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Pros and Cons of Investing in Real Estate: The Expert’s Guide

Real estate investing has consistently proven to be one of the most booming industries regarding wealth building and increasing investment portfolios. Louis Glickman states, “The best investment on Earth is Earth.”

Real estate investment is a rewarding piece, yet, many people are still skeptical about becoming real estate investors. It is a valid concern because as much as it is a reliable way to build wealth through rental income, capital appreciation, cash flow, and profits, you could lose your investment property if it goes wrong.

This article will cover the pros and cons of investing in real estate, and discuss the different ways you can build your financial future no matter what your goals are!

Is real estate investing the best option for you?

There are plenty of ways you can start investing in real estate, regardless of what your financial goals and ideal lifestyle look like. For example, owning a rental property might not be the best option for everybody because factors like physical characteristics, investment returns, work ethic, cash reserve sufficiency, and so much more should be considered. However, there are still ways to own rental properties without feeling overwhelmed by the responsibilities involved in their management.

Real estate investing is a very lucrative venture with many benefits, but everything with an upside also has its downsides. Let’s review the pros and cons of this investment.

Pros/benefits of real estate investment

Recurring/residual/passive income

Undoubtedly, one of the most significant flexes is automatically acquiring a steady income with minimal labor. You could be earning significant income to cover your expenses while making extra money on the side. Real estate is a way to achieve financial freedom. It is also a lifesaver for the aged or elderly and retirees who can no longer work actively or are above the age of the working class.

Appreciation of investment property

Real estate appreciates when held as a buy-and-hold investment, for example, if there is an increase in land value property over some time. Real estate appreciates daily (depending on the location) and can increase by up to 30% in one year. In just five years, certain areas have seen a 500% value appreciation in land costs. Appreciation rates differ and depend on the location, physical structure, demand, and supply of property in a given area.

Steady cash flow

Rental property owners enjoy a steady flow of monthly income known as cash flow. Cash flow is your income after you deduct your expenses and debt. Positive cash flow means you have surplus cash that can take care of repairs, renovations, and upkeep.

Unique tax benefits

You do not pay self-employment taxes for rental income. You also enjoy decreased mortgage interest and property taxes. The government provides tax benefits to real estate investors by offering depreciation, tax deference with incentive programs, and real estate tax write-offs. These tax benefits are helpful to relieve yourself of other debts.

Real estate investors have leverage

As a real estate investor you can use other people’s money to buy your property which could generate income for you. This purchased property appreciates over time. It means you are borrowing money for investment and then paying back the loan slowly with the profit from the investment; you thereby get more for less and have a higher cap rate. Leverage is an excellent way of making inflation work to your advantage.

Good inflation hedge

Real estate investments are immune to the loss of value of a currency that leads to reduced purchasing power due to rising prices either macro-economically or from inflation. Real estate has a hedge over inflation because real estate prices increase faster than the inflation rate. Property value rates are constantly rising or appreciating rapidly.

Control

Acquiring real estate is a way of adding to your investment portfolio apart from stock and bonds. In the stock market, your success most likely depends on the company’s success which may be totally out of your control, as opposed to real estate investing, where you can take care of your investment and increase wealth. At the same time, you barely have to worry about wild price fluctuations.

What Do I Need To Know Before Investing? 

It is crucial to conduct thorough research, delve into the real estate market, and find the right investment strategy before entering, which is why Pinto Capital Group Investment Firm offers education on acquiring real estate. Committing to a long-term investment promises to get the best out of your investment.

If you want to learn more about reliable hands-off investment options that offer cash flow opportunities, capital appreciation, tax benefits, and more, get in touch with Pinto Capital Investments to get started today!

Cons/drawbacks of real estate investment

Luxury Properties

Potential for high capital and working capital requirements

One of real estate’s biggest challenges is the significant capital certain investment vehicles demand. A lot of money is needed to acquire rental properties, a substantial limiting factor for many folks who want to indulge in real estate. If one can get past that bridge, operating expenses like property taxes, mortgage payments, and maintenance costs will also come along.

Demanding

It’s wise to consider whether you have the time, knowledge, and experience to execute an active investment strategy on your own. The risks of taking on more than you can handle in real estate include losing a lot of capital, and damaging your reputation. To avoid such losses in an active strategy, you first must thoroughly research what the real estate investments entail, including property management. Alternatively, opt for a passive strategy and let the professionals handle the tough work.

Illiquidity

Selling off real estate could be very difficult, especially if you have a pressing need for some significant cash. In the stock market, it is easy to sell your stocks if you need immediate cash. Because of the absence of liquidity in certain areas of the real estate market, you might be required to sell your property at a loss should you need cash fast.

Lack of compliance by tenants

Some tenants can be a handful and almost impossible to handle. Some do not pay on time, trash property, and ignore tenant responsibilities. These actions might end up having a negative impact financially and mentally on the property manager or owner of the property.

Real estate investing comes with the risk of vacancies which means you are losing money. Most times, landlords or real estate investors might not care to analyze the type of tenants that are renting out their properties. If you don’t want the hassle of tenant management, there are always passive investment options where professional investors can handle this tough job.

Increased liability risks

A tenant can sue a real estate investor, contractor, or guest for damage that happens on or is caused by the rental property. This possibility makes for liability risks, and the landlord could pay heavily for damage done. If you purchase a rental property, always ensure you are covered by landlord insurance. 

Bad Location

One of the terrible things that could happen to an investor is the consequences of purchasing or owning a property in the wrong location. It could lead to devaluation of that property, and you end up falling into losses.

