Should Busy Entrepreneurs Invest in Real Estate?

September 8, 2016

2:30 pm

You have a business to run. You also have a financial future to plan for. What happens when you decide to retire? There will come a day when you want to hang it up and enjoy a leisurely life.

And you will want to have enough retirement income to do that. So, you know that right now, you need to make some investments for that future. You have two choices really:

  1. You can invest in the market through mutual funds or an individual retirement account. In this case, others will manage your money, and you can hope that there are no crashes, and that, in the long term, there will be growth that eventually provides a good income.
  2. You can look for individual, single investment opportunities that may realize long-term income. One of these is real estate.

Why Real Estate?

While the real estate market has certainly had its ups and down in recent years, you have to consider this: Property is a finite resource. We can’t “make” more land on this planet, so, over the long-term, it will increase in value as demand increases from an ever-enlarging population. And it is a concrete asset – it is physical.

The other big draw for real estate is that you can choose to be active or passive in this investment, as your time and knowledge allows.

Before you put your feet into real estate investing, though, there are some “rules” you need to follow.

What is Your Goal?

Do you intend to buy properties, renovate them and then sell at a nice profit? If so, then you are really starting another business and you will have to be very active. Do you intend to buy and hold, rent those properties and gain a monthly income from them? Then, you can be active or passive as you choose. You can take care of renting, maintenance, repair, etc. on your own, or you can hire a property management company to do this for you. Typically, they take 10% of the rental fee. Another option in the beginning is to put your money with a real estate investment firm, until you are comfortable going it alone. Another option is to join newer technology-driven crowdfunding real estate investing.

Do the Research

If you are going to go this alone, then you need to learn the basics. You don’t have to attend expensive seminars. Either get a good book or find someone in the business and provide them with something in exchange for mentoring you. Going through the phases of looking for properties, making offers and closing deals can be complex, but if you can walk through it with someone who is experienced, you will learn what you need to know. The other thing to understand is that the real estate market is in for major disruption right now, and there may be opportunities to get into real estate in very new ways.

Explore Lots of Properties.

Hopefully, you have set a price range. Now the questions become location, price, and potential.

  • Location: Is the property in an area that can easily be re-sold or rented? How many properties in the area are vacant or up for sale? Is there a large demographic that will find this property attractive? Get online and look at the history of these properties. You will learn all you need to know.
  • Price: This depends upon the level of motivation the seller has. If it’s been sitting a while and the price has been dropping, go in with a low ball but reasonable offer. If it is bank-owned because of a foreclosure, you have lots of negotiating room. Banks don’t want to be in the real estate business.
  • Potential: Again, the demographics of the area will tell you a lot. Could this area be subject to potential gentrification or renaissance? If not, are other properties in the vicinity inhabited?

The Finances

Whether you intend to take a mortgage or purchase outright, and then intend to rent the property, you have to be realistic about income from that property. What are comparable properties renting for? Once you have that general idea, and you have a range that you plan to charge, here is another general rule of thumb:

You must take off 30% of that rental income and put it aside – you will have insurance, taxes, repairs and maintenance. And there may be times when it is vacant. And if you are using a property management firm, add another 10%. The other big factor is a mortgage. If you borrowed to buy the property, you must subtract the mortgage payment from the rent as well.

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Dianna is a former ESL teacher and World Teach volunteer, currently living in France. She's slightly addicted to apps and viral media trends and helps different companies with product localization and content strategies. You can tweet her at @dilabrien