As we enter midlife, we often want to diversify our portfolios and investment strategies. One way to do this is to pick up some rental properties, or to invest in flipping a house. While real estate certainly will diversify your income, there are some very real considerations you must have before jumping into the landlord business.
Real estate was considered to be a hugely profitable investment before 2006, but when the housing market crashed, fears set in and the market dried up. People have been somewhat scared of investing in real estate for the last 10 years but if you’re savvy, you can use this to your advantage.
If you’re in the position to learn about basic home maintenance in your middle age, you might find rental property to be a valuable asset. For boomers entering retirement with solid financial footing, having real estate that is maintained by a property manager can give you reliable, reasonably passive income.
Before you jump into the market, however, let’s take a look at some of the biggest aspects of owning rental property, flipping houses and how this income stream can impact your overall life.
Is Investing in Real Estate Smart?
Real estate isn’t completely passive income
Though it’s considered a passive income stream for tax purposes, it’s simply not that easy. If you aren’t in a position to hire a property manager (which you probably don’t need unless you have a lot of rentals), you’ll be the one fixing everything that breaks. If you don’t have the know-how, tools, time or money to continue with upkeep, you’ll quickly realize being a landlord can feel like a second job.
Owning rentals requires good people skills
Not everyone has dream tenants – in fact, just like when interviewing for a job, people can present themselves wholly differently than they really are when you talk to them about moving into your property. Of course you’ll get a security deposit, but will that matter when they pour bacon grease down the sink or a dog destroys the drywall?
You need to understand that this is a business contract and that you need to protect your assets. If you’re not willing to get confrontational with a bad tenant and you don’t have the money to hire a property manager, this can be the biggest hurdle to being a landlord.
Owning and flipping property is very costly
Even bad property can be expensive, both to buy and to get up to code. From there, you have to make it appealing to rent – nobody wants to live in a slum. All of this costs money and time, so you need to be ready to invest and continue investing.
If you’re not prepared to put in hard work fixing, tearing out, painting, listing, hiring a realtor and so on, then owning rental property is likely not something you’ll enjoy.
Rentals will not replace investment
If you’re not invested in mutual funds or stocks, you shouldn’t start your retirement plan with real estate. Diversification is great, but rentals are a costly and volatile investment if you’re not already on solid footing. Even if you are, they can take more time and money than you expected.
Speaking with a financial advisor and getting your investments down first can help you decide if getting into rental property is worth your time.
Owning real estate isn’t always a smart investment
Depending on where you live, having rentals might simply not be profitable. If there aren’t businesses and employment opportunities nearby, then chances are it will be harder for you to draw in tenants. Beyond that, all cities have areas that are harder to rent in for many different reasons.
Finally, you need to understand that owning real estate is a business. It’s not like stocks and bonds that accrue value with very little input and effort. You need to be able to work with people, market your listings, keep the yard and home neat and clean, and keep up repairs. All of this needs to be offset by the income generated. If there’s no income generated, you’re just losing money and time.
Talk to a financial advisor about investing in real estate
A financial advisor can help you understand the risks and potential upside to getting into the landlord game, no matter what stage of life you’re at. If you’re handy and you have the tools and materials to fix up and maintain a house, you’re already in a much better position to own and rent property. If not, you’ll likely need to hire people and that cuts into your profits, potentially creating a situation where you’re not making much money and possibly losing it.
Look at your area and see if owning real estate might be profitable and how much time and effort you want to invest. From there, talk to your financial planner about your options and then, if it seems like a good idea, jump into the world of real estate. If not, definitely steer clear!
Do you own properties? What has been your experience? We’d love to hear about it in the comments!