Should You Invest in Real Estate? 3 Questions to Ask Yourself Before You Start

5 MIN READ

One of the most common questions that I field from clients is this – “should we buy real estate”. Well, my answer is both appropriate yet frustrating… it depends!

It depends on a lot of things. Buying real estate is a big financial decision. It’s not like buying an index fund – you can’t just easily sell it and walk away if you no longer want to hold it.

Everyone has probably heard the inspiring stories about the couple who achieved financial freedom through real estate investing. They can travel the world with their family with the financial security of collecting passive rental income during their journeys.

While this sounds amazing, it also requires a lot of work to do properly. And it’s not for everyone.

This blog will give you the framework to decide if investing in real estate is the best thing for you.

*Please note – this blog is written through the perspective of working parents with 2 kids. You are not real estate professionals. You aren’t planning to flip houses, but rather planning to buy and hold the properties.

Question 1: What are you Hoping to Accomplish by Investing in Real Estate?

Before diving headfirst into real estate investing, it’s critical to first ask yourselves one key question. What are you hoping to accomplish by investing in real estate?

Most people will say the ability to generate “passive income”. Passive income is essentially money that you generate which doesn’t require your day-to-day involvement. Things like royalties, online courses, etc. are examples of passive income.

But what will passive income accomplish for you and your family? For many, it means the ability to ditch the “9-5” job that you aren’t passionate about. Passive income could free you up to spend your time exactly how you want with the financial backing of rental income to support your day-to-day expenses. Sounds pretty great, right?

But what would you ideally like to do with your time if you had complete control over it? Would you want to be working? Volunteering? Spending time with kids? Traveling? Investing in more real estate?

In order to determine if real estate investing will fit into your life plans, it’s crucial to take guesses at this question first.

Maybe your ideal life means you are managing real estate properties. Great – then getting started in real estate investing makes a lot of sense for you.

But what if your ideal life means spending more time with your kids in the near future and turning one of your long-held passions into a small business? Well, then real estate investing may not be the way to accomplish this because it can take a long time to generate enough passive income to make this financially possible.

You should start with the end in mind and then work backwards to determine if real estate investing is the best way to accomplish your desired future state.

Question 2: Can you Currently Dedicate the Time to Be in the Business of Real Estate?

Let’s say you do believe that real estate investing is aligned with your ideal life… do you believe being in the business of real estate is the best use of your time?

I specifically say the business of real estate because there is often the perception that real estate investing is a walk in the park. Think about the work involved in managing real estate – tenant turnover, tenant requests, creating lease agreements, paying for ongoing maintenance, recording the financial transactions, etc. It’s a lot of work!

Yes, you could hire a property manager to do a lot of this for you, but then you are likely giving up ~7 – 12% or so of the monthly rental income.

Time is the most precious asset that we have. Do you believe spending extra time on real estate (on top of your full-time job!) is feasible? What are you giving up by doing so? Is that worth the tradeoff?

There isn’t a right or wrong answer here – it ties back to your unique situation and your values. Perhaps you are in a sales role and you could earn more money by using that extra time on your current job? Or perhaps you ultimately want to start your own business and you could use that time towards getting advanced education or learning a new required skill?

Real estate investing can certainly be a lucrative opportunity, but it requires a commitment of time and you better be sure that you can’t use that time in a more impactful way. No amount of rental income can compensate for missing your kids’ soccer games.  

Question 3: What is the Opportunity Cost of the Money?

With any financial decision, you always want to fully ask yourself this question – what is the opportunity cost of the money? In other words, what else could you do with the money?

Here are some common examples –

• Invest in the stock market
• Pay down existing debt
• Save for your kids’ education
• Travel with your family
• Start a business
• Upgrade/renovate your existing home

Buying an investment property is a big financial commitment – you are likely shelling out a sizeable down payment and then signing up for ongoing costs. This investment can certainly pay off in the future, but it can take a long time to accomplish.

When you fully weigh the opportunity costs, you may believe that there are more meaningful investments you can make into yourself or your family as opposed to real estate. The best investment may not always be the one that maximizes your money, it may be the one that enhances your life.   

How to Get Started Investing in Real Estate

Now, let’s say you went through these 3 questions and you still feel confident that you want to start investing in real estate – how do you start?

I recommend dipping your toes in the water before you jump in. Buy one property and see how it goes before building a real estate empire. Get accustomed to the decisions, process, risks, etc. of being a landlord.

But beware – one property won’t provide you with financial freedom. It requires ownership in multiple properties to provide enough passive income so you can leave your 9-5 job.

When buying a property, you want rental property income to at least cover your expenses of maintaining a property (mortgage, taxes, insurance, maintenance, etc.) This way, you aren’t underwater and required to use some of your day-to-day cash flow to cover the expenses of your property and you are benefitting from the price appreciation of the property. If you find a really good investment property, you may even generate some rental income at first, but it’s unlikely to be significant enough to immediately change your lifestyle.

Once the mortgage payments are gone, you can certainly be netting a sizeable amount of rental income, but that can take 30 years!

Key Takeaways

• Real estate investing can certainly be a path to financial freedom, but it’s not the only path. Before jumping into real estate investing, you need to be sure that a) it’s aligned with your life goals, b) it’s a great use of your time and c) there isn’t a better use of the money
• Don’t underestimate the investment you can make into yourself. If your ultimate goal is to leave your 9 – 5 job so you can pursue a passion, then maybe starting your own business is a better decision than building up your real estate portfolio.
• Real estate investing is unlikely to get you rich overnight – just like cryptocurrency stock market investing, it requires discipline, patience and sound financial decisions to grow your net worth the right way.

About the Author
Jake is the founder of Experience Your Wealth, LLC - a fee-only financial planning firm that helps travel-loving young families who don't buy into the "9-5, work-until-you're-65" concept. We help you find the responsible balance between paying down your debt, investing for the future, but also experiencing life now.

Did you know XYPN advisors provide virtual services? They can work with clients in any state! View Jake's Find an Advisor profile.