Bill Keen is the Founder and CEO of Keen Wealth Advisors and the Best-Selling Author of Keen on Retirement.
During my conversations with clients, real estate often comes up as a potential investment opportunity. For many people, there’s something appealing about being able to see and touch what they are invested in. It’s a visible representation of their investment that can seem more real than numbers on a screen. It’s one of many reasons the topic of investing in real estate comes up.
Then, once we start digging into the topic, it’s often quite eye-opening. Many people grossly underestimate various issues like taxes, insurance or a bad tenant eviction. They also may not have considered what their money, invested in a diversified portfolio of stocks and bonds, would do compared to an investment in real estate. That’s not to say real estate is a bad investment.
It’s simply not right for everyone—it requires an investment of time and a level of expertise to do well. In this article, I’ll walk through qualities I’ve noticed in people who’ve done this successfully, as well as some factors you may not have considered with real estate investing.
Qualities Of A Successful Real Estate Investor
The people I’ve worked with who’ve been successful in real estate, by and large, have other sources of income. This isn’t their primary business; however, they’re also not afraid to manage the various processes themselves such as drawing up leases or finding renters. They might have an assistant who handles clerical tasks and an attorney to review documents, but otherwise they handle everything.
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For many people, the complexity involved with the day-to-day operations of real estate would make this investment a major headache. I’ve had people in my office who couldn’t wait to offload a property that was being occupied by a squatter who destroyed the property over the course of a year and then stole the appliances on the way out the door. Granted, this is an extreme case and a horror story that doesn’t happen often, but it does happen.
That’s why I like to tell people who are considering investing in real estate, “You need passion.” The people who have been successful love what they do and typically have a background that makes them well suited for this kind of work, such as being a real estate agent or property manager.
They also have the money needed to invest. Yes, you can buy a property with leverage, but you still need to have a solid reserve for unexpected expenses including repairs or extended periods without a renter to name a few. Prudent real estate investors also use caution and patience because they know their leverage can work against them. They don’t rush out and start buying just to build their portfolio of properties.
In a market like we’re seeing now, where the price of everything is sky-high, they’re even more selective than usual because they heed the old saying in real estate, “You make your money when you buy, not when you sell.” That means the purchase price, more than anything else, will determine your profit later on—you can’t rely on anything else to create your profit margin.
Factors You Should Consider
If you’re considering investing in real estate, let’s start with the three t’s of rental properties: tenants, taxes and toilets. Finding good renters and then handling maintenance on the properties you own are two of the most important aspects of real estate.
Then there are the taxes. Simply put, with real estate, you must be (or employ) an impeccable record-keeper. With any property you buy, your cost basis will be adjusted by the investments you make to improve the property. So, if you buy a house for $100,000 and put $100,000 into it, your cost basis will be $200,000 if you go to sell. But without the right records in place, your cost basis will only show as the $100,000 you paid for it. Under current tax law, a positive is your heirs will enjoy the “step-up in basis,” which will adjust the value (or cost basis) of your property to the value as of the date of your death.
That’s assuming you do want to pass your property on to the next generation, which many clients I’ve worked with chose not to do because it wasn’t the right fit for their children or grandchildren. They chose to unwind their real estate portfolio instead, which is another factor to keep in mind. Real estate investments aren’t liquid. Yes, you can sell them, but the process takes significant time, expense, paperwork and preparation.
Buying a property yourself isn’t the only way to be involved with real estate. You can invest through a publicly traded real estate investment trust (REIT). For many people, this is a way to balance their desire for a tangible asset like real estate in their portfolio with the level of detached involvement they desire in their investments.
The Right Choice For You
I wouldn’t want anyone to read this article and think I’m not a fan of investing in real estate. I think that, done well, real estate can be a great addition to a diversified portfolio. I would just caution against the thinking that real estate investments are the right fit for everyone or that anyone can have success with them. Given what’s required to manage a real estate portfolio, it’s not a good fit for many people’s lifestyles and the chances of success can vary wildly.
If you’re considering real estate as an investment opportunity, speak with your financial advisor and try to find someone in your circle who’s had success in this area. Take them out to lunch and ask them for their honest take on what’s required to succeed in real estate and the steps they took to get to where they are. You’ll likely find out quickly if it’s a good fit for you.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.