Is Real Estate a Good Investment?
I often get asked if real estate investing is a good idea.
My response is typically yes, but it depends.
The most important thing to know is that real estate investing is situational.
There are bad real estate investments and good real estate investments. The key is understanding what determines which category the property you are considering falls into.
While not an exhaustive list, here’s the top areas you need to keep in mind based on my experience as an advisor, investor, and what I’ve gleaned from conversations with other experts in the field.
Price Vs. Value
Contrary to some opinions in this space, you CAN overpay for property. While real estate generally appreciates over time, many different factors can keep this from happening for specific properties.
Other factors I will lay out shortly such as timeline can impact this to a great extent. It is vital to get an accurate appraisal as well as a local expert (or two) to weigh in on what they expect the value of the property to be in the future before making a purchase.
Rental properties can be especially attractive if you can generate positive cash flow right from the jump. This means you want to have a good idea of what rent you can get for the space along with a clear picture of the expenses and financing options.
In fact, the rising mortgage rates of the last year have made this aspect much more challenging for property owners. It is still workable but isn’t quite as easy as it was a few years ago.
Creating positive cash flow is usually what I encourage potential buyers to focus on because selling an appreciated property in the future can be troublesome due to….
Many people I talk to expect to buy a piece of real estate now and own it for several years before selling it to pay for some large expenses like college tuition, weddings, or retirement.
What they often don’t know or understand is that they will pay federal and state capital gains tax on the gain of the sale. The tax situation looks even worse if you have been taking advantage of depreciation while you owned it.
All in all, when it comes time to sell, most owners I work with are hesitant to actually pull the trigger and stroke a check of tens of thousands of dollars (or more) to Uncle Sam.
This especially is true in light of the fact that you can leave property to your kids through inheritance, and they will owe essentially no tax under the current rules!
Because of both taxes and cash flow, it is vital to keep in mind your timeline when considering a real estate purchase as an investment.
For short to intermediate term goals, you are often best served investing in a vehicle that offers more liquidity and suffers from less tax consequences than land or homes.
Also, since real estate is quite volatile and subject to large swings in pricing, shorter term investments are better suited for something more conservative.
Not everyone loves being a landlord. Owning and managing a property other than your primary residence comes with its own set of challenges.
This is certainly a factor when selecting a piece of real estate. Talk with your realtor and other experts to determine how much effort goes into maintaining the properties you are looking at. Weigh these with similar importance to the actual financials when making a purchasing decision.
In addition, I usually recommend offloading as much of the management responsibilities and duties to a professional firm, especially when you are getting started. These roles can overwhelm a new property owner when they aren’t used to them.
While there are many more factors to consider when deciding to dip your toes into real estate investing, these are a few of the places I recommend starting when vetting opportunities.
For those of you starting from zero, here’s the first baby steps to take.
- Start to write down your goals of why you want to own real estate and what you hope to accomplish.
- Talk to friends who own investment real estate. Ask them about the ups and downs.
- Have a conversation with a real estate agent who works in the space of investment properties.
These three steps will get you started in the right direction!
If you would like to talk about how real estate investing fits into your financial plan, feel free to schedule a time to talk with me. There is never any charge or commitment to see if I can help!