Read below to find out whether or not real estate is the right investment for you, with key insights toward the bottom.
Investors are always looking for a way to diversify their portfolios with little risk. When it comes to real estate, there is a wide range of investment options. You can buy real estate investment trusts (REITs), which are like purchasing stock in a company. More experienced real estate investors buy multifamily properties and lease them out to increase their cash flow, or sell them when the property value goes up.
If you’re looking for a more hands-on investment, buying and managing a physical property is the way to go. But be aware that this type of investment requires active management of the rental properties. By going down this route, you’re required to either manage the property yourself or hire a property manager to deal with leasing and maintenance.
Real estate investing is no walk in the park. There are some risk factors you should be aware of before deciding to get involved. However, real estate can be a highly rewarding (and lucrative) investment if you’re diligent and patient to build wealth with real estate. Compared to traditional investment means such as the stock market, real estate is a much less volatile industry despite the risks and costs. In this post, we will cover the pros and cons of real estate investing, and what you need to know before starting.
Pros Of Real Estate Investing
Here are the main benefits of investing in real estate:
Real Estate Provides Cash Flow
If you purchase an investment property and decide to lease it out, you can generate rental income from your tenants. You could use this passive income to pay the mortgage, add to your retirement fund, or just as additional cash for you and your family. Be aware that property ownership or being a landlord comes with its challenges. You’ll need to deal directly with tenants and make sure your property is up-to-date.
Real Estate Appreciates In Value
Market value of the investment properties tend to appreciate or increase over time. If you hold your property for years and want to sell, you can sell it above the price you purchased for, giving you a nice lump sum of profit. However, there are times where properties can drop in value, such as during an economic crisis even though home values historically follow a rising trend overall. Property appreciation and rental income are the top sources of revenue generated from real estate investing in the long term although market corrections might occur occasionally causing people to buy the wrong property.
Real Estate Offers Tax Benefits To Investors
Who doesn’t love a little break from the IRS? All of the cash flow generated from your property is tax-free. Plus, your mortgage interest rate, managing costs, and home insurance are all tax-deductible. You will, however, need to pay property taxes for your investment. The value of your property determines the property tax rate. The national average is around 1.08% and is usually paid annually or bi-annually although high net worth investors would fall into a higher tax bracket. In addition, real estate investments are also advantageous when it comes to capital gains tax. For example, you can benefit from a 1031 exchange and defer the payment of capital gains taxes.
Cons Of Real Estate Investing
Here are some of the disadvantages you should know about real estate investing:
Real Estate Investing Takes Time
Investing in real estate is not something you can get into overnight. Buying and selling properties is a lengthy process, but if you have the patience, it’s worth the wait and you will eventually make money. However, it’s important to have a longer-term investment strategy, do your due diligence properly, and diversify your investment portfolio. Real estate properties are tangible assets that cannot be liquidated quickly when you need emergency funds. Plus, there are transaction costs and fees that you will need to incur to sell a property.
There is also quite a learning curve, so it’s best to do a ton of research before deciding on your first investment. Otherwise, you could lose a lot of money by making rookie mistakes that easily could have been avoided. Many new investors seek out a mentor who has been through the process and successfully thrived in the real estate industry.
Real Estate Investing Requires Cash Upfront
You’re going to have to have a decent amount of capital saved up for the down payment plus the closing costs of real estate transactions if you want to get involved in real estate investing. There are many self-claimed “industry experts” who say you should get started buying properties with other people’s money. We recommend you avoid these schemes at all costs. If you’re looking to invest in real estate without dropping a large sum of money upfront or breaking your savings account, we recommend you look into REITS. You can build up a portfolio and start collecting dividends from your real estate investments.
Real Estate Can Have A Heavy Workload
Though the thought of collecting rental income might seem appealing to most investors, managing a rental property is not always easy and it can be time consuming. Sometimes tenants are late on rent or end up squatting. You are entitled to your rental payments, but you are dealing with people. Life can get challenging, and people who are renting your home may have a family. It can be tough to make difficult decisions while maintaining a strict demeanor. Property management can be challenging at times especially if you are new to the game and short on time. One way to make things easier is to hire a property manager who is responsible for collecting rent from tenants.
Real estate investing can be a solid financial decision if you know what to expect. The best advice would be to do extensive research on your local real estate market, talk to people with some skin in the game, assess your risk tolerance, learn about investment strategies, and financing options. Nothing great happens overnight, but with patience and proper planning, you’ll be well on your way to becoming a successful real estate investor.