Going into real estate investing is not something to be taken lightly.
Real estate investors typically have an incredible amount of responsibilities and problems to take care of.
However, if done correctly, a real estate investment can be highly profitable. But, many people ask themselves, is it worth it?
In this guide, we will be focusing on the pros and cons of real estate investing, as well as figuring out if it is right for you.
To begin, let's discuss whether or not real estate investing is the right thing for you.
Is Real Estate Investing Right For You?
Although investing in real estate can be a profitable activity, it is definitely not for everybody. There are so many factors that go into it that make it difficult for a person to decide whether or not they should pursue it.
In this section, we are going to cover three important aspects that should be considered before making a decision. These three aspects are:
- Your personal finances
- Your financial goals
- The advantages and disadvantages of investing in real estate
We will discuss each one in detail just below.
One of the most important things to consider before investing is your finances. This is because investing in real estate can be very expensive, especially if you are going into active investing. For example, if you want to purchase an investment property, you need a large sum of cash to pay things like the down payment, property taxes, and any other fees.
This is why it is essential that investors have no other high-interest debts before getting into real estate. It is also very important to have a significant amount of money saved up if interested in a rental property.
Another important thing to consider is your financial goals. These goals can be short-term or long-term, but they should be firmly established. This is so important because, depending on your goals, your investing strategy can vary quite a bit.
For example, if your goal is to have some money for when you retire, but still want to keep your normal job, it may be a better idea to keep your money in the stock market or in a real estate investment trust. However, if you want to commit more of your time to real estate, and want to see higher returns quickly, investing in a rental property may be the better idea.
Advantages And Disadvantages
Lastly, after considering your own personal finances and goals, you should consider the advantages of real estate investing. The advantages and disadvantages should be weighed carefully to make sure they align with your goals and finances.
If you find that real estate investing sounds like a great idea, great! Now it's time to find out what kind of investor you will be and what asset class you will be investing in. Below, we will be discussing just that and comparing some of the most common strategies.
If you want to find out more about some of the things you should consider before investing, visit DoorLoop's 15 Most Essential Questions Every Investor Should Ask Themselves.
What Kind Of Real Estate Investor Will You Be?
When starting to invest in real estate, it is important that you know what strategy you will be taking. Choosing a strategy is the best way to know how you are going to build your investment portfolio and what kind of investments you will be making. Below, we will be describing two common types of investors as well as how to choose between them.
The first strategy that we will be covering is active investing. Active investing is a form of real estate investing that is very much involved and requires a lot of effort. Active investors usually devote most of their time to their investments. They also invest in proper analysis, research, and expertise in order to grow their investments.
Passive investors, on the other hand, put significantly less time and effort into their investments. Passively investing will is typically cheaper than active investing, but it yields fewer returns over time. Examples of passive investing include crowdfunding opportunities, real estate funds, or real estate investment trusts.
Choosing A Strategy
Although both of these strategies have their pros and cons, it is good to focus on just one when you are just starting. But, how can you make such a decision?
To make that decision much easier, we have compiled a complete guide with the pros and cons of each strategy as well as some help choosing one yourself. Simply head over to DoorLoop's Guide On Active vs. Passive Investing.
So, now that we know about some investing strategies, let's get into the thick of it. In the next section, we have compiled a list of the general pros and cons of real estate investing.
The Pros Of Real Estate Investing
In this section, we will be outlining the benefits, or the pros, of investing in real estate. Although this list is not exhaustive, we feel that it provides a good idea of the benefits of real estate investing.
Generates Steady Cash Flow
One of the main benefits of investing in real estate is that it can generate a steady cash flow. This cash flow can be passive income or it can be your main source of income from rental properties or investment properties. That specific source of income would be known as rental income and will come once tenants are found for the specified property.
Real Estate Appreciates In Value
Real estate investments generally appreciate in value over time. This is especially true when you are invested in rental properties, like houses. These investments depend on the real estate market. So, when the real estate market rises, so does the value of your investment. However, when the property values fall, so does your investment. This is one of the associated risks of real estate, which will be discussed later.
Unique Tax Benefits
Another one of the benefits of investing in real estate is that there can be potential real estate tax breaks. One of the greatest tax benefits is that rental income is not subject to self-employment tax. This means that income from your rentals is taxed less than regular income. The government also offers other tax benefits to real estate investors, like deducting expenses from the taxes and using them to renovate the properties.
