To anyone involved in real estate investing, ranging from landlords to agents, there’s no doubt about it: Real estate investing is definitely worth it. But to many unaware of or new to investing in real estate, they may wonder: Is real estate investing a good idea? Today, we’re here to answer that question and show you why owning real estate is more than worth it. We’ll do so by mentioning the prominent pros and cons of real estate to help you come to a conclusion.
The Pros of Real Estate Investing
Positive Cash Flow
For many interested in the business, positive cash flow is the only incentive needed for becoming a real estate investor. Cash flow is the net profit of investing in rental properties, or the difference between rental income and rental expenses, to be more specific. As the name suggests, positive cash flow is when an investor has more income than expenses, while negative cash flow is the opposite. Positive cash flow is the obvious goal of a rental property. When positive cash flow is generated, it provides consistent profit for the real estate investor. Without a doubt, the desire for positive cash flow is the most prominent reason why many turn to buying investment properties.
Cash flow can provide both short-term and long-term benefits to property investors (more on this later). There is, however, another form of profit from investing in real estate: appreciation. Appreciation simply means an increase in value over time. When an investment property’s value upticks, its potential selling price does as well. This allows investors to make a huge bang for their buck after years of real estate investing. In areas with high appreciation, the benefit is even more immediate and profound. When investing in residential real estate, investors earn through both rental income and appreciation. This is arguably the best strategy in real estate investing, known as the buy-and-hold strategy.
Many working people dread the time of year when filling out their 1040s is a must. Fortunately for successful real estate investors, they aren’t included in this group of people. When investing in real estate rentals, investors are eligible for various tax benefits, particularly tax deductions. Virtually any expense associated with real estate investments can be deducted. Examples include capital gains, repair costs, utilities and maintenance fees, insurance premiums, depreciation, mortgage payments, and mortgage interest. While these various tax deductions are typically not a primary motive to start investing in real estate, they do act as an excellent bonus for investors.
Active or Passive Investment
In every type of business, those involved want some type of flexibility. Luckily for real estate investors, real estate investing comes with a lot of flexibility, in multiple forms. One type of flexibility in real estate is whether the investment is active or passive. Active real estate investing is when the investor gives a full-time commitment to investing and maintaining investment properties. Passive real estate investing, on the other hand, is a commitment that is less than its active counterpart. Typically, passive investors have others manage their investments and only put forth the cash needed to acquire the property. This flexibility allows potential real estate investors to commit to investing in whatever way they see fit and still reap the benefits.
Various Rental and Investment Strategies
The flexibility of real estate investing also extends to the different rental strategies out there. Investing in traditional rental properties is the most common strategy, with long-term rental income and appreciation being the main forms of benefits. Investing in short-term rentals, such as Airbnb vacation home rentals, is a rising form of real estate investing. One of the reasons Airbnb has become so popular is its flexibility, particularly as an active or passive investment.
The Cons of Real Estate Investing
While real estate investing is full of advantages, there are potential cons associated with the business.
Lack of Liquidity
One of the most appealing aspects of investing in stocks is that the money invested in them can be accessed within a relatively short period of time. In other words, stocks are liquid investments. Unfortunately, real estate investments are the opposite; they are illiquid and cannot easily be converted to cash. While rental properties pay themselves off significantly, it will take a few months’ time for that occur. The illiquidity of investment properties is one of the reasons why they are more long-term compared to other investments. Investment properties do pay off, whether through rental activity or selling after appreciable gains, but the return on investment, in the grand scheme of things, is not immediate.
Time and Effort
Like any major financial investment, investing in rental properties takes a lot of time and effort. The process of buying investment properties is not an easy one. Credit requirements, down payments, property inspections, and open houses are just some of the factors involved in the process. Maintaining and owning real estate is generally not as challenging but still requires consistent effort. The risks involved in investing in real estate are more pronounced when you’re just starting out. However, with time, patience, and good decision making, investors will start to realize positive returns from their investment properties.
So, Is It Worth It?
Let’s revisit the question: Is real estate investing worth it? Despite it being an illiquid investment and requiring considerable time and effort to generate returns, real estate investing is the best type of financial investment out there. Real estate is extremely flexible, both in terms of various strategies and commitment to the investment. The potential for making money is high thanks to consistent rental income gains and benefits from appreciation in the long-term. As an extra reward, investors are able to have most of their investment expenses and fees as tax-deductibles. There is no doubt in any real estate investor’s mind that investing in real estate is indeed worth it.
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