Investment Real Estate and Rental Properties – Is it a good idea or not?
Join Dave and Nick as they talk about the pros and cons of real estate as an investment strategy. Hear Dave’s opinion on why he decided it wasn’t for him.
There’s an adage when it comes to investing in real estate: they’re not making more of it, so the property should go up in value over time. And that’s true, to a certain extent. Although, as the last twenty years have shown, the ride can be bumpy along the way.
We often have financial planning clients ask us about real estate investments. Many times, they have seen or read that they should own rental real estate to earn passive income and avoid the financial markets. While investment real estate and a rental business may be a good investment in the right circumstances, there are a lot of considerations, and they are not for everyone.
Things to Consider with Investment Real Estate
- Stocks vs. Real Estate. Many investors see the stock market as risky because they can tune into the news every day and watch it fluctuate. They can log into their account and see their losses (as well as gains, but that never seems to be the focus) in real-time. Real estate feels different because it isn’t evaluated daily. This can create the illusion of stable prices but really it just means the market isn’t transparent.
- Real estate is not a liquid asset. That lack of transparency underlies one of the major drawbacks of real estate investments. To unlock your investment’s capital growth, you need to either sell it or borrow against it. Financial investments that trade every day may cause more heartburn as they fluctuate, but on any given day you can decide to liquidate at current prices if needed. Purchasing property, even with borrowed funds, can mean a significant amount of your capital can be tied up for long periods of time.
- Long-term investments. Lack of liquidity means that real estate must be viewed as a long-term investment. Flipping houses makes for great reality television, but unless you are extremely lucky – or don’t value the time and sweat equity you need to put into the investment to make it pay off – they don’t make for a good retirement plan.
- Borrowing. You can borrow to purchase real estate, which is often claimed as one of the reasons it can be a good investment. Borrowing, or leveraging, can be great when prices are rising. However, when prices are falling, borrowing compounds a landowner’s headaches: in a bad economy, renters may quit paying rent at the same time housing prices are dropping and selling property is difficult. However, the bank will still expect to be paid, and the more you have borrowed the more difficult the situation.
- Rental income is anything but passive. Being a landlord does not mean your only job is to walk to the mailbox to collect your rent checks and then deposit them. Handling rental applications and dealing with maintenance issues can easily become a full-time job. Before diving in, a would-be rental owner needs to really evaluate how much of a commitment makes sense. While there are management services available, in most cases hiring the work of operating rentals will take up most of the profits. Your time is valuable and managing your stress level is important.
- Stress. Being a landlord requires a certain personality, and it is not for everyone. The job requires an ability to handle stress and potential confrontation as renters come and go. Before deciding to become a landlord, you need to take a critical look at your comfort level with this type of business dealing.
- Risks and Returns. As with any investment, you must take risks if you expect a return. If real estate returns were guaranteed and rental income was risk-free, everyone would jump into the market. However, the returns would vanish as the increased number of rental units drove the price down. Make sure you are aware of the risks associated with the property you are purchasing and are prepared for them.
The Wrap Up on Investment Real Estate
Investment real estate and rental properties can be a good investment, but they are not for everyone. If you choose to add them to your portfolio, make sure you’ve considered the downside as well as the upside, treat the investment like a business, and recognize it has risks like any other investment.
About Shotwell Rutter Baer
Shotwell Rutter Baer is proud to be an independent, fee-only registered investment advisory firm. This means that we are only compensated by our clients for our knowledge and guidance — not from commissions by selling financial products. Our only motivation is to help you achieve financial freedom and peace of mind. By structuring our business this way we believe that many of the conflicts of interest that plague the financial services industry are eliminated. We work for our clients, period.
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