Andrew Carnegie once said, "Ninety percent of all millionaires become one because of real estate ownership."
However, like any investment, real estate involves risk and a considerable amount of time, effort and money. In addition, it takes time to learn how to find investment properties, repair and transform them, manage tenants and perform other ancillary tasks. Despite what the advertisements claim late at night, real estate investments are not for everyone. Should you consider jumping into the market? Here are some pros and cons of real estate investing that you should consider before your next move.
Benefits of investing in real estate
There are many reasons to invest in real estate. For starters, as opposed to futures contracts, these are goods you probably already know and understand, at least to some extent. Not to mention, historically, real estate is rising in value. Here are the main reasons to consider investing in real estate.
Real estate is a real, tangible thing that will always have monetary value. This is not always true of other investments. For example, if you invest $ 200 in the stock market and the market crashes, your stock may be worthless, just a piece of paper, the next day.
On the other hand, regardless of what the housing market does, you still own the land and all the buildings on it. And this land has value. Your $ 200,000 investment may drop from $ 200,000 to $ 100,000 if the housing market collapses, but it will always be worth something.
Real estate value
Historically, real estate increases (grows) in value over time. In other words, even if you invest $ 200,000 and a crash halves that value, your property will eventually recover. You can see this from the bursting of the housing market bubble in 2007, subsequent recovery in 2013 and prices skyrocketing now.
Many factors contribute to the appreciation of your investment, including location, supply and demand, economy and renovations, to name a few. However, based on what the market has done in the past, U.S. real estate values have risen by 3.5 to 3.8 percent per year. For 10 years, that translates to about $ 35,000 for every $ 100,000 of the value of your property.
You increase your net worth
Net worth is the total amount of what you own less what you owe. As you pay off the mortgage on an investment property, your equity in the property - what you own - increases. It changes the balance of the equation because you own more and owe less. As a result, your net worth increases.
Investing in real estate can also help protect your net worth by diversifying your investment portfolio. If you invest all your money in the stock market and it collapses, your net worth will take a big hit. However, if you divide your investments between the stock market, real estate and other wealth-building vehicles, only part of your net worth theoretically holds the financial blow.
(Talk to your financial planner to learn how to diversify your investment portfolio)
It can create a passive source of income
You have a number of options when it comes to investing in real estate. You can buy a property at a low price and flip it for profit, invest in a real estate investment fund (REIT) or rent the property to tenants. By renting a property, however, you can create a steady stream of income. Each month your property is populated, your tenants will send you a rent check and what is left after the mortgage payment and other expenses is yours.
However, you will not always have access to this money. If you use an asset management company, they will get that money,
And if you hold your assets in LLC
You will need to follow the rules regarding how you can access these funds and when. In addition, the property will be vacated and will need repairs from time to time. These cases will disrupt the cash flow.
Real estate comes with tax benefits
If you own your own home, you know you can deduct your mortgage interest and usually state and local property taxes. As a real estate investor, you can also deduct operating, insurance and maintenance expenses. When you sell the property, you can roll it over to another property (exchange 1031) and defer your capital gains. Depreciation can also be claimed as an investor as the buildings in the property deteriorate over time.
Of course, you will want to talk to your accountant or tax advisor to see how current tax laws can affect you if you decide to invest.
Disadvantages of investing in real estate
Real estate can be risky, and making money as a real estate investor is not as easy as some people would lead you to believe. Consider the disadvantages before you decide to invest.
It costs money to get started
Do not believe the gurus who sell real estate investment plans - you can not invest in real estate without money. While some people start by withdrawing equity from their personal homes, you need to have equity in the home to do so. And, taking money from lenders is expensive.
Currently, loan money rates range from 10 to 18 percent compared to a traditional mortgage rate of 3 to 4 percent.
What about taking out a home mortgage for investment property? Because the default rates of rental properties are higher than traditional mortgage rates, banks often require a larger down payment and have more stringent debt-to-income ratio requirements. Therefore, unless you already have money to invest and money for renovations and improvements, investing in real estate may not be a viable option.
It requires a lot of work
Investing in real estate requires hours upon hours of work. First, you need to look for a property and then purchase it. Very rarely the property will be ready for rent or sale, so in the next step, you will have to spend even more time repairing and renovating it. Assuming you intend to rent the property, you will need to find tenants, train them, collect the rent, make repairs as needed and vacate them if necessary. Your workload only increases based on the number of assets you own.
You can hire an asset management company, just be willing to work to make your investments profitable.
It takes time
Typically, it takes years to see significant increases. Of course you can get around the wait by buying an apartment below a significant cost and selling it at a profit. However, almost always, these properties are priced below market because they need extensive repairs and renovations. These improvements cost money, which not only cuts your profits but takes time. It is not uncommon for a major renovation to take three to six months.
Drama, drama, drama
As a landlord, you will need to manage tenants unless you are renting a property management company. Do not underestimate the drama involved. Some tenants pay monthly. Others give detailed reasons why they can not pay at all: they have started divorce proceedings, their boy has run away.
When evacuation is near, they pack without a word and leave your property damaged and full of garbage.
While you swear you will never let these things happen in your rental property, it's easy to get sucked into the drama. After all, most of us want to be loved and helped by someone who is going through a difficult time. So, understand the risk of drama, or hire an asset management company.
Investing in real estate is not as simple as owning your own home. It comes with its own set of rules that you need to understand. For example, if you appear to be preferring one group of potential tenants over another by advertising your property as “close to the Catholic Church,” you may be charged with violating the Fair Housing Act. A breach may open an expensive lawsuit against you.
Alternatively, you could file your taxes incorrectly and face an income tax audit. When you invest in real estate, you need to become an expert in fair housing laws, taxes, local tenant laws and other areas. At the very least, you will want to surround yourself with a team of professionals that you can consult with for answers.
Ready to get rich?
Investing in real estate can build wealth, but you do not have to purchase rental properties to increase your net worth. Even owning your own home can do just that.
Planning to buy a first home or invest soon?
Take away some of the stress and feel free to contact a real estate company and a reputable and reliable person who can help you.
Has three degrees and over 20 years of experience in the field of technology and real estate.
Owner and manager of a real estate company that provides real estate services in the field of courses, mentoring, financing, transaction analysis and investment.
The operator of the successful real estate and US interest forum on Facebook.
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