By | Samantha Higgins
Real estate investing is a tested and proven way of growing wealth. Since there is a perpetual demand for physical space, be it a family home or a business office, it makes sense to add properties to your investment portfolio. That said, as with any financial market, real estate investing has its own set of pros and cons that you’ll want to be aware of before you start buying properties or REITs.
PROS
1. Properties Appreciate Over Time
This is not to say that any real estate you get your hands into will appreciate, regardless of what factors you used to choose said property or how much research you did beforehand. The right property will appreciate over time at a pace that outperforms yearly inflation. While the property might be subjected to occasional slumps and corrections, there is always a high probability of buying quality real estate at discounted prices and then selling said property for a profit.
2. Properties Have Unique Tax Advantages
Real estate investors have access to certain tax benefits that allow them to further grow their wealth over time. This is the reason for the succes of many real estate companies like Home Buyers Melbourne. For instance, if you buy a rental property and collect monthly rent, the income is not subject to self-employment tax. The U.S. government also offers other tax incentives to real estate investors, including substantially lower tax rates on long-term returns on investment. Depending on your income bracket and investor category, you may also get an overage of tax deductibles that you can apply against your other sources of income.
3. Properties Offer Stability
Whether you’re buying a fixer-upper and living in it until you are ready to resell for a profit or using it as a rental space to collect monthly rent, having real estate can offer a steady cash flow or a roof over your head during financial emergencies. The income you get from a rental property is ongoing with minimal effort and time investment needed, which gives you plenty of time to pursue other business ideas and sources of income.
4. Properties Give You Better Control of Your Investment
When you invest in a stock or currency, you don’t get to sit in the company’s boardroom or the country’s central bank to help decide on the asset’s future direction. With real estate investing, every decision that has to be made falls on your lap. You say what to buy, when to sell, what structural or cosmetic improvements to make, how much to sell it for, and so on. This gives you better control of your asset from a strategic standpoint.
CONS
1. Properties Have a High Entry Cost
Real estate investors need serious capital when they enter the market otherwise they are severely limited in terms of what properties they can buy. Unlike stock market investors who can invest in thousands of companies with a mere $1,000, real estate requires greater cash outlay to participate. You’ll need a down payment plus closing fees and capital to make the necessary repairs and improvements. And when you do manage to secure a property, you’ll then be dealing with ongoing costs, such as property taxes, homeowner’s insurance, mortgage payments, and upkeep costs.
2. Properties Require Time to Grow
For starters, you’ll have to spend time learning and managing your real estate portfolio, such as what market catalysts to watch out for, DST meaning, and local regulations that encompass your property. There is a learning curve involved in real estate investing, which if forgone can result in huge financial losses. And if you plan on filling your portfolio with rental properties, expect to invest more time as these types of properties require hands-on management.
3. Many Ways it Can Go Wrong
Investing in real estate can be stressful for a myriad of reasons. It could be a tenant who’s causing problems and not paying rent, an unforeseen natural disaster, or a macroeconomic event that sends your property’s value in a sharp dive. There are also instances of rental property owners getting sued for accidents that occur in their property that resulted in property damage or physical injury. To have peace of mind, you can hire a property management company that can take care of the above issues for you for a minimal fee.
Understanding these pros and cons gives you an unfiltered and more complete picture of what you’re getting yourself into when you start investing in real estate. By knowing the pitfalls specifically, you can position yourself better when making investment decisions.
