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Is Real Estate Investing Right for You? Here Are the Pros and Cons




Real estate is one of the best vehicles for building wealth. Andrew Carnegie once said, “Ninety percent of all millionaires become so through owning real estate.”

However, like any investment, real estate involves risk as well as a considerable amount of time, effort and money. And, it takes time to learn how to find investment properties, fix and flip them, manage tenants and perform other associated tasks. Despite what the late-night infomercials claim, real estate investing isn’t for everyone. Should you consider jumping into the market? Here are some pros and cons of real estate investing to consider before your next move.



Pros of investing in real estate

There are a lot of reasons to invest in real estate. For starters, unlike pork belly futures, it’s a commodity you probably already know and understand, at least to an extent. Not to mention, historically, real estate increases in value. Here are the main reasons to consider investing in real estate.

It’s tangible

Real estate is a real, tangible thing that will always have monetary value. That’s not always true with other investments. For example, if you invest $200 in the stock market and the market crashes, your stock could be worthless, nothing but a piece of paper, the next day.

On the other hand, regardless of what the housing market does, you still own the land and any structures on it. And, that land has value. Your $200,000 investment may drop in value from $200,000 to $100,000 if the housing market crashes, but it will always be worth something.

Real estate appreciates

Historically, real estate appreciates (grows) in value over time. In other words, even if you invest $200,000 and a crash cuts that value in half, your property will eventually rebound. You can see that from the housing market bubble burst in 2007, subsequent rebound in 2013 and skyrocketing prices now.

Many factors contribute to how much your investment will appreciate, including location, supply and demand, the economy and renovations, to name a few. However, based on what the market has done in the past, real estate values in the United States have increased 3.5 to 3.8 percent annually. Over 10 years, that translates to roughly $35,000 per $100,000 of your property’s value.

You increase your net worth

Net worth is the total sum of what you own minus what you owe. As you pay down the mortgage on an investment property, your equity in the property—what you own—increases. That shifts 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 portfolio. If you invest all of your money in the stock market and it crashes, your net worth will take a major hit. However, if you divide your investments between the stock market, real estate and other wealth-building vehicles, only a portion of your net worth theoretically sustains the financial blow. (Talk to your financial planner to learn how to diversify your portfolio.)

It can create a passive income source

You have several options when it comes to investing in real estate. You can buy an underpriced property and flip it for a profit, invest in a real estate investment trust (REIT) or lease the property out to tenants. By renting out a property, though, you can create a steady stream of income. Every month your property is occupied, your tenants will send you a rent check and what is left over after paying the mortgage and other expenses is yours.

However, you won’t always have access to that money. If you’re using a property management company, they will receive that money, and if you hold your properties in an LLC, you’ll have to follow rules about how you can access those funds and when. Additionally, the property will go vacant and need repairs from time to time. Those instances 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 expenses, insurance and maintenance. When you sell the property, you can roll it over into another property (1031 exchange) and defer your capital gains. You can also claim depreciation as an investor since the buildings on the property deteriorate over time.

Of course, you’ll want to talk to your accountant or tax advisor to see how current tax laws could affect you if you decided to invest.



Cons of investing in real estate

Real estate can be risky, and making money as a real estate investor isn’t as easy as some people would lead you to believe. Weigh the cons before you decide to invest.

It costs money to get started

Don’t believe the gurus selling real estate investing programs—you can’t invest in real estate without money. While some people get started by withdrawing equity from their personal homes, you have to have equity in your home to do so. And, taking money from hard money lenders is expensive. Currently, hard money rates range from 10 to 18 percent compared to a traditional mortgage rate between 3 and 4 percent.

What about taking out a home mortgage for an investment property? Because rental property default rates are higher than traditional mortgage rates, banks often require a larger down payment and have stricter credit score and debt-to-income ratio requirements. So, unless you already have the money to invest and money for renovations and improvements, real estate investing may not be a realistic option.

It takes a lot of work

Investing in real estate requires hours and hours of work. First, you need to search for a property, then purchase it. Very rarely will property be rent or sale ready, so next, you’ll have to spend even more time repairing and renovating it. Assuming you intend to rent the property, you’ll need to find tenants, qualify them, collect the rent, make repairs as needed and evict them if necessary. Your workload only increases based on the number of properties you own.

Sure, you can hire a property management company or invest in a REIT. But even a REIT takes time to research. Just be prepared to work to make your investments profitable.

It takes time

Yes, real estate appreciates, but usually, it takes years to see substantial increases. Of course, you can circumvent the wait by purchasing a home substantially below cost and selling it for a profit. However, almost always, these properties are priced under market because they need extensive repairs and renovations. Those improvements cost money, which not only cut into your profits but take time. It’s not uncommon for a major renovation to take three to six months.

Drama, drama, drama

As a landlord, you’ll have to manage tenants unless you hire a property management company. Don’t underestimate the drama involved. Some tenants pay promptly every month. Others come up with elaborate reasons why they can’t pay at all: they started divorce proceedings, their teen ran away, you name it. Then, when eviction is imminent, they pack up without a word and leave your property damaged and filled with trash.

While you swear you’d never let those things happen at your rental property—you would evict immediately—it’s easy to get sucked into the drama. After all, most of us want to be liked and to help someone going through a tough time. So, realize the risk for drama, or hire a property management company.

It’s complicated

Real estate investing isn’t as straightforward as owning your own home. It comes with its own set of rules you need to understand. For example, if you appear to favor one group of prospective tenants over another by advertising your property as “close to the Catholic church,” you could be accused of violating the Fair Housing Act. A violation could open you up for a costly lawsuit.

Or, you could improperly file your taxes and face an IRS audit. When you invest in real estate, you need to become an expert on Fair Housing laws, taxes, local landlord tenant laws and other areas. At the very least, you’ll want to surround yourself with a team of professionals you can consult for answers.



Ready to build wealth?

Investing in real estate can build wealth, but you don’t have to purchase rental properties to increase your net worth. Simply owning your own home can do that too. Planning to buy your first home or move soon? Take some of the stress out of moving day by hiring professional movers. Moving.com has an extensive network of reputable and reliable movers to help.



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