Building a Strong Financial Foundation with Real Estate
February 24, 2014
One of the primary problems many find themselves facing at retirement age is having a fixed, predictable income with so many other unknowns. Ideally, when you’re done working, your money will start working for you in the form of equity, interest, dividends, etc. However, as often as not, people are reaching retirement and finding the reality is not as enticing as what they’ve been told or sold by their financial advisers.
The problem with any form of predicting anyone’s financial future is that even the most educated guesses are just that: guesses. Even the Federal Reserve is subject to the rise and fall of the economy and the massive fluctuations that are inherent in macroeconomics. So, with so many things working against you, how can you make your investment/retirement portfolio work for you?
The answer may not be all that surprising, but here it is: real estate. If you do find that answer does surprise you, that makes sense. Since the housing crash, many people have chalked up real estate investments as just another thing that is sucking up money. As housing prices fell, so did investor trust in the market?
As with so many other things in the financial arena, it is all about buying low and selling high. Margins are key here. While the price of the home you buy is obviously a factor, the more important thing to consider is the potential equity that can be leveraged from the property. Some of the highest equity targets can be found in foreclosures. Some of the best deals can be found at auction on sites like this one.
In incorporating these investment properties, it is important to conduct a cost/benefit analysis like you would with any financial deal. Each property is unique, and the profit potential for each varies widely. Do your homework by researching comparable sales and property values in the area. In some cases, you may find that you want to get the home inspected or appraised before deciding to invest. We’ve all heard the term “you have to spend money to make money”. This is not always the case with investment properties, but many times it is a tough reality.
Make sure to factor repair/renovation costs into your financial plan when looking at prospective investment targets. If you are planning on flipping the house, then there is a lot of equity to be had by focusing your funds on key areas of the home (kitchen, bathrooms, master bedroom, curb appeal etc.).
The same is true if you are looking at renting out the property and using it as a long-term investment. You may be able to fetch a good price with minor repairs, but funneling money into carefully selected projects can result in a higher monthly payment and may be worth the upfront costs.
In addition to the financial costs associated with these projects. There is also the factor of time and effort. You may be retired or working toward retirement and the prospect of earning sweat equity is not all that enticing. Just because you aren’t dedicating all of your time and effort toward it doesn’t mean it can’t be profitable.
Pick your battles and decide when it makes sense both personally and financially to allow someone else to tackle the projects yourself, or hand them off to a capable professional. Obviously, outsourcing construction projects represents another cost you will have to factor in, but if you choose your properties carefully, there is a pretty penny to be made.
So when you’re looking at your financial portfolio, ask yourself if your money is working for you or against you. If you don’t like what you find, perhaps it’s time to mix things up and find a solution that can result in some predictable, sustainable form of income.
Joe Givens is a real estate professional turned blogger. When he’s not writing about foreclosures or repairing drywall, he is probably watching Band of Brothers for the millionth time.