“Would buying a rental property be a good decision for us?”
The smartest real estate investors are waiting for a big pullback in prices to start buying.
The second-smartest are the people who are tempted to buy in now, but want to speak to someone to get some advice first. This group includes a reader who recently came into some extra cash and is considering a rental property. “We are unsure who to consult with on whether this is a good decision for us versus our current investments,” she wrote. “Any ideas on how to make the comparison? Would you recommend an accountant? Financial adviser? Thanks.”
Consult an accountant to get an idea of how much income you could expect on an after-tax basis from a rental property. Consult an investment adviser if you want a contrarian view on investing in real estate. In part, this reflects a bias in the investment biz. Advisers make money by selling investments such as stocks and bonds, not by validating a client’s plan to buy a rental property.
And yet, people in the investment industry tend to have a much better understanding of real estate than people who, well, sell real estate. Investment advisers understand that the price of all financial assets move in alternating up and down cycles, real estate included. They would tell you that real estate has had a fabulous run, but it’s expensive right now in many locations. A good adviser would remind you how much of a lift you get as an investor when you buy low and how much of a risk you take when you buy high.
All of that said, the best place to go for advice on an investment in real estate is a fee-for-service financial planner, where you pay a flat or hourly fee and there are no products sold. Simply ask for a consultation on whether a real estate investment makes sense – planners get queries about real estate all the time.
A planner can go beyond the question of how a real estate investment might perform, or how much income it might generate, to look at how the transaction would further your own personal finance goals. Can an investment property help you retire sooner? Would it aid or hurt your plans to help your kids buy real estate of their own? How much of your overall wealth would be tied up in real estate and thus vulnerable to a pullback in the sector? A financial planner should be able to answer all of these questions and more. The key to success in real estate might just be an investment in a consultation with a planner.