You’ve searched and searched and finally found the one. You’ve saved the money. You think you’re ready. But how do you know it’s the right time? How do you know it’ll work? What if you’ve made a mistake?
Investing in real estate is a big deal.
People often ask me whether they should buy land or rental property as a part of their overall investment strategy. I think those can be good options—but only under certain conditions. Here are my guidelines for taking on real estate.
1. Pay in cash or don’t buy at all.
Whether it’s a piece of land or an apartment complex, you need to pay cash for any real estate you purchase. Never, ever borrow money to pay for it. You’re only putting yourself in a hole to start with. Even if it’s a great deal, don’t ever go into debt as an investment!
2. Maintain an emergency fund for the purchase.
Water pipes break. Fields flood. People punch holes in walls. You need money to cover that. This emergency fund is separate from the one you keep for your own home and family. How much you save will depend on the type of property you buy.
3. Invest in real estate only if it’s a passion.
If you don’t love dealing with buildings and land and renters (possibly) and grass and taxes, keep your money invested elsewhere. That’s because dealing with the particulars of real estate can be a real pain. You’ll get tired of it quickly—but you’ll still be stuck with the property.
4. Buy real estate in close proximity to you.
You need to be able to get to your property quickly, so avoid purchases that require you to hop on a plane every other month to deal with problems. You need to be able to keep an eye on things. Your other option is to hire a property manager, but that lowers the profit on your investment.
5. Do your homework.
What are the rental rates in the area? How much could you charge in rent? What are the property values? Have they been increasing or decreasing in recent years? You’ll also need to find out how much you’ll pay in taxes and how much insurance you’ll need to buy. There’s no sense in buying real estate if you’ll barely break even.
6. Buy property that’s a small percentage of your net worth.
For example, if you have an investment portfolio of $300,000, you don’t want to purchase a $100,000 piece of real estate. If something were to happen to it, you’re dead in the water. Real estate should only be about 5% of your portfolio.
7. Be picky about tenants.
You can run a credit check and ask for references. You can require that tenants pass a background check. You can also require new tenants to purchase renter’s insurance. You can ask lots of questions. You can ask about how long they’ve lived in their current home and why they want to leave. You can ask about the nature of their work and how much they make, and you can verify that with paystubs and calls to their employer. Remember, it’s your property, so you don’t have to rent it to the first person who fills out an application.
8. Talk to a pro.
If you’ve never owned rental property before, I highly recommend talking with someone who’s been at it a while. Ask lots of questions so you have a clear picture of what it’s really like. Also talk to a real estate professional. You don’t want to go in with idealized expectations. You’re not in an ’80s sitcom.
Investing in real estate isn’t for everybody. It requires risk tolerance, practical know-how, and lots of time and focus. If you can’t be a hands-on owner with an attention to detail, then I’d suggest a different investing option, like mutual funds. You’d be saving money and avoiding a huge headache.