Investing in real estate has become exponentially popular over the last five decades and is now one of the most common forms of investment. Although the real estate market has plenty of opportunities for making big bucks, there is a lot more to investing in real estate compared to investing in stocks in bonds.
This form of investment has been around for.. a very long time. Typically, a person will purchase a property and rent it out to a tenant. The owner (aka, landlord) is responsible for paying the mortgage, taxes, and maintenance costs. Ideally, the landlord charges enough rent to cover all of the costs mentioned above. If the landlord wants to go above and beyond, he/she may also charge more to gain monthly profit. However, the common strategy is to be patient and charge enough rent to cover expenses until the mortgage has been paid, at which time the majority of the rent becomes profit.
In addition, the property may also appreciate in value over the course of the mortgage, leaving the landlord with a more valuable asset.
Potential Risks of Real Estate Investment
- The landlord may end up with a bad tenant who damages the property.
- The landlord may have no tenant. (This would leave the landlord with a negative monthly cash flow).
- Finding the right property – it is important to pick an area where vacancy rates are low and to choose a place where people will want to rent.
The biggest difference between a rental property and other investments is the amount of time and work that you will have to devote to the maintenance of the investment. When you buy a stock, it sits in your brokerage account and (hopefully) increases in value. If you invest in a rental property, there are many responsibilities that come along with being a landlord. For instance, when the AC stops working, you’re the one that gets the call.
For those who mind the work, you may hire a professional property manager who will take the problem off your hands.