Real Estate can be a great diversifier in an investment portfolio. When evaluating whether a rental property is good investment for you, consider at least two questions.
- What is your liquid vs. illiquid ratio? – Liquid assets are things that be accessed quickly and efficiently, like cash. Illiquid assets include real estate, privately held businesses, and to some degree retirement accounts or taxable investments that might require taxes and penalties to liquidate. When investing in an illiquid asset like real estate, you want to make sure you have an appropriate amount of liquid assets available in case you need access to funds.
- What is the Capitalization Rate? This metric gives you an idea of your return on the investments. To derive this you take the Net Operating Income and divide it by the Property Value.
- Net operating income = Gross rent minus expenses including taxes, insurance, utilities, advertisement, HOA fees, maintenance, property management fees, vacancy rate, and others.
Keep in mind that operating income can be manipulated by accelerating or deferring certain expenses, such as depreciation.
Once you have the Capitalization rate (Cap rate) you can more accurately weigh the returns and risk of that investment against others.
Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized investment, tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor and other appropriate professionals, such as a real estate agent, prior to investing. No strategy assures success or protects against loss.
You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.