Amanda, 37, never dreamed of being a landlord.
Years of student housing taught Amanda the horrors of renting; under-maintained houses owned by disinterested landlords had left her with negative feelings regarding rental properties. Yet when Amanda moved in with her boyfriend, Sandeep, the two decided to keep Amanda’s one-bedroom condo and rent it out for additional income.
So what led Amanda and Sandeep, a young urban couple with no experience in real estate investing, to this risky decision?
Amanda had purchased the condo fresh out of university with the help of an inheritance received from her grandmother’s passing. As a result, her remaining mortgage was quite a bit less than the national average of $200,000. Taking into account the cost of maintaining her one-bedroom condo and the amount of rent it could generate, Amanda and Sandeep weighed the risks and rewards and decided that this could provide a good return on investment (ROI) and would be a good addition to their retirement planning strategy.
There are a lot of things to take into consideration before deciding to invest in real estate. First you need to decide what kind of investment you’re comfortable with making. Options range from lower-risk (i.e. real estate investment trusts) to high-risk (i.e. fixing and selling properties, or “flipping”).
Real estate investment trusts (RETIs) can be purchased through your financial advisor or an online broker and allow you to enter the real estate market without the jeopardies associated with owning physical properties. Which RETI you should choose will vary based on your risk tolerance, timeline, and investment knowledge. Speak with a financial advisor for more information on RETIs and how to decide if they’re right for you.
The strategy of buying underpriced houses to renovate and sell is called “flipping” and is a method that has grown in popularity in recent years, partly due to television shows that feature these types of investors. This is a much riskier investment because the investor has much to take under consideration, such as cost of the property, cost of renovations, time spent on these renovations, and final selling price. It’s important to find a good contractor whom you trust and can provide accurate estimations of expenses and time required to complete the projects. The other risk in this type of investment is that you will be paying the mortgage without generating any income for as long as it takes to prepare the property for sale. The ROI on flipping houses can be quite high, but you need to decide if you can handle the risk it entails.
A midway point for entering real estate is to rent out space in the home in which you currently reside. This can be achieved through opportunities such as basement apartments, student rentals, or by utilizing an online platform such as Airbnb for short-term tenants. This strategy can be quite profitable, since you are generating income on a property that you are already paying to maintain.
Whether you are a seasoned investor looking to enter the exciting world of real estate or you are brand-new to the realm of investing, putting money into real estate can be a great addition to your financial portfolio. Speaking with your financial advisor about what you can afford and how much risk you’re willing to take is your first step into the real estate domain.