Have you been thinking about starting a new business endeavour in
2019 in order to make some extra money? Maybe real estate investing is the
answer to your quest. To help you decide if you should buy an investment
property in the new year, we have put together the most important advantages
and disadvantages of investing in real estate.
Advantages of Real Estate Investing
1. Making Money Right Away
The first and foremost benefit of investing in properties is that
you can start making money immediately. All you need to do is to buy an
investment property, fix it up if needed, find tenants, and start renting out.
Of course it’s not as simple as that. You have to find a property with a high
potential for return, screen tenants well, and maintain your property on
regular basis. However, few other investment strategies offer immediate profit.
2. Making Profit in the Long Term
Another important advantage of real estate investments is the
long-term financial gain. Once you decide to sell your property, its value will
most probably be significantly higher than when you bought it. Real estate
appreciation exceeds inflation in most years, which means that with real estate
you are protected against inflation. Moreover, natural appreciation makes you
rich without you putting any efforts into it. If you are willing to make improvements
on your house, you will also benefit from forced appreciation, which raises
your potential for making money in the long run.
3. Investing in Low Risk Assets
Real estate properties are tangible assets, which makes them a very
safe investment. Even if the housing market takes a downward hit for a few
months or a couple of years, it will sooner or later bounce back. People will
always need housing. That’s what distinguishes real estate from other
investments such as stocks, where the market might collapse entirely overnight.
With real estate, you cannot lose your investment completely. As long as you
insure it appropriately, you are protected against natural disasters and
damages caused by tenants.
4. Being in Charge
If you invest in rental properties directly, you have full control
over your investment. This is very different from investing in stocks. If you
buy shares, it will be someone else who decides how to manage your money and
how much profit you will make. Being a landlord means that you decide what
property to buy, what tenants to allow to rent it, how much rent to charge, how
to spend your rental income, and what improvements to make to your property.
You can work towards increasing
your rental income and decreasing your rental expenses in a reasonable and
responsible manner, in order to push your return on investment up.
5. Having an Opportunity to Grow
The goal of every investor is to grow his/her investment portfolio,
and rental properties allow you to do exactly this. Once you have figured out
the financing of your first investment property, you can use the extra rental
income from it to buy another property. The more properties you own, the easier
it gets to buy the next one. Indeed, real estate experts recommend adding a new
property to your real estate investment portfolio every 2-3 years. Although
this sounds impossible for beginner investors, it becomes more and more
feasible as you expand your business.
6. Financing Rental Properties
Many people stay away from real estate investing because they
assume that it requires a lot of initial capital. However, you will be
surprised to hear that most real estate moguls started with a few hundred
dollars or less. As a property investor, you can take a mortgage more easily
than as a homebuyer as you have your rental income to guarantee the monthly
payments. Moreover, you can get creative and look for private money or hard
money lender options. In addition, you can turn to crowdfunding, syndication,
or other forms of partnerships which allow you to start investing in rental
properties with very little money down.
7. Making Passive Income
Another reason which prevents many from starting a career in real estate investing is the fact they don’t want to be a landlord. While it is true that being a landlord is a lot of hard work, professional property management services allow you to make passive income from rental properties. Such companies will take care of every single aspect of owning and running an investment property, boosting your rental income and return while giving you a stress-free real estate investor experience.
8. Enjoying Tax Benefits
With real estate investments, you can claim multiple tax deductions. As an investor who’s looking for opportunities to maximise his/her return, you should make use of every chance to increase your income and decrease your spendings. This means that you should explore carefully all tax benefits applicable to your particular property investment business.
Disadvantages of Investing in Real Estate
1. Requiring a Lot of Money
Buying an investment property, similar to buying a home, requires a
significant amount of cash. With rental properties, most traditional lending
institutions required a minimum down payment of 20% of the property price. Of course,
you can get creative as a real estate investor and look for alternative ways to
finance your property purchase. However, you have to make sure that you have
the money to buy the property without risking negative cash
flow or foreclosure. Moreover, don’t forget all the additional one-time
startup costs (such as inspection fees, closing fees, etc.) and recurrent
expenses (property tax, insurance, property management, repairs, etc.). Although
they are not as big as the property price, they do add up to a substantial sum.
2. Investing in Low Liquidity Assets
As mentioned above, real estate is a tangible asset which can be
both a good and a bad thing. When it comes to drawbacks, this particular feature
makes real estate properties a very low liquidity investment. Once you buy a
rental property, you cannot sell a part of it. In order to free up any of your
initial cash, you have to sell the entire property, which means closing down
your rental business. So, make sure you have enough money for your other
personal and business expenses before you decide to tie up your capital in a
real estate investment business.
3. Being a Landlord
One of the main disadvantages associated with becoming an investor
in rental properties is being a landlord as well. Buying, owning, managing,
maintaining, and renting out a property constitutes a lot of hard work and
efforts required on daily or at least weekly basis. You cannot simply buy a
property, find tenants, and rest. If you want for your rental to succeed, you have
to be actively involved in it.
Nevertheless, even this con of real estate investing can be overcome. In recent years a multitude of professional property management companies have emerged, which offer an effort- and stress-free experience for landlords. You will have to pay such a company a monthly fee, but it will take care of all aspects of running your rental property. So, making passive real estate investments has become feasible with rental properties. Just as any other type of investment, real estate has its benefits and drawbacks. However, the lists above show clearly that the advantages of real estate investing exceed the disadvantages. Indeed, most hindrances have a relatively straightforward solution. As long as you research the local housing market carefully and analyse your future rental property well, you can make a lot of money in real estate. If you are wondering how to improve your financial independence in 2019, real estate investments might be the answer to your search.