All In on Investing in Real Estate? 5 Things to Consider

DISCLAIMER: I want to say that I myself am a real estate investor. My wife and I moved from Arizona, and we kept our condo. We rent our condo as a long-term rental, specifically in 12-month contracts. We enjoy the extra monthly income and hope to one day turn it into a short-term (Airbnb) so we can occasionally escape the Idaho winters.

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Also, grandad was heavily invested in real estate and my father is heavily invested today. In fact, I grew up working in my family business maintaining the family properties. I have seen the wealth it creates firsthand and plan on diversifying my real estate portfolio in the years to come.
How is real estate seen today?

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Real estate seems to be a “trendy” investment today, just like cryptocurrency. Influencers vlog themselves either building their dream homes or buying investment properties. They share how much they’ll “make” and how much they’ll “save” by putting their money into properties. The motives behind investing in real estate vary person to person. Let's look at the popular reasons and some potential deep rooted motives behind investing.

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Here’s an interesting question: What is the age demographic of social media real estate investors? Are they younger or older?

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Here are the main talking points I hear in regard to investing in real estate:

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• “[this person I know] invests in real estate and is making a killing.”
• “I want to build a passive income.”
• “I can’t get a return from the stock market like I can in real estate.”
• “I see people making a lot of money in real estate.”

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Here is what I hear people POSSIBLY saying.

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• “When I compare myself to [this person I know], it makes me feel like I need to do more for my future.”
• “I want to make more money.” Or “I don’t make enough money.”
• “I am thinking about my financial future as right now or tomorrow.”
• “I want to make easy money.”

Truly understanding your motives can help you avoid major financial mistakes. Lets look at the true first step in investing in real estate.

All in on investing in Real Estate? Here's 5 things to consider:

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Have you ever asked yourself “WHY do I want to invest in real estate?” Have you dug deep into your motives?
My wife and I kept our Arizona condo because we want a place we can vacation to during the winters.
My grandad wanted to provide an income to pay for my grandmother’s expenses when he passed away, which he did successfully.
My father couldn’t see another path to create his retirement income other than through rental income.
Starting with why can help you identify the best path for yourself. If you truly are dissatisfied with your current source of income, putting a large amount of money into a property for several hundred dollars more money may still leave you dissatisfied at the end of the day. Maybe that same money can help you start a business that truly brings satisfaction to your life.

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Here are some of the main goals of investing in real estate:

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1. Make my money work for me.
2. Take advantage of inflation.
3. Build a second source of income.
4. Build my long-term wealth.
5. Help me pay less in taxes.

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Now let’s look at the risks associated with each goal.

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1. Large upfront cash, this includes down payments, closing costs, repairs, etc.
2. Inflation affects interest rates, which will either make your current property lose value or make buying unreasonable.
3. While real estate can create monthly cash flow, one major expense can wipe out many months of profit. Condo Example: we had to fix our HVAC System that lost us nearly 3 months of rent profits.
4. You may have to wait a while before you can sell and get your money back, after taxes.
5. Most states require you to pay property taxes and the use of depreciation has a limit, which will require you to buy more and more property to continue depreciating.

Start with why. Real estate is illiquid so making major course corrections can take many months, or potentially years. Knowing your end result will help you determine what you should do TODAY. When you know your WHY you are better equipped to handle the stresses. You manage your properties with conviction instead of motivation.

What you need to be prepared for:

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• Spend time saving up a large downpayment then to put it all into a property to then start over saving up for a downpayment.
• Be committed to a property even if you aren’t making money on the rent. You may have to wait years before you can sell the property.

All in on investing in real estate? 5 things to consider.

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• Your finances must be able to withstand a major expense and thus a loss of income. You are ultimately liable for ALL expenses of the property.
• Real estate is illiquid. If you get in a bind, you may not be able to get your money back in a timely manner.
• Navigating real estate taxes can be complex, hiring and paying a good accountant becomes a non-discretionary expense.
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I hope you have a clearer picture of how real estate can bless your life. Being 100% all into real estate takes a certain type of person. Let’s dig into a little more on this type of person.
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What investor would primarily invest in real estate?

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• Someone who wants all the control of investing and doesn’t want to delegate the work.
• Someone who is okay tying up large sums of money into an appreciating asset.
• Someone who is okay with varying amounts of income.
• Someone who is willing to pay for maintenance expenses, sometimes thousands of dollars.
• Someone who has a significant tax liability and needs write offs.

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My father has determined that the risks and stresses of owning real estate are worth his time. Some may find that it’s not worth their time. Our condo in Arizona needed some work, the total was about $900, we only make $340 a month on the property. We lost 22% of our yearly income! Maybe you want to diversify your real estate investing. Many people may not know what options they have. Here are some other options you have.
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What are some alternatives to real-estate?
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Instead of putting all your money into real estate, maybe 50% of what you save can go to another investment that meets your goals. If your goal is wealth creation, consider retirement accounts that grow tax deferred. If your goal is income, consider investing in dividend paying Real-Estate Investment Trusts (REITS). If your goal is to fight inflation, consider putting a little money towards Gold.

Think about this: People avoid the stock market because of potential losses of 20+ percent. Remember, a dip of 20% in the market is not a loss of money but rather a loss of value, a value that will return.

Conclusion

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My clients and friends share with me what they want from real estate and often lack why they want it. Finding the current investment vehicle that aligns with your goals and values can be a difficult challenge. I often suggest to these clients and friends that diversifying and investing in alternatives can minimize risks while still accomplishing their goals. Start with why and you cannot go wrong.

All in on investing in real estate? 5 things to consider.