The Agony and Ecstasy of Real Estate Investment

Everybody needs a place to live!  Real estate is a relatively stable investment and usually appreciates over time.  It might be a nice way to invest funds from my recent inheritance.   If I could find the right investment property, it could help generate a nice passive income for my family.

However, if you’ve ever purchased real estate for investment, you probably already know it’s not without risk. After taking a look at a few single family home listings in my city, I found out I don’t have enough capital to purchase a home or property without a mortgage.  According to my real estate agent, the median home price in Australia is about AUD 612,200! Ouch!

In fact, I’d need to borrow a lot of money.  Debt, or leverage, can be positive if you know the property increases in value but it can also magnify my losses if the property depreciates.

Unfortunately, the properties I’d be able to afford with a AUD 70,000 down payment aren’t the best of the lot.  The type of tenants for these properties are not necessarily a desirable demographic and might not be the most financially responsible.  What would happen if my tenants didn’t pay rent on time or, even worse, destroyed my labor of love?

Truth is, I don’t have a lot of additional income after I pay my family’s expenses. There’s always something for single moms to spend money on. For instance, my heat pump almost blew up a few months ago and an emergency contractor visit obliterated discretionary income for a few months.

So, what about the tenant question? If I take the plunge, borrow to the max to extend my capital, and don’t find a good tenant? What checks can I perform to ensure I’ve got the right ones? Are gut feelings the ultimate test or should I rely on facts and figures I can check?

I’ve heard pros and cons from friends. One of my friends bought a small house next to her property. Her thought process was something like I’m right here, so I can pop over and collect the rent on the first of the month. And I can do this without making a nuisance of myself.

Unfortunately, that’s not what happened. My friend—who had more capital than I do to invest—borrowed 80 percent on the property.

Appliances started breaking. The tenants didn’t tend the lawn. They were late at least seven days on rent payments each month for the first quarter. To keep her mortgage payments current, my friend had to dip into her emergency funds for those months.

She said, “Sometimes, I had to juggle other payments to stay current.” She wanted to protect her good credit.

You want to know if she got things sorted and owns multiple properties now, right?  The answer is, yes. This friend struggled through and finally got it right. She asked for more security when tenants have a dog. She added a bit to the rent and ensured that the lawn was trimmed in the summer.

Another friend wasn’t so fortunate. She ended up selling the house she bought with precious cash at a loss. She said, “I couldn’t handle the constant flow of issues. I couldn’t handle it financially or emotionally. My tenants were okay at the beginning but broke the lease. They took new appliances with them!”

Okay, let’s get back to me. My agent says there are lots of transaction costs associated with purchasing a property. I know, there’s her fee and then lawyer fees, inspector fees, and more.

Since home values have tended to rise for years and are starting to ease now, I don’t know if this is the best time for me to invest. My research says that a good property will hold value over time but it’s also possible to lose money in the interim.

My real estate investment can decline in value. If I use debt—which I’d need to do because I don’t have enough cash on hand—this leverage would magnify my loss. For instance, if I lost 10 percent on paper, my real loss would be much, much more.

Although I could invest some money in a real estate fund, the fees are high and liquidity can be low. What if I need the money?

What do you think? Have you invested in real estate? What was your experience? Given my financial circumstances and family responsibilities, do you believe it might be best for me to invest in something less time and money intensive now?

I’m open to your suggestions and recommendations. Money in a savings account isn’t working very hard for me and, as you know, I work too hard to let it stay idle!

Cheers for now. I’m eagerly looking forward to your comments.

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