The media scares me. We all rely on journalists to make a big world small and help us digest current events, but whenever I see an article on something that is within my area of expertise – like energy policy or real estate – I’m often appalled at how badly some publications mangle the facts and principles in order to spin an entertaining story.

The worst offender among the popular press, hands down, is USA Today.  Check out the feature story on Real Estate entitled Many Investors Feel Like Running Away by Matt Krantz.

If you take this article as light entertainment – kind of like reality TV – I guess an article like this might be relatively harmless. But many people go to USA Today for information – and that makes journalists like Krantz dangerous.

Where to start? Well here are some of the more egregious flaws in the article’s reasoning:

Cash in the stocks, baby, we’re buyin’ real estate! The article states that the current market is “a complete flip-flop from 2002, when investors tired of the bear market ravaging Wall Street cashed in their stocks and bought homes and investment property.” This is goofy. Smart investors might tilt their investment portfolio more heavily in one direction than the other, but it doesn’t make sense to flip your life savings from one asset class to the other in an effort to catch a hot market.  Articles like this treat investing and speculating as interchangable concepts.  They're not.  

Taxes, toilets and tenants! For some reason, the popular press loves to exaggerate the pain and suffering that landlords go through. USA Today comments that “wannabe real estate tycoons stuck with properties they can't sell have been turned into landlords, forced to fix toilets and take tenant calls in the middle of the night.” Ok – show of hands – how many of you landlords are running out at 2 in the morning with a plunger in your hand? Note that these articles are written by journalists who don’t know anything about investing – take their advice at your peril.

Stocks have always outperformed real estate! The article suggests that real estate investors who are underwater now could have “shaved themselves some trouble if they had done some research,” pointing out that stocks have appreciated at a faster rate than real estate over the short and long term.

That's silly.  The source neglects many key factors about real estate and stocks.  Here's two of them:

• Leverage: the gains that you realize due to the appreciation of your real estate investment are backed by the bank’s money via a mortgage. Unless you’re a mega-aggressive margin investor, your stock portfolio is backed primarily by cash out of your pocket.

• Cashflow: The article points out that the average new home has appreciated from $4,030 to $276,400 from 1920 to 2006, a rate of appreciation that does not beat the stock market. However, this doesn’t consider the fact that real estate puts cash in your pocket. That $276k in investment properties that were purchased decades ago would be free and clear of a mortgage and would be generating from $30,000 to $35,000 per year in rental income. Compare that the dividends that an equivalent portfolio of stocks would be generating.

An interesting note: the article quotes Nigel Swaby, who’s hooked up with that iamfacingforeclosure.com guy. You’ll often see Nigel’s comments on various forums giving “advice” to investors on getting rich, but from his quotes in the article it appears that he’s sitting on the sidelines.

The bottom line: USA Today is fluff. But it’s fluff with an audience: 5.2 million daily readers. That’s a lot of bad information soaked up by a lot of people. And it’s not just the USA Today that gets basic concepts wrong; lots of other publications are just as bad.  It’s up to all of us to be discriminating consumers of information.

But here's the good news - and it's something you know already.  All markets are cyclical, and misinformation like this is great for spooking the herd.  That can be a good thing; keep your eyes open for buying opportunities. 

I'm a fan of Blog Carnivals and we're happy to be hosting this week's Carinval of Real Estate Investing here at EquityScout.com. 

No snappy theme this week - we're gonna keep it simple with a top three and a couple of honorable mention posts.  Check 'em out. 

Taking poll position, The Landlord channels Real Estate Investing's favorite curmudgeon John T. Reed in 4 lies that the Gurus will tell you posted at Lording the Land. These are points that you can't hear too often. 

Running a close second, Steve Faber discusses an alternate way of investing in real estate with- REITs – A good Investment for Tishman Speyer Properties, But Is a REIT Right for You?

Rounding out the trio, The Dough Roller presents The 1% Solution to Real Estate Investing posted at The Dough Roller, saying, The 1% rule is a rule-of-thumb that has fallen out of favor in many markets as property prices have outraced rental rates - but it's a good screening tool - if you stray too far then you're more of a speculator than an investor. 

Congratulations to the top three!  Some other notable entries follow...

Bryce Beattie presents Seven Habits of Highly-Successful Real Estate Investors. posted at Middle Class Millionaires.  I'm not sure I agree with Bryce's habit #1, avoid overleveraging to reduce negative cashflow.  In some markets good investors can find quality investments that will produce positive cashflow even with 100% financing. 

Blog Carnivals are a great resource to discover new voices writing about topics that you care about. 

• MoneySmartLife is hosting the Carnival of Personal Finance, and the EquityScout.com entry on Real Estate Investing vs. Speculating was featured as an editor's choice. 
• Real-Real Estate Investing is hosting the Carnival of Real Estate Investing, and the EquityScout.com entry on real estate investors working with Realtors took first place. 

When you start reading a lot of articles in the general news media about real estate investors it’s usually a sure bet that they’re not going to be flattering.

When the market was flying it would seem that everyone was making big bucks, if you took media coverage at face value. That led to a big increase in speculative buying. This hasn’t painted a pretty picture in many areas, and an ugly convergence of flattening/declining prices, declining sales, and a collapsing sub-prime lenders has turned many a get-rich-quick scheme into a sob story.

