Investments always come with some level of risk, and real estate is certainly no exception. There’s a wide range of variables to consider and few guarantees. So, how can you tell where your money is best spent – and how does real estate fit into your current portfolio?
Here are a few helpful tips:
- Know the market well
Paying the market price for a property may not bring about the robust returns you’re hoping for; alternatively, it’s best to seek out underpriced properties.
- Turnkey properties present opportunities
Turnkey properties (fully vetted redevelopment properties with tenants and a property manager) are often touted as a good investment for those who are just getting into real estate. However, if you compare them to other types of tenant properties, they tend to be slightly more expensive and not as lucrative.
- Avoid vacation homes
Vacation homes can generate decent returns seasonally, but vacancies and holding costs (coupled with premium pricing) often result in mediocre returns overall.
- Consider REITs
REITs (Real Estate Investment Trusts) are companies that own, develop, and redevelop real estate assets. A publicly traded REIT or REIT fund will offer low investment minimums, liquidity, and diversity. You should be aware that the performance of REITs tends to align with stock market returns, which may not correlate with actual property values. A 15% cap on real estate exposure in a portfolio is suggested.
- Be cautious with rental properties
Although you can make money with rental properties, they can come with a steep learning curve. A brick-and-mortar property requires management and expertise; you’ll likely need to hire someone to work on tasks like leasing and other day-to-day operations, which will cost between 4-8% of gross rents.
- House flipping can be risky
When flipping houses, the goal is to get in for the short term, then sell the properties at a markup. Although this can be lucrative for many investors, strong returns are dependent on factors like the neighborhood or the hidden costs of renovation, which can decrease a home’s net return. House flipping may sound like a sure thing, but plenty of risks are involved.
- Vacant properties bring capital gains
Vacant properties can have great potential for returns in certain situations. Two examples are: (1) a property in a neighborhood that’s in the process of gentrifying; or (2) a property that’s in the path of a proposed water or sewage line. It’s important to realize that investors can end up paying on the buying and selling ends. Vacant properties can have a large upside as a development play, but the capital gains tend to be burdensome.
- Investing your time can increase profit potential
Although property development, management, and administration can require an experienced team, you may be able to save on paying others to do the work. For instance, are you adept at repairs, accounting, and/or showing the vacancy to prospective renters? If you have the time, skills, and willingness to do many of the tasks yourself, the tradeoff can be worth it.
If you decide real estate investing is right for you, make sure to vet your tenants or owners thoroughly and check in with them often.
For many investors, real estate offers a tangible investment that provides greater peace of mind than something intangible like stocks or bonds. The pricing also tends to be more stable because it isn’t tracked on a daily basis or influenced by the media. Make sure to weigh the pros and cons before you add properties to your portfolio, rather than invest the money elsewhere. Feel free to reach out to one of our real estate specialists if you have any accounting-related questions.