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- If you're ready to invest in real estate, there are a few sure signs, experts say.
- You'll have a solid start on saving and investing for retirement, and you'll likely be funding both your 401(k) and IRAs, if available, with cash left over.
- Additionally, you'll have the time needed to manage real estate, including the time to buy it and work with any tenants you have.
- Having the cash to get started is also necessary, and it will likely require a full 20% down payment to buy an investment property.
If you're considering investing in real estate, there's a lot to know before you make your first purchase. It's unlike any other type of investment you've owned so far, and will be different in everything from how you manage it to how you earn from it.
For anyone who's wondering if becoming a landlord is the right move for them, a financial planner and a real estate investor say there are a few signs that it's right for you.
1. You have a solid start on saving and investing for retirement
Before anyone starts working towards investing in real estate, financial planner Riley Poppy says they should already be saving for retirement and have cash left over.
"I would typically like to see clients have their established buckets first, like their 401(k), their Roth IRA, and maybe a brokerage account," he says. This is a foundation that anyone considering investing in real estate should build before becoming a landlord.
2. You have the free time to manage your investment
Time is of the essence in real estate investing — and you're going to need a lot of it.
Poppy says he generally sees his clients take on real estate investing after changing their work schedules or roles. "You should have the extra time to manage the property and stay on top of that. Sometimes, it can be like another full-time job," he says.
It can also be more than just managing the properties. "You might have to have some legal work done to turn that into an LLC, or you have to do some of the marketing," Poppy says.
Real estate investor and landlord Becky Nova agrees. "People think that they're just going to get mailbox money, and real estate is not that," she says. In her experience, real estate investing for anyone wanting rental income also involves a lot of customer service. And, all that management takes time and energy you'll need to have before investing.
3. You have the capital needed to get started — generally, that means cash for a down payment
The process of buying an investment property is a lot like buying a home, but in some ways, it's more difficult. "There's typically a little bit more upfront capital requirements for investing in real estate," Poppy says.
Lenders see rental properties as a higher risk, and charge more for them in interest and require larger down payments. At minimum, you'll likely need a full 20% down payment to be able to start investing in real estate.
If you have the cash on hand to start investing in real estate, it's likely a sign that you're financially ready to start if your other goals are met. However, keep in mind that you'll also need other cash to keep and maintain that building.
4. You have a tolerance for risk
Like any investment, profit from real estate isn't a given. And, anyone who's considering investing in real estate should do so with that understanding.
Poppy says that he wouldn't say that real estate is a better investment than stocks, or vice versa. "There are so many variables there," he says. "Real estate can come down to the location. And real estate reacts differently when the market does poorly, and sometimes real estate can do well when the broader market is doing badly."
While the same can be said for the stock market, it's worth noting that real estate is unique in some of its risks.
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