Make sure you do your homework before investing
By Deborah Jeanne Sergeant
Historically, real estate has been thought of as a solid investment. It normally appreciates in value over time and offers investors reliable monthly income. Or, in the case of property flipping, a quick payout.
But is this still true?
“The recent bubble in residential and commercial real estate seems to be demonstrating that this time is a perfect opportunity to sit back and wait for a much better value in real estate investing,” said Randy L. Zeigler, certified financial planner and private wealth adviser for Ameriprise Financial Services, LLC in Oswego, an Ameriprise Private Wealth Advisory practice. “It doesn’t matter one’s age, I would stay very clear of this present real estate marketplace, expecting sale prices to decline substantially once mortgage rates begin to rise. Alternatively, this is a very good time to sell property, just not replace with another parcel at this time.”
Selling while the market is high does seem to represent a safe financial move; however, some investors want to snap up smaller rental properties while landlords exit the business. Doing so may help investors diversify their portfolios.
Other factors may make this a good time to buy.
“As for the buyer’s markets, interest rates are at an all-time low,” said Kurt D’Angelo, a financial consultant with Equitable Advisors Syracuse. “They can get a mortgage at a low rate. But because the inventory is low, it drives the price up.”
Investing in a residential or commercial rental property may bring in reliable monthly income; however, if keeping rent at a reasonable level for the market means that the investor cannot make appropriate repairs needed, that property may not be a good investment. Investors who can perform repair work themselves or develop other affordable means of maintaining properties can help mitigate their overhead.
Potential landlords must also consider that this investment is more active investing.
“If someone’s not interested in managing the properties, there are other investments we can get in like real estate investment trusts inside IRAs or brokerage accounts,” D’Angelo said. “You can get the returns in the RE market without the headaches of tenants.”
If it’s an investment to flip the property, the current seller’s market could offer a good deal for an investor able to renovate a run-down property. D’Angelo advises developing a team of professionals for this kind of an investment. That’s not the time to go DIY and learn along the way.
“They need to do it in a short time frame to do it in a costly manner,” he said. “If it lasts for years, they’ll be in over their heads.”
But the investor should make sure that the property and the cost of upgrades will not exceed the local market. The cost of lumber and other renovation materials spiked, which may make the cost of an upgrade much higher than anticipated. The investor should carefully scrutinize the property before purchase to ensure that its repairs are within budget. As with a tenant building investment, the investor’s ability to complete the work can save significant money on the cost of repairs.
Most experts agree that landlords should receive 8% to 9% returns in rent based on the value of the property, minus taxes, property insurance and repairs. Those receiving less are not getting enough because of their sweat equity. Most property owners should set aside about 1% to 2% of the value of the property value annually for maintenance.
D’Angelo advises that anyone investing in residential rental real estate should seek multiple occupant properties and live in one of the units rather than single occupant properties, so they can reduce their risk and receive income as they renovate. Multiple units can receive closer to a 15% return.
The pandemic also affected commercial real estate. D’Angelo said that businesses that flourished during the pandemic may need to rent larger facilities, which creates an opportunity for commercial landlords; however, new businesses started in the wake of the pandemic may not have as solid of financial footing, so landlords should screen applicants carefully.
“Some places where their employees are now working remotely, they may not need space and you can snap up some bargains,” he added.