Investing is one of the biggest ways people prepare for retirement; be it in the stock market, 401(k) plans, precious metals, business opportunities, you name it. However, one particular category of investments that has been gaining traction lately is real estate property investing. It has become so popular because it typically enables your current funds to follow the rate of inflation and even appreciate beyond inflation in some cases. Everyone can agree that some forms of investment are better than others — except that perception depends on your interpretation of the term “better.” To some, “better” is relative to the chance of a greater return, but to others, it is simply dependent on the stability of the investment for its duration. Let’s look at how these definitions compare to determine whether an investment in real estate is the right choice for you.
In order to dive into how investments in real estate stack up in comparison to other areas of investment, we need to start from the beginning and evaluate the process.
Many misinterpret real estate investment to mean you will be buying multiple houses or properties and flipping them or renting them out. While that can be your plan of action in investing, that’s not the only way to do so.
Also, prospective investors commonly assume that in order to invest in real estate, you need to have immediate access to the funds to afford multiple properties. However, you can actually take advantage of your lending options as well. There are a variety of loans that allow investing or renting with a low-rate down payment. In fact, the idea of a standard 20% down payment for a loan is woefully outdated and the average percentage has been trending downward. In recent years it has dropped below 10%, meaning that homeownership has started to become more accessible.
While you may still require a chunk of change to make the down payment on a home, different loan options require varying down payments and credit scores. For example, loans from the Federal Housing Administration require down payments as low as 3.5% with a credit score of at least 580. These loans are ideal for people purchasing their first home, which can still be an investment since real estate values appreciate in tandem with inflation. Meaning your invested money will retain its purchasing power whenever the home is sold.
What if you don’t qualify for an FHA loan, but would like to invest in property despite still not having a large mass of funds? There are options for the property title that may be useful to you, such as joint tenancy or tenancy in common. Although it’s commonly discussed in relation to renting, tenancy in property investment allows for multiple individuals to share the ownership and financial burden of a property. Using the joint tenancy and tenancy in common title options, you and others that you trust can all chip in to purchase a property. This approach can make homeownership that much more accessible and can also be handy for those just starting out in property investing without significant capital.
Lastly, there is the standard means of investing in real estate — buying a home. As you may guess, this is done by simply taking out a mortgage with upfront closing costs and a higher down payment. Some people can even afford to buy a property outright without the assistance of a lending institution. Regardless of which entrance to real estate investing best fits your situation, it’s time to consider whether or not investing in property is actually right for you.
Who Should Invest
Whether or not it’s a good idea to invest in property depends on what you are looking for in an investment and how you intend to invest. To cut to the chase, if you are looking for a quick, high return investment, then real estate probably isn’t the best place to start unless you are looking to fix and flip houses. Real estate properties see their best returns and greatest effects in long-term conditions for a few different reasons. One reason is simply the appreciation of property which, as mentioned earlier, usually follows the rate of inflation. Looking at real estate strictly in terms of appreciation, it’s not a great investment, but rather more of an asset — something to be leveraged when money is needed. Property rarely becomes an investment on its own due to upkeep costs and the rate of inflation of a little over 2% a year for the past 25 years. Since it requires more attention, property investment is not as turnkey as other forms of investment, such as stocks. However, real estate is a much more secure investment as it has a significantly lower chance of depreciation. Real estate investing is therefore most effective in two focuses: renting as a landlord and fixing and flipping.
Being a landlord is a relatively straightforward way to secure a passive income. With current rent prices being so high, it’s easy to profit off of rent even after accounting for the expenses of the building itself. While this alone may sound simple, as a landlord you still have to be accessible at all times in case of an emergency and coordinate schedules for routine maintenance of the property. Becoming a landlord is still possible even for individuals in a hindered financial situation because some loan options will allow the purchase of multiunit properties, with FHA loans being an example of this too. The only stipulation is that the borrower must reside in one of the property’s units, and there can’t be more than four units in the property. All that considered, you are still presented with a great opportunity to have your taxes, mortgage, utilities, and general maintenance paid for you, or to even just lower your out-of-pocket costs while earning experience as a landlord.
As your experience with being a landlord increases, you can hopefully start to own more properties, eventually surpassing the need for a typical job. Since most of the maintenance can be performed by hired hands, it’s possible to retire at an early age as a landlord and even continue being a landlord past retirement. Finally, if you ever decide that you are done being a landlord, you can sell the properties and essentially get a full, inflation-adjusted return on your investment.
Fix And Flip
Fixing and flipping houses is a much less stable investment in property, but it also presents the opportunity to receive much greater returns on your initial investment. The returns also have a much shorter turnaround time than renting or simply holding on to a property and selling it off later in life. This style of investing has, arguably, been popularized by a multitude of television shows, starting with the first most successful show, “Flip This House” in 2005 on HGTV.
Much like what is depicted in any of the television shows, house flipping requires a lot of knowledge in different trades and an understanding of interior design. If the flipper doesn’t have these skills, it’s possible to hire helping hands to perform these jobs. However, that will diminish the amount of the return and will also require immediate access to funds to pay for the help. So to avoid this, most people tend to do the work themselves or with business partners. The bottom line is that this form of investing is significantly more hands-on and therefore is close to outright being a full-time job rather than a passive investment. Many people working with the fix and flip style of investing have likely spent a great deal of time working in a profession that already required those same skills.
Investing in property is a good idea for individuals who are looking for stability, passive income, or assets to add to their financial portfolio. If you are looking for a significant, short-term payoff, but are not skilled in the trades and are not looking to become well-versed in them, then investing in property may not be the most feasible investment type for you. Due to the nature of property being a physical asset that is exposed to the elements and subject to age, it’s not much of a possibility to have a hands-off approach like you can with the stock market.