Investing into real estate can be a great way to add an income stream for anyone who is considering going down this path. Whether you are looking to buy a commercial property or a residential property, these types of investments can be very valuable, and they can be a differentiating asset.
When I was 20 years old and still in college, I purchased my first duplex. My parents had always been active in the real estate market, and their knowledge gave me a lot of insight into all of the possibilities that real estate has to offer.
While there can be many upsides, there are also multiple things that should be considered before closing on any type of property.
The first thing to consider is the amount of time you plan to allocate toward this investment. Small tasks that you might not even think about can slowly build up over time. Examples of this include: mowing the lawn, making small repairs around the property, cleaning the property when one tenant moves out, etc. You should ensure you have a plan when these types of things come up. Either you will need to take care of them yourself, or you will need to pay someone to do the work for you, which can be costly. Hiring a property manager is one option for landlords looking to outsource their work. When considering a property manager, you should be sure to interview them thoroughly, understand what value they will provide, and agree on fair compensation.
The next set of items to consider are the “invisible” costs that are associated with an investment property. These are all the costs you may not think about when looking at the face value of a property. Examples include: surveys, appraisals, closing costs, taxes, interest, property insurance, etc. Before accepting the first loan that is offered to you from a bank, you should shop around to see if another financial institution will give you a lower interest rate. It is also important to consider current average interest rates and make the conscious decision to either invest sooner or wait with hopes of rates dropping in the future. Furthermore, taxes are a huge financial requirement which must be planned for.
The third set of items to think about are the ways you can mitigate risk. One thing to consider is the possibility of moving sometime in your future. If there is a possibility of relocating to another area, it may not be the best idea to invest in real estate. It can be very inefficient when an issue arises at the property if you are far away from the location. While it may not be pleasant to think about a catastrophic event occurring, it is still a possibility, and it can be handled much more easily if you are closer. Some of this risk can be minimized if you have a property manager, but again you will need to pay someone else for all the work that you do not plan to do yourself. Another way to mitigate risk is by opening an LLC and placing the investment property into the name of the LLC. Benefits of putting an investment property into an LLC include: protecting your personal assets in case a tenant sues you for any reason, giving yourself more opportunities for tax breaks, and the potential to deduct some expenses such as rental income and mortgage interest.
The final thing to keep in mind when thinking about investing into real estate is the area around the property itself. It can be a much smarter investment to put money into an area which is appreciating, rather than depreciating. If many residents/businesses are moving out of the area, the property will indirectly lose value because the demand is slowly decreasing. Also it may be valuable to look into the school systems, public amenities, and the overall feel of a community. All of these things can either add value or take value away from your investment property.
Please note that there are many other variables which can impact the feasibility of investing into real estate, and the points that are written above are based on my personal experience.
If you would like to talk to an advisor about the possibility of investing into real estate, feel free to reach out, and we would be happy to sit down with you and discuss further!
