tells the best real estate moguls when to buy and when to sell?

Real estate is a long term investment

If you're planning on investing in real estate because you think you'll get rich quick, you need to think again. There have been boom times in real estate history, but the current economy is not one of them. In the 1990s, it was fairly easy to buy a property, make very quick improvements, and then flip the property, making a quick and substantial profit. After the housing bubble burst and the recession of the early part of the decade left the economy running sluggishly, real estate has been one of the last areas to rebound. If you're looking to invest in real estate, doing your research and moving slowly will be to your benefit.

Learn about past successful investments in your area

Many entrepreneurs find real estate investment success by buying a property, developing it or improving it in ways that add value, and then reselling it. But what improvements are going to add the most value in your area, and which are basically a waste of money that you won't recoup?

One way to understand the valuation of real estate in your area is to look at local case studies. For example, in Portland, SKB found that they could add value to a building by adding bike lockers and a fitness area in a mixed use building. In New England, however, a very different set of features might be desired. Knowing what business tenants or homeowners want in your area is the first step towards successful investment.

Find a balance between choosing the first property you see and waiting for a unicorn

When you decide to invest in real estate, it can be tempting to snatch up the first property you see. Alternatively, you could draw up a list of the features you need to see before you're willing to invest, and wait for the rest of your life before finding a building that meets your needs. Neither of these approaches will help you get what you need.

When you start considering investing in real estate, you should draw up a list of the features that you're looking for, and what your highest priorities are. But understand what is absolutely necessary, and what will be fixable down the road, and what is nice to have, but absolutely unnecessary.

Location is one element of a building you can't reasonably change

How do we find market problems worth solving? The conception is that business development and product management go hand in hand. An old adage about real estate is to always look for the worst building on the best street to understand the area in which you may be buying. When you are able to buy that building, you get the best chance to build equity, as you're most likely to be able to improve on your buying price when you go to sell.

If you're buying the best building on the street, however, you're going to have a harder time finding ways to improve and build value.

Understand the tax implications

Just like operating any other sort of business, investing in real estate is a business operation. That means that a wide variety of deductions open up to you, possibly including mortgage interest, depreciation, improvements, and operating costs.

If you've done your taxes on your own so far, either be prepared to learn the ins and outs of a whole new section of tax regulations as they relate to real estate and business, or considering finding an accountant who is familiar with the real estate business.

Always have a plan

Whenever you look at a building, you should have a plan on how to use it to turn a profit. Whether that involves turning it into housing, or making improvements that allow you to increase tenancy, or understand what is keeping the lot from moving, and knowing what you can develop in order to move forward. Having a clear understanding of the costs associated with development will help you ensure a clear plan without any surprises.

If you're not sure where to start with valuing real estate and moving forward, talk to your local Chamber of Commerce and look for a mentor in your area.

What advice would you give to someone just starting out in the world of real estate investment?