Becoming a real estate investor is a lucrative business opportunity to make money, to say the least, but not everyone can make it in this cut throat and competitive market. A dog-eat-dog mentality, if you will. To make it big, you have to think outside the box and think in creative ways to make money, especially lots of money. Conventional real estate investing, i.e., buy and hold real estate is a good strategy, but it will take you years to pay down the mortgage and sell the investment property, hopefully for a profit.
With risk and uncertainty tied to your real estate investments, you will never be 100% guarantee a profitable investment. Smart real estate investors perfect the art of forward planning and proper due diligence. They know when to buy and sell, where to buy and sell, and how much to buy and sell for. They have a good grasp on the ever changing real estate market conditions and act accordingly in return. Now, this doesn’t happen overnight, it is the result of years and hours spent on investing in real estate properties and analyzing and learning from past mistakes. If you are on your way to becoming a real estate investor, do not be discouraged, you will be able to understand what works and what doesn’t in due time.
6 Advantages of Becoming a Real Estate Investor
1. Cash Flow
The best perk of all real estate investing related is the steady and passive income you receive from renting out your investment property, whether it is traditional or Airbnb. Choose a real estate strategy that is aligned with your long term business plan and vision. Always have a long term investment goal and ensure the goals you set are realistic and achievable.
On a side note, earning passive income is not entirely passive, as you must fulfill your duties as a landlord and adhere to maintaining your rental property as well as to keeping your tenants happy. Having a high vacancy rate and/or high tenant turnover might hurt your rental income and eat into your profits.
2. Real Estate Appreciation
Another advantage of becoming a real estate investor is the appreciation accumulated on your rental properties over time. Given a prime location and an upswing real estate market, your investment property will naturally increase in value and sell for much more down the road, earning you big bucks. Most investors go down the real estate path as opposed to the stock market because of this specific perk. Having an appreciating asset is always a good idea for growing your business and profits.
3. Tax Perks
Real estate is running a business, and thus real estate investors are entitled to many tax advantages in return. These tax perks allow you to save more money by writing off any real estate related expenses in order to maintain and grow your business.
- Rental income
- Cost of repairs and maintenance
- Mortgage interest payments
4. Running a Business
In tandem with the previous perk, real estate investors actually run a business, and it is far from passive work. If you want to build wealth and long term financial security, you must get educated and acquire a lot of knowledge and experience to become an expert investor. No one will spoon feed you on where and how to invest, it is all on you. The web is full of readily available information on real estate investing. For example, the Mashvisor blog contains real time insight on becoming a real estate investor in addition to valuable tips and advice on how to grow your real estate investment business.
5. Financial Security
The real estate investment business is full of possibilities and long term financial rewards, including financial security and comfortable living. Becoming a real estate investor and building wealth is in direct correlation with your business plan and vision. Set achievable investment goals and start out small is our advice to you.
6. Hedging against Inflation
Another perk of becoming a real estate investor is the fact that your real estate investment business is a hedge against inflation. With the rise of inflation, your property’s value goes up simultaneously. Win-win!
Unfortunately, like any other business, real estate investing also comes with some risks. Let’s take a look at the most common ones.
6 Risks of Becoming a Real Estate Investor
1. Tenant Risk
Becoming a real estate investor and a landlord, you have to make sure to mitigate the risk of high tenant turnover and high vacancy rates. Ignoring this might result in a loss of profit and rental income, which means you will be paying your mortgage payments, property taxes, and insurance out of your own pocket. Being proactive and prompt is the key to having a successful real estate investment business. Again, treat real estate investing as a business and see your tenants as stakeholders to grow this business.
2. High Vacancy Rate
In tandem with the previous point, becoming a real estate investor entails incurring the risk of high vacancy rate. There are many factors which can lead to high vacancy, but one main criterion to avoid this risk is choosing to purchase rental properties located in prime locations and safe neighborhoods with nearby amenities and facilities, i.e., schools, parks, shops, etc. Crime infested neighborhoods will naturally attract high tenant turnover and quite possibly vacant units for a long time.
3. Liquidity Risk
As previously mentioned, real estate investing is an illiquid investment, meaning you can not sell assets or rental properties quickly without incurring a huge loss of value. Illiquid assets are not easily converted into cash, and this certainly applies to real estate.
4. Market Risk
With the ever changing market and economic conditions, the real estate market is cyclical and experiences upswings as well as downturns. Becoming a real estate investor, you should be aware of this dynamic and prepare ahead of time for any real estate market downturns and crashes in order to mitigate and hedge against market risk.
5. Risk of Foreclosure
With market fluctuations and the possibility of not being able to make mortgage payments on time, real estate investors are prone to foreclosures. To mitigate the risk of foreclosure:
- Have an emergency fund
- Pay off your mortgage payments quickly if you can
6. Physical Asset Risk
With any physical asset, the cost of repair and maintenance increases over time. The best advice we can give you is to maintain a high level of upkeep on the investment property to avoid a hefty cost of repair down the road. Do not postpone small repairs, because they might end up costing you way more if you waited too long to fix them. Be proactive on repair and renovations because the shape and state of the investment property can increase or decrease the overall value of the house when you decide to sell.
8 Ways to Hedge against Real Estate Risks
1. Diversify Your Real Estate Investment Portfolio. Do not put all our eggs in one basket, diversify with different real estate investment strategies.
2. Choose Prime Locations. The importance of location, location, location cannot be emphasized enough.
3. Choose Positive Cash Flow Properties. Head over to Mashvisor to find positive cash flow properties in an instant.
4. Practice Due Diligence. Conduct proper real estate market and investment property research before you hone in on a rental property.
5. Become a Real Estate Expert. Educate yourself and acquire as much real estate knowledge as possible. The more you know, the smarter investment decisions you make.
6. Have an Emergency Fund. To mitigate the risk of a real estate market downturn, have some money set aside.
7. Leverage Home Equity to Grow Your Real Estate Investment Business. Use home equity to buy more real estate properties, as opposed to paying out of your own pocket.
8. Keep Tenants Happy. No brainer here.
9. Be Creative. Don’t just stick to conventional ways, find out ways to maximize rental income via creative real estate tactics.
Becoming a real estate investor is definitely rewarding with many long term benefits. But, to grow your real estate investment business is no walk in the park, never make an investment decision on a whim without proper due diligence. There is also nothing wrong with seeking professional advice if you are just starting out.
Head over to Mashvisor to kick start your business!