Have you always dreamed of owning multiple homes and building your wealth through real estate? Becoming a real estate investor can be a very lucrative endeavor, especially when the housing market conditions are in your favor. But being a landlord or property flipper isn’t easy, and it’s certainly not a get rich quick scheme. It takes work, time, and money.
If you’re curious about becoming a real estate investor, take a look at the following pros and cons.
Pros of Becoming a Real Estate Investor
Building wealth isn’t always something you think of when you picture buying a house. For most home buyers, that’s exactly what they’re buying–a home. They aren’t necessarily thinking about diversifying their investment portfolio or earning passive income through rental property. But with the right know-how and some careful planning, those are some of the biggest benefits of becoming a real estate investor.
A lot of people get into real estate investing in order to generate a stream of passive income. Passive income is money earned through something that requires little direct involvement. Buying a house to rent out can be a great way to start earning passive income. Of course, in order to do that, you’ll need to be able to charge more for the rent than what you pay for your mortgage plus expenses. For example, if the mortgage on the property is $800/month, you’d need to charge a fair amount more than that to have passive income.
Don’t forget that you’ll inevitably have other expenses related to the home. Maintenance costs, repairs, property management fees (if you decide to work with a property management company), taxes, HOA fees (if your community has an HOA) and homeowners insurance are just a few of the additional costs to consider.
One of the key success tactics in investing is to diversify your portfolio.
Why diversify? Good question.
Look at investing like predicting the weather. You can make general assumptions about the laws of nature, like it’s usually hot in the summer and cold in the winter. But you may not be able to predict the specifics, like how many inches of rainfall or when the next big storm will be headed your way. The only people who can do that with any rate of real success are the people who have spent time studying those natural processes and patterns or going to school to master the science behind predicting the weather. These people have access to resources and educational expertise that the rest of us don’t have. And even those well-trained experts get it wrong sometimes. Like the weather, investments and financial markets can be volatile, even if they are, by common standards, “predictable.”
By investing in only one or two products, stocks or savings accounts, you could be running the risk of losing a larger amount of your money if those investments lose their value. By diversifying your investments, even if one or two investments lose value, you’ll still have the others to cushion the blow. By investing in real estate, you are putting your money in a different type of investment than stocks or bonds or even a savings account. As the property increases in value, your equity will (ideally) increase. Even if your stock portfolio starts to dip, you can rest assured that your real estate investment is still going strong.
Being a real estate investor offers a level of flexibility and freedom that’s hard to find in other occupations. Although it may not work out this way for everyone, if you’re able to successfully invest in real estate, making passive income on multiple properties, you could potentially afford to quit your “day job” or even work part-time. If you know you’ve got X amount of cash coming in every month, it takes the pressure off having the 8-to-5 grind day in and day out.
Most people aren’t able to dive into full-time real estate investing right away, but with some planning and patience, it could be a part-time endeavor that eventually becomes a full-time career.
Cons of Being a Real Estate Investor
Investing in real estate doesn’t always work out for everyone. It does carry its share of risks and it can be a very big commitment. Depending on your goals, some real estate investments may not be worth the time, money and effort you’ll need to put into them.
Time is a valuable asset and once it’s gone, it’s gone. Remember that when considering any project that requires a time commitment. Real estate investing is no exception. The last thing you want to be is a slum lord, buying up properties and renting them out without keeping up your responsibilities and commitments as the property owner. Not only is it a rotten thing to do to your tenants, it’s against the law. If you plan to be a real estate investor who rents out properties, be prepared to devote quite a bit of time to the process. Screening tenants, making or arranging repairs, working with a property management company, reviewing leases, etc…it all takes time. And the more properties you have, the more time it takes.
As we mentioned earlier, risk is always a factor in any investment. Real estate is considered a comparatively safe investment, especially when compared to some other investments such as options, futures contracts, alternative investments such as hedge funds, artwork or collectibles. However, risk is still present in any real estate investment.
When it comes to real estate investments, there are multiple types of risk, including general market risk, asset-level risk, credit risk and more. It would take some time to go through each one in detail, so we encourage you to explore them with a trusted financial advisor.
Finding the Right Financing
Traditional mortgages aren’t exactly designed for today’s real estate investor. In most cases, conventional mortgages are only for properties that the borrower will be using as their primary residence. Investment properties and even some second-homes/vacation homes won’t be eligible for financing under traditional mortgage products.
Another challenge for investors who are just getting started is finding a loan that doesn’t require income documentation. New investors may not have enough income from their day job to qualify for a typical investment property loan. Fortunately, there are some niche loans that can provide a good alternative. The Investor Cash Flow Mortgage is a great example.
With the Investor Cash Flow Mortgage, borrowers can use the cash flow (or anticipated cash flow) from the subject property to qualify for the mortgage. No income or employment documentation is required, and borrowers can apply for up to 80% of the loan amount. Other benefits include credit scores as low as 580 and loan amounts up to $3,000,000.
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