Should I Invest in Real Estate?

Should I Invest in Real Estate?

*This post is updated from its original posting about six months ago. I have been thinking about buying real estate to add to my portfolio. I thought a multi-family home next door to us would come on the market as a foreclosure, but that isn’t going to happen. So I have been thinking about how else, if at all, do I get into real estate. So while this was a thought experiment 3 years ago I still think about it a lot. I guess I am just waiting for the right opportunity.

This post is really more of a thought experiment than a reality. Part of the reason is that with the combination of my mortgage and our student loans I basically have two mortgages already, potentially adding a third, even if it is paid for with rent, sounds like a lot of risk and I don’t know if I want that much right now but I could be talked into it if the numbers made sense.

Many of the people are their way to financial independence own real estate as a means to diversify their income streams and have some passive income coming in so they can truly pursue their passions. As of this moment, if I were to retire early or something, my only income stream would be from some investments. However, if the market goes down I would presumably lower my withdrawals and lower my income. It can be somewhat perilous to have all of your eggs in one basket. Because of that I have thought about what it might be like to buy a 2 or 3 family home. Two and three family homes are huge in the Northeast where I live. You can purchase one, live in one unit, and basically have your tenants pay part or all of your mortgage. Sounds like a pretty good deal.

Another reason for this thought experiment is I have been thinking a lot about what the next five years should bring. As my parents get older should I make it a priority to move closer to my home state? What about our children (if we have them) and their grandparents? What if we want to live abroad for a while? Having passive income through rent would be a great way to supplement our income and I wouldn’t have to worry so much about staying somewhere or going somewhere I don’t necessarily care to be (that is not the case currently).

Potential Real Estate Investing For Me

For me it seems like there are two major ways to invest: 1) buy a property; 2) invest in REITs (real estate investment trust).

The advantage of buying a rental house is that I could physically see, feel, and touch the property. It would an asset right up front. I could get tangible income from it right away. However, there are several draw backs.

First, I have only bought one house in my life. I would have to learn how to spot a “good” deal on real estate. I wouldn’t just want to buy anything.

Second, I am not a handy person. I am not going to be a landlord that comes over in the middle of the night. I could hire a property company to manage the property and find tenants, but they would take at least 10-15% of the income for their fee.

The biggest drawback is getting the money to buy the property. I have equity in my own home that I could leverage to buy a property. However, what happens if I don’t have renters? Or they destroy the house? Carrying two mortgages and not having a way to pay for that 2nd home would be a lot of risk. Do I want to take that risk at my age? Mrs. ROB and I have a lot of student loan debt that will take away to pay off can I realistically afford it?

The other way to invest in real estate for me is REIT (real estate investment trust). REITs can be a great thing because they are like a mutual fund where you are buying slices of all kinds of properties. You diversify your risk from just one property. You don’t have to worry about if the sink breaks down. You don’t have to worry about tenants. Additionally, I could invest in it at a much lower cost. I wouldn’t have to carry a mortgage and debt.

However, REITs can be risky. First, there is no guarantee that the basket of real estate you are buying will go up in value. You don’t necessarily have visible tangible evidence of this particular piece of real estate.

Second, REITs aren’t large pieces of your net worth. When you buy a rental home it is worth whatever it is appraised with. With REITs there is no large piece of property. If you invest $2000 you investment is $2000. If you put a down payment on a house for $2000, the physical property is probably worth in the six figure range, plus you might have larger equity, which increases your net worth.

One of the biggest drawbacks with a REIT is the fact that it doesn’t provide the passive income that you might want. When you have a tenant paying your mortgage and potentially clearing a few hundred dollars per month or more than you have that cash instantly. REITs often pay out dividends (like a mutual fund or stock) but it might or might not be monthly. You don’t have the passive income and cash flow like you do from a property.

Intellectually, I like the idea of being a landlord. I love the idea of having someone else pay my mortgage. However, realistically I don’t know if it is possible or even likely. I am not handy. I don’t necessarily want to deal with the hassle of other tenants, but I love the idea of multiple streams of income to free me up to be able to do what I want.

