Renting and Real Estate

Back in my home state (New Jersey), my cousin manages rental properties. He knows that I’ve been saving money for a long time, and he has recently started asking me to invest in a new property with him. He has places picked out for me to look at whenever I’m home, and he’s very enthusiastic about the idea of pooling our resources. I’m not so sure about investing in real estate right now, though – especially when I see the places he’s looking at, which tend to be drafty and in disrepair (he says fixing these places up would be easy, but I don’t know enough about that sort of thing to say). What do the experts think: am I missing out on a big opportunity here?

Written by John Regan, former Director of Sales, for equity research.

There are a few questions contained in yours. Is real estate a good thing to invest in? Is this particular real estate deal a good one? And is it the right one for you? Let’s tackle these one at a time.

Here’s the good news for your cousin: real estate experts tell us the market looks pretty good right now. The median home value in the U.S. is up 7.4% since last year. Buying and renting property is one way to make money in real estate: when it works, it allows property owners to make a profit from their property (in the form of rent) while maintaining an asset that, if property values keep rising as they have, they’ll eventually be able to sell for more than they paid for it.

Of course, for this to work, you need a property that people want to live in and buy. Your cousin’s drafty picks might be a little rough in that cold New Jersey weather. Top local professionals told us that replacing siding and windows could solve much of the problem and net your cousin some savings, so he may be right that the fix is an easy one–but it’s impossible to say from just the information in your letter.

The most important question of all, of course, is whether or not this deal makes sense for you. You have saved some money, and that’s great. But property owners typically come into the real estate business with plenty of money already in other places. That’s because buying property can really cost you some cash, and it locks up the value of that cash in a type of equity that’s not very “liquid”–that is, easy to sell. If you invest in stocks and bonds instead of real estate, you can always get that money back in a pinch if you need it. If getting the cash you need involves selling a house, though, you won’t have that cash nearly as quickly!

Your cousin sounds like he’s coming on a little strong, so be careful with your choice. While investing in real estate can be a perfectly sensible move, you don’t want to put all your eggs in your cousin’s basket while locking your savings into a long-term investment with little liquidity. Consider the situation carefully, and don’t let your cousin’s pressure distract you from the facts of the matter.

“I think of real estate as a little bit like cooking or like art.” — Jerry Speyer

Tell us what you think.