At the end of the day, the goal of investing is about making sure you have enough investment income to cover your “needs” and to support your “wants” for the duration of your life and perhaps, the life of others. Whatever that income number is, real estate can be a great component of your portfolio. Investing in rental homes can produce a steady stream of income, that doesn’t require your time daily, so you can be employed, be entrepreneurial, take care of family, be retired and/or pursue your passions at the same time.
Why Real Estate
As Warren Buffett advises “only invest in things you understand.” Most people understand residential real estate because they already live in a home and the basics of collecting rent and the need for property maintenance, taxes and insurance. If you take care of your property, it will take care of you. If you don’t want to or have the time to manage your properties, there are property managers that can handle just the initial leasing or everything for you.
Investor Tip: Its all about the numbers – make sure you have forecasted both income and expenses before making an offer to purchase. Cash flow is important!
Stock Versus Real Estate Investments
Real Estate shouldn’t be your only investment, but it does have advantages that generally aren’t available in the stock market. Cash flow – your rental property should generate cash flow from the start that goes into your pocket or is used for additional investment. Leverage and appreciation – when you purchase a property you are typically paying 25% down on the price of the property yet you earn appreciation on the total price of the property. When you purchase a stock, the appreciation is based upon the full price you pay for the stock. Debt reduction – your tenant pays your mortgage payment with their monthly rent. Stability – the stock market is much more volatile and can make huge swings up or down based upon things that don’t have much to do with the company you have stock in. Home values are more stable since people always need somewhere to live and prices take longer to move up and down since the process of selling a home takes longer.
The timing is good to purchase investment properties right now: low interest rates, low vacancy, and rising rental rates. Besides, due to the pandemic, there is currently a preference for renting homes versus apartments and since more employees can work remotely (some permanently) this means they can live further out from employment centers in areas where home prices are lower.
Investor Tip: Where you buy a rental home is very important as there are different rules and restrictions in place for landlords depending on which city and/or county the home is in.
Need to know more? Make sure you work with a real estate broker who has the…