Many people have become interested in investing in real estate. There are numerous books, tapes and seminars all designed to make it look easy and increase your personal wealth. Furthermore all that is required is a simple declaration such as ” I am a real estate investor”, and bingo you become what you believe.

Any appreciating investment gets people attention. In the late 90’s the stock market was unstoppable and investment clubs sprang from no where. When you have the entire market going up it’s easy to make money, no matter where you choose to invest.

Real estate investing is no different. Over the last several years owning real estate has become much more attractive. Its, tangible, you can drive by it and see it. Visually it’s much more appealing than a stock certificate.

People generally invest for two reasons: (1) for potential appreciation and (2) for positive cash flow. A very simple definition of cash flow is “Will the income from the property be sufficient to cover the expenses”? Finding a money making real estate investment is much more difficult given a slower market or rising interest rates.

Most would agree that from 2001 to 2005 we had historic appreciation here in Pasadena, South Pasadena and most of California. Annual appreciation of 15 to 20% was fairly common and property values skyrocketed. On the other hand you had rents increasing typically from 3 to 5%. Over time, income has decreased compared to property values.

Why would this be important?

As an investor, you hope to find a property where you can invest a smaller amount of your own money and have the tenants make your month payments (rent). Hypothetically say that you purchased a duplex (2 units) in 2003 for $350,000 and the rents were $1200 for each side for a total of $2400/month. Now in 2006, you sell the property for $775,000 and the rents have increased to $1400/side or $2800.

To finance the above example you would almost have to invest $400,000 in a down payment of your own money to produce a principal and interest payment of $2622 at an interest rate of 7.5%.

As you can see it has become much more difficult to find properties that produce positive cash flows with a 10 - 20% down payment and it could be more likely that a down payment of 50% is more likely.

There are other alternatives such as a 1031 exchange, living in one of the units as your principal residence or possibly looking at up to 4 units to minimize some risk.

Investing is also a process in which you need a clear understanding of what you hope to accomplish. Are you an investor which usually requires a long term outlook or are you a speculator hoping for a quick buck. Speculators made out very well over the last few years.

Most everything I have ever read states that over time, real estate has been a very profitable investment. Each situation should be addressed individually and consider your aversion to risk, and potential for reward.