I speak with a lot of investors, and one of the things I always ask is how they purchased their first property. I find that many people end up holding onto a home that they used to live in, simply because they love the property.
They keep the property as a rental, not because it's a smart investment, but because they love the home. They have years of memories in the home. They love the paint colors they chose.
For instance, I recently spoke to a couple based in Philadelphia who owned one property. It was their first home, and when they had to move, they couldn’t bear to let go of the house.
When I asked them about their return on investment, they said they were in the process of paying down the mortgage, and that they were basically breaking even. They projected that they might begin to make a profit in ten years.
This is a huge red flag for me; the whole point of investing is to make money! If the return on investment is low or non-existent, it’s simply not a good investment.
This is why the worst way to invest in real estate is emotionally. When you invest in a home or a neighborhood solely because you love it, chances are, it’s not a profitable investment.
Real estate investing should be all about the numbers, and nothing else should matter. Here’s how to calculate ROI to determine if your investment is sound.