A few questions to ask before you invest in real estate
Most people can succeed at investing in real estate if they’re willing to do their homework. Following, are 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.
Do you have sufficient time?
Purchasing and owning investment real estate and being a landlord are time consuming. The same way an uninformed owner can sell 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.
Of course, if you hire a competent and experienced property manager, you will be rewarded with less time required for oversight.
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 causes you distress, at a minimum, you should only own rental property with the assistance of a property manager.
Does real estate interest you?
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.
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.
No one has a crystal ball, so don’t expect to be able to buy at the precise bottom of prices and sell at an 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 (and emotional) wherewithal to handle such a downturn? How have you handled other investments when their values have fallen?
Different ways to invest in residential real estate
The first (and one of the best) real estate investments for many people is a home in which to live. Following, are some investment possibilities inherent in buying a home for your own use, including potential profit to be had from converting your home to a rental or fixing it up and selling it.
Buy a place of your own
Unless you expect to move within the next few years, buying a place may make good long-term financial sense. (Even if you need to relocate, you may decide to continue owning the property and use it as a rental property.)
In most real estate markets, owning usually costs less than renting over the long haul and allows you to build equity (the dollar difference between market value and the current balance of the mortgage loans against the property) in an asset.
Convert your home to a rental
Turning your current home into a rental property when you move is a simple way to buy and own more properties. You can do this multiple times (as you move out of homes you own over the years), and you can do this strategy of acquiring rental properties not only with a house, but also with a duplex or another small multi-unit rental property where you reside in one of the units.
This approach is an option if you’re already considering investing in real estate (either now or in the future), and you can afford to own two or more properties.
Holding onto your current home when you’re buying a new one is more advisable if you’re moving within the same area so that you’re close by to manage the property.
Invest and live in well-situated fixer-uppers
Serial home selling is a variation on the tried-and-true real estate investment strategy of investing in well-located fixer-upper homes where you can invest your time, sweat equity, and materials to make improvements that add more value than they cost.
The only catch is that you must actually move into the fixer-upper for at least 24 months to earn the full homeowner’s capital gains exemption of up to $250,000 for single taxpayers and $500,000 for married couples filing jointly.
Be sure to buy a home in need of that special TLC in a great neighborhood where you’re willing to live for 24 months or more.
Purchase a vacation home
Many people of means expand their real estate holdings by purchasing a vacation home — a home in an area where they enjoy taking pleasure trips. For most people, buying a vacation home is more of a consumption decision than it is an investment decision. That’s not to say that you can’t make a profit from owning a second home. However, potential investment returns shouldn’t be the main reason you buy a second home.
Before you buy a second home, weigh all the pros and cons. If you have a partner with whom you’re buying the property, have a candid discussion. Also consult with your tax advisor for other tax-saving strategies for your second home or vacation home.
Your real estate investment team
For most people, real estate investing is hands-on and complicated enough to require the services and knowledge of a team of professionals.
The following is a list of different real estate professionals and service providers you should consider teaming up with as you search for real estate investment opportunities and proceed with the purchase of property:
- Tax advisor: A good tax advisor can highlight potential benefits and pitfalls of different real estate investment strategies. Make sure that your tax person has experience with real estate investing and understands your needs and specific goals in regard to your property investments.
- Financial advisor: If you’ve worked with or can locate a financial advisor who sells their time and nothing else, consider hiring them. A true financial advisor can help you understand how real estate investment property purchases fit with your overall financial situation and goals.
- Lender or mortgage broker: Postpone making an appointment to look at investment properties until after you examine the loans available. You have two resources to consult:
- A lender is any firm, public or private, that directly loans you the cash you need to purchase your property. This type of lender is often referred to as a direct lender. Most often, your list of possible lenders includes banks, credit unions, and private lenders (including property sellers). Lenders tend to specialize in certain types of loans.
- A mortgage broker is a service provider who presents your request for a loan to a variety of different lenders in order to find the best financing for your particular needs. Just like real estate or insurance brokers, a good mortgage broker can be a real asset to your team.
- Broker or agent: Your investment team should include a sharp and energetic real estate broker or agent. All real estate brokers and agents are licensed by the state in which they perform their services.A real estate broker is the highest level of licensed real estate professional, and a licensed real estate sales agent is qualified to handle real estate listings and transactions under the supervision of a broker. The vast majority of real estate licensees are sales agents.
- Appraiser: An appraiser can be an effective team member if your real estate investment strategy involves buying and selling properties with somewhat-hidden opportunities to add value. Appraisers see many properties over their career and thus often possess insight into real estate opportunities that others miss.
- Attorney: If you live in an area where attorneys aren’t usually involved in real estate transactions, an attorney may not be necessary. In some states, having an attorney is essential to handle the transaction and closing.In any case, you should consult with an experienced real estate attorney as your investments increase in size and complexity. With more complicated transactions, have the attorney review the documents — even in states where the title or escrow company handles the paperwork and serves as the independent intermediary or closing agent.A good real estate attorney can help you structure proposed transactions. Particularly if you’re looking into a large transaction where you assume loans or you’re attempting to secure special financing, a competent real estate attorney can be invaluable.