Determining Whether You Should Invest in Real Estate

By Eric Tyson

Most people can succeed at investing in real estate if they’re willing to do their homework, which includes selecting top real estate professionals. Here, we ask several important questions to help you decide whether you have what it takes to succeed and be happy with real estate investments that involve managing property. Income-producing real estate isn’t a passive investment.

Do you have sufficient time?

Purchasing and owning investment real estate and being a landlord is time-consuming. The same way an uninformed owner can sell his property for less than it’s worth, if you fail to do your homework before purchasing property, you can end up overpaying or buying real estate with a slew of problems. Finding competent and ethical real estate professionals takes time. Investigating communities, neighborhoods, and zoning also soaks up plenty of hours, as does examining tenant issues with potential properties.

As for managing a property, you can hire a property manager to interview tenants, collect the rent, and solve problems such as leaky faucets and broken appliances, but doing so costs money and still requires some of your time.

Can you deal with problems?

Challenges and problems inevitably occur when you try to buy a property. Purchase negotiations can be stressful and frustrating. You can also count on some problems coming up when you own and manage investment real estate. Most tenants won’t care for a property the way property owners do.

If every little problem (especially those that you think may have been caused by your tenants) causes you distress, at a minimum, you should only own rental property with the assistance of a property manager. You should also question whether you’re really going to be happy owning investment property. The financial rewards come well down the road, but you live the day-to-day ownership headaches immediately.

Does real estate interest you?

In our experience, some of the best real estate investors have a curiosity and interest in real estate. If you don’t already possess it, such an interest and curiosity can be cultivated.

On the other hand, some people simply aren’t comfortable investing in rental property. For example, if you’ve had experience and success with stock market investing, you may be uncomfortable venturing into real estate investments. Some people are on a mission to start their own business and may prefer to channel the time and money into that outlet.

Can you handle market downturns?

Real estate investing isn’t for the faint of heart. Buying and holding real estate is a whole lot of fun when prices and rents are rising. But market downturns happen, and they test you emotionally as well as financially.

Consider the real estate market price declines that happened in most communities and types of property in the late 2000s. Such drops can present attractive buying opportunities for those with courage and cash.

No one has a crystal ball, though, so don’t expect to be able to buy at the precise bottom of prices and sell at the exact peak of your local market. Even if you make a smart buy now, you’ll inevitably end up holding some of your investment property during a difficult market (recessions where you have trouble finding and retaining quality tenants, where rents and property values may fall rather than rise). Do you have the financial wherewithal to handle such a downturn? How have you handled other investments when their values have fallen?