REAL ESTATE INVESTMENT: WHERE'S THE SWEET SPOT?
If you’re asking yourself this question you’re already on the right track to successful real estate investment. Wondering how many you need means you’re thinking about a long term plan. When it comes to answering that question, there’s no universal answer other than, “1 or more”. If you haven’t purchased your first rental property yet, start at 1. Regardless of your investment experience, the best answer for you is going to come down to your goals. What are your goals as an investor and how does that fit in with your current and future realities in terms of family, employment/retirement, and other personal variables?
FINANCIAL SECURITY VS. FINANCIAL INSULATION
The most common answer we hear when asking about what people’s goals are is “financial security”. But what does that really mean? It’s like saying, “I want to be happy”...dig further, find something actionable and language that is instructive. “Security” in this context is far too vague and if you dive deeper it’s also one of those terms that’s not really attainable. You will never be fully secure from anything.
Instead, the term “financial insulation” is more appropriate and more instructive. Insulation provides protection from the elements you can’t control. It’ll keep your home as warm as possible or if you’re venturing out into the cold, layers of clothing work to insulate your body. Financial insulation follows the same premise. Each property you buy pads or thickens your layer of insulation. The more you layer up, the safer and more flexible your financial situation will be.
When thinking about your real estate portfolio it’s smart to think about each of your properties as a layer of insulation you’re building to protect your financial well-being and ability to meet your long term goals. If you can't put your arms down, you're in great shape. PHOTO CREDIT: IMDb
HOW MANY DO YOU NEED?
The answer will be different for everyone but as mentioned above, everyone should start with one. With one rental property you’ve got a thin layer of insulation. Assuming you’ve bought smart and are managing the property well, you should have a little passive income, a little bit of equity, and you’ve built some leverage with the banks. The next step is to convert that equity and income to create twice the insulation. Double the rent roll, double the equity, double the leverage. To stay with the winter clothing analogy, two properties is a solid winter coat, hat, and gloves. It’ll do the trick for the average person who spends most of their time indoors but wants comfort when outside.
Each house is a ring of insulation around you. And just like there are some people who do more outside in the winter, there are plenty of us who are looking to invest in more than just two properties. The more you have (if buying and managing correctly), the closer you are to that vague idea of “financial security”.
So it’s important that you then think about your current and future life conditions. What is your family status in terms of expenses and responsibilities? Are your kids young? Are they a couple years from college? Are they already out of the house and now you’re waiting on grandkids? What is your employment situation? Do you need to rely on the passive income you’re collecting or are you able to reinvest? Are you close to retirement or retired? What does your spouse’s employment situation look like? And finally, what about your personal status? How old are you and where are you in your life? Is this investment for you or for future generations? Do you have a separate pension to rely on and how close is your residence to being paid off? Answers to these questions should help in guiding you toward what your ultimate goal and strategy should be. In the same way money managers frame retirement accounts differently for a 30 year old than they would a 60 year old, there are a plethora of variables in real estate investment to help shape the best possible game plan for you.
LEARN MORE: THE NEX-CESS STORY OF MANNY ANICETO: Building A Legacy For Your Kids And Grandkids
PRIORITIZING YOUR GOALS
When it comes to your game plan, there are three priorities that can help guide your choices:
1. ELIMINATE DEBT:
You should begin by aiming to eliminate outstanding debt, especially if interest rates are exorbitant. It simply makes no sense to invest your money in a property (or financial market) that makes 7-10% a year while you’re paying interest beyond that figure. Debt can be a useful tool in investment but if you have any student loans, unpaid credit cards, or other figurative liens on your financial health, take care of them before the spiral is untenable.
LEARN MORE: 9 REASONS TO PAY OFF YOUR DEBT
2. PASSIVE INCOME:
If you think about debt as the money you owe to others, once it’s eliminated those profits will stay with you to use as you please. With a professional property manager your own effort can be minimal while passively receiving monthly rent payments. This passive income increases your quality of life and can be used for a number of things including a downpayment for a single family home when you’re ready to take that step.
LEARN MORE: WHY BUYING A SINGLE FAMILY HOME OUT OF THE GATE IS THE WRONG PLAY
3. WHAT AM I GETTING THAT I CAN’T GET ANYWHERE ELSE?
Once you’ve reached a place where your rental property income stream has helped you create enough insulation to help you feel secure, it makes sense to look into where exactly you want to house your money. Again, this comes down to your goals and those life variables. Some people squirrel their earnings away in crypto, stocks, or startups in an effort to diversify. Others, take that money and invest it back into their properties to increase the value of their portfolio, the quality of tenancy, and subsequently a larger return through increased rents. Updating countertops, putting in new floors, or replacing a roof are three ways to put your profits back into your property to help secure additional growth over the long term. As a property management company, we’re obviously partial to the reinvestment in property lane as we’ve seen it yield high returns for countless clients.
LEARN MORE: THE BEST WAY (AND TIME) TO ADD MAXIMUM VALUE TO YOUR RENTAL PROPERTY
RECAP AND NEXT STEPS:
The bottom line is that you want to get one rental property as soon as you can do so. Get your foot in the door and create that first ring of insulation. We all know hardworking people who get to an advanced age and struggle because they hardly have a penny to their name or the pensions they thought they had aren’t sufficient. The opportunity to purchase a home, other than your primary residence, is overwhelming in New England. Over half the properties in Rhode Island are rental properties and most properties tend to sell within every 10 years. Greater Worcester and Fall River have the same residential profile. Natick, Massachusetts is not in an area that has as many multi-family homes, but with rising interest rates and an unfavorable sellers’ market, more and more people are leaning toward renting their single family homes. The point…if you are in Southern New England, there are plenty of opportunities out there for you.
Contact any of our offices to learn more about rental property opportunities in your area. It’s also important to remind readers of Nexus’ Nvest® program which provides clients (Nvestors) with buyer’s agency and opportunities to buy properties in any Nexus Property Management® territories.
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