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Are you cut out to own investment real estate?

Investment real estate

Are you cut out to own investment real estate?

I am often approached by would-be investors asking me to help them find a “hot deal”.   I love that request so much!  Owning investment real estate can be very rewarding.  But it’s not something that you should go into blindly.  Here are some questions you should ask yourself before taking the plunge:

1)  What are your investment goals?

The type of property that you purchase can vary greatly based on what you are trying to accomplish.  Is your goal long-term building of equity by debt reduction and appreciation?  Or is it maximizing your monthly cash flow?  Multi-family units tend not to enjoy the same level of appreciation as single family homes do, but their monthly cash flow is generally better.  There are pros and cons to either approach so you need to be clear on what you are trying to accomplish.

2)  What is your tolerance for hassle?

When you buy investment real estate, what you are really purchasing is a small business.  Who do you want your clients/tenants to be?  There is generally a trade off as far as the rent to purchase price ratio being better in “worse” areas, but often your eviction and vacancy rate are therefore higher as well.  The potential for cash flow is better, but the management is a little more hands on.  Although don’t be fooled; even in “better” areas of the community you can have tenants that don’t pay and need to be evicted.  Eviction and chasing payment is just part of the gig.  If you can’t handle it then I strongly recommend hiring a property management company.  They are worth every single penny they earn in my opinion.  My properties are more profitable since turning over their management to people who are professionals in this area.

3)  Do you have cash reserves?

Although there is great opportunity for making money on both a monthly basis and through appreciation and debt reduction, there are still expenses that come up when you least expect it.  A city inspection might have you replacing a roof when you thought you had a few more years of life.  A tenant that wasn’t properly screened doesn’t pay rent, even though your mortgage payment keeps coming.  Someone moves out and you discover their child had spilled red juice on your carpet and therefore needs to be replaced.  This opportunity to make money can all of a sudden becomes a drain on your finances in the short term, make sure that you have a cushion so that one bad month doesn’t leave you in a bad place financially.

In summary, owning investment real estate can be an amazing addition to your financial plan.  Just make sure you know what you’re trying to accomplish and select the right piece of real estate to help you reach your goals!

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