This isn’t a conundrum I am going to solve anytime soon. And considering mortgage rates are going up I might have missed my window to get a great deal on real estate. I might just have to go with REIT or continue on with my normal investments.

Any thoughts? For those of you who are landlords any advice? Drawbacks? What would you advise?

12 thoughts on “Should I Invest in Real Estate?

  1. You will be able to find thousands of articles for and against owning rental property. I, personally, was a landlord and as much as I love real estate and believe it should be in everyone’s portfolio, I do know want to be a ‘landlord’ again.

    Ever thought about real estate crowdfunding?

    I am enjoying being a ‘passive’ landlord with crowdfunding at this stage of my life. Less hassle and not as much capital locked up. Even the capital that does go into the investment, I am sticking with investments that are 12-24 months in duration.

    1. Hi Church,
      I have thought about real estate crowdfunding, but my net worth isn’t quite high enough for Realty Shares. I have thought about REITs and could do some through one of my investment accounts, but I was thinking about being more hands on. Still trying to think through it all. Thanks for stopping by.

  2. I think that investing can be a smart decision for anyone and can add significantly add to someone’s wealth, if they are willing to put some time and effort in to it. One of the most important parts to investing in real estate is finding the right property at the right price. Many people spend far too much money on a property they are looking to rent out.

    The industry has the 1% principle. You should be able to receive about 1% percent of the purchase price back in rents to make a profit. Example: If you purchase a house for $100K you should be able to rent the unit out for $1,000/month. At times, this principle seems like a stretch because of inflated home purchase prices, but following the principle will keep you from loosing your shirt.

    I also recommend finding a really good management company. I never had the desire to be called at 3 in morning to fix a leaky toilet. They make renting a super easy experience. If you do some research you can probably find a company that will manage a property for 7 to 10%, 10 to 15% seems a little high for management fees. In the end, I think the price is well worth the investment.

    1. I agree Sam. My only reservation is two-fold: 1) finding the right property that is a deal; 2) dealing with renters and finding that management company; 3) also coming up with 25% to put down on a rental property is a barrier. Crowdfunding is a possible answer, but real estate, while I know a lot of the basics is not my realm of expertise. I am much more comfortable with mutual funds and the like. That stuff I know pretty well (at least I hope).

  3. I’ve been really interested in real estate investing recently. I did buy a rental property out-of-state 2 years ago. Trying to save up to buy more. I think buying a multi-family to live in and to rent a portion would be the best way to start. You get cheaper interest rates and the rent can cover most or all of your mortgage. Unfortunately I couldn’t do that here in NYC where a multi-family house is like a million bucks! I understand being wary of the risks but my out-of-state rental has a monthly payment of about $478. If it was vacant, I’d be able to cover it. It hasn’t been though and the property manager takes care of most things since I don’t want to be a landlord.

    1. I think that is great you did a rental. Why did you choose the place you did? I mean I have thought about looking in other areas of the country (e.g. my hometown) where real estate is more affordable. The problem is I wouldn’t be living in it. If I could go back I probably would buy a two-family or three family, rent one and then live in the other unit.

      1. After doing some research, there were a few cities that popped up as good places cash flow rental investments with strong rental demand and a good economy. Kansas City, MO, Indy, Memphis were some I considered. I went to with KC as I felt comfortable with the provider who was highly recommended. I’ve also read that some consider KC “silicon prairie” and there are a lot of tech jobs there…Google Fiber also chose that as the first city to install it’s fiber optics network. What part of the country do you live in?

        1. KC is a good choice, particularly with Overland Park nearby. Good choices. I live in the New England area where rentals are expensive although my city isn’t bad (Providence). I have been thinking about doing it closer to my home state of MN!

  4. I really like that you mention why the tangibility of real estate is appealing to you. I feel the same way, where investing in real estate seems more legitimate than other investment means. This is something to keep in mind when I’m looking at purchasing a rental home because while I’m in a similar situation with my current mortgage, a rental home really could be a real and experimental venture. Thanks for your post!

    1. I would love to hear your perspective on the issues that you are facing. And what is determining where you are in the process.

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