On the heels of a recession that saw home values drop, many would-be investors have shied away from buying investment properties. But real estate has historically remained a sound investment, boasting a long-term appreciation rate that makes it a worthwhile investment for those who can withstand temporary setbacks in housing prices and hold on to their properties over the long haul.
But investors are often nervous as they look for their first properties. Uncertainty about housing prices aside, investing in real estate also is risky, and first-time investors need to be comfortable with such risk in order to make the most of their investments. The following are a few things potential real estate investors should consider as they decide if investing in real estate is right for them.
Real estate investors typically have tenants, and those tenants inevitably have needs. Investors who have experience as contractors may not find it difficult to renovate a property and make it more attractive to tenants, nor are they likely to be inconvenienced when minor issues on the property need to be addressed. Investors with no such experience will need to hire contractors to do the work for them, cutting into potential profits down the road. In addition, investors who don’t have the ability and/or the time to address minor issues like a clogged drain or a drafty window on their own will need to hire a property management firm to tend to such needs. Such firms are effective, but also expensive, further cutting into your profits. Even those investors with contracting experience may have little or no knowledge of how the leasing process works, forcing them to rely on a real estate firm to write up leases and ensure all leases stay current. This, too, can cut into an investor’s profits. Investors who don’t bring any relevant expertise to the table can still make a profit from their real estate investments, but those profits likely won’t be as significant when outside companies must be hired to ensure the property is in good shape and all necessary documents are in order and up-to-date.
Real estate is often a time-consuming investment. Tenants pay good money to live in attractive rental properties, and those tenants will have a host of needs that must be met. Investors must be sure they have the time to address their tenants’ concerns, especially investors with no plans to hire property management firms. Potential investors who already have full plates at work and at home may not be able to devote the time necessary to make the most of their real estate investments, and therefore might be better off finding another way to invest their money.
Time also must be considered when considering profits. Real estate is not the type of investment that turns a profit overnight. Even investors who are looking to invest in an up-and-coming neighborhood must be prepared to hold onto their properties for at least a few years, if not much longer, to maximize their investments. Though real estate is a sound investment, it is not a get rich quick type of investment, so investors looking to make a quick buck should consider alternatives before buying investment properties.
First-time real estate investors might be wise to choose a smaller property for their initial investment. Larger properties can be overwhelming to manage, and investors often rely on property management firms to tend to these properties. Such firms charge more to manage bigger properties, which can eat into investors’ finances. Veteran investors can handle such overhead costs, but first-timers might find themselves caught off guard upon realizing the gravity of their financial commitment. A good rule of thumb for first-time investors is to stick to smaller properties, only moving on to larger buildings once they are fully comfortable with all that comes with investing in real estate.
The cost of a real estate investment goes beyond the purchase price of the home. In addition to the mortgage on the property, investors must pay the taxes and insurance on the property, as well as any costs associated with maintaining and managing the property. Certain tax breaks are available to real estate investors depending on where they live. For example, in the United States, taxes on the profits when a property is sold may be deferred if those profits are immediately rolled into another property (such a deferment is only available to those investors who arrange this exchange prior to selling the initial property). Potential investors need to consider all of these costs, and might want to hire a real estate lawyer to help them make the most of their investments and any profits they yield. But even hiring an attorney is an additional cost investors must consider before investing.