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SHOW NOTES FOR EPISODE 538: THE PROS AND CONS OF REAL ESTATE INVESTING
Many people avoid real estate investments because they think they are scary or need a lot of money to invest. Neither is accurate. In today’s podcast, Bill shares both the positive and negative reasons why real estate is a good investment or not.
Tip of the week: Organized real estate investors are always winners
In the end, the bottom line is that organization will make or break a new real estate investor. New real estate investors who are organized will always come out as winners. By organization I mean consolidating as much as possible so that it’s all in the same place and can be accessed anywhere and anytime. Market research data, property reports, closing statements and tenant leases can all easily be stored in the cloud.
Online financial real estate management tools are used by organized investors to accurately calculate and forecast income, expenses, and net cash flow. Solid organization helps generate strong ROIs, while disorganized investors quickly find themselves losing money. It’s also much easier to attract outside investors if you can show to them you’re organized and efficient. Trust me, this will be a game changer!
https://www.stessa.com/blog/real-estate-investing-tips-from-experienced-investors/
The Pros and Cons of Real Estate Investing
Diversifying your investment portfolio is essential. If you put all your eggs in one basket, you could suffer a total loss in the blink of an eye. But when you invest some funds in the stock market, other funds in bonds or ETFs, and some in real estate, you increase your chances of higher earnings and fewer losses.
Many people avoid real estate investments because they think they are scary or need a lot of money to invest. Neither is accurate, and to reassure you, here are nine great reasons why real estate is a good investment.
Pros: The Top Reasons Real Estate Is a Good Investment
If you’re thinking about investing in real estate or maybe you’re already an investor, here are some of the top reasons real estate is a good investment.
You Can Leverage Your Investment
There aren’t too many other investments that allow you to invest in assets worth much more than you have to invest. For example, if you have $10,000 to invest in the stock market, you can usually buy just $10,000 worth of stock. The exception is if you invest on margin (borrow), but you must be an accredited investor with a high net worth to make that happen.
With real estate, you can put down a fraction of the home’s cost to invest in it. For example, let’s say you found a home for $100,000; if you put down $10,000, chances are you could find a loan to finance the rest as long as you have good credit and stable income.
With that, it means you invest just 10% of the asset’s value and own it. Then, over the years, as you pay the mortgage down, you’ll hold more of the investment, increasing your rate of return not only by paying the mortgage down but also with the natural appreciation of real estate experiences.
You Can Use the Equity to Increase Your Real Estate Portfolio
A favorite way to use an investment property’s equity is to grow your real estate portfolio. For example, let’s say you have $50,000 equity in a home. You can refinance the mortgage on it, take out the $50,000, and use it as a down payment on your next property.
Depending on the value of your properties, you may even be able to pay cash for future properties, increasing your portfolio and the equity in it even faster
You Can Force Appreciation
Unlike stocks or bonds, you can force the real estate to appreciate. It sounds weird, but it’s possible.
First, know that real estate appreciates naturally. On average, real estate appreciates 3% – 5% a year without you doing anything except maintaining the home. But, you can increase the rate of appreciation by making renovations or repairs.
Not all renovations increase a home’s value, so if you’re making renovations to increase its value, work with a licensed appraiser or real estate agent to find out the best (most valuable) renovations you should make.
You won’t get a dollar-for-dollar return on your investments, but some renovations can pay you back as much as 80% – 90% of the money invested.
The renovations don’t have to be major either. Of course, adding a room or finishing the basement will add more value than simple cosmetic renovations, but even minor kitchen and bathroom upgrades can drastically affect a home’s worth.
You’ll Get Tax Benefits
Like any business owner, real estate investors can take advantage of many tax write-offs. But, while it’s an investment, when you own a home and rent it out, you run a business – you are the landlord.
As the business owner, you can often write off the following expenses:
- The mortgage interest paid on the loan
- Origination points paid on the loan
- Maintenance expenses
- Depreciation (spread out over 27.5 years)
- Real estate taxes, homeowner’s insurance, and HOA dues
Always talk to your tax advisor before assuming you can write expenses off, but know that investing in real estate is a benefit. When you invest in stocks or bonds, you can only write off any capital losses if you sell the asset for less than you paid for it.
You Can Earn Regular Cash Flow
If you buy and hold real estate, you can earn monthly cash flow renting it out, and this increases the profits from owning real estate since you aren’t relying only on the appreciation but the monthly rental income.
It may seem overwhelming to buy rental properties, find quality tenants AND manage the property, but there are many available options to help you.
You can always hire a property manager to manage your property and pay 7-10% of the monthly rental income for their service.
