By Mike Miles
For some, investing in real estate seems like a great idea. For others, it scares the living (blank) out of them. Depending on who you speak with it’s either a way to make a ton of money or a way to lose everything. Which side do you sit on?
Personally, I sit somewhere in the middle. Shocker, right? The boring mortgage guy takes a boring position on the question. Let me clarify, I probably shade on the side that investing in real estate is a great thing to do … in moderation. Rarely can someone successfully hit home run after home run with buying and selling real estate. I know way more successful investors who play the buy-and-hold game versus the investors who play the flip game.
Buying and holding is just like it sounds … buy a property and maintain ownership of it for a long period of time. In most cases, the property is rented out to a tenant. This rent income usually covers the mortgage payment plus a little extra. Successful buy-and-hold investors price in things like repairs, vacancy, maintenance and escrow (tax and insurance) increases into their monthly rental amounts. The tenants rented to can be short or long-term commitments. It’s quite common for tenants to sign lease agreements of 6, 12, or 24 months. However, short term rentals like Airbnb are gaining in popularity.
For the investors that go the Airbnb (or similar) route, the property can either be considered a rental or it can be a vacation home. Using a vacation home as an investment property is a strong idea as it allows the owner to offset expenses by renting it to short-term tenants and allows for it to be used for an actual vacation or perhaps a retirement home in the future.
Buying and holding is a safe play, but is limited regarding the short-term return on investment. Flipping has a much higher probability of a bigger payoff, but the risk of loss is significantly higher. Investors who flip properties are those who buy real estate, renovate it and sell it for a premium … sometimes for 100 percent above the acquisition cost. Looks and sounds kind of fun right? It can be. But it can also be devastating.
Renovating a property is never easy, and sometimes the project can end up being much larger (and expensive) than originally planned. Additionally, the property is more susceptible to market conditions that could adversely affect the sale. Conditions such as mortgage rates, seasonality, economic factors and housing inventory all influence buyers’ decisions. The longer a flipped property takes to sell increases the chances of significant revenue loss.
Back to the beginning of this post … for those who believe investing in real estate is a terrible idea … I can understand where that comes from. We are only 10 years removed from perhaps the worst financial crisis in our history. People were losing homes left and right, so it’s natural to be fearful. Thankfully, regulation and guidelines are in place to dramatically decrease risk compared to two decades ago.
If you’d like to discuss your real estate investing options, give me or my team at Fountain Mortgage a call. We offer no-cost consultations and will provide an in-depth look at your personal situation to see if investing is right for you.
This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268