Welcome back for my second installment in this real estate investing series. My last article outlined some of the fantastic benefits of owning investment properties, but like any business venture, there are also some considerations to make and drawbacks to consider. When you’ve carefully weighed the pros and cons of this major investment and know what to expect from this type of property ownership, you will feel much more comfortable when the time comes to write an offer.
The purpose of sharing this information is not to scare anyone away from investing in real estate. It can actually be quite lucrative and enjoyable for many people, but I want you to be aware of the challenges you will face, especially as a new investor. The notion that investing in real estate equals easy, “passive” income is a bit misleading. Successful investors put in a great deal of time and effort, often much of their own “sweat equity”, into their properties. Be sure you’re ready to take on those responsibilities.
- Investment properties can be costly to buy, sell and operate. An investment in real estate is a significantly higher cost than other investments. This is a bigger financial commitment than buying stocks or buying a small interest in an existing business. Remember that you’re buying a house, which for most people is the single largest purchase they ever make. Investment properties are tangible assets that require regular, ongoing maintenance to keep them in great shape for tenants.
- Plan the management of the property/properties. Someone will need to handle the day-to-day operation of the property. Either you or someone you hire must make sure that everything is in working order. When you’re marketing and preparing for new tenants, you need to ensure the house is clean and the yard is in good shape. If something has been damaged due to weather, as the owner of the property, you are responsible for the repairs. It is possible that there could be something to tend to at the property several times per month. Another property management consideration is long-term maintenance. When you buy a property, some major details to factor in are the age and condition of the roof, HVAC, plumbing, and electrical systems. These things are costly updates and replacements, but eventually they will need to be done.
- Good investment properties can be hard to find. There are always affordable “fixer uppers” for sale, but that does not mean they can be turned into profitable investments. In addition to the home itself, consider other factors like the property’s location, proximity to businesses, restaurants, a university, etc. The condition of the home is also very important because you don’t want to invest in a money pit that will eat up your cash flow from rent payments.
- Real estate is not exactly a liquid investment. Stocks can be sold for a profit in a matter of seconds, but real estate transactions take time. Unless you intend to wholesale your real estate purchases, as an investor you need to be prepared to own a property for months or years and lease it while it appreciates. Eventually, you will make a profit when you sell but give it time to increase in value. Your profit long-term will come from renting to tenants.
- Owners take on liabilities. There are both legal and financial liabilities associated with owning investment properties. Ultimately, your name is on the mortgage, deed, taxes, and insurance for the property. Have a plan in place in case tenants do not pay their rent or there is damage or injury that occurs at the property. It is also your responsibility to make sure the property does not sit vacant between tenants and determining rent increases based on the market and appreciation. Don’t risk losing income or personal assets by overlooking these additional precautions. When it comes to your financial stake in this investment, take every action to ensure your security and success.
Like I mentioned at the beginning of this post, I am not sharing this information to scare new investors or dissuade anyone from starting a venture in real estate investing. Overall, this is a great business to get involved in, but there are risks in addition to the rewards. I want you to invest wisely with both eyes open and with enough education to understand what you are taking on. Enjoy this great adventure, and I look forward to hearing many of your success stories! Stay tuned for my last installment of this series next time. I’ve got a great interview set up with an investment-savvy Realtor.