So, you want to be a real estate investor? Investing in real estate can be a great way to create wealth and financial freedom. But, like any investment, there are both pros and cons of investing in real estate that you need to consider before taking the plunge. Let’s break it down so you can decide if investing in real estate is right for you.
The Pros
Investing in real estate can provide high returns on investment. You have the potential to make more money with real estate investments than you would with other forms of investments. This is because it is a tax-efficient way to build wealth since you can deduct certain expenses such as property taxes and mortgage interest.
Real estate is also a tangible asset that you can physically touch and see, making it a more reliable investment than stocks or bonds. You can also diversify your portfolio by investing in different types of real estate such as residential, commercial, industrial, and multifamily.
Being able to use OPM (other people’s money) to invest in real estate is also a major advantage. You can use leverage to purchase properties with bank loans, which allows you to diversify your investments without having to put up a lot of cash. Banks won’t grant loans to most other investments because of the considerable amount of risk.
Furthermore, it can offer financial security and stability as rental income provides a steady stream of passive income. Watching those rental checks roll in every month can be a very satisfying experience!
Also, the value of real estate typically increases over time, which can provide significant capital appreciation. If you ever decide to sell, you can make a nice return on your original investment. This is especially true if you are well-equipped with the ability to add value to a property.
Using the property as collateral for a loan can also be advantageous in some cases. This can help you receive cash to invest in more assets if needed. You are not able to collateralize all assets. The BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat) is an excellent example of how to use a property as collateral.
Finally, the demand for this type of investment is always high. Despite market fluctuations, the need for housing and other real estate investments continues to grow as populations expand. Humans will always need a place to live, making real estate a safe bet for the long term.
The Cons
Just like any investment, investing in real estate comes with risks. It can be an expensive endeavor and costly to maintain, as you may need to pay for repairs, taxes, insurance, and other expenses.
It can also take a considerable amount of time to manage the property. You will need to find tenants, collect rent checks, deal with tenant issues, keep up with the bookkeeping, etc. This is not something you want to do if you are short on time or don’t have the right resources in place.
Sure, you can hire a property manager but this doesn’t guarantee that the tenant will behave themselves. Potential civil disputes can be costly and time-consuming. Property values can also fluctuate, so you could end up losing money if the value decreases.
Additionally, real estate investments are illiquid because it can be difficult and time-consuming to sell or refinance a property. This makes it tough to access cash quickly in case of an emergency or opportunity cost situation.
Finally, investing in real estate requires knowledge and expertise. You need to understand the market to make effective decisions and be able to recognize a good deal when you see one. It also requires discipline, patience, and dedication as it often takes time for an investment to pay off. History is filled with unbeknownst real estate investors buying land at the wrong time and for too much.
Closing Remarks
For all of these reasons, it is important to consider all aspects of investing in real estate before making a decision. It can be a great way to build wealth and financial stability. However, there are plenty of risks that you should be aware of. Be sure to do your due diligence and use sound judgment when investing.
You can reduce some of the negative aspects by taking the time to educate yourself on the real estate market and taking the necessary steps to minimize your risk. Some pros can be maximized such as taking advantage of rental incomes and using the BRRRR strategy to quickly increase capital. Investing in real estate is no small undertaking, so make sure you are well-prepared before taking the plunge.
