Using Real Estate as an Investment Strategy
October 15, 2019
Northwest Real Estate Services
With the prevalence of television shows promoting “Fix it and Flip It” for quick cash, the subject that often is overlooked is a long-term strategy of ownership of investment properties.
During the Great Recession, investors who routinely hold onto real estate for present and future income were confident that their real estate holdings would “bounce back” and eventually regain their value. That has proven to be true! Prices are rising well above pre-2007 values.
For the residential rental market, most jurisdictions now report 100% occupancy with waiting lists, as a shortage of apartments and houses prevails. This has resulted in rising rental rates, making more profits for the owners.
For the commercial rental market, predictably slower to rebound than the residential market, occupancy is reported to be improving and rents increasing. New construction is not keeping up with demand in many sectors.
Should you be considering ownership of rental properties as part of your long-term investment strategy? Or as a real estate professional, should you be suggesting it to potential buyers?
Let’s look at the pros and cons:
Why Long-Term Ownership can be a Sound Investment Strategy
- It has proven consistent growth, even with hiccups in the market.
As already noted, real estate can rebound without loss of the physical assets. However, it requires the ability to maintain and manage it long- term.
- The owner benefits from long-term improvements.
This includes remodeling and routine maintenance. Being in control of the maintenance plan for a property has its benefits, as you know what was done to the property and when. This also means you can control the quality of workmanship and materials.
Risks Exist in Investments in Real Estate as a Long-Term Investment Strategy
- If an owner is heavily financed, risk is greater during low ebbs in the market.
Can you afford to miss out on a few months rent, during remodeling times or when tenants break a lease? As some real estate investors found out during the economic recession, they did not have enough assets to get them through a slow time and wound up losing their real estate assets to foreclosure.
- Real estate demands maintenance and improvements that costs money.
The downside of real estate ownership is that the improvements have deferred maintenance due to wear and tear from tenant occupancy. Tenants, by nature, may not care for your property as you would. Replacement of floor coverings and appliances and the need for interior painting between tenant occupancy are examples. And of course, those components that require routine replacement, such as furnaces, water tanks, and roofs, require savings to make them happen.
- Rentals of real estate require a sharp eye on income and collections.
Management of rentals is more than handling repairs and watching rents roll in. A management plan must be in place to find the right tenants and to track and collect rents. This is where many owners fail, especially if they are not full-time investors. If management services are handled by others, that must be factored into the income/expense planning. If you are planning on doing it yourself, this requires a level of discipline and timeliness that is the key to rental success.
Real estate ownership as a part of an investment portfolio can be a sound strategy if handled properly with ongoing attention. Whether for yourself or for potential buyers, consider its overall return as a possible choice rather than stocks, bonds, or other investment vehicles that may present greater risk to the investor.