I get asked about investment properties more often than many other financial concepts. Apparently the word on the street (Main Street, that is) is that having rental properties is a surefire way to grow wealth. Well, it is one way to grow wealth — but it’s certainly not a surefire one.
Slow and Steady
Successful real estate investing in hopes of creating a steady passive income stream takes time. Breaking even doesn’t happen overnight and making a profit certainly doesn’t either. But it can happen and when it does, it can significantly increase your cash flow. The best part of real estate investing is that you can’t lose all of it like you can in a fund or in the market. You’ll still have that house or building even if the current value isn’t what you dreamed it would be.
Here’s what’s historically true: you don’t really make money in the house you live in. Let’s say you buy a $200,000 house today and in five years you sell it for $300,000. Well, you need somewhere to live so you’ll have to buy another $300,000 house which is likely pretty similar to the one you just had. Unless you downsize, it’s often a wash. So, can you make money on owning an investment property? I fully understand wanting to have assets that are concrete (pun intended) versus ones that exist as a bunch of numbers and charts. But before you go into an investment property, plan out how much you’ll actually be spending on it versus making off of it.
Cautionary Tale or Success Story?
For every cautionary tale, there is a success story…of people making money, getting great tax incentives and living off that profit. It’s up to you to weigh the risk and reward with not only how you want to make money but also how you want to spend your time. If you are still gung-ho about investing in real estate, then go for it, but do so cautiously and really know what you’re getting into. If you are purchasing a foreclosed property, know that there could be additional tax bills, and outstanding HOA dues that you would need to pay for and may not be disclosed at the sale.
Calculating the cost to maintain the property, water heaters and A/C units aren’t sexy, but they are expensive. Know your state laws. In many areas it’s nearly impossible to evict tenants, even if they don’t pay. During the COVID crisis, renters were able to delay paying rent for over a year. That’s right, many landlords didn’t collect a dime in rent for over a year!
An investment property isn’t as simple as the get-rich-quick scheme that it’s sometimes made out to be. This route isn’t for everyone, but if you do decide to invest in property, get smart about it and get after it.
A version of this article was originally published on Forbes.