With how rapidly the real estate market has grown over the past several years, it’s hard not to want to throw as much money as you possibly can into the market. In San Diego where we are located, the median home value has increased by more than 70% since 20111, and rent prices have climbed more than 75%2. It doesn’t take Warren Buffet to know those are stifling numbers, but when you factor the risks that come with owning an investment property, is it really that good of an investment?
Here are some questions to ask before you purchase your first investment property:
Can you withstand the ups and downs?
Although the San Diego market has increased by a huge amount over the last decade, this is far from a guarantee in the future. Anyone who was invested in pretty much sector during the 2008 financial crisis knows that steady gains are not always a sure thing.
Real Estate comes with its own personalized set of risks outside of market forces alone. On any given day you could find yourself with a huge maintenance bill that sets you back months or even years before you turn a reasonable profit. If you are going to jump into a real estate investment, we think you should be ready to commit for a minimum of five to ten years, and able to cover any unexpected costs that arise over that period.
Have you considered all the costs?
Properly taking care of a real estate investment is not a cheap affair. If you have already maxed out your resources acquiring your new property, you will likely be in for a rough surprise when the monthly bills start coming in. Depending on the unit you purchased, you could find yourself with maintenance costs of as little as a few hundred dollars, or as high as several thousand.
Before you purchase a property, make sure you have done a thorough inspection and take inventory of the lifespan of some of the big-ticket items such as the roofing, plumbing, foundation, electrical, and appliances. Start budgeting and planning to replace them now, so that you have enough money ready to go when it’s time to pull the trigger.
In addition to maintenance costs, make sure you have budgeted for taxes, management fees, vacancies, and unexpected costs that your tenant brings. Although you should do everything you can to source the most reliable tenants, you just never know what might happen.
Does it sound fun?
No matter where you stand financially, knowing how much you will enjoy real estate investing should dramatically affect your final decision. Obviously, everyone wants to have fun, but from a business perspective, your level of enjoyment can have a huge impact on the bottom line. That’s because if you are investing in something that you believe in, you will go above and beyond to research the market and understand how to maximize your profitability. More importantly for real estate, when things take a temporary turn for the worse, which they always do, then it won’t be hard to avoid the urge to sell at the bottom of the market.
Investing in Real Estate can be one of the most financially rewarding and enjoyable experiences if you plan well and go in with the right expectations. In most cases, you won’t become a millionaire overnight, but if you are in the right market you can see a steady profit over time.
So what do you think? Is Real Estate for you?
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