5 Questions to Ask Yourself Before Investing in Real Estate
So you’ve decided to get in on the real estate investment game. Great! Real estate is one of the best investments you can make, but before you make the big decision to become a landlord or a flipper, you have to have a plan. As with any investment, there are risks and benefits. Here are five questions to ask yourself before you decide whether or not you’re really ready to invest in real estate.
Am I really ready?
Being an experienced homeowner doesn’t magically make you ready to become an investor. Buying and owning investment property is very different from buying and owning a primary residence. This is not the “get rich quick” plan some tout it to be. Millenials are especially vulnerable to this myth. Don’t fall victim to those home improvement reality shows; there’s a lot that happens behind the scenes there. Owning an investment property is hard work. There are also many liabilities involved. Landlords must comply with fair housing regulations, building codes, and safety measures.
Do I have enough cash on hand?
Investing in real estate is a whole new financial ballgame. If you’re not paying cash for the house, you’ll need enough cash for a down payment and any other closing costs not paid by the seller. If you buy a fixer-upper, make sure your cash on hand exceeds whatever budget you set up. (And yes, having a budget is an absolute must.) Unexpected issues almost always crop up during renovation. You’ll also need to set money aside for regular maintenance and emergency repairs. If you rent the house out, a good rule of thumb is to put 10% of each month’s rent into an escrow account to prepare for any emergencies. Other expenses to prepare for are water/sewer, garbage pickup, and utilities (unless you leave those up to the tenant, which many landlords do), accounting, evictions, vacancies, possible legal fees, and capital improvements.
Am I prepared to deal with tenants?
Of course there are dream tenants who pay their rent on time each month and take care of your property like its their own. But let’s face it. If you own it for a while, you’ll probably end up with problem tenants at some point. A good landlord cannot be a doormat. Don’t let your sympathetic side get the best of you, because some tenants will take advantage of it. Don’t just threaten them with late fees and eviction; follow through. That brings us to the next question…
Will you manage your investment yourself or hire a property management company?
If you’re not sure you can check your sympathy and anxiety at the door, you can always turn the property over to a management company. They can find tenants and take care of all communication and financial dealings. A good property manager will decrease vacancy and have a working relationship with vendors to make repairs less expensive. Most companies take around 10% of the monthly rent for their management fee, which isn’t much in the grand scheme of things.
Do you have a plan and an exit strategy?
Don’t go into this blindly. Know what you’re going to do with your investment property and how long you will keep it. Because the housing market is constantly changing, you have to give yourself options. If you’re new to real estate investing, consider yourself a startup. Make a business plan with an end goal. Things might change along the way, but at the very least, you’ll have something to aim for.