Is Investing in Real Estate Worth It?
With interest rates still very low, you may be wondering if investing in real estate is worth it. It’s all quite glamorous when you read the “no money down” success stories. There are more than enough real estate gurus available to show you the way.
But before you buy, here’s why you might not want to invest in real estate, now, or ever. In fact, I gave up owning rental property decades ago because being a landlord sucks.
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Learn the pros and cons of real estate investing and alternatives to buying and selling real property.
So, let’s imagine that you’re seeking that glamorous lifestyle of the rental real estate owner. You think you’ll have a host of properties and the rent checks will simply roll in.
Or maybe you’re considering flipping real estate.
My Real Estate Story
I was raised in the real estate world. My dad started a company the year I was born where he purchased cheap run down homes, renovated them, and resold the newly remodeled homes.
In fact, my Dad was a real estate flipper, before it was a “thing.”
As a child, we spent Sunday’s driving around the city looking for property to buy.
In elementary school, my Mom got in the business and became a real estate agent. To become a real estate flipper my dad went to sheriff sales to buy foreclosures. He combed the newspapers – no internet then. He dealt with multitudes of bad tenants and difficult workers.
When I got older I spent a few years in the business, delivering eviction notices, bidding on property at sheriff sales and buying and selling real estate for my own account and for others.
I did a stint as a real estate flipper and landlord myself.
I had my share of “bad tenants” who didn’t pay their rent! I dealt with my own crop of sub-par contractors too!
Later, I worked as an investment portfolio manager for a real estate holding company. There I managed the stocks, bonds and other investments and left the real estate management to someone else!
Owning Rental Real Estate Is Not a Get Rich Quick Scheme
How Much do Real Estate Investors Make?
Certainly, it’s possible to make money as a landlord and flipping real estate. Some people thrive in this business. With interest rates lower than they’ve been in years, now might be a good time to invest in real estate if you are financially, temporally, and emotionally able to handle it.
It’s important to understand that when you are investing in real estate and building up a real estate portfolio, you do not have a salary. That’s right, there is a lot of work that comes before profitability.
It’s rare to buy a property cheap enough to receive a substantial cash flow after expenses in the beginning.
Unless you were fortunate enough to purchase an extremely low priced property and were able to rent it for a high amount, you’ll need to be patient to realize substantial real estate income.
Flipping real estate might get you a decent profit within a year. But the key is buying a the right price, so that after repairs and expenses, you make a decent profit.
If you are up for the challenge, real estate might be for you.
For me, the actual management of real estate sucks!
And, being a landlord sucks too!
I’ve done it, it’s a lot of work, and there are other ways that I capture the benefits of real estate investing (more about that later).
Buying and managing real estate is a lot of work and requires deep pockets. Yet, real estate investing can be a way to boost your net worth, slowly, despite of the stressors of being a landlord.
Additionally, you might get lucky and get the perfect tenant who’s neat and tidy and pays her rent on time. And that tenant might stay forever and never balk at a rent increase. But, don’t count on it-because you’re more likely to have a string of tenants moving in and out.
Here’s what they don’t tell you in “invest in real estate” courses, books, blogs and seminars. Owning and managing rental real estate is a long term wealth building endeavor.
Learn whether investing in actual real estate is worth it, for you.
30 Steps to Buying and Managing Rental Real Estate
- Search through many real estate listings and visit potential properties.
- Meticulously analyze the potential income and expenses of each property, making sure to allow plenty of cash for unexpected repairs and vacancies.
- Complete reams of paperwork when applying for a loan.
- Analyze records of the current owner before purchase. Have the judgment and experience to recognize whether the owner’s records are accurate or not. Call utility companies and verify utility costs. Check with the assessor for tax rates.
- Make an offer on a prospective property and negotiate until either your offer is accepted or rejected.
- If you can’t come to an agreement on price and terms, move on and start the process over.
- After the initial offer is accepted, follow up on all property inspections to make sure the real estate is in the expected condition.
- If repairs are needed, negotiate with the seller about completing the repairs, or reducing the purchase price.
