When we were first looking to invest in real estate back in 2019, we carefully and painfully weighed the pros and cons. To be honest, our own fear of “what might happen” almost kept us from investing in it all together.
I have distinct memories of my father’s journey as a real estate investor. He owned a small apartment complex in a neighboring town and I remember him spending countless hours dealing with issues at the apartment. As for me, I was the hired help, cleaning out abandoned apartments of all the junk left behind and painting the walls to make them ready for the next owner.
On the flip side and more recently, after looking at when we would retire with a tool like our financial freedom calculator, and through some coaching and mentoring from our mastermind at Cashflow Tactics, we decided to take the plunge and never look back. You can even see some of our progress in our (in)frequent updates and how all of it is going.
With all of that said, real estate can be a wise investment, providing both potential income and tax advantages. If you make a bad investment, it can be costly and very painful.
Before you enter the market, it is important to be informed about what you are getting into. Real estate investing can be a great way to make money, even with as little as $20,000, but there are also some potential drawbacks that you should be aware of. This article will explore both the pros and cons of investing in real estate.
Key Takeaways:
- Real estate investing offers potential for appreciation, unique tax benefits, steady cash flow, and the ability to use leverage.
- Real estate investment can build equity and provide more control over your assets.
- Real estate investments can hedge against inflation and offer multiple earning avenues.
- Real estate investing has drawbacks, such as time-consuming property management, dealing with problem tenants, and changing neighborhood conditions.
- High costs and additional expenses may be associated with real estate investments.
- To succeed in real estate investing, research extensively works with the right agent, be prepared to walk away from bad deals, and look for undervalued properties.
- Investigate potential properties thoroughly and ensure they have income-generating solid potential before purchasing.
Real Estate Investing Pros
Real estate has long been a good way to build wealth. Some of the benefits of investing in real estate include the potential for appreciation, the ability to leverage your investment, and the potential for rental income.
1. Real Estate Appreciates Over Time
Property that is carefully selected tends to increase in value over the years, typically at a rate that is much higher than the rate of inflation. There are certainly occasions when market conditions are not ideal, and it is possible to purchase property that is not ideally suited to the current market. I have found that there is always an opportunity to buy a high-quality property at a reduced price, make improvements to increase the equity, and eventually sell it for a profit.
It’s always advisable to buy property when the prices are low and sell when they are high in order to maximize profit. Real estate always has an inherent value. A stock may decrease in value to the point where it is worth nothing, however a property will always hold some value due to the value of the land itself and any buildings or other structures on it.
If you buy property in an area that is gentrifying, you stand to make a lot more money when you sell as the property value will have appreciated.
2. Real Estate Has Unique Tax Benefits
The tax benefits associated with investing in real estate can help investors increase their wealth over time. The government offers tax benefits to real estate investors, and rental income is not subject to self-employment tax. Depreciation and lower taxes on long-term profits are two examples.
Depending on your income and how you are classified as an investor or real estate professional, you may be able to get more tax deductions from your rental property than you can use against your other income. If you’re renting out property, you can deduct many of the associated expenses on your taxes. This includes things like travel costs for checking up on your properties.
3. Real Estate Provides a Steady Cash Flow
The monthly income left over after all bills have been paid from a rental property is called “cash flow.” Once you have your property set up, you will have a monthly income that is mostly passive, allowing you more time to pursue other interests.
If you want to buy a rental property but don’t know where to start, you can use HomeLight, a free service that will connect you with a real estate agent in your area. They will help you find the best property for your needs.
4. Real Estate Lets You Use Leverage
The power of leverage can help you grow your real estate holdings and achieve your wealth-building goals quicker. The use of leverage refers to using borrowed capital in order to improve the potential return on investment. Real estate investing offers the advantage of being able to leverage money to minimize risk. You can buy an investment property using a conventional loan with a 20% down payment.
You can control an asset worth $150,000 by investing $30,000. If you do your research and plan carefully, you can increase your wealth rapidly by using Leverage, especially when interest rates are low like they are now.
