Grab RSS Feed
In 2005, so many people were buying real estate. With no experience and no money, they bought properties they couldn't afford and were convinced they were going to make a fortune.
Unfortunately, it didn't work out that way, and most of them now have a foreclosure or short sale in their past.
Does that make real estate a bad investment? No. It's an investment. The good or bad part comes from how you approach it. What's good for one person can be bad for another.
To find out how to make real estate investments work, I decided to talk with a few experienced professionals and asked them whether real estate should be in a retirement portfolio.
What to do in your 40s to retire a millionaire
The key is knowing what you're in it for. Are you looking for current cash flow, long-term appreciation, or are you looking for a flip opportunity? You must know your area. In the Midwest, you might find smaller residential rentals that will throw off stable cash flow. In other areas near military bases or manufacturing facilities your focus might be on Grade B multifamily properties, as you'll have a steady source of working tenants who will pay their rent.
To make rental properties work, look at the age and condition of the roof, windows, plumbing, etc., and keep enough reserves in the bank to cover capital expenses that will come up. Also, plan on holding two months' rent in the bank to cover turnover costs that occur between renters.
Real estate can be a good investment for retirement, as rental rate increases have historically outpaced inflation. For an individual investor, this means that an investment property bought with a break-even cash flow can become a net profit generator in a couple of years.
Rental growth rates do vary by location and said research shows that the three key factors that determine rental rates are the number of jobs, the level of wages, and the amount of available housing in a market. Smart investors focus on markets with job and wage growth.
However, it is important to do your homework before you buy. Focus on finding properties before they hit the mainstream market. Look for homes where you can go in, make improvements, and then raise rents.
Determine a competitive rental rate for the property, and research expenses including capital improvements. Then calculate your cash flows and tax implications before making a purchase decision.
With property, be prepared for the little interruptions. These things can slow down the time to market. And of course, with renters, there will be calls and repairs to handle. That's why smart investors realize that the value of their time is greater than the fees paid to a property manager, and property management fees are tax-deductible, so they cost less than they appear.
Also, short-term renting has become very popular and easy, but there are pitfalls. Nearly all cities and states impose lodging and occupancy taxes that must be paid on rental transactions. Over the past few years, government agencies have increased their focus on short-term rentals and stepping up enforcement tactics to ensure short term rentals are properly registered and paying the correct taxes.
Rental real estate can be a great addition to a retirement portfolio, but it's not a get-rich-quick scheme, and it's not for everyone. Like any business, it takes cash, research, time, and commitment.
For more information, contact Black and Buono.
marketwatch.com
