The value of home ownership when compared to renting is a definite pro for the the former but as you get familiar with property ownership you may decide to delve into obtaining more real estate in the form of rental properties. Realizing the multiple benefits of appreciation, mortgage paydown and rental income cash flow, property investment is a lucrative option and time tested to prove stability in times of economic uncertainty. As the old saying goes “Everyone needs a roof under to live in!”. But before diving in you may consider a few concepts to help put things into perspective.
Lead with Numbers
As one of Kevin O’leary’s famous lines “Show me the money!” Even if it’s the perfect property for your vision, located favorably and in your price range, before pulling the trigger you need to run the numbers. Accounting for shortfalls and surprises, proper market rent and vacancies could put a damper on your prospectus for profit and returns on capital vested. Allowing for a 20% cushion from your initial expenses/costs is a good practice to implement as a buffer. Sometimes it could change a unicorn into an alligator! Prepare for the worst and everything else will fall into place.
Take Opportunity Cost Into Consideration
Return on investment is a calculation that many novice investors don’t take seriously into the equation. A common thought is “As long as it pays for itself, who cares?” Let me propose a metaphor to illustrate my point. If someone offered you to invest in doorknobs with a ROI of 20% or you had another opportunity to invest in real estate that would yield 10%, (assuming the same amount of risk) you should shout “Show me the shiny doorknobs!” My point is regardless of the investment ROI for your hard earned money trumps everything!
Time Available for Minding your Properties
Starting off a lot of real estate investors think that rental property is a “Fill it and forget it!” kind of investment. While if properly managed this can be true to some extent, it is never a good idea to be an absentee landlord no matter how good the tenant is. Account for allocation of your personal time to tend to your property assets or hire someone to do it for you. This is definitely something to consider if you plan on accumulating multiple properties and building a portfolio that is primarily real estate based.
While real estate rental properties is a very good vehicle for wealth accumulation, it is not a free ride. While many think you can’t go wrong, just go out and buy some homes, rent them out and you can retire, this is probably a bad perspective to go by if you decide to seriously consider this journey of multiple property ownership. Instead I would propose to start small obtaining practical education through experience as opposed to going all in right out of the gate. Before going into any type of potential venture whether it be real estate or anything else, education will always reduce your risk without sacrificing the potential returns. Continually learning is an investment I can guarantee that has a better ROI than anything else, even over those shiny door knobs…