Should you invest in real estate? 3 questions to ask yourself before you start

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    Should you invest in real estate? 3 questions to ask yourself before you start

    5 MIN READ

    One of the most common questions I ask from clients is “should we buy real estate”. Well my answer is both appropriate and frustrating … it depends!

    It depends on much of things. Buying a property is a big financial decision. It’s not like buying an index fund – you can’t just sell it and walk away when you no longer want to hold it.

    Everyone has probably heard the inspiring stories about the couple who gained financial freedom through real estate investments. You can travel the world with your family with the financial security of generating passive rental income during your travels.

    That sounds amazing, but it also requires a lot of work to do right. And it’s not for everyone.

    This blog gives you the framework to decide whether real estate investment is best for you.

    * Please note – this blog was written from the perspective of a working parent with 2 children. They are not real estate professionals. You are not planning to flip houses, but rather plan to buy and hold the properties.

    Question 1: What do you hope for by investing in real estate?

    Before investing headlong into real estate, it’s important to ask yourself a key question first. What do you hope for from investing in real estate?

    Most people will say they can generate “passive income”. Passive income is essentially money that you generate that does not require your daily commitment. Things like royalties, online courses, etc. are examples of passive income.

    But what does passive income do for you and your family? For many it means the ability give up the “9-5” job that you have no passion for. Passive income could give you the freedom to spend your time exactly how you want, with the financial support of rental income to meet your daily expenses. Sounds pretty good, doesn’t it?

    But what would you most like to do with your time when you were in full control of it? Do you want to work? Voluntary work? Spend time with kids? To travel? Invest in more real estate?

    To determine whether real estate investments will fit into your life plans, it is important to guess this question first.

    Perhaps your ideal life means managing real estate. Great – then getting started with real estate investment makes a lot of sense for you.

    But what if your ideal life means spending more time with your kids in the near future and turning one of your long-standing passions into a small business? Well then, real estate investments may not be the way to go about this as it can take a long time to generate enough passive income to make this financially possible.

    You should start with the end in mind and then work backwards to see if real estate investing is the best way to achieve your desired future state.

    Question 2: Can you currently devote yourself to the real estate business?

    Let’s say you believe that real estate investing is in line with your ideal life … do you think the best time is to get into the real estate business?

    I specifically say that Companies of real estate, because it often gives the impression that real estate investments are a walk in the park. Think about the work involved in managing real estate – tenant changes, tenant inquiries, drawing up leases, paying for ongoing maintenance, recording financial transactions, etc. It’s a lot of work!

    Yes, you could hire a property manager to do this for you, but then you are likely giving up around 7-12% of monthly rental income.

    Time is the most precious commodity we have. Do you think it’s feasible to spend extra time on real estate (on top of your full-time job!)? What are you giving up on? Is it worth the compromise?

    There is no right or wrong answer here – it ties in with your unique situation and values. Perhaps you are in a sales position and could make more money using that extra time on your current job? Or would you ultimately like to become self-employed and can use this time for further training or learning a new required skill?

    Real estate investment can certainly be a lucrative opportunity, but it takes time and you should be sure that you will not be able to use that time more effectively. No rental income can compensate for missing your kids’ soccer games.

    Question 3: What is the opportunity cost of money?

    You want to ask yourself this question in full every time you make a financial decision – What is the opportunity cost of money? In other words, what else could you do with the money?

    Here are some common examples –

    • Invest in the stock market
    • Pay off existing debts
    • Save for your children’s education
    • Travel with your family
    • Found a company
    • Update / renovate your existing home

    Buying investment property is a huge financial commitment – you’ll likely pay a sizable down payment and then sign up for the ongoing charges. This investment can certainly be worthwhile in the future, but it can take a while long time to reach.

    When you fully weigh the opportunity cost, you may believe that unlike real estate, you can make more meaningful investments in yourself or your family. The best investment may not always be one that maximizes your money, but one that enriches your life.

    How to start investing in real estate

    Let’s say you’ve answered these 3 questions and are still confident that you want to invest in real estate – how do you get started?

    I recommend dipping your toes in the water before jumping in. Buy a property and see how it goes before building a real estate empire. Get used to a landlord’s decisions, process, risks, etc.

    But be careful – real estate does not give you financial freedom. It requires ownership of multiple properties to have enough residual income to allow you to quit your 9-5 job.

    When you buy a property, you want the income from renting the property at least Cover your property maintenance costs (mortgages, taxes, insurance, maintenance, etc.). That way, you are not underwater and have to use some of your daily cash flow to cover the cost of your property and you benefit from the property’s increase in value. If you can find a really good investment property, you may even get some rental income at first, but it is likely not significant enough to make a lifestyle change right away.

    Once the mortgage payments are gone, you can certainly earn a sizable amount of rental income, but that could take 30 years!

    The central theses

    • Real estate investments can certainly be a Path to financial freedom, but it is not the only Path. Before investing in real estate, you need to be sure that a) it aligns with your life goals, b) uses your time well, and c) the money is not being used better
    • Don’t underestimate the investment you can make in yourself. If your ultimate goal is to quit your 9-5 job to pursue a passion, then maybe starting your own business is a better decision than building your real estate portfolio.
    • Real estate investments are unlikely to make you rich overnight – just like you would Cryptocurrency Investing in the stock market takes discipline, patience, and sound financial decisions to grow your net worth in the right way.

    This article originally appeared on Experience Your Wealth


    JakeNorthrupAbout the author
    Jake is the founder of Experience Your Wealth, LLC – a fee-only financial planning firm serving young families eager to travel who don’t get caught up in the “9-5, work until you’re 65” concept. We help you to find the responsible balance between paying off debt, investing in the future, but also experiencing life now.

    Did you know that XYPN consultants offer virtual services? You can work with clients in any state! View Jake’s Find a Advisor profile.



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