Real Estate is a fantastic way to diversify your investments and create financial security for a stable retirement. Establishing a plan is important for accomplishing those goals. In doing this, you need to be careful that your plan does not become more important than your goal. I’ll give you several examples of what I mean by this and how it can be easy to put hard work and money into efforts that don’t produce the level of financial success that was in your goal. It’s easy to slip into these subtle mistakes, so make sure you pay attention to each example that I give.
A common plan is to rent out your current home when you decide to move rather than selling it. This can be a great plan to reach your goal, but in some circumstances it may not. Owning a rental is always a good idea, but stop and ask yourself if this particular home is the most profitable as a rental or whether a different one would be better. Simply because you already own the home does not always mean it should also be the investment property you want. In many circumstances, you may be better off selling it in exchange for something that will be a more profitable rental. See our video, What Type of Rental Property Should I Buy for a better understanding of what makes a good rental property. https://kasteelproperty.com/video-what-type-of-rental-property-should-i-buy/ . I have heard people say they want to keep their home as a rental so they can avoid paying taxes on the capital gains. However, this can be avoided through a 1031 tax exchange when you sell one investment property and take the profit directly into the purchase of a different investment property. (See our future video on 1031 exchanges)
Just as a thriving company can go out of business because they won’t adapt to a changing market, your real estate is the same. You need to be willing to adjust and change so that your goal stays more important than your plan. To keep this focus you may need to clearly define what your goal is and even write it down.
Sometimes we fall in love with a particular house or plan to the extent that we are willing to go to great lengths to stick with that specific property or plan, when in reality there may be better, more profitable options out there. For example, lets imagine you own an older home that needs landscaping, a sprinkler system, has a partially finished or functional basement, an outdated kitchen, or faded siding. Or maybe it doesn’t have the problems of an older home, but the yard is really big or complicated. It has difficult neighbors or is in a rough neighborhood, or it’s in a remote location. There are many reasons a particular property may not be the best investment in the long-run. The important thing is to remember what your goal is and to let your plan change, as needed, to best accomplish your goal.
I’ve seen real estate investors that have been dreaming of moving out of their home and turning it into a rental property for so long that they are unwilling to consider any alternative courses of action. Even when the home has a long list of things that need to get fixed, updated, changed, or improved upon that will cost tens and tens of thousands of dollars and take many years to accomplish. There isn’t anything wrong with owning or buying a home like this to live in if a person’s goal is something like being closer to family or having a project to work on, or getting more square footage for a growing family that they otherwise couldn’t afford. However, if our goal is to maximize our profits in the real estate market, this would not make a good investment as a rental property.
Another common situation is inheriting a home and wanting to keep that home as a rental. Again, having a rental property is always a great idea but you need to ask yourself, is your goal to keep that specific home or is your goal to have a successful investment property. Either goal is a great goal but if your goal is the latter you should ask yourself if your inheritance could be used better by selling that home and using those funds to purchase something that will perform better as a rental property.
Also, sometimes circumstances can change and what was a good plan, now needs to be adjusted to stay on track with your goals. Maybe the property is getting older or the community is changing, HOA rules can change, markets can change, etc. If you aren’t willing to also change and update your plan as needed, you will have a much harder time accomplishing your financial goals.
You can find financial freedom and success in real estate if it’s done right. Define your goals, stay focused on them, make plans, and change plans as needed to reach those goals.
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