What to invest in and the risk vs. reward is the biggest decision most people face when diversifying their financial portfolio. And while stocks/mutual funds are always an option, real estate is often one of the more dependable, stable, and long-term ways to invest your money. Housing markets will rise and fall, but trends overall show that if you’re able to stick it out for the long game, there can be huge returns.
If this is something you’re considering, what are your options? How do you know if you are in the right place to invest your money? What is involved with having real estate investments? Let’s find out!
First, some pros and cons.
The pros. The tenant’s monthly rent payment makes this a unique investment cash flow wise as it can give you a regular monthly income. The mortgage interest, property tax, insurance, maintenance, and the utility bills (if those are included in your tenant’s monthly rent payments) can be deducted from your income, offsetting rental income. A rental property can be a great way to lower your overall tax bill. Also property values tend to go up over the long haul and your mortgage amount will go down over time.
Now, the cons. This is not some kind of free ride income. When you take on being a landlord, this is a job in and of itself. You have to be ready to take care of emergencies, disputes, maintenance and vacancies. And all of that can sometimes make it difficult to recoup overall cost. You don’t have a guarantee of when the property will sell and the exact price you will get unlike a mutual fund that you can liquidate whenever you choose. Also, you will need 20% down payment to finance a revenue purchase.
Still on board? Great! Let’s get into what to ask yourself before you move forward.
Do you have enough excess income or savings on a month-to-month basis to cover unexpected costs or vacancy without neglecting your existing obligations? Do you have good credit? Do you have the 20% down payment and closing costs ready to secure your financing? Keep in mind, you may be able to use existing home equity to get the 20% down payment.
If those answers are all yes, awesome! Then it’s worth starting to consider what type of property you want. Single-family homes and multiplex units are often the best bet for a good monthly return, and bigger is not always better. Especially as factors like schools, hospitals, public transportation, and businesses that surround the property are important as well.
Where to start?
If you’ve been nodding along this entire time, still fully on board, congrats: you’re in an incredible place to consider an investment property. The best thing you can do now is to get a mortgage pre-approval from an expert in revenue properties. Start keeping an eye on the rental markets in the area you’d like to invest in and start reaching out to experts to provide you with advice on the different real estate, tax, and financial decisions you’ll be making so you can put the best foot forward with this new adventure.