Real estate is one of the most historically profitable and stable investment vehicles known to man. Owning a real asset protects your capital against inflation, diversifies any investment portfolio, and can produce regular income while appreciating over time. Your investment also creates housing opportunities for those in need.
It’s looking pretty peachy so far. But that’s not to say investing in real estate should be taken lightly. Real estate is a big move, and without taking time to consider the pros and cons of real estate investing, investors risk diverting focus away from their dreams along the way. Real estate investing can be highly profitable though in many cases, the package includes a mother-lode of problems to handle too. So is real estate investing worth it?
In reality, it depends on your financial situation, risk tolerance, and projected lifestyle. This article will discuss the pros and cons of investing in real estate so you can decide for yourself.
Is Real Estate Investing Right For You?
Real estate investing has the power to transform your life if you manage to find an appropriate strategy for your goals. But it certainly isn’t for everyone. There are a few vital considerations to determine whether becoming a real estate investor is the right choice. Let’s dive into a few questions to ask yourself before committing:
What Are Your Financial Goals?
Defining your desirable financial situation in five, ten, twenty, or fifty years is the first step to achieving it. People can use real estate investing as a means of saving for retirement, putting money away for a college fund, quitting their job and traveling the world with a passive income, or even building a new career.
Investors operate best when they firmly establish their own goals. Founding overarching aspirations and a timeframe to achieve them will help carve out an investing strategy. These goals also serve as a benchmark to success as you scale the heights of your investment.
What Is Your Current Financial Situation?
Personal finances play an influential role in the real estate investors’ gameplay. One of the best pieces of advice we’ve encountered from the real estate investing sphere is to clear any high-interest debt obligations you have. You’ll always derive more from your investment if it’s not at the cost of high-interest debt service payments in other areas.
Moreover, investing can be expensive, particularly if you’re looking at active investments. Purchasing a rental property, for example, requires a large sum of cash for down payments, ongoing expenses, property taxes, and other fees. Likewise, mortgage qualification and payments lean heavily on your credit score, savings, income, and debt owed.
If you don’t have significant savings to invest in real estate, you can still access low-entry strategies such as professional syndications.
What Is Your Risk tolerance?
We mentioned earlier that real estate investing can be your one-way ticket to traveling the world with a passive income or building a new career (to name a few). Both options expose investors to completely different lifestyles and come with various risks. Before investing, consider your current time commitments, how (or whether) you want this to develop, and the risks involved with your projects.
High-risk investments tend to produce higher average returns. But when things go pear shape, they take longer to recover. If you plan a 40-year investment term, your risk tolerance will likely be higher than if you only invest for three years.
What Kind Of Real Estate Investor Are You?
A plethora of real estate investing strategies are available, and they can take you to many different places. Each comes with its own distinct set of advantages and drawbacks. You’ll be better positioned to determine a strategy once you have reflected upon the above questions. Real estate strategies can be broken down into two categories.
Active Investing in Real Estate
The term “active investing” doesn’t leave much to the imagination. Just as it sounds, it describes a situation where the investor actively solicits and manages their real estate deals. There’s a fair chunk of work involved in active investments, and they tend to consume time and energy at various levels depending on the strategy.
A few examples are buying and managing a rental property, fixing and flipping a home, or sponsoring a syndicated deal. Active investors need time on their hands to dedicate to their projects.
Certain skills, knowledge, or experience are also required to make an investment venture successful. If you lack the experience or skills required, you simply need to be committed to learning them.
Passive Investing in Real Estate
Passive investors take a hands-off approach to their investments. This means they offer capital to fund a project of their choice that gets managed by a professional or a third party. It’s a fantastic option for busy people without the time, experience, skills, or resources to actively manage a real estate deal. Passive investing allows you to take advantage of the benefits of real estate investing without the hard work and time commitment.
Examples of passive investments include real estate funds, a real estate investment trust, and crowdfunding. Passive investments tend to carry significantly lower risk than active investments. They also draw smaller returns in the short term, so if you hope to achieve your financial goals in the next couple of years, this may not be your first choice.
However, passive investment over the mid to long term is incredibly attractive for many real estate investors who want to start building generational wealth without additional temporal and financial demands. If you like the idea of earning residual income and building equity in an appreciable asset without having to lift a finger, get in touch with the professional syndication experts at Pinto Capital Investments to learn how you can get started today.
How Do You Choose?
Regardless of what your life looks like, any investor should take sufficient time to deliberate the above concepts and how they apply to the individual’s life. Once you are clear on your values and direction, it will be easy to determine whether real estate investing will serve you over the long term.
To make the process easier, we’ve compiled a list of pros and cons of real estate investing to support you in making the best decision for your future.
Pros Of Real Estate Investing
Becoming a real estate investor can transform your life and open an abundance of unique doors and pathways into the future you aspire to create. Let’s dive into a few reasons so many people are attracted to real estate investments.
Steady Cash Flow Streams
Similar to your day job, real estate can secure new recurring revenue streams. Residual income comes from rental yield once you have found paying tenants. This could be supplementary cash flow solicited from a multifamily crowdfunding investment. By contrast, it could develop into your primary source of income if you start to manage a rental or investment property.
Cash flow over the long term can help you build a nest egg, assist with monthly expenses, or make lump-sum payments to pay off the property.
