Should you invest in real estate?
Financial experts don't agree on everything, but one thing they share common ground on is the reliability of real estate as an investment.
Since 2012, home prices have risen with each passing month, according to the National Association of Realtors. Within days of hitting the market, for-sale properties across the country are snatched up in short order, as demand continues to far outpace supply. Depending on your available resources and financial goals, investment properties can help supplement your income or become a full-time occupation.
If real estate is something that you've always found interesting, you may be wondering where you begin. In other words, how do you start investing in real estate or go about buying your first investment property. You may also be curious about what you should know before you fully enter the real estate market and the extent to which you'd like to be involved. This should help you answer some of these questions.
What do real estate investors do?
As their title implies, residential real estate investors use financial resources in order to build, optimize, maintain or otherwise manage property that people use for dwelling purposes. Everyone needs a place to put their things and kick back from life’s daily stresses, and polls show buying a home is something the vast majority of Americans hope to do. The ongoing desirability of homeownership has led more people to start investing in various types of real estate. Fun fact: According to NAR data, 23 percent of the home sales in February 2019, the most recent month for which data is available, were cash sales.
Just how involved real estate investors become in the process is for them to decide. For example, those who wish to supplement their income, may opt to buy shares in a real estate investment trust, or REIT.
Similar to mutual funds, REITs function as organizations that maintain various types of real estate, whether it be commercial (like offices in high rise buildings, residential (townhomes, single-family units) or those used for accommodation purposes (like hotels). REITs can be a good starting point for buying real estate because there's usually less responsibility involved, particularly if the REIT is a public one.
A much more involved form of real estate investing is buying houses to resell them, typically after implementing necessary renovations. Better known as house flipping, this can be a potentially lucrative way to turn a profit and is something that an increasing number of properties have been the product of. For example, in 2018, more than 207,950 single-family homes and condominiums were flipped, according to ATTOM Data Solutions. They accounted for roughly 5 percent of all real estate transaction over the 12-month period.
Getting a higher price on a flipped home is made possible by renovating properties, which can increase their resale value. However, it’s important to do your homework before investing in a fixer-upper so you know how much it will cost to make the necessary improvements. Whether you do the repairs yourself or hire someone to do them, you want to avoid spending more on the renovations than the potential increase in appraised value.
The labor-intensive elements of home flipping - both in research and physical work - is part of the reason why experts recommend it only for those who have the amount of time and available resources to make the commitment.
Is it a good time to invest in real estate?
Former Speaker of the House of Representatives Tip O'Neill used to say that all politics is local. In other words, goings-on in terms of activities, events or circumstances are subject to change, depending on the place you're talking about. The same can be said for real estate. Asking prices, home buying interest and inventory in one portion of the country might be different from the next.
Generally speaking, though, few can deny that it's a great time to be buying real estate, if for no other reason than climbing home values and the pace at which people enter the marketplace. Indeed, in February, existing-home sales rose 12 percent from the previous month, based on the latest NAR data. Additionally, the median price among all housing types - single-family, townhome and condo - rose 3.6 percent on a year-over-year basis to $249,500. February 2019 was the 84th month in a row that home values rose from the same period a year earlier.
What's more, in a separate NAR study, more than 50 percent of those surveyed said they considered the current real estate market to be worthy of entering in order to buy a home. This was due, in part, to a strong economy, 53 percent of whom thought it was continuing to improve through
the first three months of 2019.
But just because there's ongoing consumer interest in buying homes doesn't necessarily mean it's a no-brainer investment. Here are a few key considerations before you make the decision:
Do your homework
Whether you buy property as an investment vehicle is a determination you should only make after doing your research. There are lots of online resources you can go to that provide tips on cost-benefit analysis, but things you can do on your own time include actually visiting the property that's up for sale, what other homes in the area sell for and your financial capabilities.
You may want to meet with a financial advisor or mortgage provider who can go over some of the numbers with you to give you an idea of whether or not you're a good candidate and have the necessary cash flow or ability to make a down payment on an investor mortgage (usually 20 percent of the purchase price).
Start out small
At the outset, avoid buying a house that will require a lot of renovation if you plan on rehabbing it yourself. Starting small will allow you to get your feet wet and determine if investment property work is something you wish to pursue long-term.
Pay off debt
Debt is always something you should try to avoid, but if you require an investment loan, you may be required to be free of any outstanding debt, such as medical bills or unpaid tuition bills. Prioritizing your finances and credit score can improve your odds of mortgage approval.
Real estate is a road worth traveling that's paved with endless possibilities. Through planning, research and smart money management, it just may be the super highway to a future of wealth and prosperity.