Many advantages and disadvantages of investing your money in real estate
Q: I have been a long-time reader, but I have never had a reason to write to you before. That is, until now. A few months ago, I inherited several hundred thousand dollars from someone close to me and tried to figure out how best to invest them. Other than the house I currently own and bought 17 years ago, I have never been involved in buying a house, let alone renting it. Can you give me some advice on what I need to know?
A: Well, first of all, please understand that I am not an investment coach, so I take no responsibility as to whether your real estate investment will ultimately pay off. Other types of financial advisers are better equipped for this.
But your question gives me the opportunity to revisit my own take on real estate investing, something that I have talked about in detail over the years, but with the pandemic raging, it hasn’t been a hot topic since. about 16 months.
Investing in real estate is great for a lot of people. And not so great for others. Some of the richest people in the country have achieved this by investing in real estate. Also, some of the poorest.
Like a lot of things in life, it has everything to do with the individual, their personality traits, their likes and dislikes in general, their willingness to take risks, and a fair amount of silly luck.
First, the analysis of the half empty glass:
When you put your money in your savings account, CD, or money market account, you know where it is, how much it will earn you over time, and how to get your money back if you need it. And you have the added benefit of knowing that your savings account won’t be chasing you. You can forget your CD, go on with your life and sleep peacefully.
You don’t get any of that with real estate.
Investing in real estate is business, pure and simple. It is something that you need to stay actively involved with.
When you buy a property, be it residential, bare land, or commercial, you are not only locking in the money you have invested, but you are committing to investing more money in the property for as long as you own it.
You incur a mortgage, property tax payments, appraisals, insurance, maintenance costs and possibly future legal costs. If the economy puts you in a situation where you can’t even afford the property retention fee, you have a few choices left, all of them bad.
Then there are the efforts and risks associated with being a homeowner.
You have to find the right tenant and hope that they will continue to pay. If they don’t, you have to hire a lawyer to evict them, which not only costs you money, but can allow the tenant to live there for free for months.
Once a tenant moves out, you hope you won’t find the drywall, cabinets, and appliances in a pile in the yard.
You also hope not to receive a summons and complaint (legal action) brought by a tenant for anything from failure to maintain habitable accommodation to sexual or racial harassment.
And now, for the half-full glass part:
No one ever loses money in real estate if they can hold the property long enough to make a profit. Despite the great recession of ten years ago, this is still statistically true.
Historically, the value of real estate has always gone up, ultimately.
You can certainly make a lot more money in the real estate market than tossing your money into a CD if you have the financial means and the patience to wait for bad markets.
Also, depending on how much you put on the property and the interest rate you can get from the bank, it is very possible to buy a rental home where you start making money on the day. where the tenant is moving into.
Then there are the many tax benefits of owning investment property, which you need to sit down and discuss with your tax advisor.
Real estate is a great investment for someone with the right personality and the right goals. But if you’re not ready to treat it like a business, you might want to think twice before you get your feet wet.
By all means, use a real estate agent to find and acquire a property if you decide to go ahead. Then, if you are considering renting it out, seriously consider hiring a property management company to handle the day-to-day affairs. California’s landlord / tenant laws are complicated and became so much more just before Covid-19 hit.
Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you would like answered in this column, you can send an email to [email protected].