Real estate can be a great investment, but picking the wrong property is disastrous.
For months now, the U.S. housing market has been hampered by too few homes being chased by too many buyers, limiting choice for potential buyers and pushing up home prices – and even resulting in bidding wars in hotter markets.
The persistent shortage of properties resulted in the fewest number of contracts in a year to buy existing homes in January, according to the National Association of Realtors, which warned that tight housing inventories could slow the housing market just as the spring selling season gets underway.
The shortage of properties is a problem not only for those looking for a place to live, but for those who are looking to invest in real estate, seeing returns in the form of rental income or profit derived from the sale of rehabbed homes.
“Buyers of all kinds, including investors, are finding it a challenge to find homes in our market due to low inventory,” says Monica Ajer, an agent with Coldwell Banker Residential Brokerage in Berkeley, California. As spring nears, more properties are entering the market, but there are still way more buyers than homes, Ajer says.
“Homes that need significant repair and upgrading but are in hot locations may be wise investments,” she says, but bidding wars are breaking out among those who recognize that potential.
That’s true not only in the Bay Area, where Ajer sells, but also in markets nationwide. Denver, Dallas/Fort Worth, Portland, Oregon, and Richmond, Virginia, are among 10 of the nation’s hottest markets for 2016, according to Zillow, a real estate information website.
Whether you’re considering purchasing a multiunit complex for immediate rental, buying a home now with the idea of selling it a few years or profiting from the purchase of a fixer-upper that can be resold at a much higher price, here’s what to look for when considering real estate as an investment:
Plan on a big down payment. Mortgage insurance isn’t available for investment properties, so a 20 percent down payment is required to get traditional financing. And putting even more down can result in a better rate. Also, loan costs are generally higher for investment properties.
Enjoy being handy and fixing things. Opting for the landlord route brings with it lots of challenges, including making repairs. Be sure to have enough savings on hand to handle any unexpected repairs in the short term – before the rent checks start rolling in.
Income varies. Tenants come and go, and it may take a while to rent out a just-vacated unit – especially if it needs substantial repairs or rehabbing, reducing your income. But you’ll still have to pay the bills, including mortgage, property taxes and insurance.
Property taxes. Depending on the type of rental property purchased and how long it is kept, investors could discover a big increase in property taxes, if a homestead exemption had been in place for the previous owners.
Beware of fixer-uppers. If you’re new to investing in real estate, beware of taking on a bigger challenge than you can handle. Unless you have the skills for large-scale improvement – or know someone who does quality work at bargain prices – you’ll likely pay too much to rehabilitate the property and still make a profit on its sale. A better option is to look for properties that need modest repairs that are priced at below-market rates.
Start small. While repairs present a challenge, so can buying a larger property than you’re ready to handle. Starting small – purchasing a single apartment, condo or duplex, for example – can help you get grounded in the idea of investing in real estate and decide whether it’s really the right step for you.
Choose your partners wisely. If you can’t afford to buy property on your own and wish to enlist co-investors, be sure you’re comfortable not only with your business partner but the agreement struck up to purchase and manage the investment.
Consider a REIT. If the day-to-day challenges of buying and managing a rental sound too burdensome, there’s still a way to benefit from investing in real estate: real estate investment trusts. REITs are privately or publicly held companies that use investors’ money to buy and lease real estate. REITs are easy to purchase – just open a brokerage account – and they yield many of the same benefits of actually owning real estate, such as routine income (in the form of quarterly dividends), and they typically offer better and more reliable returns.