If you are thinking about investing in the California real estate market, there are a number of factors which need to be considered. Below are four of the most important.
- Do you want to be an active or passive investor? When you purchase real estate property and manage it yourself, you’re playing an active role, and one that involves significant time and effort. Talk to other landlord-investors to get an idea of the potential benefits and pitfalls before going this route. Passive investments include exchange-traded funds, REITs, or mutual funds, and require less direct involvement. If you are seeking to simply diversify your investment portfolio, this channel will likely make more sense.
- What is your timeframe? If you’re speculating and hoping for a quick return on your investment, the liquidity of a real estate investment will matter to you. Passive investments in California real estate are more liquid than active ones. The real estate market is cyclical, and if it changes, you’ll have an easier time selling an ETF (exchange-traded fund) than a house.
- Are you taking on real estate as a full-time business or just a hobby? Think about how much time and money you’re prepared to devote to these investments, and how much of a financial cushion you have if things don’t work out. Many real estate investors enter the market as hobbyists and quickly find that it becomes more than they can handle.
- Are tax considerations important to you? If you do not use the property yourself (or at least use it minimally), operating expenses for a rental property can be tax-deductible. When you sell real estate, any profit is taxed as capital gains, not income, so the rates will be lower. Because tax laws can change, consult a financial professional if tax considerations are an important factor in your investment strategy.
Once you know the answers to these questions, you’ll be in a better position to choose your investments wisely and experience outcomes that match your goals. If you’ve got any questions about this process, please let me know!
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