Pros and Cons of Real Estate Investing
In this shifting economy, it is always a good idea to establish additional streams of income that can support your lifestyle and investment goals. Buying property as an investment is just one of many ways that an additional stream of income can be achieved. I come from a long line of real estate investors. My parents, aunts, uncles, and grandparents all have numerous investment properties and have used this tool as a financial means to reach their retirement goals and maintain a cash-flowing business. Having grown up watching this as ‘the family business’ I have learned firsthand many of the dos and don'ts of buying and selling property as well as the success and failures of being a landlord. Now, as a trusted realtor, I am able to apply these lessons and local expertise to assist my clients in achieving their financial goals with investment property. Let’s look at some of these lessons and then discuss if buying real estate is something you want to add to your investment portfolio.
Real estate is now Americans’ favorite long-term investment, according to a recent Bankrate study. Real estate investing has consistently ranked as one of the top choices since Bankrate started the survey in 2012. With the recent appreciation values we have seen in the market over the past two years, many investors have seen upwards of 20 - 30 % increased value in their property. So the question now is, Have I missed the boat or is an investment in real estate still a good choice? The answer is yes, real estate is always a good investment. But, as always, you need to look at your own unique goals to determine if this is the right investment vehicle for you.
Buying investment properties as another income stream has been a popular way to generate income for many years. But the real estate market can be volatile and stressful, which can make it hard to plan your investments appropriately. Here are some pros and cons of investing in real estate.
It’s a tangible, physical asset
Real estate is a physical thing that will always have a monetary value, which is not always true with other investments. Regardless of what happens with the housing market, you still own the land and any structures on it.
Real estate appreciates
Historically speaking, real estate appreciates in value over time. We saw that from the housing market bubble burst in 2007, the subsequent rebound in 2013, and skyrocketing prices now. Keep in mind that many factors can still contribute to how much it will appreciate - including location, supply & demand, the general state of the economy, and renovations & improvements.
If you’re looking to make money in real estate, you’ll want to think long-term. As you pay down or eliminate principal over the years, you should be able to grow your cash flow.
You increase your net worth
Buying an investment property can be a good way to diversify your portfolio. Diversification means that your investments are spread out so that one bad outcome won't impact overall performance.
It can be a passive income source
Buying an investment property is a great way to build wealth, especially if you have a steady stream of income. You can buy an underpriced property and flip it for a profit, invest in a real estate investment trust (REIT), or lease the property out to tenants.
Take into account all expenses, such as maintenance, insurance, taxes, and depreciation. Calculate your annual return and see if that’s good enough for you.
If you own your own home, you know you can deduct your mortgage interest and usually state and local property taxes. As a real estate investor, you can also deduct operating expenses, insurance, and maintenance. Consult your accountant or a tax expert to learn the best options for you in your state!
It’s expensive to get started
While real estate investing may sound like an excellent option for you, it is not for everyone. Unless you already have the money to invest and money for renovations and improvements, real estate investing may not be a realistic option.
You’ll also need to have enough cash to cover closing costs, homeowners insurance, property taxes, and maintenance issues that come up at the property.
It takes a lot of work
Real estate investing comes with many challenges. You have to spend time and money from both your free time and personal finances in order to make your real estate investments successful.
It takes time and effort
It usually takes years to see substantial increases. Improvements cost money, especially for major renovations that usually go for three to six months
Don’t underestimate the drama involved in being a landlord. Some tenants pay promptly every month. Others come up with elaborate reasons why they can’t pay at all. You can also just hire a property management company to save you the trouble. But, doing so also eats into your ROI.
When you invest in real estate, you need to be well-versed in Fair Housing laws, taxes, and local landlord-tenant laws, among many other laws. I strongly advise you to align yourself with trusted professionals that you can rely on to provide the support that you may need with some of these complicated issues.
You don’t need to be a seasoned real estate professional to take advantage of this popular investment strategy, but you do need to align yourself with a trusted source to help you with issues that may arise. There are many affordable ways that you can get into real estate investing to start generating cash flow. You need to be strategic in how you go about researching your options and deliberate in the decisions you make and how they will impact your investment strategy. Talking with a trusted realtor is always a good first step to see if this is the right type of investment for your goals.