- If the owner won’t make the real estate repairs, then make sure you have enough cash to make them yourself, or back out of the deal.
- If all goes as planned, sit through an hour settlement, sign all the papers for the mortgage and the purchase and get the keys to your real estate.
- Clean, repair and remodel the property so it’s ready to be occupied.
- Deal with contractors who don’t show up or do shoddy repair work.
- Create lease agreements, arrange for a service to check credit ratings of potential tenants, and set up a bookkeeping system for the property.
- Advertise the property for rent.
- Vet potential tenants on the phone.
- Meet with the tenants to show the property.
- Review the prospective tenant’s rental application, credit report, and phone their references.
- Waste a lot of time with potential tenants who don’t show up or are not financially stable.
- Select a tenant for the rental.
- Meet with the tenant to sign the lease, receive the deposit and rent payment. Walk through the unit with the tenant and note the condition of the property. Make sure to record existing flaws in the home. This is important at move out so that you can decide whether the property is in proper condition for the renter to receive their security deposit.
- Field phone calls at inopportune times when there is a problem, a clogged drain, a broken window, a broken stove, etc.
- Arrange with a repair person to make the needed fixes and pay the bill or make the repairs yourself.
- Call the tenant when the rent is late.
- Evict the tenant when they fall months behind in the rent.
- Go to court to handle the eviction or hire an attorney.
- When the tenant moves out and leaves the property a mess, you need to go through the entire process again.
- Pay the monthly bills and maintain the financial records.
- If you hire a property manager it’s not always much better. Then you have to pay the property manager and oversee him/her to ensure they are doing a good job. You also have to comb through their records to verify accuracy.
- If you choose to flip the property instead of renting it out, you have a host of other problems. Complete steps 1-12 and then put the property of for sale.
- When flipping, pay all the expenses until the property sells. And then go through the process again.
Why Real Estate Might be Worth It
Even though I’m no longer a landlord, I invest in real estate.
In fact I like the real estate investment class. It is less correlated with stocks and bonds and adds diversity to your portfolio.
You can also receive cash flow from real estate investing.
And there are so many ways to get access to the real estate market without being a landlord or a real estate flipper.
Ways to Invest in Real Estate
Buy REITS (real estate investment trusts). These are publicly traded real estate investments, like stocks. They come in a variety of flavors from diversified funds like the Vanguard Real Estate Index Fund (VNQ). I happen to own this one.
REITs also come in many varieties like:
- Self Storage
- Lodging and Resorts
- Data Centers
- and more
REITs are easy to buy on the public exchanges and typically have low expense ratios and steady cash flow. And you’ll never receive a tenant call in the middle of the night if you own a REIT.
Real estate crowdfunding is a newer asset class that is available to both accredited and non-accredited investors. Accredited investors either have a high net worth or earn a high salary, or both.
Real estate crowdfunding platforms offer direct investing in specific real estate projects or real estate funding projects. Before investing in real estate crowdfunding platforms it’s wise to understand who is running the program.
Unlike REIT investing, when investing in a real estate crowdfunding platform, you typically need to be prepared to tie up your money for several years, likely five years or more.
Following are several popular real estate crowdfunding platforms:
Why I’m Not a Landlord
If you’re wondering, “Should I invest in real estate?” go in with your eyes open. Make sure you have cash for a down payment and renovations as well as spare time to invest in this project. You’ll need endurance to oversee the ongoing management of the rental real estate.
If you have the endurance and enthusiasm, then try out becoming a landlord. Be aware that you’ll end up dealing with a variety of people-good and bad. And you’ll need more cash than you imagined for unexpected expenses and to cover the bills when the property is vacant.
At one point, I thought being a landlord was fun and exciting. But that excitement gave way to exhaustion and annoyance at being a landlord.
Eventually, I realized that I can still invest in real estate, enjoy the cash flow and capital appreciation without being a landlord. At present, I own REITs, both US and international, and may invest in real estate crowdfunding in the future.
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Disclosure: I own VNQ and VNQI
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