While you are pretty excited about the prospects already. But now might be a good time to discuss what the downsides of buying an investment property are.
There are a few, no doubt. But the fact that a lot of people do it goes on to indicate that the advantages outweigh the disadvantages for a lot of people.
Whatever decision you make in the end is not what is most important. What is most important is that it has to be an informed-decision. For that reason, we’ll outline the drawbacks and then let you decide based on all the information we provide:
One of the biggest risks when buying an asset is the risk of future devaluation of the asset and real estate is no exception. While we are currently in a sellers market in many regions in the US, there are also neighborhoods where the property value has declined over the last few years. It’s very important to do due diligence regarding future outlook of a property value and consult duly licensed real estate agents to help with that.
The biggest headache most people have with property is maintenance. That entails repair work, tending to tenant calls promptly and taking care of issues such a plumbing, electricity, replacements, etc.
All of this costs time and money. If you have some time and can learn a few handyman skills, it helps a lot. If not, you’ll have to hire someone and it can cost money.
That drags down your ROI. The repairs can sometimes be costly enough for you to have enough cash at hand at all times.
Listing and showing the property
When tenants leave, one big task is to re-list the property as available on rent. Again, that requires time and effort to get it rented out again.
Listing and showing does not require as much skill. Any informed homeowner should be able to do it without much problem. It also doesn’t cost as much, since a lot of websites allow you to list them for free.
Most new renters will expect all issues to be fixed, appliances working and a fresh paint may be. That can cost a little money.
What does take time is to show it. Again, not that bad if you are living in the same area.
This can be a little bit of a drag. It can sometimes take a month, or even more, to rent out the property.
Every day that the property is lying vacant is a cost because you still have to pay the mortgage, taxes, insurance and other expenses.
When doing the ROI calculation, assume 1-month of vacancy (or more if you want to be conservative) to see if the ROI makes sense.
Real estate is illiquid
One of the big issues with real estate is that it is an illiquid asset. While you can find buyers all the time, the costs associated with buying and then selling can be pretty substantial.
You’ll likely pay significant closing costs when purchasing, and then again when selling (in the form of commissions to buyers’ and sellers’ real estate agents). Unless you are sure about keeping the property for a long enough time, this might be a big factor to consider when buying an investment property.