It’s a great feeling when retirement, IRA, 401K and investment accounts go up 20 percent in a year. But that can change on a dime if the stock market goes down 20 percent in a matter of weeks.
Traditionally, implementing a “buy and hold” strategy and remaining calm during market corrections results in long-term gains over time. Diversity with all of your investments remains the key o being financial solvency and healthy portfolio should include a mix of stocks, bonds, cash, real estate and other alternative investments.
Determining whether or not real estate investing makes sense should entail some research on the market and buying/selling trends.
Now some of the cons:
- Real estate is not a liquid asset if you need quick cash.
- Downturns in the economy can have significant impact on home values; you may lose money if you have to sell at the wrong time.
- “Flips” can turn to “flops.” TV shows, infomercials and seminars can be misleading, often overstating the amount of money to be made and understating the amount of costs and risks.
- Being a landlord can be tough. It involves managing tenants, maintaining the property, understanding the legal requirements and applicable landlord/tenant laws, and doing repairs. There is also the likelihood at some point you will deal with evicting a tenant and having months of vacancies with no rental income.
Some of the pros:
- Real estate typically realizes long-term gains as the market appreciates.
- Primary residences can often be purchased and financed with a monthly mortgage payment that is less expensive than renting and gains can be tax-free.
- Rental property can provide income and, in many cases, the rent exceeds the costs of the property (mortgage, taxes, insurance and other related expenses).
- Investment real estate can have significant tax benefits (speak to your financial advisor or CPA to determine how much you could save in income taxes).
- Second homes can be used for personal use and rented seasonally to offset a percentage of the expenses.
- Return on investment and financial gains generally are higher than many other types of investments.
When you are ready to explore real estate investing, consider these tips:
Partner with a realtor who specializes or is experienced in investment real estate. Savvy agents will know where the deals are and how to get the best balance of location, price and potential rental income.
If your first real estate investment will be your primary residence, your realtor and lender can advise you about down payment assistance, special financing with no-low money down, future rental income and a long-term plan for future real estate purchases.
Speak to a local lender who can advise you on how much you will qualify for, review your overall budget, structure the right financing, work with your financial professional to ensure this investment is in your best interest, and provide guidance from start to finish. Need assistance finding the right local realtor? Local lenders can refer you to experienced agents they have worked with and help you save time and money. These agents know of real estate opportunities that may not be listed for sale and can watch for a property that would meet your needs before it’s on the market.
Consult with your financial advisor, CPA or attorney and determine how much real estate should be part of your portfolio. In some cases, you can buy real estate through a self-directed IRA. This can be used for either the down payment or purchase price.
If you plan on purchasing investment property for short term rentals such as VRBO or AIRBNB, check with local government ordinances, whether taxes need to be collected and minimum rental periods. Some condos do not allow rentals less than six months. Even single-family homes and communities may have restrictions you should be aware of.
All investing has risk, and there are no guarantees you will make money in the stock market or by investing in real estate. It’s great to see our investments go up in value but be smart and be prepared for the down turns that will occur over time.