You may know people who own a home, condo, duplex or fourplex as an investment and may wonder whether or not that sort of investment would be good for you. Like any other investment, real estate has its risks and offers an expected return.
To help you consider whether or not an investment in real estate is right for you, consider the following:
If you are handy around the house, can readily fix a broken toilet, replace a light fixture, are able to lay tile and think painting a wall is a form of entertainment for you, owning real estate could make sense. If you hate working around your own house and don't know a socket wrench from a crescent wrench, you'll be glad to know that mutual funds require no maintenance.
Financial Assets Make You Nervous
If financial assets like mutual funds, bonds and stocks make you a little nervous because you can't touch them, you're a good candidate for owning investment property. If you love checking your brokerage statement and tolerate the downs well enough to enjoy the ups, you may find real estate to be too demanding.
If you have the resources to make a good size down payment (most banks like to see a 30% down payment for investment properties) you could find that real estate investing works for you. If you can't swing a big down payment, don't swing for the fences; keep your money invested in financial assets until you've got that down payment.
If you have a good income that more than meets the needs of your family and that would allow you to cover big repairs, months when the tenants don't pay rent on time, and other foreseeable gaps in cash flow, you're in a pretty good position to invest in real estate. If you don't presently have that extra cash flow to support a cash flow problem with your real estate, keep your money invested in financial assets that will never ask you to chip in for a new roof.
To do the work of managing real estate yourself it helps to be around. If you're willing to hire all of the work done by others, you can do it from the other side of the world (I have), but that will eat into your profits.
If you are prepared to be sweet as pudding to prospective tenants and sour as a lemon to the ones who get behind on their rent, you may be ready for real estate. If you can't stand to be nice or, even worse, you can't stand to be mean, you may not be able to rent or collect the rent on your real estate.
If you understand that real estate appreciates slowly, that mortgage payments have to be paid every month and that returns take a long time, you may have the right mindset for real estate. If you expect real estate to quickly make you into a multimillionaire, you're simply expecting too much.
You've heard it before, right? There are two kinds of people in this world: those who like investing in real estate and those who don't. In my experience, those who like it and do it best are those who like to do most of the work themselves and who have used little or no debt to finance their real estate. Those who don't like it or don't do well are those who want to hire out all the physical work or who have used too much debt. Now, which one are you?