Buy Land: Pros and Cons of Real Estate Investing

Real estate investing has become a hot topic as many people question the need for and benefits of landlords and housing investing companies. On the other hand, financial experts, investors, and landlords mention real estate as one of the best and least riskiest wealth-building methods. Real estate purchasing, renovating, holding, renting, and selling can be very lucrative both as a business and as an investment method, as long as investors are careful to understand the pitfalls and nuances of the market. There are both pros and cons to investing in real estate, and investors should educate themselves before they spend any money in this market.

Pros

There are many advantages to real estate investing. In fact, this form of passive investment is a favorite among the wealthy and most experts agree that around 90% of millionaires got rich through real estate investing. This means that there are many, many pros to this method of wealth building. Here are a few of the greatest advantages of real estate investing:

Potential for Income

Real estate investing can provide a potential source of passive income through rental properties, which can generate rental income that exceeds the cost of financing, maintenance, and management. Many investors prefer real estate because it has multiple potential income sources. These potential income streams include commercial or residential rent, appreciation, the ability to pull out equity, added value through improvements, and tax advantages. Other potential income streams, such as farming income, mineral and water resources, subdividing, and owner-financed sales are also popular. Businesses such as real estate marketing companies, investment firms, and real estate agencies can help new investors learn more about the best ways to get started and the potential for profit.

Appreciation

Over time, real estate tends to appreciate in value, which can provide investors with capital gains when they sell the property. Appreciation value can vary dramatically between locations, so some real estate investors realize most of their wealth-building through appreciation while others will experience little to no appreciation and will need to look at other methods for generating income, such as rental income. In many cases, the areas that are the most beneficial for one method of wealth-building will be less desirable in other ways, so investors will be able to choose which kind of wealth they are desiring to build by carefully choosing where they purchase properties.

Tax Advantages

Real estate investors can take advantage of various tax deductions, such as property taxes, mortgage interest, and depreciation, which can help reduce their taxable income. These tax advantages and benefits can help to offset the taxes that people might need to pay on their business income, investment income, and income from employment. It can also help to reduce the taxes they need to pay when they sell properties they currently own.

Diversification

Investing in real estate can provide diversification in a portfolio, as real estate values tend to move independently of the stock market. Most investors seek to have their money located in several different kinds of accounts, stocks, and other investments. Real estate has proven to be one of the most stable and reliable investment options, as well as sometimes generating income. Investors who choose to only invest in the stock market are often missing out on potential income they could be making if they chose to diversify.

Leverage

Real estate investing can provide opportunities for leveraging capital through mortgage financing, allowing investors to acquire properties with less of their own money. The ability to use other people’s money (OPM) when buying real assets like real estate is a great advantage. By leveraging your money in this way you can buy more property than you would be able to if you were purchasing stocks or other investments. You can’t usually take out a loan to purchase mutual funds, for example, and if you could it wouldn’t usually be beneficial.

Cons

While real estate investing is one of the best and most common methods of building wealth and passive income, there are disadvantages as well. It is true that many people have become wealthy through real estate investing, and many more have used real estate as a way to supplement their work income and help prepare them for retirement. However, just like all investment methods, real estate is not for everyone. Here are some of the biggest disadvantages of real estate investing.

Illiquidity

Real estate investments can be less liquid than other types of investments, as it may take time to sell a property and convert it into cash. Because real estate is less liquid, it can be hard to sell if needed during a down-turning market or in the case of an emergency. If an investor thinks they will need to access their money quickly or if they are uncertain about the investment, they should choose a more liquid investment, such as mutual funds or stocks.

Upfront Costs

Real estate investing can require significant upfront costs, such as a down payment, closing costs, and inspection expenses. These costs can make an investment that initially seems lucrative turn into a liability upon closer inspection. When evaluating real estate investments, especially short-term investments like renovation projects, investors need to have a thorough understanding of the costs and expenses involved, both in purchasing and in maintaining and selling property.

Market Risk

Real estate values can fluctuate due to changes in the overall economy, local market conditions, and other factors. All investments involve risk, and while real estate is less volatile than many investments, and thus less risky, it is not completely without risk. It is not true that real estate markets never lose value, and investors who don’t understand this put themselves at a higher risk of loss. Investors who are considering short-term investments, properties with narrow profit margins, or who are less educated on real estate are at a greater risk of losing money.

Management Responsibilities

Rental properties require ongoing maintenance, management, and tenant relations, which can be time-consuming and require expertise. When considering this form of real estate investing, potential investors should educate themselves on the expenses, time consumption, and volatility of rental properties in their market. If they are not comfortable finding and screening tenets and managing properties, they should consider hiring a property management company. The expenses of management fees must also be calculated when evaluating the cash-flow potential of a property.

Regulatory and Legal Risks

Real estate investments are subject to various legal and regulatory risks, such as zoning laws, environmental regulations, and tenant protection laws. While these risks are relatively straightforward, it’s important for investors to make sure they understand regulations and laws in their area and neighborhoods, and that they understand the rules and regulations that govern the landlord-tenant relationship.

Final Thoughts

Real estate has historically been and will continue to be, one of the best ways to create wealth and invest. However, real estate investing is not a one-size-fits-all investment strategy. This investment method must be carefully considered and understood before any money is exchanged, and investors need to spend time learning about the market, strategies, and the pros and cons before they choose any method of investing.