If you’ve got some extra money saved up for your future, putting it in a plain old savings account isn’t enough these days. With interest rates so low, you end up losing money to inflation each year. Instead, you’ll want to find an investment vehicle that earns a good amount of money back, and one of these options is often real estate, but is it the right choice for you and your circumstances?
One way to make money on real estate is to buy a banged-up house cheaply, fix it up, and then resell it for a higher amount. This is a short-term investment, as you want to sell it again as quickly as you can to get your money back out of the property. It can make you a good chunk of money rather quickly, but also requires a lot of start-up cash and the willingness to put in many hours of work.
Since a house being sold for little enough to make it worthwhile usually won’t pass an inspection, it’s almost guaranteed that you need to buy it outright instead of getting a mortgage, meaning you need enough cash to buy the house even before you get started with the repairs, which can cost several thousands of dollars, depending on what needs fixing. If you’re very handy with tools and have plenty of time, you can save some cash by doing some of the work yourself, but you’ll most likely need to pay contractors to do the work for you, which is often pricey. If you make good decisions and choose a property that can sell for more than the amount of money you put into it, however, you can make thousands of dollars on a fix-and-flip, which is a much better interest rate on your money than if it was sitting in a bank.
Rental properties are very different than fix-and-flip properties. Though you may do some repairs to a property, the goal is not to sell it quickly and get your profits quickly, but rather to create an income stream coming in each month over a long period of time. If your area has low enough housing prices and high enough rents, you can set up a steady income through one or more rental properties, while also getting additional interest on your money as house prices rise. Investors can even get rental properties with mortgages, allowing you to get a nicer property than you can afford with just your savings, and even to get multiple rental properties earning you money.
The 50% Rule
The general rule of thumb for a rental property is that the monthly expenses for a property, including paying a property management company (which you pay yourself if you’re managing it, and is usually 10%-12% of the rent), mortgage, taxes, and insurance, should equal about half what you can get in rent each month. This is rather conservative, but it allows you to have a cushion for big repairs and vacancies without eating your profits.
Owning property is often a good choice for your savings and helps you get a much higher amount of interest off your saved cash than other types of investments, but you must make decisions carefully. Buying a property that will cost too much to repair or one with a mortgage you can’t cover with the rent can leave you with less money than you had to begin with. Crunch the numbers, be realistic (or even slightly conservative) about the costs, and find a property that will be a good investment for you.
Robin Knight is an avid blogger for Movoto. If you're moving in the DC area, look into more information on Alexandria homes.