Real estate investments for retirement or as “passive income” has long been touted as the way to create wealth and increase net worth. While it’s true that real estate certainly can do all of those things. It’s important to take a look at the realities and requirements of this type of investment.
Financial Requirements of Real Estate
One of the main points to understand with all real estate is the amount of “leverage” that it offers you. Leverage is when you purchase an asset by putting down a percentage of the purchase price and financing the rest. Thus, leveraging a relatively small investment for potentially much bigger returns.
In order to purchase any real estate, having the funds to purchase and maintain the property is critical. In addition, being considered “credit worthy” is important in determining the types of interests rates that a lender will offer.
Investment property financing comes with higher interest rates than purchasing a primary residence. The terms and conditions are also far more stringent. As lenders find these to be a riskier investment than home ownership.
Time Requirements of Real Estate Investments
Many people often talk about how they “just sit back and collect the rent check!” While that may be true on occasion, real estate definitely requires a time commitment.
Finding tenants and showing the property takes time at the outset of the investment. Making sure that you find the right tenant is critical. It cuts down the amount of time and effort your investment requires each year. The wrong tenants can cause damages to the property or not make rent payments. Which will greatly increase your time commitment to either take them to court or fix the issues at the property.
Property maintenance is a major time commitment that many forget to factor into their analysis. Murphy’s Law of what can go wrong, will – happens frequently in real estate. Knowing how to fix and make repairs certainly comes in handy. And if that’s not in your skill set, having the right people that can do that is certainly a major plus when something happens. That just leaves the overseeing and managing the repairs to the owner.
Legal Requirements of Real Estate
Any time there is a landlord – tenant relationship, there are certain do’s and don’ts that the property owner needs to be aware of. Missing some of these can open up legal issues that are best avoided. Luckily there are several sources online that cover the basics and speaking with an attorney that specializes in this area as well is critical.
In addition, an attorney can insure that you have the best lease for all of your tenants that protects you. The lease is the binding agreement between all parties and having a lease that protects the landlord will give the owner an additional level of security.
Real estate investments offer many opportunities for investors. Whether it’s as an additional part of a portfolio or starting a new portfolio. Knowing what to anticipate and preparing for it will make the entire process easier and far more successful.