If you’re in a position to make investments towards your future, you’ve probably been told to diversify. The reason for this is because every investment comes with risks.
One way to diversify, in addition to investing in stocks and bonds, is to invest in real estate. But is real estate a good investment? The answer really depends on a lot of factors.
Read on to learn more about real estate investing and to discover if it’s the right match for you.
What is a Real Estate Investment?
First, it’s important to clear up the distinction between what is a real estate investment and what isn’t. Your home isn’t considered an investment. You might be scratching your head on this one. Isn’t that why you bought it?
Home ownership isn’t a bad place to put your money, but you’re not going to make money from it.
Over time, the value of most homes increases at the same rate as inflation, especially when considering mortgage interest, taxes, renovations, and upkeep. But, when the mortgage is paid off, you will have a home to live in after retirement, and you can pass this investment on to your children.
When talking about real estate investments, we’re referring to rental income. That is unless we’re contractors who can flip a house after renovating. Putting that category aside, let’s take a look at how much money is needed for long-term real estate investing.
Have Money to Make Money
It goes without saying that you have to have money to invest. The same holds true when investing in real estate. When answering the question, “is real estate a good investment?”, one of the factors to consider is how much money you have to invest.
Most financial experts advise against borrowing money to purchase real estate investments. You wouldn’t borrow money to purchase stock, and the same holds true for real estate.
It’s best to pay cash if you can. Otherwise, a minimum of 20% down is recommended. At the very least, you should be able to pay the mortgage payments with or without renters. There will be times when your property will go unrented, and covering the costs is essential.
Other costs to consider, are taxes, maintenance and upkeep, renovations, and cleaning costs after renters move out.
If you don’t have the skills or time to handle necessary repairs or a property, as well as advertising property and collecting rent, then that can save you some money. But many investors find it easier to have property managers handle those tasks, which is an additional expense.
Finally, investment property is a long-term investment, and your money will be tied up. Do not invest in real estate if you’re counting on an immediate pay-off.
Where to Buy?
Location, location, location. Do your research, and invest in property that will hold or increase its value. These markets do fluctuate, but it’s not a bad idea to buy property or land in an area that has a growing market.
Take a look at the job market, school districts, and ease of transportation in the city you’re buying in. Also, investigate the property itself, such as if there’s a lien on the property and the neighborhood.
For instance, Florida is a hot market right now. The economy is strong, and the price of homes are dropping. But condos are considered to not be a good investment, and Florida does have hurricanes. Check out Bigger Equity for more on this topic.
All investments are risks. If you’re wondering, “is real estate a good investment?”, it’s less volatile than other kinds of investments. If you play your cards right and do your research, real estate can be far less risky than most other investments.
What Kind of Real Estate is Best?
There are a lot of options when it comes to property investments–duplexes, apartments, commercial real estate, to name a few. It’s always best to start small and build.
Many real estate investors start with a single rental unit, like a duplex or basement apartment. Test the waters first.
One option is to purchase a duplex where you live in one half and rent out the other. If you can set up a situation where the rent from the duplex pays for the entire mortgage and taxes of both sides of the house, you’re golden.
As mentioned, you should have enough income to pay the mortgage in the event that the other half isn’t rented out right away or there are gaps when the property isn’t rented or in need of renovation.
When things have settled and income is earned from this first property, you can consider purchasing an additional income property. The more property you own, the larger the income potential.
With property income also comes some tax advantages. If you are a business owner, the tax advantage can leverage. Mortgage interest, property taxes, depreciation, and losses can be deducted from your taxes.
Capital gains taxes can be deferred if you decide to sell the property and reinvest in another property.
Rental income will affect your tax bracket and is subject to income tax.
Is Real Estate a Good Investment?
In the long run, the short answer is yes, with conditions. If you have enough income without having to borrow too much. It’s a less volatile investment than other kinds of investments. And it’s a good way to diversify.
If you have the patience to manage this kind of additional income and are able to budget in property upkeep and the cost of hiring a property manager, one or more rental properties can, over time, bring in a considerable amount of income.
If you have done your research and purchase property in an up-and-coming neighborhood, real estate can be an excellent investment.
Is Real Estate a Good Investment? If you can answer “yes” to all of the above “ifs”.