Many investment and FIRE (Financially Independent, Retired Early) experts tout real estate investing as the surefire way to wealth. But, is real estate investing right for everyone? Here are a few questions you can ask yourself to help you determine whether or not real estate investments belong in your financial portfolio.
The following post is by MPFJ staff writer, Laurie Blank. Laurie is a wife, mother to 4 and homesteader who blogs about personal finance, self-sufficiency and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom and to a simpler, more peaceful life.
Many investment and FIRE (Financially Independent, Retired Early) experts tout real estate investing as the surefire way to wealth. Personally, I’m a big fan of real estate investing, and we are currently building our own cash stockpile to get us ready to invest in real estate.
You can grow your wealth through real estate in a number of ways. However, the two most popular avenues involve purchasing rental properties and purchasing properties to fix and flip.
But, is real estate investing right for everyone? Probably not. As with any other investment product, there are risks involved with investing in real estate. Before you go out and buy a rental property or rehab property, it’s important to know if you’re cut out for real estate investing, because not everyone is.
Here are a few questions you can ask yourself to help you determine whether or not real estate investments belong in your financial portfolio.
What Do I Know About Real Estate?
Investing in real estate - successfully at least – requires knowing many of the ins and outs of real estate in general and of real estate investing.
All that you need to know can be learned, but it’s going to take weeks – if not months – to educate yourself on what you need to know about real estate and investing in it.
Don’t believe those late-night infomercials that say you can achieve wealth through real estate in just a few hours. You’ll need to spend oodles of time educating yourself and researching all there is to know about real estate if you’re going to have serious success investing in it.
Do I Have a Solid Financial Situation?
It takes money to invest in real estate. Most lenders require a minimum of 20% down (usually more like 25 to 30 percent) to buy a rental property or fix and flip. You’ll also need to have a low debt-to-income ratio that will allow for you to be able to afford an additional house payment in case your property doesn’t rent as regularly as you’d like it to.
Similarly, if you’re looking to do fix and flips you’ll need to have the cash reserves to cover not only the down payment and closing costs but to cover any rehab costs as well. You can use OPM (Other Peoples’ Money) to cover these costs as some investors suggest, but doing so comes with a whole other set of risks that can result in legal proceedings and broken relationships if things don’t go as planned.
Do I Have the Time?
Investing in real estate takes time. LOTS of time. Not only do you need to be able to make the time to research real estate investing in general, you need to make time to search properties and go and view them if necessary.
Finding the right property can take weeks and even months of looking on the Internet, working with your realtor and going to view properties. Most successful property investors will tell you that they look at dozens of properties before they find the right one to buy for investment purposes.
Do I Have the Skills?
Owning real estate investment properties takes skill. With fix and flips, you need to know how to properly remodel a house. With rental properties, you need to be able to fix minor problems such as faucet leaks or broken door handles.
You do have the option to hire a property management firm that will take care of these things for you, but know that handing off management and repair of your properties has the potential to cut into your profits big time.
What About Peer-to-Peer Real Estate Investing?
There is another way to invest in real estate, and that’s called crowdfunded real estate investing.
Similarly to crowdfunded lending groups such as Prosper and Lending Club, there are companies out there that will offer you investment shares in other peoples’ real estate ventures.
Two of the biggest crowdfunded real estate investment firms are Realty Shares and Fundrise. Both offer the option to invest in real estate in a way that doesn’t require hands-on management or tens of thousands in cash.
If you’re interested in real estate investing but thinking that direct investments might not be the way to go for you, crowdfunded real estate investing could be an answer.
Conclusions
In summary, it’s important not to invest in real estate (or anything else) without having a clear picture of what you need to know and what tools are needed to maximize your chances of success. With proper research, however, real estate investing can be a great way to achieve financial security.
***Photo courtesy of https://www.flickr.com/photos/shotbynicci/8670765247/in/
