Today we have a guest post from Kate Underwood of Club Thrifty. Take it away Kate...
Investing in real estate is a big decision. Plenty of people make bank on rental properties, and — with the current state of the economy — you may be thinking about getting in on the action. Property ownership can be a terrific way to invest in your future, but there are several factors to consider before diving in headfirst.
While investing in the stock market typically constitutes the basics of building wealth, alternative investments such as real estate can help diversify your finances even further.
If you’ve been asking yourself whether real estate investing is right for you, read on and see if your situation passes the test!
If you’re going for an actual property or building, you’ll likely need a decent sized down payment. In addition to issues finding financing, a down payment of less than 20% means you’ll probably get stuck paying the pesky PMI, or private mortgage insurance (for readers in the US). That can add a significant amount to your monthly mortgage payments.
It’s usually best to save up a healthy down payment before investing in a rental home. Without that, you put too much risk on your shoulders in case of unexpected expenses, plus you lose money due to PMI until your balance is below 80% of the purchase price.
When investing in real estate, don’t forget that the down payment and mortgage are only one piece of the picture. There are other fees to deal with such as interest, property taxes, insurance, and repairs.
When you become a landlord, you also sign on to handle all the little nuisances that come with home ownership. And those hassles often cost money! Whether you’re hands-on or you hire it all out, repairs and upkeep are guaranteed to rack up some expenses over time.
Be aware of potential lapses in rental income, too. If you get awesome tenants who stay for years and always pay on time, that’s terrific. But if renters only stay for a year, then you’ll be looking for new tenants often and the unit will lie empty for a month or more. That’s all time you’re losing out on rental income, so it’s good to have a financial cushion in place.
Investing in real estate is one way to diversify your income streams, which is certainly a wise goal. But before you plunk down a large chunk of change for an investment property, think about your other long-term goals, like retirement.
What sort of retirement plan do you already have in place? Will you receive a company pension or 401(k)? Are you completely self-funding your retirement? Have you already taken advantage of company match? Try to balance out your real estate investments with other more traditional ones like index funds and Roth IRAs.
There’s not much point in thinking about this issue unless you actually want to become a landlord, right? Think about whether you even want to take on the task. After all, managing real estate is a somewhat hands-on kind of deal.
First of all, be sure you’re prepared to stay put for a while. If you’re likely to move soon or frequently, realize that managing property from afar can be an enormous pain – even if you use a property management company. Stay local to minimise the hassles or consider hiring a management company, which will add significant expense to your investment.
You’ll have to put some time into your rental properties if you go with a traditional brick-and-mortar place. It’ll involve regular updates such as appliances, plumbing, and exterior repairs. You’ll have to maintain a decent relationship with your tenants, too.
There may be negative interactions - like when your renter trashes the place or the cops get called there at 2 a.m. for a noise disturbance. If you end up having to evict a tenant, are you prepared to stick to your guns?
People can make things complicated - and as a landlord, you’ll be dealing with people. Just something to keep in mind before you go for it!
Property Is Tangible
One great aspect of getting your hands on a piece of real estate is that it’s something tangible, something real. Unlike investing in shares of the stock market, this has a more “solid” feel to it, and it’s great for at least part of your investment portfolio to fit that description.
Ongoing Demand for Rentals
People will always need a place to live, and not everyone wants to buy. So, why not be the landlord they need and profit from it?
As long as you do your homework, choose a solid location, and find good property, you can usually count on a good pool of potential tenants. The idea of rental property ownership is to get a somewhat passive income stream going.
Renters Pay Your Mortgage
This benefit sounds pretty sweet, right? Ideally, you’ll purchase your rental property to hold long-term. If you keep a fairly steady stream of tenants for years, you can likely pay off the mortgage without breaking a sweat.
An Additional Source of Income in Retirement
In addition to helping you pay off the mortgage, tenants bring you a nice injection of passive income. This is an especially appealing possibility for retirees. Real estate investments can bring in extra money you need, supplementing your pension, 401k, or other sources.
Rental income can help shield you from economic hardships (employer downsizing, dips in the stock market, and more). If you’re not quite at retirement age yet, passive real estate income can provide some serious peace of mind.
Sell Property for Profit
At some point, years in the future, you may want to let go of the management aspect of real estate investing. This is the time when you can sell any rental properties you own - hopefully for a nice profit!
Although past performance is never a guarantee of future results, real estate tends to appreciate over a significant number of years. In addition to the monthly rental income, the idea is that the value of your condo, duplex, or other rental property will increase over time. Hopefully, when you’re ready to unload it, you’ll walk away with more money than you invested.
Maybe becoming the landlord isn’t your jam, or maybe you don’t have enough cash saved for a good down payment. You can still dip your toe into real estate investing with crowdfunded real estate platforms.
Fundrise, RealtyMogul, and similar platforms enable investors to get involved for much less money up-front than with traditional real estate purchases. Because you share the cost of the property with multiple investors, your initial investment can be fairly low.
You’ll continue to make regular contributions to the property investment over time, and as it brings in rental income (or income from its sale), you’ll get a portion of that payday.
Obviously, no investment is 100% foolproof. Unless you’re going to stuff your money under a mattress (not recommended, by the way), you’ll have to accept a bit of risk to grow your stash. You just have to weigh the risks against the potential benefits and make the right decision for you.
Investing in real estate can be one of the most profitable ways to grow and diversify your portfolio as well as up your income between now and retirement. Are you ready to take this financial step for your future?
Kate Underwood is a freelance writer and staff writer for Club Thrifty, a website dedicated to helping people dream big, spend less, and travel more.