5. You Don’t Need Much Starting Capital
You can invest in real estate without a lot of money. Often, you can invest with as little as a 20% down payment on a property. Our own preference to do this is to utilize turnkey investment properties which are pre-rehabbed and rent ready for tenants.
Due to the increase in popularity of crowdfunding sites that allow people to invest money in real estate projects that have the potential to generate income, more and more people are taking advantage of this opportunity.
Crowdfunding gives you the ability to invest in a variety of real estate projects by buying shares in different REITs and individual deals. This diversity can help to reduce risk and maximize profits potential. When you invest in a rental property, you are not responsible for managing the property.
6. Real Estate Builds Equity
If you use leverage correctly, your tenants will essentially be paying for the property for you. The money you make from renting out your property goes towards paying off your mortgage each month, and also increases the value of your property. If you have a mortgage on a rental property, your tenant’s rent payments will go towards the mortgage, slowly increasing your ownership of the property. It’s like a savings account that grows without you having to deposit money every month.
If you have a rental property, the tenant’s payments might reduce the amount you owe on the property over time. This could leave you with more money overall. Your loan will be paid off in thirty years. Your tenant’s mortgage payments have allowed you to build equity in your property, which you can now either sell or continue to rent out.
7. Real Estate Gives You Control
An advantage of investing in real estate is that you have more control over your investment than you do with other types of investments. You can have more control over your success in investing in real estate than in other types of investment. You can not have an impact on the way management decisions are made that could potentially affect the stocks you own by sitting in on board meetings. In real estate investing, you have a lot of control over the decisions that are made.
Investing in real estate can help you reduce risks and grow your portfolio more quickly. I, as a real estate investor, am in control of my success or failure. When I want to find deals, I can hustle. I make sure the best tenants are attracted to my properties by employing strategies in a competitive rental market. I can make strategic improvements to increase rental income.
8. Real Estate Provides a Hedge Against Inflation
Inflation is when prices go up over time because the value of money goes down. The annual inflation rate varies, but the inflation rate in 2022 has been very high.
Inflation erodes the value of many investments. If the value of your stocks went up by 5.5% last year, your profit after accounting for inflation would only be 3.9%.
Historically, real estate investments have kept pace with inflation, and in many cases it’s actually an excellent inflation hedge. When the cost of a loaf of bread rises, so do rents and property values. The monthly cost of a fixed-rate mortgage payment does not increase.
Your cost of ownership will not increase as your annual rental income increases. When inflation rates go up, the amount of money you have available to spend also goes up. Inflation increases the value of property. My properties will be worth more in 10 years than they are now.
9. Real Estate Allows You To Earn In Multiple Ways At Once
While all of the above are true, one of the things we like most about real estate is taking all of them in combination. You can earn from four (five if you count inflation) at the same time. Cashflow, appreciation, real estate tax advantages, and amortization all combine together to earn in multiple ways.
One unique feature is that if one profit center isn’t working for you, others will. This allows you to win in multiple ways and help mitigate losses.
For example, let’s say that your cashflow goes negative on a property or your portfolio like ours did for a portion of 2022.
We still made money via appreciation, tax advantages, and amortization throughout the course of that time and the whole year.
Real Estate Investing Cons
There are both benefits and drawbacks to investing in real estate.
1. Time
Real estate investing isn’t an overnight process. It takes a lot of time and energy to fix up a property—especially if you want to keep it and rent it out. Real estate investments can take a long time to show a return on investment.
Flipping a house can take time, too. Investors sometimes have to wait for market conditions to improve or for a buyer to appear before they can sell a property.
Don’t invest in real estate unless you’re willing to go through the entire process until the end. It can be quite a long haul.
2. Property Management
Once you’ve bought a property, you’ll need to put time into maintaining it. For some people, this can be a full-time job. It may require painting, landscaping, and regular repairs.
You can avoid being on call as a landlord or dealing with repairs by hiring people to do it for you or setting up a triple net lease. Many real estate investors choose to hire property managers and contractors to take care of their properties. This can be expensive, but it can also make the burden much easier to bear.
