Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Josie in AZ: Hi Brian, I’m 58 and have three rental houses. I’m also convinced that real estate still offers the best financial security as I enter the last phase of preparing for retirement. It’s been 12 years since I looked at the market for what makes sense as a good investment strategy. Can you update me on what I should be thinking about today?
Answer: Hello, Josie. You’re not a new investor, so I’m assuming you have all or most of the answers to the basic questions. Questions like, “Should I invest?” and “What kind of real estate investing I should I do?” So, let’s make this article about some of the tougher and more advanced issues you probably want to be thinking about.
How can my investment lose money? Even an experienced investor that thinks he/she has found a great deal should ponder this question before writing a check. Regardless of your experience and intuition, there are risks with every deal. What you need to do is identify the risks, evaluate each one, and decide if the potential reward is worth the risks. But don’t stop with the evaluation. Also, look for ways to mitigate any risk. For instance, if a house needs work before a tenant can move in, you may want to negotiate with a contractor to pay in phases instead of mostly upfront. This helps motivate the contractor to finish the job quickly and limits how much you might be out if the job is only partially completed.
What competitive advantage can I use in this market? Try to find a couple of advantages that you can exploit. But make it the right ones. Under pricing a rental in a soft or undesirable neighborhood is not a good long-term strategy for your retirement finances. Instead of going into a risky neighborhood, you can stay in middle-income and working-class neighborhoods that you know have been reliable for many years. Another competitive advantage might be as an all-cash buyer for a lower price. The more competitive advantages that you can identify going into the deal, the more likely it will be a good long-term investment. If you’re trying a strategy that you haven’t used before, make sure you research it well before jumping in. Also, take a look at any weaknesses that you might have. There is usually a way to minimize a weakness.
What will I do if plan A doesn’t work? Josie, you might notice the theme here is a focus on avoiding risk. For instance, maybe your sure-fire plan is for a son or daughter to rent the house from you. That might be fine for the next year or so but what happens when she or he decides to buy a home of their own? Are you confident that you’ll be able to rent to a stranger? One way to do this is by not remodeling or even using paint colors that only appeal to your son or daughter. Keep everything neutral so that your plan B charms a wide swath of potential renters.
What if you’re not a cash buyer? What are your financing options? Because it has been several years since you financed an investment, your old sources may no longer be in the business. Going the route of a bank mortgage for a rental probably isn’t a good idea during these times when houses are snatched up the day after they go on the market. You should have at least one solid financing source plus a backup. It looks like you might have a few choices. You might use one of your other rental houses to secure a loan before you make an offer. One option gaining popularity is an individual 401k retirement account that uses existing retirement funds to invest in real estate. There are several advantages to an individual 401k. One is that all of your income from the rental grows tax-deferred in your retirement account until you start making withdrawals. Another is you can borrow money from your account and pay the interest back to yourself.
Will your investment sustain and even increase the rate of return (ROI)? This is about both the rent you expect to collect and the appreciated value that you might sell for one day. Rental houses tend to be a long-term investment for mom and pop investors. You should try to look beyond the income that will be generated for the next year or two. Is there anything on the horizon that might jeopardize the long term value like a shrinking population or a major employer struggling to stay in business? Have there been foreclosures or vacant houses in the neighborhood? Are houses sitting on the MLS for longer than other neighborhoods? None of this will tell you what might happen in ten years but the more you know today, the more aware you’ll become about what might happen in the future.
Josie, keep asking questions. The more questions you have answers to, the fewer unknown risks you’ll be taking.
What tough questions do you think investors should be asking? Please add your comments.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].