So you're looking to make a buck in the real estate game? There are plenty of methods out there to try to earn income in property investment. I spent a substantial number of hours in recent years evaluating doing so myself, even making several offers. The real estate market was hot, and I was outbid each time - thankfully. I've run the numbers, and frankly, there are better ways to invest your money. But if you've read my previous blogs, you know I'm not hear to tell you what to do. I only hope to arm you with information before making financial/career decisions. With that said, here are my considerations before jumping in.
Wish my lawn looked like this!
House/Condo Purchases
One of the most common ways to get involved in real estate investing is to purchase a second home/condo and rent it out. First, I recommend doing research yourself. Zillow is a great resource for finding listed properties as well as some critical information like features, school districts, taxes, etc. Next, figure out mortgage payments with a mortgage calculator. Lenders typically require 10% down payment for a rental property, so you will have to come with a good amount of money upfront. Of course, you need to include any and all expenses: HOA dues, taxes, insurance, utilities, maintenance, etc. An additional consideration is a turn-key rental service that handles tenant agreements, maintenance referral, etc. After getting a good feel for the costs and figuring out what you can afford, then I would enlist the help of a realtor. Be respectful of their time and narrow down to a few properties; if they have recommendations, certainly listen but don't feel obligated to see a property that doesn't meet your criteria.
Now it's the fun part... how much money you can make! Sites like Rent-O-Meter can give you an estimate, but I would recommend researching comparable properties listed for rent. Remember, set rent too low and you risk losing money; too high, you're stuck without income but all the costs! Consider your target tenant market - a single person? Larger family? Retiree? Account for time when your property is not rented out (a month per year?), including time off the bat for any renovations to make the property more appealing. Yup, count any renovations towards your costs. Finally, some good news - property tends to appreciate over time! If you hold it for the duration of a 30-year mortgage, the eventual sales price could be double what you paid! My loyal readers know I'm an Excel junkie, so I created a spreadsheet to calculate my true rate of return. Contact me through the Ask Me! part of my page and I'll send it to you. If you want to create your own, I recommend using Net Present Value (NPV) methodology to evaluate if it's a money-maker, using a lost-opportunity interest rate (I use a conservative stock market annual return of 5%). Spoiler alert - if you follow the steps above, it probably is a no-go. Even with appreciation and making more in rent than expenses per month, you still had to sink thousands of dollars initially. Remember, NPV accounts for time value of money, and you may be better off plowing your investment in a nice ETF or mutual fund. Of course, there are stock market risks, but don't we see the same things in real estate (remember 2009)? Plus, rental properties take a lot of time and effort. Getting a call at 9 PM on a Saturday night that the water heater burst is not my idea of a relaxing evening.
There's only one scenario where renting out a home makes financial sense based on my analysis. If you currently live in a house, and want to move into a new home, you retain the current house and rent it out. This saves you thousands in transaction costs up-front and changes the NPV substantially. The tricky part is floating two mortgages (assuming you haven't paid off the first mortgage). Obviously, if you are moving far away, you can still do this, but you probably want to hire a turn-key property manager to assist.
Flipping Properties
Oh, now you're slick. You're just going to buy a place, renovate it, and put it right back on the market for a nice profit? Over-produced reality shows where the cute couple purchases a "fixer-upper" and turns it into a beautiful estate is fantasy. They turn these projects over in a few weeks with the television network's clout; legions of interior designers and tradesmen aren't waiting around on your schedule. Most flips are done by companies, and have a staff of in-house or contracted project managers, designers, electricians, plumbers, carpenters, realtors, etc. jumping from job to job. They will have a portfolio of dozens of homes in progress. This is not to say you can't do this - but like the rental properties, run the numbers. Doing this once is difficult, but if you want to multiple flips over time, try to establish partnerships with key players to bring costs down and drive schedule efficiency.
A clearly-photoshopped guy, in very wrinkled pants, looking for his missing car keys.
A Nice Landing?
Perhaps you'd rather skip the building portion and just buy a piece of land. As the corny saying goes, it's a good investment because "they're not making any more of it!". If this for personal use like hunting, building a vacation home, etc., I would not necessarily consider it as a pure investment. Unless you're able to lease the land (e.g. farming), you will lose money each year on taxes and maintenance. But, if you're only looking to make a profit on this land acquisition, you're speculating on increased property values. Depending on the potential use, you'll have to outbid developers that have the same idea and, frankly, know a lot more than you do about land than you or I. Certainly, you could do your research and find a good opportunity, but it may be decades before you realize a gain when you are able to sell.
If You Find Yourself In Hotel Conference Room B...
Here's a tip - if there's a radio ad, unsolicited email, mailer, etc. for an "easy" way to make money in real estate, it's probably a scam. If they offer a free DVD, book, or lunch at a local hotel, yeah... that has pyramid scheme written all over it. If it was such a great idea, why do they need you? You're either going to be putting up your own money or spending your own time to buy into their program.
Human pyramid? Nope, just a bunch of sad sacks who fell for a pyramid scheme.
The "REIT" Choice?
Still like the idea of making some money in real estate, but want to avoid the sweat equity required to make it successful? Consider a REIT, or Real Estate Investment Trust! Similar to a mutual fund, it's a collection of investments, in this case properties, that return revenue. Think of it as buying fractions apartment complexes, office buildings, or industrial warehouses. You earn dividends based on the revenue coming in (rent paid by tenants). There are hundreds of publicly-traded REITs available for purchase through any stock trading platform (big fan of Fidelity myself). You can also buy or sell like a mutual fund on the open market, with minimal transaction fees compared to buying or selling a physical property. You do need to pay income taxes (versus dividend taxes) on your earnings. Also, management fees tend to be higher, which makes sense as you're essentially paying for the property management through your investment. My only caution is being selective on which classifications of properties you invest in. My two cents is the commercial office space investments are in for long-term pain; the combination of COVID-19 and ever-increasing work from home capabilities spell doom for the traditional office.
What's Right for You?
As you can see, there are multiple options for investing in real estate. How much you want to invest, and how much time and effort you're willing to put in, should dictate your decision. As my father imparted in me since I was a little guy, "think of the consequences of your actions". Buying a property, land, or falling for a real estate get-rich-quick scheme will have significant impacts on your finances. Take a measured, long-term approach before taking the plunge. Let me end on a lame property investment joke.
How many insects do you need to make money from your rental unit?
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