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You may not like this answer, but I've got to be honest:

Don't invest in real estate.

The explanation...

...there are two fundamental RE investment strategies, excluding derivatives of those two and investing in mortgages/paper.

1. Buy and hold -- be a landlord, and
2. Buy, fix up, and sell (flipping)

I've done both, and will again. At the moment, though, in my market, neither is very attractive to me. I have just sold my last 3 rental properties in the last several months.

1a. Being a landlord is tough stuff right now. Interest rates are so low that many former tenants have bought. There are still good tenants out there but the balance has definitely shifted to a higher percentage of bad tenants. I don't like to be a landlord in a tenant's market.

1b. The stock market has been very scary and the money market has little profit in it -- there is a lot of money trying to get into real estate. This has driven prices up for rental properties and has increased competition for tenants. Just as I don't want to be buying stocks when "new investors" are clamoring for the latest high flyer, I am similarly timid about real estate when the herd has turned towards it. Bubble? Maybe, maybe not, but it feels a bit scary to me.

1c. Being a landlord is tough work, and in my recently reformed opinion, should only be done full time. My luck with property managers has not been good, and doing the job part-time is draining. My new personal threshold is around 20 properties or more.

2a. It appears to me that everyone and their brother wants to get into the "flipping" game. As long as the market keeps going up, it is hard to argue with the profit potential. At some point, though, we may fall off a cliff and then there will be a lot of people "upside down" in their current project(s). There is so much competition at the moment, though, that margins appear to me to be getting thinner and the risk is going up.

2b. There will always be money to be made in this business, just like in new home construction. The key is to do it well, do it efficiently, do it in volume, and to not overextend yourself. $5,000 to invest precludes "flipping" in my estimation. I recommend either being a builder/contractor or having full-time, extremely close relationships with many sub-contractors. I also recommend developing a business model that makes the process very standardized.

Derivative:
There is the opportunity to become "birddog" in that you find the deals (usually long before they get listed or even get put up for FSBO) and use your $5k to tie up the property in an option. You then sell your position to another investor. This is a derivative strategy but may work for you. Being a "birddog" however is not an easy job. You have to kiss a lot of frogs before you find a prince(ss). Plan on making lots of calls, visiting lots of neighborhoods, shaking lots of hands, combing the obituaries and divorce notices, etc. You'll see plenty of signs for "I buy houses" or even the newer national franchise of "We buy ugly houses". You will NOT be the only one combing the hills for deals. This can be a very emotionally taxing job.

The bottom line will always be Return on Investment (or Return on Equity if you buy and hold). With $5,000 I'd consider real estate only if a good flip candidate fell in my lap, otherwise I'd look elsewhere. If you want to dip your toe, start out as a "birddog" to a) see if you're good at it, and b) get a feel for working numbers and deciding if there's profit to be made. The experience will be good for you.

Some final thoughts:
- In an uptrending market, cash is king and you need to be able to analyze and move VERY quickly. Few great deals will wait for financing.
- Tucson is much like Tampa in that we both are growing and will probably continue to grow, thus we are unlikely to see a big downturn in prices if the "bubble" breaks. What we see here, though, is a leveling of prices for periods of time. For an investor, that can hurt.
- Read lots of books, even the shyster gurus usually give enough truth that there is value. I like what http://www.johntreed.com/ has to say about gurus, and he rates many of them.
- I'd skip seminars or expensive courses/tape sets/coaching programs for the moment.
- Hook up with a good real estate agent that is or was an investor. Find as many mentors as you can and LISTEN to them.
- Get VERY GOOD with numbers. Create spreadsheet models. Here are a couple that I've created for you to start with: http://www.santanarealtors.com/FlipCalc.xls and http://www.santanarealtors.com/BuyHoldCalc.xls You can, and should, modify them to suit your needs.

George Jenson
Disclosure: AZ Real Estate Agent, http://www.santanarealtors.com
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