June 22, 2024

Investment Properties: Everything You Need to Know

Once you decide to sell, you can benefit from the increase in the property value of your investment property. When you cash out, you could theoretically realize a huge return on investment—depending, of course, on the real estate market you bought into and sell in, the improvements you’ve made to the property, how eager your seller is to buy, and, let’s face it, a whole lot of luck.

It’s a way to diversify your wealth too. Many experts see real estate as a less volatile investment than stocks, high-yield bonds, cryptocurrencies, IPOs, and the like. Some homeowners see investment properties as nest eggs that they can count on to provide them a reliable source of capital come time for retirement.

What are the cons of investment properties?

If you don’t fully match an investment property’s purchase price with cash outright, you’re probably going to be making mortgage payments for a while, adding to your monthly expenses. If buying an investment property means your monthly net will become unaffordable, then it’s likely going to drag you down sooner or later.

Until you sell the property, you’re still dealing with all the associated expenses of being a homeowner as well, like taxes, repairs, utilities and maintenance, HOA fees, and so on. If you have to renovate the property to raise its value or make it more attractive to rent or sell, that becomes part of the money you to sink into and adds to the red ink when you finally determine how much of a return on investment you’re getting.

Any investment—no matter how much of a sure thing it’s supposed to be—carries risk. Real estate may be seen as more stable than many other investments, but it’s definitely not risk-free, and many an investor has lost their shirt in real estate investments, especially when a housing bubble goes bust. Even in supposedly bulletproof real estate markets like New York City or San Francisco, you’re not guaranteed that your property value will go up. And if you overpaid, you may never get your investment back and have to accept a loss on resale just to unload the property and stop bleeding money into its associated expenses.

Finally, if you want to turn the property into a source of rental income, you’re going to have to become a landlord, which often isn’t a walk in the park. Your tenants will have expectations (and rights), and you’re going to be spending both time and money to keep them satisfied and to keep the monthly rent coming in. And if you draw the short straw and get nightmare tenants? Add legal fees to your expenses column as you face the worst-case scenario, eviction proceedings, and attempt to get your investment property back on the market quickly so you can find more suitable tenants and get that monthly rent going again.

What’s the 1% rule or 2% rule for investment properties?

The 1% rule states that your investment property should bring in at least 1% of your total investment every month. So if you were thinking of a home with a purchase price of $900,000 and would have to make $100,000 worth of renovations and repairs, the 1% rule would say you should ensure you could bring in $10,000 in monthly rent (1% of $1 million) before buying it.

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