The Pros and Cons of Investing in Real Estate

Investing in real estate can be a great way to make money, but it has its downsides too. If you’re thinking about investing in real estate, understand the pros and cons of investing in it to make sure it’s right for you.

While you don’t have to be an expert to invest in real estate, having some knowledge will help you make the right decisions. Here’s everything you should know.

8 Pros of Investing in Real Estate

1.     You can Leverage your Investment in Real Estate

Unlike most investments, you can invest in an asset worth much more than the amount of money you have with real estate. If you qualify for financing, you can borrow the money needed to buy the house, alongside your down payment.

This means you can turn $50,000 into a $200,000 or $300,000 investment depending on how much financing you qualify to borrow.

2.     Real Estate Appreciates

On average, real estate appreciates 3.5% - 3.8% per year. This is without making any improvements to the home too. If you renovate or improve the home in any way, you may even earn more in those years.

Real estate appreciation depends on the market, of course. There are good years and bad years depending on what’s going on in the world, politics, and the stock market, but on average you can expect around a 3.5% per year appreciation.

3.     You can Earn Cash Flow

If you buy a property and rent it out, you can earn monthly cash flow. Your net cash flow will depend on the expenses you have running the property, but when done right you should walk away with cash each month.

Before you invest in rental properties, make sure there’s a market for them in the area, you can charge more rent than the property will cost you, and you have the resources to manage it either yourself or the cash to pay a property management company.

4.     You can Fix and Flip Properties

If renting properties out doesn’t seem like something you would enjoy or can handle, you can buy rundown properties for cheap, fix them, and sell them for a higher price – flipping the property.

Most fix and flip investors flip properties within six months so you don’t have a lot of carrying costs. To make it work, you must know which properties to buy, have the resources or capability yourself to fix them up, and then the knowledge to sell them for a higher price.

It takes a team of real estate professionals to make it work, but when done right, including a real estate agent, appraisers, inspector, mortgage lender, and contractors, you can fix and flip a property for a profit.

5.     Real Estate Investments have Tax Benefits

As a real estate investor, you may get certain tax benefits, much like a business owner would get. You don’t have to worry about paying self-employment taxes like you would if you owned a business, but you can write off certain expenses including deprecation, direct expenses to run the property, and even travel expenses to go to and from the property to manage it.

6.     Real Estate Hedges against Inflation

Stocks usually lose value when inflation happens. Your returns suddenly become worth less than before. With real estate, though, the prices naturally increase with inflation, so you keep pace with inflation. You won’t typically beat inflationary prices but knowing that your rent prices and home values will increase with the pace of inflation can provide peace of mind.

7.     Real Estate Builds Equity

Real estate naturally builds equity in a few ways. If you have a mortgage on it, you build equity every month when you make a mortgage payment. You can see the rate you’ll build equity in it by looking at the amortization schedule provided to you at the closing.

You also build equity as the home appreciates, or when you make larger payments than required on the mortgage.

You can use the equity to reinvest in the home to make it worth more, or even for other purposes including growing your real estate investment portfolio.

8.     You are in Control of your Real Estate Investment

Unlike stocks, you can control your real estate investment to an extent. For example, you can improve it and increase its value. You can also control which tenants occupy a rental property or how much you spend on a property.

You have a much larger say in how much you earn on your real estate investment when you make careful real estate investing decisions.

5 Cons of Investing in Real Estate

1.     You Must Invest Long-Term to see Good Returns

Investing in real estate isn’t a short-term investment. Stocks can be short-term, meaning you can buy and sell a stock even on the same day if you wanted. Real estate doesn’t have that option.

If you fix and flip properties, you can possibly sell a property in 6 months or so, but that’s about as short-term as they come and there’s no guarantee you can even sell a home that fasts. To see the greatest returns in real estate, you should hold onto properties for at least a few years.

2.     You Need a Lot of Capital to Start

Even though you can leverage your investment with a mortgage, not everyone qualifies. Even if you do qualify, you’ll likely need 20% - 30% of the property price to put down on the property plus closing costs, which can be 5% - 6% of the property’s price.

3.     You Must Know What You’re Doing

You can invest in stocks and bonds and not know much about what you’re doing because a stock advisor or even robo-advisor can help. With real estate, you must know what you’re doing even if you have a team of real estate professionals helping you.

This is just a sampling of what you must know:

• How to find the right properties
• How to bid the right price on a property
• How to find tenants
• How to manage a property
• How to sell a property for a profit
• What and how to fix the property up

One mistake can cost you hundreds of thousands of dollars in a loss.

4.     There’s no guarantee you’ll Make a Profit

Even if real estate appreciates, it doesn’t mean you’ll make a profit. If you run the property wrong or you make a bad investment decision, you can still end up with a serious loss. Real estate appreciation helps offset the risk of a loss, but it doesn’t guarantee you won’t have a loss.

5.     Real Estate Requires a Lot of Time and Effort

Real estate isn’t a set-it-and-forget-it investment. You must put in a lot of time and effort to make money at it. Even if you hire a property management company to manage your property, you must still be available to make decisions, handle certain tasks, and decide when you’ll sell the property.

If you run the property yourself, you’re on call 24/7 and must be available physically and financially to fix the problem.

Tips to Make the most of Investing in Real Estate

Do your Research

Don’t invest in a property until you know the area is worth it. Find out the rental demand in the area, the average home appreciation, and what renters look for in the area. If you plan to fix and flip, make sure the homes in the area are selling for the price you’d need to make a profit on the deal. Don’t just assume any home you can get for a great deal and rent out or flip is worth it.

Invest your own Money

You’ll need quite a bit of money to start investing in real estate. The more money you invest yourself, the easier it is to get financing. You’ll also get more friendly financing terms which will make your investment even more profitable.

Choose a Niche

Decide what you’re most interested in investing in, whether it’s townhomes or condos for young adults or large homes for families, choose a lane and stick to it. You’ll have an easier time becoming an expert in the niche and increasing your earnings.

Invest in Other Areas

You don’t have to invest only in your hometown. You can invest in homes all over the country if you can afford a property management company. This allows you to take advantage of lower prices elsewhere. It also allows you to diversify your investments, so you can take advantage of other markets and not put all your eggs in one basket.

Final Thoughts

Investing in real estate is a great way to diversify your investments and grow your net worth. Like any investment, there are risks, but when you understand the ups and downs of investing in real estate, you’ll make smarter decisions and be able to enjoy the profits.