Different Ways of Investing in Real Estate

Investment

You must, of course, have wondered or asked yourself what type of real estate investor you would like to become. Not all real estate investments will be suitable for everyone; for example, not everybody might be capable of making the time or actively engaging in managing rental properties.

In such a scenario, you can consider other areas that do not require you to manage the property. You must know what you want to get into and how it works. Keep track of your local markets, and know what is in demand in your area.

Are you thinking of owning real estate? Here are some of the options that you should consider.

Residential real estate investment

Residential properties include single-family homes, apartments, condominiums, and other types of living arrangements. It is the most common type of real estate investing. It consists of the places developed for people to live. The different types of residential property are:

  • Long-term rental property: the type of property bought to rent out to tenants.
  • Vacation rental: this is buying a property in an area that travelers can rent on a short-term basis.
  • Accessory dwelling units or ADUs: are like vacant spaces on your property that you can rent out to tenants like a basement or shed.
  • Flipping or micro-flipping: this involves buying a house with the aim of quickly selling it at a profit. Micro-flipping entails almost the same concept, except the property is not improved.

In this type of real estate, you enjoy tax benefits. Property usually appreciates over time, especially after you make renovations and improvements. Also, if your property is in an excellent area, you will have high-profit levels, which every investor wants to enjoy.

The downside of this type of property is that its management can be very tedious due to performing duties like collecting rent, repairing the structure and exteriors, and other landlord duties. However, by passively investing in multifamily and commercial real estate projects, professional investors – like Pinto Capital – will handle all of the hard work for you as you earn passive income and take advantage of tax benefits.

Commercial real estate investing

Comercial Property

These include hotels, offices, retail stores, warehouses, and restaurants. You use it for commercial or business purposes. This type of property is run actively.

The good part of this type of investment is that it yields high cash flow; again, based on the area, this type of property has quick value appreciation, especially if housing businesses are thriving.

The downside of owning this type of property is its increased vacancy risk when one situates it in the wrong location. It is also cost and management-intensive.

REITs

Real Estate Investment Trust (REIT) falls under passive investment, unlike the commercial or residential type of property. Just as you can own stock in a company and then earn a share of the profit made (dividend), you can also do the same through a Real estate investment trust. REIT is a company that owns and operates real estate properties. The point of this kind of investment is to enable you to gain from investment properties just by simply buying shares from a REIT, and at the same time, you do not have to partake in the operation or management of the properties.

The pros of REITs

  • If engaging actively in real estate operations is too overwhelming for you, then this is a more appropriate and suitable type of investment for you.
  • Do not forget that REITs are stocks which means they have high liquidity.
  • Depending on the REIT you invest in, the profit or dividend you earn from it can be very lucrative.

The cons

  • If you need your money in a short amount of time, then you should not consider this because it is a long-term investment.
  • In REITs, you do not have control over the property. You barely have information on the type of property or investment, and the operation of those properties is out of your reach.
  • REITs lack leverage advantage.
  • They are very responsive to interest rates. The value of REITs decreases if treasury yields rise.

Raw land

This investment type is the purchase of raw land. It is essential to know that not all land can generate income. Before choosing land to invest in, make sure you situate it in a good location. But what does a good location mean? It means you should not situate land in an underdeveloped or too remote location, and it should be in a place that is easy to access.

Land investment requires no maintenance cost. It appreciates more quickly than any other investment. Land has low supply and very high demand, which makes it a valuable asset.

This investment has some drawbacks too. First, purchasing requires a vast amount of money. It involves no tax benefits, and it might not be the fastest way to make money because land appreciation takes time.

Industrial real estate

It refers to real estate used to develop or manufacture goods and products. It includes food manufacturing facilities, warehouses, and temperature-controlled facilities. These play a significant role in the lives of the consumer. It is usually not a place for people to visit.

Pros

Industrial real estate has a high demand. It is an excellent way to diversify your investment. The rental terms last much longer, up to 25 years, as they are not likely to change their location. The property appreciates over time, too, and rental rates are significantly higher compared to other types of investment.

Cons

This investment comes with high vacancy risk, especially after a tenant has completed their lease. There is less tendency to flip an industrial real estate but maintenance of the industrial property is very tasking and requires professionals.

Real estate crowdfunding

Real estate crowdfunding uses social media platforms or the internet to fund a real estate project by connecting a large number of investors and getting them to contribute a small amount of money. As an investor, this method gives complete access to the real estate market.

The advantage is that it is easily accessible, making entry into the real estate market easier. It also does not require much capital, making it easier for people to participate. It is another form of passive investment. There is flexibility in the sense that you can select the kind of investment you want to get into, unlike REITs.

The downside is that the investment is not liquid. You also do not directly control the running of the properties you are investing in. 

These are just a few of the many ways of investing in real estate you should know.

Summary

The pros and cons of real estate investing depend on what you want to accomplish financially , and the lifestyle you want to maintain. The real estate industry has many career opportunities, from being a property owner to being a real estate broker to being a real estate attorney to a leasing consultant. Its world is massive and comes with many perks like being your own boss, financial freedom, and high earning potential. 

To keep up with the real estate market, you could use the help of expert real estate investment professionals to help you find the best available properties and access data to understand your market’s timing. All the information you need is within your reach just by simply asking. 

Do you need to navigate around real estate investing and bag amazing deals? Check out Pinto Capital Investments to get expert assistance and make your next real estate investment a success!

Anthony Pinto
Anthony Pinto
Anthony Pinto is the founder and CEO of Pinto Capital Investments (PCI), a real estate investment firm focused on acquiring affordable and workforce multifamily properties and apartment buildings through syndications. Since 2019, PCI has gone full cycle on 2 large apartment complexes (+100 units) with an IRR in excess of 85%.