Real Estate Investing: Is Now The Time?

Not everyone associated with the real estate industry is hurting in this current economy.  For real estate investors, opportunities abound. Of course, real estate investing can be a tricky thing, so it’s a good idea to move slowly and have a large cash position before starting to invest.

Madison, over at My Dollar Plan, recently shared some reader thoughts on real estate investing, as it appears her and her husband might be venturing into the world of becoming landlords. I thought two of the comments really stood out:

I’m a landlord. If I had it to do over again, I still would have bought a rental property, but I would have made sure the math worked better. Make sure that the mortgage is no greater than 60% of the expected rent. – MITBeta

I had people coming out of the woodwork to discourage me. “Do you really wanna fix toilets?” was the most often posed question. My response was…”No. I don’t want to fix toilets but if I fix one a month and get paid $650 to do it that would be fine by me.” I consider this a part time job/ small business that will naturally require some of my time. By doing this, I was able to create some expectations on the time and money I have to commit personally to this investment. Furthermore, I put in a best case scenario and worst case scenario of owning the property and even a time line with an exit plan in place if I hated it. – Eric

Eric and MITBeta have the right idea, and I thought Eric’s point about an exit plan was particularly insightful. After all, what if you did jump into real estate investing with both feet and decided you hated being a property owner?  Bad time to be stuck with a house.  Besides having a good exit strategy in place, there are a number of other things to consider.

Five Things To Consider Before Investing In Real Estate

1. Consider whether or not you want to be a landlord.  Like Eric mentioned in that comment, the number one thing that discourages people is the thought of getting wee-hour phone calls about a busted pipe, or some other landlording duties.  Chances are these occur few and far between, but they will no doubt happen at the most inconvenient times.

2. Can you afford a property manager? For those that don’t want the duties of being a landlord (including finding and screening potential tenants, collecting rent, etc.) there are property managers available, who will for a portion of your monthly rent or a fixed fee, handle these administrative duties for you.  Sure, it cuts into your profits, but if you are not the hands-on type, this might be a good option to consider.

3. “Money is made at the buy.” Nothing could be more true when it comes to real estate investing, but getting a deal (or a steal)  may mean the house needs work before you can rent it.  If you are eyeing foreclosures, or fixer-uppers, be sure to consider how much sweat equity you are willing to invest in getting a house in good condition before renting.

4. Find deals that cash flow with some cushion.  If your mortgage payment is $650 a month you don’t want to rent the home for $675. Besides having little profit to show for it while carrying the mortgage, the spread does not provide for an adequate cushion to cover repairs or to build up a small fund to float months when the house is unoccupied.

5. Put down a chunk of cash with each property acquisition.  Part of the blame for this recent real estate market bubble bursting was speculative real estate investing with highly leveraged positions.  Gone are the days of 100% financing (or higher) on investment properties. And for good reason. Imagine if you held five mortgages with virtually no equity when the bottom fell out of this market. Frightening to think of being upside down on five mortgages.

The bottom line to taking a frugal approach to investing in real estate is to move slowly. Take your time to find the right deal, and walk away from those that just don’t feel right. Build up a significant cash reserve before investing in real estate, so you can weather the storm of highs and lows in the market.  Real estate investing can be a very profitable venture if approached in a slow, thoughtful manner.