Real estate is generally a great investment option. It can generate ongoing passive income and can be a good long-term investment if the value increases over time. You may even use it as a part of your overall strategy to begin building wealth. For investment purposes, there are at least a dozen ways for an average investor to bring real estate assets into a portfolio. In most cases, the greatest advantage of investing in real estate is the almost guaranteed capital growth. It’s an exciting business sector, and all forms of properties are always in demand. But like with any investment, you can expect some downsides and risks as well.
Right now, real estate investing in either commercial or residential property is one of the most popular ways to make extra money on the side. Some have found it so successful that they’ve made it a full-time profession. Like any investment, it’s important that you understand the benefits and limitations of investing in Real estate. When you recognize the pros and cons, you can calculate whether this investment option suits your personal circumstances and long-term financial goals.
Here are some of the biggest pluses and minuses of investing in real estate.
Real estate is an essential component of diversified portfolios, providing the potential for income, capital appreciation, inflation protection, and diversification. Diversification is an extremely important process for investors. In order to reduce the overall risk from different markets, many investors spread their money in different types of investments.
- Property value growth
Property value growth is largely driven by external variables, such as population growth, nationwide economic performance, and neighborhood development. Investors can increase their chance of benefiting from property value growth by researching historic pricing data and projected development trends for the locations of potential rental properties prior to investing.
- Large payouts result in higher-than-average yields
For dividend investors, high yield is a primary consideration. Management can raise the payout to more than 90 percent but, by law, can’t lower it below 90 percent. In other words, management can’t decide to slash the dividend payment.
- Appreciation and leverage
Real estate profits are generated by appreciation and leverage. The property appreciates not based on the down payment but on the full market value. In most cases, investors only need to put a 20% down payment to own a property with the rest financed by a mortgage. When used prudently, leverage can allow investors to achieve much higher investment returns.
- Tax benefits
Prior to the tax changes, business owners were eligible to deduct up to half of the cost of assets that they purchased for their business in one year — now landlords can deduct 100 percent of the personal property for rental units. This law changes again in 2023, so now is the time to take advantage. There are a significant number of tax concessions you can claim for managing and maintaining a rental property. On a mortgaged rental property, you can claim annual loan interest and any origination fees as tax-deductible expenses.
- Real estate is expensive
While most people earn enough to own a home, buying a second investment property can be financially challenging. Compared to other asset classes, real estate is one of the most expensive assets you can invest in.
- Management and maintenance cost
Buying and maintaining a property incurs significant costs including property tax, stamp duties, maintenance fees, and agent commissions. Again, this inflates the cost of owning real estate. Whether an investor hires a management company to take care of day-to-day administration of property or not, there is a significant cost to maintaining a property and dealing with tenants. This type of expense, in both time and money, is rather unique to real estate and needs to be considered beforehand.
- Time Consuming
You can’t just decide to make real estate investments and expect to immediately see results. As a real estate investor, you have to understand the time and effort that need to go into this career. You probably won’t achieve a positive cash flow right away, and that’s okay. It takes time to build a name and a reputation in the real estate investment business.
- Lack of liquidity
Real estate is not a liquid asset. Even in the hottest market, it can easily take several months to complete a sale. And if your timing is driven by an emergency or other unexpected event, you need to sell fast might not garner the best price.
For many people, real estate is the asset class they are most familiar with as virtually everyone is aware of the houses, condominiums, malls, shops, office buildings, factories, etc. we see in everyday life. Likewise, many people invest in real estate when they buy their first home. With the impacts of the housing-induced recession hitting almost every part of the country, it’s a wonder anyone considers investing in real estate anymore. But when you realize you need to save and invest just to be able to meet your living expenses in retirement and to fund significant expenses like a college education, it’s important to consider all of your options.
Yes, becoming a real estate investor isn’t a perfect dream, it has its advantages and disadvantages just like any other career. Going in with the right mindset, a good work ethic, and the right tools will help you benefit from all the pros in real estate investing. Investing in real estate is a profitable business. But it involves a lot of blood, sweat, and tears (as well as capital). However, the good news is that these days you can also become a real estate investor and enjoy passive income by simply investing in properties through crowdfunding investment platforms
Any investor who wants to see the benefits of real estate investing should rely on a professional’s expertise. You must weigh both carefully if you’re thinking of entering the business. An experienced, full-service real estate firm can identify and break down an investment strategy that suits your personal circumstances and accelerates your long-term financial goals.
Choosing to become a real estate investor could be the best decision you ever make career-wise if you stay determined to work hard. Investing in real estate is a profitable business. But it involves a lot of blood, sweat and tears (as well as capital). However, the good news is that these days you can also become a real estate investor and enjoy passive income by simply investing in properties through crowdfunding investment platforms.