Of course, there’s always the risk of tenants defaulting or vacating the home early, but there’s a risk with every investment. Without risk, there can’t be a reward.
You May Feel Financially Secure
There’s not much to feel secure about when you invest in the market. But, as 2020 showed, it can change in the blink of an eye. One minute you have a significant investment, and the next, you’ve lost everything.
When you invest in real estate long-term, you know you have an appreciating asset. It may go through hills and valleys, losing some value along the way, but housing usually bounces back if you hold onto it long enough.
Many people invest in real estate to supplement their retirement income. Whether you own the property while you’re retired, earning the monthly rental cash flow to supplement your income, or you sell a property you’ve owned for many years once you’re in retirement and make a profit, you’ll increase your retirement income.
Some people feel more secure knowing their money is invested in a safe, tangible asset investment (real estate) rather than leaving it liquid in a cash account or investing it in the stock market.
There Are Many Ways to Invest in Real Estate
If buying real estate and renting it out is too stressful for you, there are many other ways to invest in real estate, including:
- Buy an undervalued property, fix it up and flip it (fix and flip)
- You can also flip raw land
- Be a wholesaler working as the middle man between motivated sellers and a network of buyers.
- Use house hacking, which means you buy a 1 – 4 unit property, live in one unit, and rent out the others using the rental cash flow to cover your mortgage.
- Invest in (REITS) Real Estate Investment Trusts
- Invest in mortgage deeds and trusts, leins, lease options
- Own an AirBNB
- And more
You Can Pass Real Estate Down to Your Heirs
If you want to leave a legacy behind but don’t think going cash is a good idea, passing real estate down can be even better.
Not only will you give your heirs an income-producing asset, but it’s also an appreciating asset. So they can either keep the property and let the legacy continue or sell it and earn profits.
Protection from Inflation
Inflation is something to keep an eye out for in any market. The good thing about real estate investing is that it is generally a fantastic hedge against inflation because it holds intrinsic value, is in limited supply, and is a yielding asset.
Apartments with popular suburban climates often have a huge draw for students and young families, especially due to the safety, cost of living, and access to resources in the area. The higher the demand, the more likely the investment is to feature a solid hedge against inflation. It’s that easy!
Cons: What Are the Downsides of Investing in Real Estate?
Like any investment, there are pros and cons to investing in real estate. Understanding the ‘downsides’ can help you make the right choice. You may find that you still want to invest, but knowing the negatives can help you make smarter choices and protect yourself.
There’s No Guarantee
Like any investment, there’s no guarantee a property will appreciate or that you’ll make profits. Many factors determine what happens, including the state of the economy, the demand for housing at any given time, and local events or occurrences.
Like most investments, though, real estate almost always bounces back. So if you’re in it for the long haul, you should be on target to make a profit.
Working as a Landlord Is Time-Consuming and Exhausting
You have to be a specific type of person to handle being a landlord. For example, if you buy and hold real estate, you’ll want to rent it out to make money. Getting calls in the middle of the night about a broken pipe, clogged toilet or barking dog is a reality. But if being a landlord is too much for you, remember, you can always call a property management company.
It’s Tougher to Get Financing
Securing financing for an owner-occupied property is typically easy if you have decent credit and stable income. You’ll need a small down payment and can usually ensure the rest in the form of a fixed-rate or adjustable-rate loan.
However, when buying a home for others to live in or fix and flip, lenders aren’t as generous with their financing options. They often have stricter requirements, including higher credit scores, lower debt-to-income ratios, and much higher down payments. For example, many lenders require 30% of the purchase price down on the home to secure financing even if you have good credit.
Also, if you’re buying single family homes, most lenders won’t finance past 10 homes.
Cash Flow Isn’t Guaranteed
There’s no guarantee that you’ll always have tenants. If your tenant’s bail on you, the mortgage and expenses fall on your shoulders. If you have a mortgage, you must keep paying it even though you aren’t receiving rent for the time being.
You need a solid reserve fund and be stable in your finances to handle any situation that may come your way.
The Bottom Line
Real estate is a great way to diversify your investment portfolio. You can offset the risk of high-risk investments, such as money invested in the stock market. In addition, if you invest in rental homes, you can enjoy, not only the cash flow, but you the appreciation that grows every month, giving you significant capital gains when you need it most – in retirement.
Real estate can be a liquid asset if you need it to be. Don’t invest money you’d need immediately, but know that any money you have invested in properties you can usually liquidate within a few months if required.
References:
https://www.geekwire.com/sponsor-post/8-reasons-real-estate-good-investment/
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