Among the many investment opportunities that are bound to come your way is real estate. Taking the leap to put your money into the world of commercial or residential property is, however, not an easy decision. To be successful, you need to weigh the benefits against the risks of the real estate market. To help you with this, let’s look at the pros and cons of investing in real estate.
Pros of Investing in Real Estate
- Stable Investment: Compared to other investments for example stocks, real estate is less volatile. This relative stability is due to the fact that properties move a lot slower and are always in demand.
- Income Potential: According to a House Index Price (HPI) report by the Federal Housing Finance Agency (FHFA), house prices have continued to appreciate at an average annual rate of 3.3% since 1991. This goes to show the huge potential that comes with property investment.
- Positive Cash Flow: Once you are a rental property owner, you stand to earn a steady and passive income. The rent you collect pays off mortgage and property taxes and what is left becomes your income. In essence, you get other people to buy the property for you and pay you at the same time.
- Tax Incentives: As a rental property owner you stand to claim a wide range of tax benefits. Among the deductibles that will increase your income include depreciation on repair works, inspection visits, utility bills that are included in the rent, property taxes, energy-use efficiency, and mortgage interest.
- Leverage on Investment: Property offers stable security in the eyes of lenders. This means that you can leverage your holding for a lower down payment on subsequent real estate investments. Typically, you will only be required to put 20% down on a property with the rest being covered by a mortgage; this ease of property ownership makes high ROI a possibility.
Cons of Investing in Real Estate
- Low Liquidity: Among the various investments that you can put your money into, real estate is considered the least liquid. Acquiring a property can take you less than a month but selling it could take years. If you find yourself in need of money quickly and selling is your only option, you may have to sell way below the market price.
- High Cost of Entry: Real estate is expensive, especially for first-time investors. You must pay at least a 20% down payment; this could mean taking a second mortgage or depleting much or all of your savings. Apart from the initial acquisition, you will have to pay for any repairs, upgrades, and replacements on the property.
- Less Diversity: As earlier noted, real estate prices continue to increase every day, this means that entry into the industry will probably cost every penny that you can spare. That is the real definition of putting all your eggs in one basket; if a housing bust occurs you could find yourself facing foreclosure and possibly lose it all.
- Greater Liability: Every single tenant and visitor in your property is a potential liability. From injuries due to faulty electric sockets to falls as a result of unstable railings, you may find yourself facing lawsuits and paying damages. With such great risks, a property that is not up to code will attract huge insurance premiums which can greatly cut into your rental income.
- Management Woes: Owning property is a huge undertaking in terms of labor; you will have to deal with maintenance and any upgrades that may come up. This may require you to be your own handyman or employ help. Professional help will be less stressful but it will come at an extra cost.
The Take-Away
Real estate is a sound investment in that you can have huge returns on investment. You can leverage your property for further financing which will increase your holdings. At the same time, you can file for tax exemptions, which will increase your monthly earnings from rent. That said, being a property owner comes with its share of headaches; the initial investment will probably deplete all of your savings, you will be liable for any injuries that occur in your property and there is an off chance that you could lose considerably if a housing bust hits.
