The outlook for the stock market and much of the economy remains uncertain. That being the case, many investors are looking for alternative spots to grow their portfolios. One of the best choices for a number of reasons is real estate. This exciting field offers benefits both obvious and less well-known that make it an excellent option for your money. But it’s not suitable for everyone. Read on for an explanation of the advantages and disadvantages of real estate investing.
Pros of Investing in Real Estate
Many folks are familiar with some of the advantages of investing in real estate. But unless you’ve taken a closer look, you may miss out on some less well-known but equally valuable benefits.
Multiple Ways to Make Money
Real estate investments offer numerous ways to make money, regardless of your strategy.
For example, owning a rental property doesn’t just make you money from the cash flow you receive each month after the property’s mortgage and bills are paid. It also quietly earns money from appreciation as the property grows in value over time. At the same time, you bank additional money each month when you make the mortgage payment. This allows tenants to pay down the loan’s principal.
Not only will you be able to deduct actual expenses required to operate and maintain the property, but you can also take a write-off for depreciation.
This on-paper expense costs you nothing out of pocket but can reduce your tax bill. When you sell the property in the future, you may also be able to take advantage of lower tax rates on capital gains. Alternatively, you might defer taxes entirely by buying a similar property in what’s known as a 1031 exchange.
Protects Against Inflation
Inflation has been a major topic of discussion over the past months as prices continue to grow across the economy. These conditions are ideal for holding a tangible asset like an investment property.
As prices go up, the value of your property tends to increase as well, helping you avoid much of the pain of inflation. At the same time, you’ll be paying back your loan in “cheaper” dollars, generally at a long-term fixed rate. As rents and other income grow over time, your mortgage payments will typically remain the same, improving your returns.
Diversifies Your Portfolio
All too often, people have their whole nest egg invested in the stock market, bonds, or similar financial instruments. This means that they’ve tied their long-term wealth entirely to these financial markets.
Real estate investments offer critical diversification, a key to any balanced portfolio. Few people can truly avoid economic downturns, but having diversified investments means you can lessen the blow and come out the other side as strong as ever.
You Don’t Need a Lot of Money to Get Started
Many people may ignore real estate, thinking they don’t have the cash to find a deal.
This isn’t necessarily the case. Aside from common strategies like rental property investing or house flipping, real estate investors can also get started in low- or no-money-down systems like wholesale real estate.
Those who sell wholesale real estate do the legwork of finding great deals. They usually do this by aggressive and creative marketing to owners who may not even initially consider selling their home. Once they’ve found a willing seller, they connect them with a previously identified buyer who has the cash for an investment property but not the time to search for great deals.
For their work, the wholesaler typically receives a fee. They profit by selling the contract on the property to the end investor at a slightly higher price.
As you can see, this requires little initial investment from those interested in wholesale real estate, other than marketing costs and time spent networking with potential buyers and sellers. It can be an ideal way for would-be real estate investors to generate some capital. They can do so while growing their connections in the local market.
Real estate investors who are just getting started can also use more passive means like REITs, which are essentially mutual funds that hold real estate investments. These are basically hands-off investments but usually generate the lowest returns with the fewest incidental advantages.
Cons of Investing in Real Estate
Like any investment, real estate isn’t perfect and isn’t right for everyone. Before rushing into the real estate investment world, consider the following to avoid a potentially unpleasant surprise down the road.
Many Strategies Require Lots of Cash
We mentioned wholesale real estate above as an example of a low- or no-money-down strategy. However, wholesale isn’t for everyone and every situation, and many other strategies do require a significant amount of money.
Depending on the property type and location, this could be anywhere from the low five figures to six figures or more. For some, this isn’t an unreasonable amount of money. But for others just getting started, it might prevent them from taking advantage of good deals when they arise.
Investments Usually Aren’t Easily ‘Liquidable’
Most real estate investments are long term. If you put down ten or twenty grand on a mortgage, you’re generally unable to access that money without selling the property, ending the investment.
In some cases, you may be able to take out loans or lines of credit to access the equity in properties without selling. However, these come with various fees and restrictions and take time to process. Therefore, real estate investments aren’t the best choice for those who may need to access their money quickly and easily down the road.
Time (or Extra Money) Required
While many investments may be able to grow on their own with little management or involvement, real estate is not among them. You’ll need to deal with finding tenants, conducting maintenance, and other day-to-day requirements of owning a property. Some may find their enthusiasm for real estate investing flagging after the third call in a week for a clogged toilet or locked-out tenant.
Of course, property management companies exist for precisely this reason, allowing professionals to take care of these things so you don’t have to. But you’ll need to give up some of your returns to pay any property managers, who usually take a cut of the rent they collect for you each month.
A Great Deal Lies Outside Your Control
You may do everything right when it comes to finding the right property, picking the right tenant, and managing correctly. Still, real estate investors face lots of factors outside their control.
The city your property is located in may change rental rules or zoning. Similarly, a huge new housing development could open up nearby. Your property’s ideal neighbors may sell their home. They might be replaced by party animals who leave their lawn covered in trash. These are just a few downsides you’re exposed to that you’ll often have little notice of or way to avoid.
Real Estate Investing: A Top Way to Grow Your Money…But Not For Everyone
Those looking to grow their portfolio will find few better ways than real estate investing. From long-term buy-and-holds to wholesale real estate, there are so many strategies for investors to tailor to their financial needs and resources.
Still, it’s crucial to remember that real estate may not be right for all investors. You should assess your situation and any potential deals carefully before jumping in. Who knows? You may be on the verge of an investment that changes your financial situation forever!
Article by Deanna Ritchie, ReadWrite