If you’re considering adding real estate to your investment portfolio, you’ve come to the right place. To help you decide if real estate is a good fit for you, we’ll go over all the pros and cons of real estate investing.
Buying investment properties to flip, sell, or rent is exciting. Real estate is a great way to earn passive income and grow your wealth. Like any form of investing, however, real estate doesn’t come without risks. Let’s jump into the pros and cons of real estate investing.
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The pros of real estate investing
Real estate investing is one of the best ways to build your investment portfolio. Let’s dive into all the pros below.
1. Real estate appreciates
Real estate that is well-chosen in good markets will appreciate over time. While the level of appreciation may vary, real estate is considered a low-risk investment. If you buy real estate at a discount, in the right neighborhood, you’ll see the value increase over time.
While there can always be dips in the market, over a long period, your investment will withstand the ups and downs. This is especially true when you make the right improvements.
The updates you do will help boost your curb appeal, the value of your home, and its appeal to buyers. Be smart not to overspend, and you’ll see a nice return on your investment.
Take some time to do research on home values in the area. You’ll want to make sure you get a deal on the home so that you can earn equity over the years. If you’re renting the property, good markets will also see rental rates increase over time.
2. Real estate investing has tax benefits
Real estate is a great way to grow your net worth. Real estate also offers great tax benefits when it comes to other forms of income.
Real estate income, for example, isn’t included in self-employment tax. The U.S. government also encourages real estate investors with tax benefits.
In terms of rentals, your rental income could also offset taxes you pay on other income. This will depend on your overall income level.
Real estate also allows you to deduct expenses like a business. You can deduct travel costs and other operating expenses at tax time. You can also deduct energy-efficient home improvements in many cases.
3. Investing in real estate gives you a steady flow of cash
Rental properties count as passive income. This steady cash flow provides a monthly income in the form of rent. Anything you collect as rent will offset your mortgage.
Anything on top of your mortgage is pure profit. The more rental properties you have, the higher your passive income is. This is a great opportunity to slowly build wealth.
Take a look at market rents when you search for homes. The closer you are to transportation and other amenities, the more rent you can charge.
4. You can use real estate as leverage
You can use real estate as leverage to buy more real estate. This grows your portfolio and can increase your profit margin. If you use leverage correctly, it can help minimize your risk.
When you borrow capital to buy a home or investment property, you’re using leverage. With interest rates as low as they are, leverage is even more appealing.
5. Investing in real estate builds your equity
Using leverage well means your rental tenants are paying for the property. Rental income pays off your mortgage every month. This puts more equity into your home each time you make a mortgage payment.
This is essentially like a savings account where your tenant makes the deposits. With every year you own the property, your debt is decreasing, and your equity goes up. Your equity increases, the more rental properties you do this with.
If you choose to sell your rental property, your investment is worth more with tenants already in it. You’re saving the next investor from needing to find tenants. This drives your sales price up.
6. You’re in control of your investment
Real estate puts you in the driver’s seat when it comes to your investment. Think about stocks, for example, you can only control what you buy and sell. You can’t control the company and how well it does.
With investment properties, you control which you buy. You can choose what improvements to make and where to spend your money. You’re in control of how many properties you have as well.
You can choose to resell homes or use them as rental properties. You can also set your rent and choose your tenants. Real estate is a great way to control your wealth.
7. You can hedge inflation
Inflation refers to the price increases that happen over time in an economy. This is caused by the value of money going down. Inflation decreases the value of several different types of investments.
Real estate tends to keep up with inflation. This means that if the cost of milk goes up so do property values and rental rates. What doesn’t increase is the cost of your fixed-rate mortgage each month.
When inflation causes the cost of living to go up, it also pushes up your cash flow. If inflation goes up so does the rent you can charge, for example.
The cons of real estate investing
No investment comes without risk. Below, will go over some of the potential cons of real estate investing.
1. Real estate investing takes money
Real estate investing does cost money. It takes money to make money after all. In order to start investing in real estate, you’ll need to have the cash to buy the property or put down a down payment.
In addition to a down payment, you’ll also need cash for closing costs and to cover your rent each month if you don’t have a tenant.
If you’re renovating, this will take additional funds. Depending on the extent of your renovations, your investment could cost you quite a bit of money upfront.
Don’t forget insurance, taxes, and maintenance on the property. Make sure you have enough cash to cover these expenses before you dive in.
2. Investing in real estate takes time
Real estate takes time to learn and manage. Between finding tenants, and managing properties, you’ll be making a big-time investment. It also takes time to find the right properties.
In terms of property hunting, you’ll need to do your homework. You’ll want to know a lot about your location and the property values in the area. The more you know, the better informed you’ll be about your purchase price and renovation budget.
3. Investing in real estate for the long term
Unlike the stock market, the real estate market isn’t as volatile. When you buy investment properties, you’re likely thinking long term. While some properties can be flipped quickly, many are held for longer as rentals.
In terms of reselling, paying off mortgages, and closing costs, liquidating your money could also be more costly. Over time, the value of real estate often goes up. Building your wealth is also a long-term play with real estate.
4. You can encounter problems
With rental properties, there are always risks associated with collecting rent and having tenants. If a tenant doesn’t pay, it can be costly and time-consuming to get them out of your property.
5. Tax benefits depend on your income
It’s important to note that real estate tax benefits don’t apply to all income levels. Consult a tax attorney to determine which benefits you’ll see. High-income or net worth individuals may not qualify for all real estate tax breaks.
6. Real estate investing comes with risks
With certain investment properties, you want to be sure you’re spending money smartly. Over investing in property could cost you at resale time. Just because you put in a $100,000 designer kitchen, doesn’t always mean you’ll get that money back.
In some cases, you may buy a home at the wrong time. Property values could drop, or you could end up in a buyer’s market. This is where taking the long-term approach to real estate investing is worth the wait.