Should I Buy an Investment Property?

You may be interested in buying an investment property if you want to diversify your holdings beyond stocks and bonds. While stories of quick flips—buying a home, renovating it, and reselling at a much higher price—dominate TV reality shows, renting is the true core of real estate investing. That’s because historically there has been very little real price appreciation in houses. Renting generates a steady monthly paycheck, like a classic dividend-paying utility stock. Any price appreciation is a bonus.

But investing in a rental home isn’t like buying a low-cost index fund. Choosing the right property, maintaining it, dealing with tenants—all that takes work. Think hard about whether you’re prepared to put in the time. Can you handle after-hours calls? What if your tenant doesn’t pay rent?

Veteran real estate investor Leonard Baron says landlords ought to be handy and like fixing things. He also cautions people who are already juggling 60-hour jobs with kids to be wary. “Things may go well with your properties and you might not have too many issues, but that’s the exception, not the norm,” he says. Baron also suggests anyone considering getting into the rental business make sure they have enough savings to handle unexpected repairs early on, before the rent checks start coming in.

Even though home prices have bounced back, deals can be found—if you’re careful. Underestimating the costs of renovation and ongoing maintenance, the biggest rookie mistake, can quickly tank your returns.A recurring complaint from those undertaking research in the property sector is that conclusions often have to be drawn from incomplete, out of date, inaccessible or otherwise imperfect information sources. 

Data inadequacies mean that even seemingly straightforward questions, such as identifying the volume of stock in a given market, are sometimes surprisingly difficult to answer with precision. This in turn influences the way real estate is viewed as an asset class, how it is valued and financed, how it is occupied and used, and also has implications for the quality of planning policies and other public policy decisions that affect (or are affected by) property.

Ease of access to good information also helps to explain some researchers' predilection for studies of data-rich listed property behaviour rather than comparatively data-poor direct investment. The following lament, from a recent study of investment performance drivers in the UK, is symptomatic: 

"A unique challenge for fund managers is the integration of real estate's mix of financial and physical characteristics into a formal framework of asset appraisal, portfolio construction and risk management. Type and region factors explain some of the variation in asset returns, but not the majority. The power of constructing a portfolio based solely around these two factors is limited, therefore, and places the greater emphasis on short-term stock selection rather than asset allocation Other attributes are suspected of driving property returns, in particular, an asset's specification, location, current lease terms and tenant strength. But how can these factors be included in an investment process when there is a lack of consistent data measuring their impact on the drivers of asset returns?"

Despite the growth and evolving maturity of property research as a profession and as an academic discipline, we still seem to struggle with challenges that would have been familiar to pioneers in the sector, working in the pre-digital 1970s and early 1980s.