The economic benefits of owning rental property may seem compelling but is real estate a good investment? And, are you landlord material? Certified Financial Planner, Paul Fain, joins us with the pros and cons of investing in real estate.
WHAT ARE THE TRAITS REQUIRED TO BE A GOOD LANDLORD?
- Enjoy home improvement projects (painting, plumbing, drywall).
- You have spare time.
- Dealing with difficult people/situations.
- Have cash.
WHAT ARE THE MAIN BENEFITS OF OWNING A RENTAL PROPERTY?
#1 Income stream (goal: positive cash flow)
#2 Appreciation (location, location, location)
#3 Tax benefits (deduct interest, depreciation, etc.)
WHAT RATE OF RETURN SHOULD AN INVESTOR EXPECT?
- The “Cap Rate:” Gross Income – Expenses = Net Income/Purchase Price = 4-10% Expected Return
- Consider the expected returns of other asset classes: stocks, bonds, CDs
WHAT ARE THE CONS?
- Vacancy (mortgage, insurance, property tax still due)
- Bad tenants
- Over-investment (purchase, remodel)
- Illiquidity
- Time (maintenance, collections)
- Being too nice (never raising rents!)
ARE THERE ALTERNATIVE WAYS TO OWN OR MANAGE REAL ESTATE PROPERTY?
- Hire a management company (ex: 10% of gross rent)
- Buy Real Estate Investment Trusts (REITs)
To read more about investing in real estate check out Have a Plan for the Family Real Estate.
