Real estate investing is perhaps one of the oldest investment tools around, predating stock markets and many modern-day financial vehicles.
While the simplest version – renting to provide an immediate and fairly consistent return on investment – may seem easy, real estate investing isn’t for everyone.
Under the right circumstances and with the best approach, real estate investments may yield rewards like tax advantages and an excellent rate of return. Additionally, the real estate market usually experiences less volatility than stocks, meaning there’s generally more predictability. Most times, real estate only increases in value over time — the longer you hold on to your real estate investment, the more it appreciates.
But real estate investing, which is usually a long-term commitment, also comes with responsibility, such as taking care of a property, managing tenants, and taking on significant financial investments along the way.
Is it for everyone? Definitely not. In fact, certain personality traits lend themselves to successful real estate investing. It may be for you if:
You can think on your feet – Can you confidently make quick decisions? Real estate investing requires evaluating buying opportunities, determining the right price to offer, and getting your offer accepted before others can make theirs. Indecision certainly doesn’t serve real estate investors. Rather, they require the ability to objectively assess the deal and swiftly act.
Additionally, you have the proper foresight to understand the full range of possible outcomes from evaluating the income potential and resale price after improvements to understanding tax implications and beyond. Avoid investing blindly — those who experience the most success know exactly what to expect when purchasing a property as an investment vehicle.
You can be objective in your decision-making – Do you fall in love with a property and let your feelings cloud your rational judgement? Real estate investing calls for a realistic mindset and clear-sighted approach, especially when it comes to the financial side of things. If the purchase price is too high, it might make it tough to generate a return, at least in the short term.
You have the temperament to be a landlord – Investing in real estate might require you to become a landlord. This role comes with a lot of responsibility, even if you outsource to a property manager. You will need to have 24/7 availability for emergencies, willingness to address maintenance or tenant issues, pay for associated expenses, and maintain a level head in potentially stressful circumstances, among other obligations.
You have the time and patience for the investment to turn a profit – Even more importantly, do you have the cash flow from other sources to support your investment? Unless you are collecting rent (and even then), seeing a profit takes ample time and effort — and you’ll be footing the bill along the way. Keep in mind that rental income can easily be consumed by mortgage, upkeep expenses, and property tax.
Albeit not new, one specific real estate investment tactic – flipping – spiked in interest, thanks in part to the influx of DIY television programs that compress months (and even years) of decisions in the real world into a 30-minute program. Think realistically about flip properties. Improvements and construction can take longer than planned, you might encounter additional obstacles that need to be addressed before you can flip, or you can end up investing way more in the property than it’s worth on the market. And remember, gains from flip properties are only realized once they’re successfully sold.
You’re comfortable with risk - Real estate prices are cyclical — and timing does not always work in your favor. Right when you’re ready to sell, the market price may be lower than what you initially expected. Or, rental income from investment properties can suffer during difficult economic cycles. An investor must also be able to understand both the risks associated with acquiring property and, conversely, the risks associated with self-funding. Ultimately, the market can play an important role in the success of your investment. A skilled financial planner can help determine the level of risk you can potentially undertake. They can also provide guidance on maintaining investment solvency and a contingency plan in case of the market turning.
Becoming a real estate investor is about much more than purchasing a property with the intent that cash will roll in. With the correct mindset, approach, and attitude, investing in real estate can be exciting, challenging, and profitable. Others may be better served by seeking out a financial planner to first learn about how to participate in real estate investing before taking on the time and responsibility of buying properties themselves.