I am often asked, “Is Real Estate a good investment these days?” For me the answer: “It is always a good time to invest in Real Estate”. The question most people should be asking themselves is, “Do I want to invest in Property and what is required?” Let’s have a look at some the issues relating to Real Estate investing.
Personally, I have had a very positive experience with investing in property. Unfortunately, not everyone shares this experience. In fact, in his latest newsletter Abdo Romeo, Pat McKeough (the man behind the website, The Successful Investor Network) says, “If you buy property as an investment, you may discover that there are greater risks, and more work, than you bargained for”.
Just as investing in mutual funds, stocks and investment certificates is personal, so is the decision to invest in property. Your first step should be to weigh all your options and compare it to other forms of investing. Let’s look at just a few considerations you should be aware of when investing in property.
The first of these is “Financing“. A mortgage is a very common component of investing in property. The requirements for investment property are very different from the mortgage on the house you own as your personal residence. Fortunately, it is still easier to get financing for property than for stocks. The reason for this is the fact that real estate is less volatile and easier to appraise. Investing in property has a long history, which makes it easier for banks and financial institutions to analyze their risks. Its value also rarely drops dramatically overnight, as some stocks do from time to time. It’s important to remember that while leverage can enhance returns, it also can enhance risk. The amount of cash required to purchase investment real estate is more that the purchase of principal residence real estate. In some instances this ratio could be as high as 65/35. Where the buyer must come up with 35 percent of the purchase price plus closing costs.
The next consideration is what we call “Other Costs“. When investing in property it is important to be aware of all the associated costs and fees. Among these costs we find realtor commissions, lawyers’ fees; all of which make up what is commonly called “closing costs”. You will also be faced with other expenses such as property taxes, maintenance costs, utility expenses, insurance fees, and financing costs like mortgage interest. While there are also costs associated in stocks, mutual funds and securities, there are not quite as many variables to pay.
One must consider “Cash Flow” when purchasing property for investment reasons. Whether there will be a positive cash flow on your new property should play a major role in your investment decision. In order for a property to provide positive cash flow, the monthly rental income must exceed the expenses. This means the rental income must be greater than the mortgage, taxes, maintenance and other monthly expenses.
If you have to subsidize the monthly income, then you are going to find yourself in a negative cash flow situation. Unless you are willing to hang onto such a property for future possibilities of a large payout, it is wise not to invest in such a property. There are properties with potential for further development that will bring a large windfall and in such a case it is necessary to know the market well enough go guarantee a substantial return. A word of caution; an experienced property investor will never rely on market appreciation as a reason for purchasing investment property. No one has been able to predict the housing market with certainty over the short term.
You must be willing to put in the “Time and Effort” if you invest in property. We call this sweat equity. You will have to spend time dealing with tenants, arranging maintenance, doing the accounting and so on. If you have several properties you may find it easier to hire a property manager; but remember this will become another expense and will affect your cash flow.
The important thing to remember is that the investment return must be worth the time and effort you are willing to put into it.
One last detail to consider is the “Risk and Reward” factor. Just like stocks, property comes with risk. For one thing, property has liquidity risk. That is, it is harder to sell than stocks, mutual funds or other investments. You can get stuck with a property longer that you originally planned. You may also have to sell a property at a loss due to poor cash flow. There are risks is clear, however, some of the wealthiest people in the world have built their fortunes from real estate investing. Like so many other things in life, what you put into it is what you are likely to get out of it.