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5 Do’s and Don’ts of Investing in Real Estate

By U.S. News & World Report

Owning real property is a goal for many investors. When done properly, investing in real estate can offer a number of benefits for individuals including the ability to diversify income streams and capture long term capital appreciation. However, there are a number of ways investors get it wrong when it comes to real estate and the costs can be quite significant.

As you consider whether investing in real property is right for you, keep these key considerations in mind.

Do: Consider real estate as a diversification tool. One of the benefits of owning real property in addition to traditional investments like stocks and bonds is the diversification it can provide to your income and asset holdings. Having multiple sources of income helps reduce the impact to your finances, should one stream dry up. The real estate market isn’t directly correlated with the stock market either, so holding both types of assets can be a good thing.

[See: The 10 Best REIT ETFs on the Market.]

Keep in mind that real estate can only help diversify your assets if it’s a component of your net worth — not a big piece of it. Also consider location as part of your diversification strategy as physical location is a main driver of a property’s relative value. It is important to be familiar with the local market, but don’t overlook the added risk if your own home is in the same community. Of course being a long-distance landlord carries a different set of risks, so try to find a balance.

Don’t: Over-concentrate in one asset class. Just as real estate can provide diversification, it can just as easily concentrate your holdings in one volatile asset class. Investors just starting out may have a higher risk of real estate concentration risk as the property may represent a much larger piece of their overall net worth. Why may this be a bad thing? The real estate market can be volatile and while you can control how the property is maintained, the majority of factors that drive local and national markets are outside of your control. These factors can range considerably. Consider the impact of a major employer moving in (or out) of a community, changes in interest rates, sharp increase to property taxes, and changes to the public services offered in a community.

Do: Consider an investment property if your cash flows are already strong. Real estate can be quite cash-intensive so if you’re holding too much excess cash and find yourself with a large surplus each month, an investment property can be one way to put those funds to work for you. Real estate is unique in that it requires a lot of cash upfront (down payments greater than 20 percent are common) and ongoing cash reserves to maintain and cover for ordinary expenses, but the investment self is highly illiquid. Unlike a traditional investment where you can sell off some of your stocks as needed to raise a lump sum, you cannot sell a room in your property. Unexpected repairs, prolonged vacancies, or past-due tenants can lead to financial problems if cash reserves are light.

Don’t: Rush through your cash flow projections. As any professional real estate investor would tell you, the numbers have to work. Particularly when investing in a buy-and-hold property, your cash flow assumptions must be solid to help ensure you’re making a good investment. Do extensive research to obtain accurate income and expense figures and consider building out a model to tie it all together. A standard model should include provisions such as the cost of capital, expected vacancy rate, taxes, and a discount rate, which is essentially your required rate of return for the investment.

[See: 7 Ways to Trade Volatility With ETFs and ETNs.]

Cash flow modeling is a critical step before making a purchase, as real estate investing carries more risk than traditional investments. Not only is real estate illiquid, but it can actually have a negative value (being “underwater” for example) whereas with stocks, you can’t lose more than your investment.

Finally, consider scenario analysis as part of your cash flow projections. What if you were to invest cash in the market instead of buy property? What tax benefits may you sacrifice by renting your former primary residence instead of selling it? Depending on your specific goals, real estate may or may not be the best way to get there, and cash flow modeling can help you figure that out.

Do: Talk to someone who already owns an investment property. One of the best ways to educate yourself is to speak with someone who’s already faced the same challenges. New real estate investors are often surprised how much work being a landlord can be. It isn’t as easy as it looks on HGTV!

Hiring a property manager is an option, but will impact your cash flows. As a landlord, you’ll also need to ensure compliance with the numerous local and federal laws. Some states, such as Massachusetts have very strong tenant rights laws. Landlords may expose themselves to financial and legal risks if they don’t comply with housing discrimination laws, proper escrow procedures, building codes, and so on.

Investing in real estate is attractive to many individuals who like the idea of having a tangible asset with passive income potential. However, it is important to objectively assess the opportunity and be realistic about your potential net income after taxes. As an individual investor, it can be challenging to find properties with sufficient cash flow potential to justify the risk and opportunity cost, especially as there are many professionals with a whole infrastructure behind them that are trying to do the same thing.

[See: 7 Stocks That Could Save Your Portfolio.]

The key is to stay committed to only pursuing opportunities that work for your numbers.

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5 Do’s and Don’ts of Investing in Real Estate originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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