3 Reasons Not to Invest in Real Estate
Many military families are interested in investing in real estate. When you’re moving every couple of years, it seems to make sense to buy a house or two, and then rent them out when you move. Or you look at friends who have been successful in real estate, and you think you should pick up an investment property, too.
Real estate investing can be a good financial plan for some military members, as long as they do the research, run the numbers, and understand the pros and cons of their choices. Here are three times you should be cautious about real estate investing.
3 Reasons Not to Invest in Real Estate
Reason #1: You Haven’t Finished Your Real Estate Education
There’s a lot to know about real estate investing: how to select a profitable rental, purchase contracts, credit issues, home inspections, long- and short-term tax implications, property management, and landlord-tenant laws. There’s so much to learn about all these subjects! It can be particularly hard to get good information on certain aspects of real estate because a lot of the people who are providing the education (i.e. real estate agents, mortgage brokers, folks selling real estate classes) have a financial interest in your outcomes.
If you’re looking for a good place to learn about real estate investing from reputable sources, I recommend RichonMoney, BiggerPockets, and The Reluctant Landlord. When you can carry on a semi-intelligent conversation about cap rates, depreciation recapture taxes, the laws around service animals, and the different things you want to include in a lease, then it might be time to consider real estate investing.
Reason #2: You Don’t Have Your Own Financial House In Order
Owning a rental property opens you up to a wide variety of financial risks. There are the obvious risks of a non-paying tenant or expensive tenant damage to the property. (Pro tip: Never assume that you’ll recoup money that a tenant owes you. The chances you’ll get it back aren’t high.) Then there are the less obvious risks of increasing costs without increasing rents, overbuilding crushing demand, liability, major non-tenant damage, tax implications, and more.
At the very least, you want to have your own personal emergency fund and your rental property emergency fund. It’s a high bar, but my goal is $10,000 per property for an emergency fund. You might not start there, but you need to have a plan for how to get to a large emergency fund. That might mean taking money out of your personal accounts, or having adequate cash flow from the rental to build that account up quickly.
You also want to make sure that there is wiggle room in your personal budget, both to get started and for the long-term. You don’t want to be counting on that first rent check to make the mortgage payment, especially if the rent is coming through a property manager. Bank errors, tenant forgetfulness, and vacancies can all disrupt your income stream, and the mortgage and other expenses need to be paid even if you aren’t. If a delayed or missed rent payment is going to cause financial panic, you’re not ready to buy.
Reason #3: You Don’t Have The Mental or Emotional Capacity Right Now
Rental properties can be easy-peasy, or they can be a huge nightmare. Generally, they’re somewhere in between. Whether you’re managing yourself or using a professional property manager, you need to be prepared for the unexpected. If you’re already at your wit’s end because you have three little kids and an aged parent and a full-time job, this might not be the time to add a rental property.
You might go years without spending any time or energy on your rental property, and then your tenant’s dog bites someone, your tenant dies, or your house burns down. (Two of those things have happened to me, one happened to a friend.) And suddenly that house becomes the most important thing in your day.
Having a great property manager can eliminate some of the day-to-day issues with a rental property; but not all property managers are great, and they can’t always take care of everything without you.
Rental real estate can be a good part of your overall financial plan, but there are a lot of ways it can go wrong. An important part of making a good decision is knowing if this is the right time in your life to be embarking on this type of investment. Understanding the process, being financially prepared, and considering the time and energy requirements are three important ways to be sure that you’re ready to embark upon the journey of being a landlord.