The Real Facts Behind Real Estate Investing
CFP Board Consumer Advocate shares tips for investors considering a real estate purchase
With a rising economy and low interest rates, the fear of real estate investment that followed the 2009 market crash is slowly subsiding and investors are regaining their appetite for this particular asset class. Before buying up properties like a game of Monopoly, investors need to be aware of several unique aspects to real estate that can make or break an investment.
In her latest contribution to LetsMakeaPlan.org, CFP Board Consumer Advocate Eleanor Blayney, CFP®, outlines several aspects of real estate that investors should consider before buying investment property.
“Real estate investing is surging again as the economy improves, interest rates remain low and the bull market wanes,” said Blayney. “As more investors – including retiring baby boomers – look for assets that will help generate ongoing income, it is important that they first understand the nuances of being a successful real estate investor.”
When deciding whether to make a real estate investment, Blayney recommends taking into account the following:
- Not a stock substitute: One advantage the stock market offers over real estate is diversification, which protects against the irrationality of the market. Very few individual investors can achieve the same level of diversification through real estate, because that would mean acquiring commercial, rental, and industrial properties in different geographical markets to obtain a similar level of diversification.
- Expensive proposition: Investors need to put more money down upfront when purchasing property because of lender requirements. Interest, taxes, insurance, maintenance, and repairs are reoccurring costs owners will face as well. And real estate assets often require larger cash reserves for times when a property is not generating income because of a vacancy.
- Active management: Real estate requires an investor’s time, attention, and availability because tenants require attention at all times. Hiring a property manager is an option, but it adds to the costs of the investment.
- Becoming a business owner: Buying real estate is equivalent to starting a business. From weighing the benefits of a rent increase to doing a cost-benefit analysis on property improvements, properties require significant amounts of strategy and management. Like any business, investors also need to consider an exit strategy.
“Making a profitable real estate investment takes skills beyond the average investor’s,” said Blayney. “While there is plenty of upside – in the form of ongoing income and appreciation – it does not come easily or cheaply. Consulting with a CFP® professional will help you to assess whether and when purchasing real estate for your investment portfolio makes sense.”