What even is an investment property?
Simply put, an investment property is any property that will make you money. It is a piece of real estate that you rent out to someone else for their use and typically is not your primary residence.
Types of Investment properties:
An investment property can include mobile homes, vacation homes, single family homes, duplexes, two flats, multi-units, farm land, commercial property like parking lots and storefronts, and/or industrial property like warehouses. This is not an exhaustive list, so start to look around your every day life to see what other examples of investment properties you can find. You can find more details about these types of investment properties in our next article. Whichever property type you choose, before investing you have to ask yourself one critical question. A question that my own dad regretted not asking himself at the beginning because it would have saved a lot of heartache and money.
How involved do I want to be in this business? Below are some things to think about:
Are you a hands on person (interior design, good at repairing issues and working with tools, etc.)? Then you can benefit from purchasing a cheaper property that is more of a fixer upper. You can get a good price and perform the projects yourself if you have the knowledge and/or a trusted contractor. Great, you’re just like my dad!
Are you looking to purchase a property and do the least amount of heavy lifting possible? Then you can benefit from purchasing a turn key property that is already renovated and move-in ready for a tenant. These will cost you much more money than if you purchased a fixer upper, but now you do not have to spend months renovating a property and taking 1,000 trips to Home Depot. Great, you’re just like me!
The type of person you are and the amount of work you are looking to sink in will dictate what property types you should invest in, your budget, and whether this is the business for you.
Now that you have a base level understanding of what an investment property is, you may say to yourself, well isn’t this just for rich people.
Common Misconceptions:
Here are the three most common misconceptions in relation to investment properties:
The owner is rich and at least 40+ years old
The owner makes a lot of money from having the property
This is passive income
The owner is rich and 40+ years old
Now this isn’t to say that there are no property investors that fit into this category. There are plenty of people on the internet who show how much money they make and they come from wealthier backgrounds. You do not have to be born into money to begin creating wealth for yourself. We all have different resources afforded to us whether from birth or resources / support we have acquired over our life. You’ll be surprised how much prep work you can do before having the money to invest in your first property. So when that opportunity to own something does arise, you don’t have to get ready if you stay ready.
The owner makes a ton of money with the property
There are many stories of people who have gone into debt from property investing. As my dad says, “Just because you have a spouse doesn’t mean you’ll have a happy marriage.” You can have 10 properties, but if these properties are not generating cash flow, then you just have 10 liabilities throwing you into debt. You have to manage your money properly by thinking of common and surprise expenses like mortgages, an unexpected tenant move out, a hot water tank goes out, the list can go on and on. You have to work to get rich in this business, and that brings me to point # 3.
This is passive income
No investment property is completely passive. In all honesty, you might be making a poor investment decision if you were not part of the process at any stage. You can be the person that has to do a lot of work at the beginning stages by scouting out what property or land you are interested in, speaking with realtors, researching the area you are most interested in, decorating the vacation home, etc. On the flip side, you could be doing day to day work like sending over leases, showing apartments, cleaning out a unit after a move out, etc.
As with any good report, we need a pros and cons list. Here are some of the pros and cons to consider if you want to make one of your income streams from property rentals:
Pros of Investing in Properties:
You can become rich
It can be kind of passive income
You can become rich
The money you generate could be life changing. As long as your money is making you money. Remember, if the mortgage is $2,000 and you are renting out a single family home for $2,300, but you didn’t save/plan for surprise repairs and the boiler goes out costing you $4,000 - you’re not going to become rich that way. Seriously, boilers are expensive! Look into the IRS hobby law if you want to learn more about why generating income for your business is important from a taxpayer standpoint.
It can be kind of passive income
If you put in the work at the beginning stages and set it up properly with planning and putting together a trustworthy team, it can be passive income.
Cons of Investing in property:
You have to create a concrete exit strategy
Not guaranteed to make money
Planning for unexpected expenses
Have a well thought out exit plan
This might not be much of a con for some depending on their current job. If you have been working as an HR manager for the past 10 years at the same company and you enjoy your work, you might not have a concrete exit plan with deadlines and additional details. If you are a content creator or an entrepreneur of some sort, your exit strategy is possibly more concrete due to the volatility of your work and your variable income. You need a concrete plan for how to exit the business. This could be because things go poorly and now you have to sell at a lower price that you bought it for. This could also be because things went well and now you have to see who you can pass this investment onto when it’s time.
You’re not guaranteed to make money
This one is pretty straight forward. Another gem from my dad, “Just because someone invests in the stock market does not mean they made money from it.” The current market, the amount of upgrades you put into the property, and the amount you can charge for rent based on your city and building location have a bearing on if you will make money or not.
Budgeting for unexpected expenses / roadblocks
Failing to plan is planning to fail. The sooner you budget for those emergency repairs, tenants who move out early without any notice, and renters who leave your property a complete mess, the sooner you can remedy these situations and get back to having a positive cash flow. Budgeting for these situations will not only save you money, but will save you mental stress.
Quick story, my dad grew up an inner city kid from the south side of Chicago in a large family. He did not grow up rich or even middle class. However, he did have a loving, supportive family and the self-discipline to make his dreams a reality. At the age of 36 with a wife and two kids, he left his 9-5, and used the money he saved to purchase his first property. You are never too young or too old to realize your dreams.
