Reasons to Add Residential Real Estate to Your Portfolio

October 15, 2020

This article was originally published in the Winter 2020 edition of Long & Foster | Christie’s Luxury Homes magazine. Read the latest issue here.

When the stock market is near record highs, optimistic investors are happy. Realistic investors know it’s time to diversify and rebalance their portfolio. Both precious metals and real estate attract savvy investors who are concerned about the potential inflationary environment created by government stimulus programs.

Investors who have gained profits from the improving stock market may want to convert some of that profit into a down payment on an investment property. Real estate, whether you choose to buy and flip or fix and hold, can be a solid addition to any investment plan.

Why invest in real estate now

Low mortgage rates have created a frenzy among buyers looking to capitalize on their enhanced buying power. While investors typically qualify for mortgage rates that are a little higher, you can often borrow money for an investment property within the 3% range.

Real estate can be an investment vehicle for future retirement income. In the early years of owning a residential investment property, rent from your tenant can cover the mortgage payments. When the mortgage is paid in full, that monthly rent becomes active income that may allow you to retire more comfortably.

While some real estate investors choose to buy a home, improve it and sell it to a new buyer for a fast profit, that process works best when you can find a bargain-priced property. In today’s environment of low inventory and rising prices, that can be a challenge.

Real estate investments over the long term offer several potential benefits.

  • Appreciation. While home values fluctuate in different markets, they generally appreciate at least 4% annually. Keep in mind the appreciation is on the entire home value, not just your investment, so your actual appreciation rate is considerably higher. For example, if you purchase a $100,000 house with a 20% down payment, or $20,000, and the property appreciates 4% in one year, the new value is $104,000. But a $4,000 appreciation on your investment of just $20,000 is a 20% rate of appreciation.
  • Tax benefits. Your tax advisor can help you determine eligible tax deductions on investment property, which generally include interest on your mortgage, property taxes, depreciation and operating costs, such as repairs and maintenance.
  • Tenant-paid mortgage. As your mortgage balance is reduced, you’re building equity in the property for a future sale or to borrow against and buy another property. Best of all, the mortgage payments are covered by your renters, rather than coming out of your pocket.
  • Cash flow. Depending on your expenses, you can usually generate positive cash flow from the rent you charge. This is even easier when mortgage rates are low since that keeps your costs lower.

How to get started in real estate investing

As within any investment, it’s important to establish your personal goals and appetite for risk. Some investors prefer to buy a property and sell it for a profit as soon as possible, while others want a property they can rent for the long-term. Another option is to buy a second home that will appreciate over time, provide a vacation location and bring in revenue from short-term rentals. While some investors who pay cash for a residential property instantly gain cash flow from rental income, other investors focus on building equity over time with one or more properties.

Every property owner needs to decide whether to handle their own tenant screenings and maintenance issues or to hire a property management company. Working with a property management firm can help relieve stress for you and may help you keep tenants for longer periods because of the professionally managed maintenance. Be sure you’re aware of all expenses associated with the property, including landlord’s insurance, taxes, maintenance, homeowner’s or condo association fees, among other potential fees. A financial advisor can help you understand the tax implications of investment property.

Investors need to be aware of the risks and be prepared for an occasionally empty property. Generally, the rental housing environment remains stable and strong despite record levels of unemployment. Tenants have paid their rent, many with the help of unemployment insurance and government stimulus support, at a similar rate in 2020 as in other years.

You’ll need to be aware of the rules in the jurisdiction where you intend to invest. Some areas have laws that strongly favor tenants and others have laws that are friendlier to property owners. A professional real estate agent with local knowledge and experience with real estate investing can identify properties that are likely to appeal to renters and hold their value for the long-term.

Investors can work with a real estate agent to compare the opportunities to invest in a single-family home, a condo, a duplex or even a small apartment building. Each investor should decide on their own rules for investing and their own numbers. For example, some investors choose to buy only when they have enough cash reserves in the bank to cover their property expenses for a full year just in case that would be necessary. A real estate professional can educate investors about the best-and worst-case scenarios for each property under consideration.

If you’re thinking about investing in real estate, get started at Long & Foster. Our teams can help you buy or sell a home, evaluate investment properties that fit your financial goals, and finance your purchase. Our insurance company can provide your landlord’s insurance policy and our property management division can offer professional support for your investment.

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