Investing in real estate is an absolute must for any person or family. At the bare minimum, you need to own your home and not rent. There are too many advantages to owning real estate, and if you don’t take advantage it can hurt you in the long run. People invest in real estate for many reasons. Most buyers purchase real estate to build equity and appreciation in their personal home. Others take it a step further and buy real estate solely as an investment and not for any personal use. Real estate investment is often a good idea and a necessary part of a balanced portfolio, but new investors need education on real estate as an investment. For example, how does one determine a good price or fair value? There are many ways that investors determine a property’s investment value. For example, gross rent multipliers, cap rates, and the internal rate of return. These are all good barometers but require more explanation and may be a little advanced for “Investment 101”. For now, I only want to discuss the basics to consider when getting starting in real estate investment.
When most people think of an investment they generally think of the stock market, a 401k, or an IRA. All three can be good tools for investment, but what most people don’t realize is that real estate has been one of the best performing investments throughout history. To put it simply, it is a real asset and they aren’t making any more of it. Meanwhile, the population continues to grow and people continue to live longer. And all of those people need places to live and work. There are many areas where you can invest when it comes to real estate. For example, rental housing, commercial buildings, or land just to name a few. But one of the best areas to get started is residential rental properties. Athens, GA is a great college town with a major university. Therefore, residential and multi-family rentals represent a large part of the investment opportunities in the area. Having a large state university in Athens creates a strong rental market. Because of UGA, there is a steady supply of people that need short term housing which makes Athens an ideal place to purchase investment property. So what do you need to know when it comes to investing in rental properties? There are numerous factors to consider when investing, but the three most important are location, price, and time frame.
Everyone should understand that location is important in real estate, but it is especially true when purchasing investment property. The location of a property is directly correlated to its desirability and ultimately the rental income. If a property is well located it will have less vacancy and more resilient rates. For example, if you are buying a property to lease to college students make sure it is located in an area desirable to college students. Conversely, if you want to rent to families than you may want to find a property in a good school district. It is also important to understand that a well maintained property tends to attract better tenants than a poorly maintained one. The next thing to consider is the price. Price is important when it comes to buying anything, but an investor really needs to understand how the price of an investment property relates to cash flow. Investors use many methods to value investment property. An old rule of thumb is to take monthly rent and multiply it by 100 or 110 to determine a value. It is a very basic formula and doesn’t work every time. But it is a good place to start for a new investor. Basically, you need to make sure that the investment is not going to lose money. Be sure to take into account all the expenses along with the mortgage payment. Many times new investors forget about maintenance or other costs outside of property taxes and the mortgage. Lastly, you should have a plan or time frame in mind for the investment. For example, do you want to pay off the property? Do you want to hold and sell later, or take advantage of depreciation and cash flow for a number of years? There are numerous reasons people invest in real estate, but be sure you understand your goal and purpose of investing.
Yes, there are many factors to consider when investing in real estate, but it should not be viewed as a scary endeavor. It seems most people don’t invest because they worry about an unexpected cost or the maintenance of a property. This is somewhat understandable because maintenance can be a costly item from time to time. Nevertheless, if a property is well located, and purchased right with a time frame in mind the advantages will greatly out weigh any risks.