3. Problem Tenants
problem tenants can ruin your real estate investment by damaging your property, not paying rent, or refusing to leave when asked.
Some states have laws that protect tenants, making it difficult for landlords to take action against them or evict them.
It’s importance to understand the rights a tenant has in the state where you plan to buy real estate so you can avoid any potential problems. An attorney can offer you advice and guidance throughout the process.
4. Changing Neighborhoods
You can’t just focus on the property you’re interested in when you’re buying real estate, you have to take the surrounding area into account as well. The quality of a neighborhood may change over time because of many factors such as economic conditions, quality of schools, crime, taxes, and weather patterns.
Of course, this can go two ways. Sometimes you can buy a property cheaply, and then the quality of the neighborhood improves, causing the property to become more valuable. You should speak to a real estate agent and people who live in the area before buying a property, so that you can learn about the area’s past and what the future may hold for it.
The same applies if you’re planning to flip a house. The resale value of a property is likely to be influenced by the values of the surrounding properties and the quality of the neighborhood.
5. High Costs
Real estate can be very expensive. You will need to save for a down payment and closing costs. A down payment usually costs 20% of the purchase price, while closing costs can sometimes cost 3% or more. This refers to fees charged by real estate agents, insurance premiums, inspection fees, and appraisals, among other associated costs.
If you own a house, you may have to make improvements that require an investment of money. For example, you may need to do some work on the floors, add drywall, work on the landscaping, or repave the driveway.
You’ll need to factor in monthly maintenance costs and possibly homeowners association fees when you budget for capital improvements. This text is discussing the cost of hiring a property management company. The cost will depend on how active the company is and how much property the person owns.
In total, real estate investment is expensive and there are additional costs that may not be immediately apparent.
It’s a good idea to talk to a financial advisor before you start investing. That way, you can make sure you’re in a good position to do well in the market. You don’t want to be stuck with a property you can’t afford.
Tips For Real Estate Investing
1. Research as much as possible.
Information about real estate is very valuable when making investment decisions. Make sure you know exactly what you’re getting into before you purchase a property by doing your research ahead of time.
The real estate market, mortgage rates, mill rates, local vacancies, and economic trends should all be assessed. It’s a good idea to consult with a trusted advisor or a few different advisors to see if now is a good time to buy.
You will need to do extensive research on the property before making a decision. You should be aware of any mold or asbestos problems in the building. You should ask around about the other tenants in the building, what the competition is like in the area, and how much it would cost to rent somewhere else.
2. Get the right real estate agent.
You need to find one who knows the market well. It is important to find a real estate agent who is not only good at negotiating, but also has a strong understanding of the market. Connect with a local who can show you things you won’t find online or by yourself.
If you want to be successful in real estate investing, it’s important to choose a good agent. It’s usually worth it to pay more for a great agent.
3. Don’t be afraid to walk away.
The best business deals are sometimes the ones you walk away from. If you aren’t confident about a real estate investment, it’s probably best to walk away or wait. Making the decision to invest in real estate is a big responsibility and you need to be prepared to accept the consequences that come with it.
It can be difficult to refuse an investment offer if you are already working with another investor or have family involved. The final decision on whether or not to invest in real estate lies with the person funding the investment.
If you work well with others, it might be a good idea to invest in real estate with a group of other investors. If not, perhaps you’re best on your own.
4. Look for value properties.
Value investing is finding assets that are undervalued and then selling them when they reach their full value. Keep your eyes peeled for properties selling for below market value in strategic locations. This is a great opportunity to buy a property at a low price and then sell it at a higher price when the market value increases.
This might be easier said than done. Still, it’s possible to snag a once-in-a-lifetime bargain.
The Bottom Line
Whatever you decide, you should not rush into buying real estate. Before making a purchase, be sure to investigate the property thoroughly and confirm that it has the potential to generate a strong income from rentals or other passive sources.
We’ve been extremely happy with our own decision to invest in real estate.
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor owning properties in multiple states.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here.
