Owning rental real estate can be extremely desirable. You get passive income, capital gains, and someone else is paying for your equity. No wonder it seems as though everyone wants to own a rental property. But is investing your money in real estate really worth it? Even though house prices today are incredibly high in some markets (i.e. Vancouver and Toronto), mortgage interest costs are near historic lows. While real estate has the opportunity to be an excellent long-term investment, it also carries the risk of your savings account dwindling to nearly nothing.
In this article, we’ll walk you through the basics of real estate investing, what you need to know, and if it’s the right decision for you. Let’s start with the basics. What is real estate investing?
Investing in real estate 101
When you invest in real estate, you are purchasing a piece of land or property in order to make income off it later. While investment property is supposed to end in a profit, some real estate will end up costing you money every month that you continue to own it. For example, a vacant piece of land that you hope to one day sell to a developer. It may be a great cash out at the end, but you still have to pay taxes and maintenance until you sell.
Other real estate investments will generate cash immediately. This can include apartments, rental homes, or even brick-and-mortar shops. Tenants will send you monthly rent, allowing you to pay the expenses while keeping the difference as profit. This is the most simple form of real estate investing.
For many investors, having a stream of income from a rental property works better than investing in stocks and bonds. They are able to enter the property and see it as a real, tangible asset. They can modify it to their preferences and use their own knowledge and skills to determine the rental rate. If the real estate is priced at an appropriate rental rate, you should enjoy a stable rate of return on your investment.
However, it’s important that you make sure you are ready to begin investing in real estate. Purchasing a home or piece of land can be expensive and you will need to put down a significant amount of money upfront. Don’t forget the ongoing maintenance costs that you would be responsible for, as well as the potential for a gap in income if you don’t have tenants.
Tips to get started in real estate investing
1. Plan out all of your expenses
Make sure that you account for the cost of the property, including property and income taxes, maintenance and upkeep, repairs, landlord insurance, and any other related costs. You’ll need to price your rental property properly so that all these expenses are fully covered.
2. Research the property beforehand
If you are investing in a property that you plan to sell later on, you need to research the property and surrounding neighbourhoods thoroughly. Is there any construction planned close to the land? Consider how that will affect the property value. You will also want to take a look at the neighbourhood and whether the area is up-and-coming, and other external factors that could have an effect on the property value.
Once you have done in-depth research, you should be able to make a smart decision on whether or not to purchase the property as an investment. Always keep in mind that investing is a risk. You have the potential to make money on your investment, but there is a chance you could lose money.
3. Start small
Some real estate investors begin their landlord journey by purchasing a home with a basement apartment, or a duplex, and then continue to live in one unit and rent out the other. This is a good way to enter the real estate market, but keep in mind you will be living with your tenants.
As your knowledge of being a landlord and managing an investment property grows, you may consider purchasing a larger property. This could lead to greater income potential. Once you own multiple properties, it will become easier to not only purchase these investments but also manage them. This leads to earning a greater return on your investments as well.
Pros of investing in real estate
1. Steady income
The majority of people often invest in real estate due to the steady stream of income they earn in the form of having a tenant pay rent. Depending on your location, you could potentially be earning enough income to cover your expenses and make extra money on the side. Urban cities or university/college towns tend to bring in more income because of the high demand for rental properties.
Location is key to smart real estate investing (like all real estate purchase decisions). If chosen wisely, you will be capable of securing steady cash flow for many years to come and potentially even saving towards your retirement.
2. Financial security
Investing in real estate will provide you with long-term financial security. When you have a steady flow of cash, the investment will bring you financial rewards for a long period of time. Owning a rental property can provide you with a sense of security due to appreciation in value over time.
With that said, however, there is no guarantee the value will increase indefinitely. That is why it is always recommended to thoroughly research the location before purchasing your property of choice.
3. Build equity for the future
When you invest in real estate using a mortgage, your tenant is usually the one who pays the mortgage costs. This in turn will increase your equity in the home and your overall net worth.
As you build equity, you now have the leverage to acquire additional rental properties and increase your cash flow.
4. Hedge against inflation
Investing in real estate is an excellent hedge against inflation. As the markets rise, so does the rental income you’re receiving from your property as well as your investment’s overall value. This means that real estate investors are protected against both the short and long-term effects of inflation.
Cons of investing in real estate
1. Hands-on work
Having an investment property takes a lot of time and hands-on work. Finding tenants, dealing with the midnight phone calls about property issues, and everything in between will take additional work and oversight.
2. Negative cash-flow
An investment property can cost you money every month if left unoccupied. You’re still required to pay taxes, upkeep with maintenance, insure your property and more. This means that if you find yourself with a vacant property, you could run into financial instability.
Investing in real estate can be a great financial move that may allow you to retire early. It’s important to remember that it is not a get-rich-quick scheme, and it is not easy. Real estate investing will take time, patience, flexibility, and ambition to be successful.
The bottom line
Of course, the sooner you get started in real estate investing, the easier it will be and the better off you will be years down the road. While the journey may not be easy, it can be extremely worthwhile in the long run.