Is Real Estate Investing Right For You?

A friend of mine recently bought a duplex near a University town in Michigan. His purchase surprised me because I didn’t realize he was looking for a place to settle down. Having relocated many times for work and with sights set on international travel, his home purchase seemed out of the blue until he told me that his goal was to use it as an investment property.

Real estate is quickly becoming one of the most popular investment vehicles in modern America. You might know someone who is doing just this and making a decent profit on the rental income they get each month and are wondering if you should get in on the action as well.

While real estate investing can have many perks, it is important to go into it with both eyes wide, wide open so that you are prepared for the unexpected hurdles that will inevitably come your way. Houses brake, people are unreliable, and location perks shift, so understanding your variables is an important first step to determining if real estate investing is right for you.

If you are thinking about adding a rental property to your investment portfolio, take a look at the top questions you need to consider before putting a “for rent” sign in the yard.

Do You Know The Costs?

This may sound like a silly point but it is important to know the costs of purchasing and maintaining a rental property because many costs change when you buy a primary residence as opposed to a rental property.

You will first need to make the down payment. Unlike your ability to make a 0%-3% downpayment on your primary house, you will need 20% down to secure your first rental property. Once you have the cash on hand to purchase the place you will then have to acquire a good loan. Some mortgage lenders will have increased rates for homes that are not used as your primary residence so be sure to look at that difference and factor that cost into your total budget.

Many advisors urge new investors to keep the purchase price of their first investment property low, around $150,000 if possible. That may seem like a small price tag, especially if you are looking to buy in an in-demand area but it is important that you do not overwhelm yourself financially.

You then will need to consider yearly property taxes which also tend to increase by about 3% when the home is used as an investment as opposed to your primary residence. This cost often catches many new investors off guard so it is important to plan for that so you will be prepared when the bill comes.

Depending on the state of the home upon purchase, you may need to make some serious renovations to make it rentable. You will need a home inspection which will cost anywhere from $400-$1,000 depending on the demand and the location and that will shed light on any structural, roof, plumbing, electrical, or HVAC upgrades that may need to happen before you rent. Depending on the area, you may also need to make some cosmetic upgrades like new paint, carpet cleaning, kitchen upgrades, and bathroom fixtures to make your property more appealing to renters.

When you are looking to do improvements, be sure to focus on the ones that will get you the best value on the property. It is also important that you stick to your renovation budget, especially on a rental property. You don’t want to put more money in than you could hope to get out.

Is The Area Right?

Highly populated areas like cities and college towns are excellent places to invest in real estate whereas a country estate may not turn the kind of profit you are looking for. Have you done research into your potential area? Do you know the current value of homes and the amount of rental potential you could have? It is important to calculate your potential profits and losses before you purchase your investment property.

Understanding the location of your property is one of the most important things to renters. I myself have walked away from a beautiful property because it wasn’t in my desired location. It is true what they say about location, because it really matters especially to renters. When you look at a property, evaluate its proximity to downtown, restaurants, entertainment, etc. to help determine if it will be a good fit.

Are You Ready For Renters?

Finding the right tenants is perhaps one of the most important parts of a successful real estate investment. Your tenants will be the benchmark of your success which is why it is important that you find the right ones. If you don’t, you may be dealing with property damage and unreliable payments which will eat into your profit.

For these reasons, it is important to not skip on the rental history, credit check, and background check on your potential renters. It is also important for you as the landlord to have landlord insurance and to require your renters to have renters insurance. This will help ensure that both of your personal properties will be protected in case of an emergency.

You will also need to decide when and how often you will check in on your property. Many landlords like to visit their properties 1-2 times per year to ensure everything is working properly and that there is no visible damage.  

Just like in your own home, your renters (at some point) will experience a plumbing problem, a broken faucet, a leaking roof, or other home damage and you need to be prepared to handle that problem. It is best if you are able to handle some of the smaller fixes yourself and save the larger expenses for other contractors as it will save you money.

What Are Your Goals?

Before diving into any new financial venture, it is important to assess your goals.

• Why are you interested in real estate investing?

• How will this type of investment add to your portfolio?

• Is real estate investing aligned with your other financial and personal goals?

Taking the time to look at your reasons for embarking on this new journey will help you determine if you are getting into this for the right reasons. You don’t want to tie up your assets just because it’s the “new thing” to do. You want to use your money in an intentional way, which is why it is important to take a step back and look at your goals.

How Does It Fit In The Big Picture?

Real estate investing will add a new dimension to your investment portfolio, but there are many ways to add diversification to your assets. It’s important to take a look at your overall portfolio and determine the type of portfolio you want to build. Do you see making real estate a large or small portion? How does it fit into your overall investment picture?

There are so many factors that go into owning and managing a property. From taxes to down payments to insurance, you will need to be financially prepared to take on the expense of a rental property. It is also important that you know the social responsibilities that come with real estate investing like finding the right renters and being able to secure new renters when the current tenants leave.

Even though it can be difficult, when done right, real estate investing can be one of your greatest tools for securing long-term profits. If you would like to talk about adding real estate to your investment portfolio, give me a call!