It has been long held that real estate investing can be an excellent addition to a portfolio. The past two years’ run-up of property values may certainly make one consider investing in this market, but whether you think there is still opportunity or you’ve missed the mark, there are many long-term aspects to single family home investing one should consider.
The very first question is why are you even considering investing in residential housing? Is it rental income you seek or capital gains? If the latter, do you think a particular market will pop soon or do you think in future years the market will bear fruit. These questions should also be asked in conjunction with your financial advisor as real estate can have capital commitments that can impact an overall budget.
Rental
Consistent income from property has a strong appeal, but most experts agree that it can be very difficult to make rental income work from just one property. All it takes is one blown furnace to erase your annual profit. Of course, the old maxim of “Location, Location, Location” is everything in real estate, so the location you have in mind might command a strong rental premium and if you have a very low mortgage then the monthly cash flow could be strong. Keep in mind that insurance policies and mortgage rates are more expensive with investment rental properties. It is for all these reasons that the pro’s often suggest owning many properties or going with multi-family properties to offset these risks and higher costs.
Flips
Getting in and getting out quickly can be a lower risk way to enjoy property profits. Most buyers cannot see through dated kitchens, baths, paint and run-down landscaping, so these are the investments in a flip property that give the biggest return. Working with a seasoned local realtor and pouring through Zillow are going to be invaluable assets in knowing what the market will bear for both home acquisition and sale price.
Fixer-Uppers
If you do not enjoy swinging a hammer, be prepared to dip into your own pocket more for the market that normally has the biggest profit potential. In general, the worse it looks, the more theoretical gains you can enjoy. A home formerly owned by hoarders, defaulters, or heirs that don’t keep the heat on can be goldmines for the right flipper. The big risk is when you start taking down sheetrock or plaster, what are you going to find? Every single surprise means more money eroding profit. A watchful eye on the expenses compared to the eventual sale price is everything in this residential play. If you don’t have an affinity for renovations, you may not know if what your contractors are suggesting is sound advice or not. It is not uncommon for the first timer to take a loss on their inaugural fixer-upper.
However, if you are handy, have time, are fit and have enough capital reserves to account for that unforeseen issue, flipping a home in poor condition can be one of the most lucrative ways to play the real estate market. It also can be incredibly gratifying to create a new home for a future family to enjoy.
As with all investments, be sure to involve your financial advisor so you do not fall into the trap of falling in love with your new creation at the expense of your overall wealth well-being.
Related: Save 6% and Sell Your Own Home?