Should you invest in real estate?

Real estate can be a good investment but it isn't right for everyone. When I talk about real estate investment I mean buying rental property and renting it to tenants for long periods while rental income is used to generate cash and possibly pay a mortgage.

Here are a few basic questions to ask:

Do you want the extra work involved? Whether you are planning on managing the property yourself or just hiring a professional property manager there is work involved in owning real estate. See my previous post addressing if you are cut out to be a landlord.

Can you stay in the investment for several years? Rental real estate is a long term investment. You will not make much money if you buy and sell property in a year or less. Closing costs and realtor commissions will eat all your profits. If you might move in the next year or two or if you need your money faster then buying rental real estate isn't a good idea.

Is your market good for rental investments? Some markets are much better for rental investments than others. The thing to look for is the ratio of rents to property values. If renting a home is much cheaper than buying a home then its not a great market to be buying homes. Certain cities or areas like San Francisco are pretty bad places to invest in. So look to see if your market has a favorable rent / price ratio.