Everybody is always trying to find investment ideas to secure the future for themselves as well as family and loved ones. Investing in real estate is one of the most effective ways to build generational wealth. This is why many who already own a home of their own make the decision to further capitalize on the real estate market by purchasing an investment property. However, before you decide to make this jump, there are several important things you should consider. 

Are you ready to be a landlord? 

Although it may be exciting to think of the future wealth you will be generating from your investment property, you should think carefully before you decide to buy. One of the first things you should ponder is if you are actually cut out to be a landlord. Managing a rental property can be quite time consuming and inconvenient at times. Do you want to be an active landlord or a passive one? 

There will always be something that needs repairing or maintenance, whether it is a big deal or a little issue. Either way it will require significant amounts of patience. Also, being able to take care of some of the minor repairs yourself can save you money and increase your profit margins (active landlord). However, if you don’t know your way around a tool belt, you may have to hire professionals to do the work. 

You will also need to be adept at dealing with the legal paperwork involved in managing rental properties. Failure to do this properly can result in serious consequences if you happen to be sued by a tenant. 

Of course, another option, besides managing the property yourself, would be to hire a professional property management company (passive landlord). However, this will cut into your profit margins if you do decide to go that route. 

It is all about location 

Choosing a good location for your particular investment strategy is essential to your success as a real estate investor. You’ll want to consider choosing a property in an area which is growing or has the potential for growth. In fact, we would recommend consulting with professional agents who specialize in rental properties vs. striking out on your own, especially if you have limited experience in the rental market. 

Residential vs. commercial property 

Deciding if you want to own residential vs. commercial is another decision you’ll need to make.  Some points to consider before purchasing:

  1. Residential: How comfortable are you with evicting a family from a residential property you own? While you hope it never happens, this is a reality and can be very difficult to execute.
  2. Commercial: Is the business you’re renting sustainable in a difficult economic cycle? What will happen to the business if we experience a resurgence of the recent pandemic? Would you be able to continue receiving rental payments? 

Balance risk and reward 

Ultimately, the decision to buy an investment property will depend on making a risk versus reward analysis. Consulting with a financial professional such as a Real Estate Agent can help you avoid making a poor decision on the actual property.  Additionally, consulting with a Financial Advisor can help you see if property fits into your overall financial plan. 

Bottom line, regardless of the property you’re purchasing:

  1. Do your own research
  2. Hire professionals to assist you in locating, negotiating, and purchasing
  3. Run the numbers. A good Financial Advisor can assist here.
    1. Is the income (yield) from the investment, after expenses and costs, worth the amount of your time spent on the project
    2. Will you be able to sell the property for a gain (after expenses) that compensates you for the length of the holding period
    3. If the numbers don’t work in your favor, it’s probably not worth the time commitment or the loss of liquidity on your money 

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.