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Fixing a leaky faucet, re-painting walls, or patching holes in the drywall. That’s what it takes to get into real estate investments, right?
Well, not exactly.
Being a landlord is one way to invest in real estate, with potential income as well as costs and responsibilities.
Still, it’s not the only path you can take to becoming a real estate investor.
Real estate can offer income and long-term growth, but returns vary and you can lose money.
It all starts with knowing what you’re getting into. You’ve got plenty of investment options, but that doesn’t mean it’s going to be a walk in the park. So, if you’re just starting out, keep reading!
We’ll explain some options for getting into real estate investments and the costs and risks to consider before you begin.
Like we mentioned earlier, you don’t have to become a landlord to invest in real estate.
That’s where real estate investment trusts (REITs) come in.
A REIT is a company that owns or finances income-producing real estate, such as malls, apartment buildings, warehouses, or mortgages. Buying shares lets you invest without buying and managing a property yourself.
Publicly traded REITs trade on stock exchanges. Other REITs are not publicly traded and can be harder to sell, so it’s important to understand which type you’re considering.
REITs still carry investment risk. Share prices and income can decline, and returns are not guaranteed. Changes in interest rates and property markets can affect their value.
Before investing, research the REIT’s holdings, fees, risks, and how easily you could sell your investment. Consider how it fits your goals, time horizon, and ability to absorb losses.
You’re probably thinking…
Doesn’t this option mean I’ll have to be a landlord?
Yes. One potential benefit of renting out a vacation home is that you may also be able to use it yourself for part of the year.
Personal use affects the tax treatment. Under IRS rules for rental and personal use, a dwelling is treated as a residence if personal use exceeds the greater of 14 days or 10% of the days rented to others at a fair rental price. This can limit rental expense deductions.
If you’re considering a second home, remember that mortgage occupancy rules are separate from tax rules. Describe your intended use accurately to your lender and confirm the requirements for your loan.
Down payments, interest rates, and eligibility depend on the property, its use, your qualifications, and the loan program.
You may choose to hire a property manager. Fees and services vary, so get quotes and include management, cleaning, maintenance, insurance, taxes, and vacancies in your budget. Managing it yourself also takes time and work.
Vacation rentals can generate income, but bookings and profits vary. Check local rental rules and any homeowners association restrictions before buying.
When you “house hack,” you rent out rooms in your home or other units in a property where you also live.
Rental income may help cover your monthly mortgage payment and other housing costs. Living in the property may affect financing options, but it does not eliminate lending requirements or the costs of being a landlord.
For a simplified example, suppose you live in one unit of a triplex and rent the other two for $700 each per month. Assume your monthly mortgage payment, property taxes, and insurance total $1,100. These are illustrative amounts, not a current mortgage quote or a rental forecast.
The $1,400 in rent would leave $300 after those assumed housing costs, but before repairs, vacancies, management, utilities you cover, and other expenses. That $300 is not net profit, and actual cash flow could be negative.
House hacking also involves landlord responsibilities and possible privacy tradeoffs. Renting rooms may mean sharing common areas; a triplex may have separate living spaces. Check local rental rules and budget for upkeep before committing.
You’re probably familiar with this investing strategy: buy a house that needs work, renovate it, and try to sell it for more than your total costs.
The difference between the purchase price and sale price is not your net profit. Renovations, financing, taxes, insurance, utilities, closing costs, and selling expenses all affect the result.
Of course, it’s never as simple as fix and flip.
Big rewards mean big risks, and if you’re not careful you could lose thousands or hundreds of thousands of dollars on your investment.
Some investors use the “70% rule” as a rough screening guideline: an estimated purchase price no higher than 70% of the expected after-repair value, minus estimated repair costs. It is not a guarantee of profit or a substitute for a detailed budget.
So, budget before you buy. Evaluate all costs, a realistic selling price, the time needed to complete and sell the property, and a reserve for unexpected expenses.
There’s a lot to look out for when you decide to flip a house. Consider the property’s condition, location, and comparable sales. A low asking price alone does not make a good investment.
Property values can fall, repairs can cost more than expected, and a sale can take longer than planned. Consider whether you could absorb those setbacks before buying.
There’s no doubt about it:
Investing in real estate doesn’t typically come cheap.
REIT shares may require less upfront capital than buying a property, but both approaches involve risk.
For a property purchase, plan for upfront costs, ongoing expenses, and cash reserves. Having enough for a down payment does not necessarily mean you can afford the investment.
If you finance the purchase, your mortgage payment will be an ongoing expense. The loan amount, rate, and repayment term affect the payment and total interest.
Compare expected income with all ownership costs, and allow for repairs and periods without rental income. Paying debt down faster may reduce interest, but you also need available cash for those expenses.
Whether you’re a homeowner or an investor, understanding your cash flow is part of planning for debt repayment and future purchases.
That’s where the Money Max Account can help. Money Max is financial software that uses the income, expenses, balances, and loan terms you enter to calculate payoff projections and suggested payment timing and amounts.
You can use those projections to explore how changes in your available cash flow may affect your payoff timeline and interest costs. Results depend on your circumstances, the accuracy of your information, interest rates, and the payments you actually make.
Money Max does not receive your debt payments or consolidate your loans. You continue making payments through your financial institutions. It is not an investment adviser and does not select investments or guarantee investment returns.
Before committing extra money to debt repayment, consider the reserves you need for property expenses and other obligations. For advice about a specific investment, loan, or tax situation, consult an appropriately qualified professional.
To learn more about using Money Max to track cash flow and explore payoff scenarios, visit our website or contact us with your questions.