We’ve all dreamed of living in a gorgeous home — one with large floor-to-ceiling windows, stainless steel appliances, and kitchen cabinets that stretch up to the ceiling.
But while we’re used to thinking of a home as a personal purchase, houses have another function, as well — they can be great investments.
In this article, we’ll talk about the pro’s and con’s of property investing — so that you can decide whether or not it’s right for you.
Should You Invest in Houses?
First of all, let’s define the term “property investing” — we’re not talking about buying a house for yourself and HOPING that it will someday maybe rise in value. That’s not real ‘investing.’
Instead, we’re talking about buying a house for the sole purpose of using it as an investment. Most people either “flip” houses, meaning that they quickly sell the home for a profit, or they “rent” houses to tenants for the sake of collecting monthly payments over the long-term.
If you decide to get into investing, you’ll first need to decide whether you want to flip or rent.
Flipping Houses — You’ll buy a house in a desirable neighborhood. You’re looking for the “worst house on the best street.” You renovate the house, adding upgrades, and you keep a tight control on your costs when you’re doing the renovation. You then sell the house for a profit.
If you’re flipping, be careful not just about the cost of the renovation itself, but also the amount of time that the upgrades require. You’ll pay “holding costs” while you’re doing the upgrades. Those holding costs include the mortgage, insurance, taxes, and more. In addition, your cash is tied-up in the house while you’re doing the upgrades, meaning that it’s not working for you in another house (there’s missed opportunity). As a result, you’ll want to be very careful about both the time and the money that you spend in doing the upgrades.
You’ll also want to have a clear estimate of how much the house can sell for. This is called “after repair value,” or ARV. If you’re not sure, or if you mis-estimate, you might end up losing money on the project. After all, you’ll base your renovation budget according to the estimated ARV.
Finally, you should have a clear idea of how much the closing costs and other transaction costs will be. Some examples include advertising, realtor fees, title insurance, attorney’s fees, and other transaction costs.
Renting Houses — If you decide to hold a house and use it as a rental, make sure that you’ve accounted for all the costs of operating a house. This includes vacancies, repairs, maintenance, property management, tenant placement fees, and more. There’s much more to the cost of owning a house than just the mortgage. Also, make sure you or your property manager screen the tenants carefully. They’ll be living in — and protecting — your very expensive asset.
How Can I Learn More?
Most information about buying a home is tailored towards owner-occupants. But you should read advice that’s geared to investors. If you’re interested in learning more, check out books on Amazon that are geared specifically towards real estate investing. These are packed with information tailored specifically to property investors.
Photo credit: Alison Christine / Flickr