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 goes up in value.
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 kind of investment requires active management. 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. In this post, we will cover the pros and cons of real estate investing, and what you should 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 a property and decide to lease it out, you can generate rental income from your tenants. You could use this income to pay the mortgage, or just as additional cash for you and your family. Be aware that 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
Properties tend to appreciate or increase in value 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. Property appreciation and rental income are the top sources of revenue generated from real estate investing.
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 tax 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.
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. There is 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 industry.
Real Estate Investing Requires Cash Upfront
You’re going to have to have a decent amount of capital saved up 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, we recommend you look into REITS. You can build up a portfolio and start collecting dividends from your investments.
Real Estate Can Have A Heavy Workload
Though the thought of collecting rental income might seem appealing to most investors, it’s not always easy. 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. 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 and talk to people with some skin in the game. Nothing great happens overnight, but with patience and proper planning, you’ll be well on your way to becoming a successful real estate investor.