The Pros and Cons of Real Estate Investing: What You Need to Know – ReadWrite | Wordy Zone

The outlook for the stock market and much of the economy remains uncertain. Because of this, many investors are looking for alternative places to expand their portfolios. One of the best decisions is real estate for a number of reasons. This exciting field offers both obvious and lesser-known benefits that make it an excellent bang for your buck. But it’s not for everyone. Read on to explain the pros and cons of real estate investing.

Benefits of investing in real estate

Many people know some of the benefits of investing in real estate. But if you haven’t looked closely, you might be missing out on some lesser-known but equally valuable benefits.

Multiple ways to make money

Real estate investing offers numerous opportunities to make money, regardless of your strategy.

For example, if you own a rental property, you don’t just make money from the cash flow you receive each month after the property’s mortgage and bills are paid. It also quietly makes money from the appreciation in value as the property appreciates in value over time. At the same time, you transfer additional money each month as you make the mortgage payment. This allows tenants to repay the loan amount.

tax benefits

Not only can you deduct the actual costs required to operate and maintain the property, but you can also write off for the depreciation.

These paper expenses don’t cost you anything out of pocket, but they can reduce your tax bill. If you sell the property in the future, you may also be able to benefit from lower capital gains tax rates. Alternatively, you can defer taxes entirely by buying a similar property on a so-called 1031 exchange.

Protects against inflation

Inflation has been a major topic of discussion in recent months as prices continue to rise across the economy. These conditions are ideal for holding a tangible asset such as an investment property.

As prices rise, the value of your property tends to rise as well, helping you avoid much of the pain of inflation. At the same time, you pay off your loan in “cheaper” dollars, usually at a long-term fixed rate. As rent and other income increases over time, your mortgage payments tend to stay the same, improving your returns.

Diversifies your portfolio

All too often, people have invested their entire nest egg in stocks, bonds, or similar financial instruments. This means that they have their long-term assets fully tied to these financial markets.

Real estate investing offers important diversification, a key to any balanced portfolio. Few people can truly avoid economic downturns, but with diversified investments, you can soften the blow and come out the other side as strong as ever.

Not you To need lots of money to start with

Many people may ignore real estate and think they don’t have the money to find a business.

This is not necessarily the case. Aside from common strategies like investing in rental apartments or house flipping, real estate investors can also get into low- or no-money-down schemes like wholesale properties.

Those who sell wholesale properties do the legwork to find great deals. They usually do this through aggressive and creative marketing to owners who may not even be thinking of selling their home. Once they find a willing seller, they connect them with a previously identified buyer who has the cash for an investment property but doesn’t have the time to shop for great deals.

The wholesaler usually receives a fee for their work. They benefit by selling the contract for the property to the end investor at a slightly higher price.

As you can see, this requires little upfront investment from prospective wholesale real estate buyers, aside from marketing costs and time spent networking with potential buyers and sellers. It can be an ideal way for prospective real estate investors to generate some capital. They can do this while also growing their connections in the local market.

Real estate investors who are just starting out can also use more passive vehicles like REITs, which are essentially mutual funds that hold real estate investments. These are essentially automatic investments, but they usually yield the lowest returns with the fewest side benefits.

Disadvantages of investing in real estate

Like any investment, real estate isn’t perfect and it’s not for everyone. Before you jump into the world of real estate investing, here are a few things to keep in mind to avoid a potentially unpleasant surprise later.

Many strategies require a lot of money

We mentioned wholesale real estate above as an example of a low or no money down strategy. However, wholesale is not for everyone and every situation, and many other strategies do require a significant amount of money.

Depending on the type of property and location, this can be in the low five-digit to six-digit range or higher. For some, this is not an unreasonable amount of money. But for others who are just starting out, it might prevent them from taking advantage of good deals as they arise.

Investments are not usually easily “liquidated”

Most real estate investments are long-term. Generally, if you put ten or twenty grand on a mortgage, you can’t access that money without selling the property, thereby ending the investment.

In some cases, you may be able to take out loans or lines of credit to access real estate equity without selling it. However, these come with various fees and restrictions and take time to process. Therefore, real estate investing is not the best choice for those who need quick and easy access to their money later.

Time (or extra money) required

While many investments can grow on their own with little management or involvement, real estate is not one of them. They have to deal with finding tenants, performing maintenance, and other day-to-day requirements of owning a property. Some may slack off after the third call in a week about a clogged toilet or a locked out tenant.

Of course, for this very reason, there are property management companies that allow professionals to take care of these things without you having to deal with them. But you have to give up some of your earnings to pay property managers, who typically take a portion of the rent they collect for you each month.

A lot is out of your control

You can do everything right when it comes to finding the right property, selecting the right tenant and managing it properly. Still, real estate investors face many factors that are beyond their control.

The city where your property is located may change rental rules or zoning. A huge new housing estate could also be built nearby. The ideal neighbors of your property can sell their house. They could be replaced by party animals that leave their lawns covered in trash. These are just some of the disadvantages you face, which you often don’t know much about or can avoid.

Real Estate Investing: A Top Way to Grow Your Money… But Not for Everyone

Those looking to expand their portfolio will find few better options than real estate investing. From long-term buy-and-hold to wholesale real estate, there are so many strategies that investors can customize to suit their financial needs and resources.

Still, it’s important to remember that real estate may not be suitable for all investors. You should carefully consider your situation and potential deals before jumping in. Who knows? You may be about to make an investment that will change your financial situation forever!

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Deanna Ritchie

Deanna Ritchie

Editor-in-Chief at ReadWrite

Deanna is the senior editor at ReadWrite. She previously worked as Editor-in-Chief for Startup Grind and has over 20 years of content management and content development experience.

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