Real estate investment is very lucrative if you understand the market well; it can generate wealth for you for many years, and you will even have so many valuable assets to pass on to your children. However, as beautiful as this sounds, it’s not always the case, so real estate investment also has some downsides.
Therefore, if you are a new investor, before you dive into the world of real estate, you should know everything you can gain and what you might lose in the process. We have compiled a detailed list of the pros and cons of real estate investment to help you stay informed as you start investing.
Pros of Real Estate Investment
Recurring Income
One of the most beneficial aspects of real estate investment is the steady income that it can generate; whether you invest in commercial or residential properties, you can enjoy a steady income flow from rent. This cash flow can cover maintenance expenses and investments in other properties. The best part is that even after enjoying the cash flow for many years, the property’s value will still increase, and you can sell it at a higher rate.
Tax Benefits
Investing in real estate can offer you many tax deductions and incentives. Property tax and insurance, maintenance costs, owner expenses, and mortgage interest are tax deductible. You can reduce your overall tax liability, and if you own a property for a long time, you may qualify for capital tax gains exemptions.
Appreciation
Although some factors can affect a property’s value over time, historically, real estate appreciates when held as a buy-and-hold investment. So, the property is expected to appreciate and generate more money over time. This can result in significant gains when it is time to sell it.
Diversification
As an investor, real estate is an excellent way to diversify your investment portfolio beyond traditional bonds, stocks, and exchange-traded funds (ETFs). Real estate has a low correlation to the stock market so that it can protect you from market volatility. Diversification will effectively help you spread risk in your investments and enhance the stability of your portfolio.
Potential Inflation Edge
The appreciation rate of real estate properties is much higher than the inflation rate. Between 2001 and 2020, the median home sales price rose by about 238%, while the inflation rate only rose by 41%. So, inflation can not reduce the value of a property. Also, rental property owners can easily manage property maintenance costs by increasing rent prices so they don’t make losses due to inflation.
Leverage With OPM
OPM stands for other people’s money; you can use third-party financing to acquire properties in real estate. This can include traditional mortgage loans, equity partnerships, conventional loans, seller financing, etc. It is a financial leverage that lets you buy properties with borrowed money and pay them back when you profit from the investment.
Control
Unlike other forms of investment like mutual funds, bonds and stocks, real estate investment allows you to control your property management, improvement and appreciation. You will have the ability to increase its value through some strategic updating. It offers a more hands-on experience than just sitting and watching your property appreciate or devalue due to uncontrollable factors.
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Cons of Real Estate Investment
Management Intensive
So much is involved in purchasing, operating and managing a property, especially when it is a rental property. You will need to determine a fair rent price according to market statistics, perform routine repairs, maintenance and even renovation, follow fair landlord and tenant laws and conduct regular inspections. All these can be overwhelming, so some investors hire professionals to keep things running smoothly.
Capital Intensive
Investing in real estate can make you spend a lot of money. If it is a buy-and-sell property, you will spend a lot of money on renovations and risk being unable to sell it more profitably. If it is a rental property, it will take a long time to get all the money you spent on the property from rent.
Liability Risks
There’s a high risk of liability in real estate investment; you can get sued by an unsatisfied tenant or guest, an injured contractor, and so on. So, to prevent this, many investors get insurance for their properties; they may also require their tenants to buy renters insurance policies if the law permits.
Not Liquid
Real estate property is a long-term investment; even for a buy-and-sell investment, it will still take up to a month to list a property, negotiate a deal and close escrow in a strong seller’s market. So, real estate is not easy to sell. That is why it is essential to have emergency personal funds and pay off your high-interest debts before investing in real estate.
Risk of Bad Tenants and Vacancy
One of the common challenges many real estate investors face is dealing with difficult tenants; finding and retaining reliable tenants is a big challenge. Bad tenants can damage your property, create a wrong impression for the property, have issues with other tenants, miss rental payments and even try to evade eviction.
Also, there is a risk of vacancy for rental properties; if the rent is your only source of profits, then vacancy will be a threat to your income flow.
See also: Real Estate Investment: How to Avoid Scammers When Buying a Property
So you can see that there are many incredible benefits to real estate investment, like recurring income, property appreciation, tax benefits, etc. However, there are disadvantages as well, but that notwithstanding, there is no business or investment without risks and disadvantages. Hence, you have to know the market well to minimise the risks and increase the potential rewards.
