Passively investing in real estate, through REITs or other real estate index funds, can be done through your 401(k) or Roth IRA. For more hands-on investing in real estate, we believe you should wait until Step 7 of the Financial Order of Operations, hyperaccumulation.
Real estate investing is commonly believed to be one of the “best” ways to build wealth. Investors own tangible property that grows in value while also receiving cash flow. It’s a win-win, right?
Real estate investing can be a great source of income, but it may be more difficult than you think. However, there are many ways to invest in real estate, and it may be a lot more accessible than you think.
Rental real estate investing sounds like easy money – put a small deposit down on a property, get a check each month to cover the mortgage, and sit back while your real estate appreciates. The truth about real estate isn’t quite so simple. Here are three common misconceptions about real estate investing.
1. Real estate is passive
A hot buzz word in the world of finance right now is passive income, particularly investing through real estate, but anyone who does real estate for a living will tell you it’s anything but passive.
First, due diligence must be done on the front end to determine the location of the property, to find tenants, to figure out the logistics of the agreement, etc. Once you do get tenants in the door, life happens, and you (or a paid property manager) may find yourself dealing with maintenance and repairs as tenants wear the property down.
2. Real estate doesn’t take a lot of money
On the front end, you will likely need to put down 20-25% down for an investment property, especially if you hope to receive a low mortgage rate. On top of that, you will have transaction costs during the real estate purchase.
After the property is purchased and leased, it will need to be maintained. You may need to hire a property manager, you’ll have property taxes due, and you could face costly repairs, such as needing to replace the roof or air conditioning unit. Also keep in mind that your real estate assets are not liquid, so the money that is tied up in the property is not easily accessible.
3. Real estate always goes up
Think of 2008. Real estate prices are not immune from volatility, and they are often less resilient than stock recovery. On average, real estate does increase in value, but this return is not something that can be relied on. In a down market, investors may lose tenants or value in their homes, but they are still responsible for home maintenance and mortgage payments.
Real Estate investing falls in Step 7 of the Financial Order of Operations. Before pulling the trigger on an investment property, be sure to have your cash reserves covered and maximize your tax-advantaged retirement accounts. After reaching these steps, it could be a good time to consider hyper-accumulation through real estate investing.
Check out the video below for more information about where real estate falls in the FOO.
