What You May Not Know About Investing in Real Estate

What You May Not Know About Investing in Real Estate

  • Donna Brongiel
  • 09/19/23

If you're new to the real estate investment market, it's important to have a thorough understanding of the potential pitfalls and risks associated with using properties purely as vehicles for monetary gain. With the right property and commitment to this specific type of investing, people can reap solid profits. However, selecting the wrong property and, perhaps even more importantly, not having the knowledge or dedication this type of investment requires can lead to disappointing results.

What's not to like?

Luxury properties often have the greatest potential to become lucrative financial ventures. While they're some of the costlier assets a person can acquire, they're usually located in incredibly beautiful, much-in-demand locations, naturally attracting the vacation-minded. Most short-term tenants are willing to pay top dollar for the opportunity to relax and have fun in a beautiful home located in a charming location.

Common pitfalls

Between owning a splendid luxury home and easily attracting affluent short-term lessees, it may seem as if investing in Fontana real estate or houses in similar communities is an easy prospect. However, even the best properties have the potential for disappointment if the owner fails to consider both the large and small duties associated with leasing a property.

Prioritizing emotion in decision-making

There's much more to owning a house for monetary gain than buying a home for personal use. Most people select their residence because it's esthetically appealing and has all the necessary features to support their lifestyle. Purchasing a home as an investment for similar reasons is generally only a good strategy if the owners are fully committed to someday using their investment as their retirement home.

First and foremost, stakeholders must commit themselves to objectivity and remain emotionally distant when acquiring, managing, and selling their real estate venture.

Failing to plan is planning to fail

Like all endeavors involving capital, real estate investors need both a short-term and a long-term plan before searching for a house. Just as when planning to purchase mutual funds or exchange-traded funds, investors want to know critical data points, such as a mutual fund's expense ratio and the expected rate of return. They also define the maximum they're willing to lose in a certain period.

A similar plan should be drafted when investing in a rental home. To start, the plan should include how much income the buyer expects from the property, what types of tenants they want to work with, a comprehensive list of expenses, and a designated selling point if the venture doesn't turn out as expected.

Not doing your homework

Again, as with the purchase of other types of assets, such as stocks and bonds, most people carefully consider the pros and cons of each investment; they consult with financial advisors, make comparisons between assets, and, in short, ask a lot of questions before making their final decision to buy into an asset.

In the same vein, people need to research the pros and cons of owning a residence as a working asset; they'll want to compare properties, ask many questions, and consult with their financial advisor before making any offers.

Underestimating landlord responsibilities and expenses

While it's true that houses located in popular vacation spots can attract fantastic short-term tenants, there's a lot of behind-the-scenes work involved in acquiring such occupants. A new landlord must draft a solid rental agreement and have it reviewed by a lawyer. New owners must put forth marketing efforts to attract high-quality tenants. If their efforts aren't producing the desired results, they may need to hire a company that specializes in attracting respectful tenants.

A substantial amount of work goes into preparing a house to attract high-paying lessees. A property's exterior and interior spaces must always be well-maintained and operational. The interior requires top-to-bottom cleaning between the stays of every group of tenants. The owner can hire a landscaping maintenance crew and a cleaning service and have pre-existing contracts with plumbers; heating, ventilation, and air-conditioning personnel; etc. Initially, the income from rental receipts may struggle to meet the expenses if the owners decide to delegate every maintenance task to a third party.

Owners must also consider what they want to do with the home during seasonal downtimes. Attracting renters for the summer is relatively easy, yet leasing only for a single season still leaves the rest of the year available. Many landlords understandably feel uneasy about leaving a rental house unused for a long time.

One of the best ways to fill these gaps is to consider renting to college students throughout the academic year. Doing so will keep a home occupied while leaving the peak summer season open for high-paying occupants.

Since obtaining reliable tenants is paramount to a successful landlord experience, new investors may want to consider contracting with a service that manages obtaining lessees. While this will mean an added expense, it may be a good option until a property owner becomes more comfortable with the leasing process and can manage the task on their own. It's also a viable option for busy investors who want to avoid involvement in managing occupancy.

Paying too much or overextending yourself financially

As with any residence, paying too much for a property and/or overextending yourself financially with a less-than-ideal mortgage is possible. More than a few people have allowed the vision of acquiring large weekly sums to overshadow the stress and strain of financial overextension. Again, the key to avoiding such a situation is to always adhere to objective facts and figures rather than allowing emotion and poor judgment into the financial decision-making process. Be patient if the numbers don't work for a particular property. Wait for one that's in line with your financial goals.

Making Fontana real estate investment a success

Becoming a successful investor is all about connecting with the right professionals. The best-in-class real estate agents of Lake Geneva Real Estate Team can ask the right questions and deliver exceptional solutions.

After a buyer selects a property, we use our professional expertise to guide them through the buying process, ensuring that each step is executed smoothly and efficiently. Handling the numerous details associated with a complex real estate transaction frees our clients to focus on maximizing the ROI from their new asset.

When you're ready to invest in one of the gorgeous properties in Fontana or one of the other communities surrounding Geneva Lake, please visit our website.

*Header photo courtesy of Shutterstock

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