Ability To Use Leverage
In investing, leverage is an investment strategy that basically uses other people's money. It consists of borrowing money to invest and then paying it back with the hopeful profit from the investment. One common way that real estate agents use leverage is by borrowing money to buy a rental property. Once the property is purchased, the mortgage payments are covered by the tenant's rent payments, and the loan is slowly paid off.
This is typically used by rental property owners to purchase more rental properties. If it is an investor's first time purchasing a property, it may be much more difficult to even get the loan. But, if the investor has a history of paying back loans, they may be more likely to be granted one.
Another one of the important benefits of investing in real estate is that it builds equity. Equity is essentially the money that investors make from their investments. In the case of real estate, let's say that you purchased a $500,000 property. As soon as you purchase it, you rent it out to tenants and the monthly income from that property covers the mortgage. Let's say that after one year, you only owe $480,000. That means that you are $20,000 richer and still have the property. That is what is known as equity, and it is the foundation of how investors profit from investments.
Provides An Inflationary Hedge
An interesting aspect of real estate investments is that they go hand-in-hand with inflation. As the purchase price of everything else in the country goes up, so does the real estate market. This means that inflation does not lower the value of your investments, it actually bolsters them.
This aspect of real estate is especially useful for long-term investors. If your property is worth $200,000 right now, for example, it will probably be worth a lot more in ten years. And the best part is that, unlike business and material objects, property never grows obsolete. People and businesses are always going to need places to reside so real estate will always be significant.
Investments Are Tangible
Lastly, an important characteristic of real estate investments is that they are tangible. This means that it will always have value. Stocks in the stock market, for example, can drop to pennies and investors can lose all the money they invested. Real estate, however, never loses its value completely, and will always be worth something.
The Cons Of Real Estate Investing
Now that we know about all the advantages of investing in real estate, let's go over some of the disadvantages, or cons, of investing.
Requires A Lot Of Time
One of the greatest disadvantages of investing in real estate, especially for active investors, is that it is time-consuming. Investors need to spend countless hours learning and managing all of their investments to make sure that they are not losing money. They must also spend a lot of time analyzing real estate trends and the market to plan their future investments.
Without the proper time, it is difficult to become a successful investor. That's why there exist people like professional analysts and investment managers to help ease the responsibilities.
Expensive To Invest
Another disadvantage of investing in real estate is that it could be very expensive. At the very least, a rental property requires:
- A down payment
- Closing costs
- Property taxes
This adds up to a lot of cash. Without this kind of cash, it is probably better that investors stick with cheaper alternatives, like real estate funds.
Although some investors find that long-term investments are more beneficial, some prefer short-term investments. Real estate, however, is a very long-term investment. Investors are purchasing an asset that is very expensive and that it cannot be sold too quickly. This means that the investor cannot get their money back in case they need emergency funds. This is why investors should invest in real estate properties with a long-term strategy.
Assets Are Not Liquid
As mentioned in the last paragraph, real estate assets are not easy, or quick, to sell. This makes them illiquid. Liquidity is the ability of an asset to be sold, or liquidated. If an asset cannot be easily sold, like a house, then it is illiquid. This means that if the property owner is in sudden need of cash, they might have to settle for selling the property at a very steep discount.
As soon as an investor owns a piece of property, they can be held liable for anything that happens there. For example, if the property is being shown and someone gets hurt, the owner is typically held liable. This is the same for when there are tenants in the property and something happens to them. Without the right insurance, the owner may be liable for all damages and can get sued.
If you want to learn more about insurance, be sure to visit DoorLoop's Full Guide On Property Management Insurance.
Investments Can Be Variable
As mentioned in one of the advantages, real estate investments can vary in price. They can vary with inflation, the real estate market, or the general stock market. There are many factors that can cause the real estate market to fluctuate which will cause the value of your investments to fluctuate as well.
In conclusion, the only way for you to know if real estate investing is the best choice for you is by evaluating your financial stance and your goals and starting from there. Once you establish that, you can begin doing research and learn about how real estate investing can help you build a future. And always remember, "buy low, sell high".