Real Estate Appreciates Over Time
Real estate appreciates in value over time. This is particularly advantageous for those investing in a rental property, like single-family houses or multifamily apartments. Appreciation is driven by the local market. So when the value of comparable property prices rises in your area, the value of your asset will appreciate accordingly.
On the flip side, if similar properties depreciate in your market due to unanticipated events like a natural disaster, mass exodus, or local degeneration, your property will also decrease in value. This element is useful to consider when determining your risk tolerance and knowledge of real estate markets.
Diverse Tax Benefits
If the tax man has you shaking in your boots, real estate investments may be able to lighten the blow. While this should never be the sole reason you invest in real estate, it may improve your financial “bigger picture”. Rental income is exempt from the self-employment income tax bracket, which means you pay less tax on rental income.
You can claim deductions on property and maintenance expenses, as well as the depreciation value of certain parts of your asset (such as concrete, roofing, and plumbing). Additionally, with offers like a 1031 exchange, you gain additional tax benefits life deferring capital gains by reinvesting in real estate.
Hedges Inflation
Real estate and inflation stick together like glue. As inflation causes the price of commodities, products, and services to rise in a country, it affects the real estate market in the same way.
Consider if you were to invest $10,000 into a savings account with a 5% interest rate. You have good returns over the short term and somewhere safe and liquid to save money. But if you fast-forward twenty or thirty years, that $10,000 will be nowhere near as comparably (or equitably) valued as it is today. In short, it won’t keep up with inflation. Real estate investing is a great way to counteract this issue.
Real Estate Creates Leverage
Leverage is a strategy in real estate that enables the investor to accelerate their wealth-building ventures and grow real estate holdings using other people’s money (OPM). For example, an investor may take out a mortgage to purchase a rental property. Once the property is filled with paying tenants, rental income can cover the mortgage payments, and the loan is eventually paid off.
Rental property owners can then use the leverage of their investment to purchase a second property and begin the cycle again. Without investing a significant amount of their own money (apart from the down payment in the first property), an individual can own two investment properties freehold almost entirely by using other people’s money.
Cons Of Real Estate Investing
By now, real estate investing is probably starting to sound like a sweet deal. But we wouldn’t accurately be representing the whole picture unless we touched upon the cons of real estate investing as well.
While there are many great advantages to a well-managed investing strategy, it’s important to be critically aware of all aspects of real estate investing to decide whether the asset class is right for you.
Capital Intensive
Entry into a real estate investment is usually pretty capital intensive. Financing an investment makes it easier to purchase. However, even with a mortgage or a loan, you’ll still need to pony up about 20% of the purchase price, along with closing costs and real estate agents fees. There are initial renovations and repairs expenses to pay before you can start earning money from the property. Not to mention ongoing maintenance costs, property taxes, and monthly mortgage payments.
When compared with other investments, this is an enormous amount to front up with at the beginning. If you want to invest in real estate but don’t have this sort of money available right now, it may be best to start with something more accessible, like crowdfunding.
Management Intensive
Investing in real estate properties requires a lot of work to manage. For example, rental properties demand time for finding quality tenants and learning about local landlord-tenant laws. You’ll need to be available to deal with ongoing maintenance and repair issues. Even if you choose to hire a property management company, it will cut into your profit margin. Plus you still need to ensure they are doing their job properly.
Fix and flips require a whole new level of attention and skills. If you know your way around a toolbox, you can save a lot by performing maintenance and repairs yourself. However, this will require a heavy input of your free time.
Demands Time And Skills
Investors spend countless hours managing their investments and analyzing their local real estate market to ensure they are still profiting. It’s necessary to consider whether you have this time available for your real estate investment.
When managing a rental property, landlords must determine fair market rent, negotiate a lease agreement, screen potential candidates, and conduct inspections.
Not Liquid
The sum of investment capital involved in purchasing a real estate asset and its long-term appreciation value indicates that for maximum returns, your money will be tied up for a long time. Assets are not easy or fast to sell. This means that, unlike money in a savings account at the back, it’s difficult to liquidate the investment and take your profit should you need to.
In many situations, it can be strategic to hold a property for up to a year or two beyond when you wish to sell to gain better advantages from a shifting real estate market. On the other hand, if an investment property owner needs to sell for cash quickly, they may have to make a steep compromise on the sale price. If you need a short-term fix, select a strategy with higher liquidity.
Liability Risks
When you own a piece of real estate, you’re typically legally liable for whatever happens there. So, if tenants, guests, or contractors become injured as a result of structural or maintenance issues, the onus falls on the landlord.
Rental property insurance will be an additional expense, but without a comprehensive policy, you may end up being sued for all damages. It is wise to shop around to ensure you have a policy that matches your risk tolerance.
Final Thoughts
For many investors, real estate is an efficient vehicle to help them build generational wealth and achieve financial goals. The only way to know for sure whether investing in real estate is right for you is by assessing your financial situation, establishing some goals, and weighing up the pros and cons of investing in real estate.
While many real estate investment strategies demand significant amounts of money, time, and skills to begin and manage over the long term, this approach will not be for everybody. If you’re looking for a stable, low-risk investment without the hassle and ongoing costs, give Pinto Capital Investments a call. With a professional partnership, you can access a reliable steady cash flow and build equity in an appreciable asset class without lifting a finger.
