We’ve probably all heard those real estate investing success stories, but is real estate investing always a bed of roses?
The real estate industry is an appealing choice for an investor. Everyone needs a home and the need for housing is only increasing in most corners of the world. So are real estate values. Essentially, we are looking at a pretty stable industry. However, becoming a real estate investor can go sour if you don’t manage your expectations. Therefore, we put together a list of the pros and cons of real estate investing. Understanding the pros and cons of investing in real estate will help you determine whether a real estate career is for you.
6 Pros of Real Estate Investing
To set our balance scale with the pros and cons of real estate investing, let’s start with some of the pros of becoming a real estate investor. As there are so many pros to choose from, we have picked these six pros that apply to most investors. These should highlight why buying real estate is so great!
#1 – Almost Anyone Can Become a Real Estate Investor
These days, you do not need to save for years until you can purchase an investment property and become a real estate investor. If you save the amount of the down payment, usually around 10 to 30 percent of the property value, you can borrow the rest from your bank, a lending institution, or a private lender of your choice. Imagine, you could purchase a property worth 100K with as little as 10K down. If saving even that 10K sounds overwhelming, you have options here too. Indeed, getting into real estate investing is no longer about your resources but resourcefulness.
#2 – You Generate Passive Income
Probably the single best thing about real estate investing is the possibility to generate passive income. What can be better than going to bed at night knowing that your rental property is making money on your behalf even while you sleep! Moreover, when you advance to the next level in real estate investing and purchase more rental properties, their rental income can cover all the expenses and leave you with pretty nice positive cash flow. This is the profit that you generated passively. What’s not to love here? Passive income generation can also work for you in the long run. In fact, you can make your retirement years financially secure with regular rental income from your investment properties.
#3 – Investing in Real Estate Works as a Hedge Against Inflation
If you are saving money, you are likely to be concerned that the purchasing power of your money declines as time passes. Investing in real estate offers great inflation protection. Also, if you invest in long-term rentals, the value of your investment property increases with time as it experiences real estate appreciation. Although a rental property is a tangible asset, you can monetize it by renting it out for a nice positive cash flow. When you look at the different investment options out there, you will also notice that real estate investments are more resilient against the volatility of asset markets. If you do not want sleepless nights stressing over the volatility of the bonds and stock markets, real estate investing with its slower pace is a good option.
#4 – You Can Get Tax Deductions
Another good thing about real estate investing is that you can get some nice tax benefits through depreciation. Tax deductions, of course, are good news for your returns. This annual deduction for depreciation means you can write off a certain percentage of the property value as an expense against revenues. There are usually also tax credits for certain types of real estate investments, which are deducted from the tax you owe.
#5 – Real Estate Investing Is Good Risk Mitigation
For investors, adding real estate to their investment portfolios can be an excellent way to mitigate risks. Of course, receiving monthly rental income is a great bonus too. However, it is the buffer it provides against riskier investments that might appeal to many investors. Having a more diversified investment portfolio can provide more security versus too narrow of a focus on a single investment domain.
#6 – You Boost Local Economy & Community
On top of making money in real estate, there are also those benefits that, well, simply make you feel extra good when buying your investment property. The first is that you get to boost the local economy. When you invest in real estate, you get to hire different types of contractors and purchase various materials for the property, which all stimulate and benefit the local economy. At the same time, you support the whole community by increasing available housing and tax revenues. As a real estate investor, you are not just any investor but an investor in the wellbeing of the whole community.
4 Cons of Real Estate Investing
To manage your expectations, there are of course challenges and cons in real estate as in any other industry. Some of the cons here may not be as relevant to certain types of investment properties but are still generic enough to apply to most cases.
#1 – Illiquid Assets Require a Long-Term Commitment
One thing is sure when investing in real estate properties: when you jump on that bandwagon, you cannot jump off that quickly, or that easily. Real estate properties are considered illiquid assets. Investopedia defines illiquid assets as something one cannot easily sell or exchange for cash without a substantial loss in value. It is not easy to sell a property that quickly. Most real estate transactions are done in private markets where transactions with multiple bidders are slow and require a substantial amount of capital. Therefore, if you think that you need to convert your asset into cash quickly at some point, this might not be the type of investment for you. Many elements in the process are not entirely in your hands, not the least of which is the schedule.
#2 – Real Estate Investing Does Not Come Without Risks
Beginner real estate investors often ask what are the potential risks of real estate investment. Although real estate investing can be rewarding, there is a set of risks at every stage of the real estate investing process. For example, you might not find a suitable investment property with a decent ROI, you might face difficulties entering competitive markets, or you may even end up choosing the wrong tenants who damage your property (and cash flow). In real estate investing, as with any other form of investing, there is always a risk that you might end up losing money. Most risks, however, can be mitigated by understanding the pros and cons of real estate investing and utilizing all the resources out there that help you make smarter decisions.
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#3 – Becoming a Landlord Is Time-Consuming
No question that becoming a landlord is one of the most commonly cited and notorious cons of real estate investing. New real estate investors often get shocked by how much energy and effort they need to invest in their rental property and their new role as a landlord. This is why it is better to start small and scale only after learning the basics of property management. An unprepared real estate investor might be looking at a very bumpy road ahead. Here are some of the basic responsibilities expected from you as a landlord:
- Searching for new tenants.
- Dealing with problematic tenants.
- Doing regular maintenance.
- Fixing potential damages to the rental property.
- Making yourself available around the clock.
- Knowing the basics of the legal side of owning a rental property.
With a task list like this, becoming a landlord arguably can seem daunting. You must now be wondering what happened to that “passive” of the passive income generation? Well, if you find a profitable investment property that can cover the costs, you can hire a professional property manager to do all of this on your behalf.
#4 – Some Tax Benefits Are Not Applicable to All Real Estate
Tax benefits can be a pro – or a con – depending on if you get them or not. This is why you need to know your local tax laws or consult a knowledgeable accountant. Sometimes the tax benefits work only at specific income levels. When the income level is too high, there might be nothing for you to claim on your taxes. If you counted on getting these tax benefits when budgeting your desired income level, this can be a big blow. If you want to know whether tax benefits are a pro or a con in your case, consult a professional to help you understand taxation before proceeding with your property investment.
There you have it – our list of the key pros and cons of real estate investing. After weighing the pros and cons of real estate investing, it seems to provide more rewards than challenges. You probably noticed that the cons list was not anything a determined investor could not overcome. In fact, they could also be seen as pros depending on your point of view. No one is born an expert. By familiarizing yourself with different real estate investment strategies and doing your homework, you will get there in no time.