How about the Florida couple – an administrative assistant and a carpenter with a combined household income of $90,000 – who took out $750,000 in financing to buy three investment properties. Now that the market has tanked and they’re facing foreclosure they’re suing the lender – claiming that the bank never should have trusted them with the money in the first place.

These sordid stories aren’t hard to dig up, and they highlight a fundamental truth: There’s a difference between investing and speculating. Either approach may be right for you…but the danger comes when you think you’re doing one but you’re actually doing the other.

Investors and speculators have fundamentally different objectives and risk profiles, and consequently require two distinct skill sets. I’d argue that in today’s economy we all need to be investors. The job-for-life-guaranteed-pension world of previous generations has evaporated in recent years, and social security is looking increasingly rickety as it prepares to bear the weight of the retiring baby boomers. Many Americans are waking up to the fact that they’re gong to be responsible for their own future livelihoods.

Few of us, on the other hand, are cut out to be speculators. What’s the difference? Well there’s been no shortage of ink and pixels spent on the subject, but here’s my take:

Most people can easily place themselves in one category or the other.

There’s a lot to be said for having the speculator personality and skill set in a market that is hot, but smart speculators know when to sit on the sidelines. Flipping and pre-construction investing are, almost without exception, speculative activities. Many of us have talked to people who purchased an ugly starter home, slapped a new coat of paint and fixed up the landscaping, and the sold it for a big profit. Here’s a news flash: it wasn’t the paint or the shrubs that pushed up the price of the house – it was the rising market. This is a strategy that only works in bull markets. It’s a speculative play.

Most of us, myself included, belong on the left column.

Which side are you on?

I’ve stated in previous posts and articles that running the numbers and making sound assumptions about your potential investments is one of the keys to avoiding real estate investor burnout.  Real estate is a long term game and you can’t build a stable portfolio overnight.  This means you need some staying power, so if you end up packing it in after your first investment or two you’ll never get there.  

So in my view looking before you leap is the best way to keep your momentum as an investor, and that means having an idea about what to expect from an investment in terms of rate of return, cashflow and net present value.  

But analysis is like aspirin, or fine wine, or just about anything, for that matter.  A bit of it can make a big difference – but that doesn’t mean that a massive dose is a good idea.  More isn’t necessarily better.  

How do you strike the right balance?  Well that depends on the investor.  Personally, I’m an engineer by training and I love numbers; that’s why I ended up building this site.  I see the value in using a tool to catch all of those assumptions wrapping them into a cashflow projection.  Plus, I love to tinker.  But therein lies two danger – 1) becoming infatuated with the analysis and forgetting about the underlying uncertainties (no analysis is perfect) and 2) becoming infatuated with perfecting the analysis to the extent that you never get a deal done.  In other words: don't get paralyzed.

Both of these problems happen...probably more than you’d think.  

So...how to avoid these issues?  Again, it depends on the investor and your personality type, but I’d suggest the following rules of thumb: 

• Remember: your analysis is based on your assumptions.  Unless you have a working crystal ball you’re never going to get it all right.  Your analysis will give you your base case.  When you get your results ask yourself “is this target a good result?  Does the potential reward justify the risks?”  if the answer is “yes” then drive on and figure out how to make the deal work – don’t spend time fine tuning.  
• Analysis is a process:  I worked for a while in strategic planning with a major corporation.  We spit out huge, detailed plans.  And we never followed them.  Is this a bad result?  Well, not necessarily – the planning process itself is hugely valuable.  It forces executives to examine their assumptions, communicate their goals, and crystallize their thinking.  The planning process helps organizations to articulate their vision and set their course, even if they don’t follow the resulting plans to the letter.  Real estate analysis is similar: running the numbers will force you to consider the big questions around vacancies, rental rates, repairs, and other risks that you might not consider before jumping into the investment.  
• Evaluate the sensitivities:  Don’t just look at the final “answer” – look at the sensitivities to understand how much risk you’re taking.  Ok, you’re forecasting a 5% appreciation rate...but what if it’s 3%?  Or 8%?  The EquityScout tornado diagrams will help you do this, but if you’re running spreadsheets you can do the same thing manually.  
• Be honest with yourself:  There are two camps that you want to stay out of – the overly conservative camp that kills every deal that comes along by handicapping them with excess costs, and the rose-colored-glasses camp that tweaks all the variables up until they get the result they want.  Nervous Nellies do no deals, and the Pollyannas do bad ones.  
• Remember: once you’ve made your bed you’re going to have to lie in it.  A single fortuitous event (a upgrade in the neighborhood) or misfortune (a mold infestation or a disastrous tenant) will radically impact the performance of your investment.  You’re still going to have a lot of uncertainty to manage once you make your investment; the purpose of the analysis is simply to ensure you’re pointed in the right direction before you pull the trigger.  

BankRate.com's real estate advisor Steve McLinden does an excellent job covering ethical considerations of flipping houses for a profit. 

Property flipping has gotten a black eye as of late from shady practices that have victimized first-time buyers, at-risk communities, and the reputation of the real estate industry as a whole.  The matter hasn't been improved by the proliferation of quick-money real estate courses and goofy reality television programs like Flip this House and Flip that House (yes, these are two different programs - just another indication of the general public's manic appetite for all things real-estate related).