Many of us have seen or heard stories about entrepreneurs making their millions through climbing up the rungs of the property ladder. They start with a small starter property and end up with an impressive portfolio of real estate. However, investing in real estate is not for the faint-hearted.
There are many aspects of buying real estate that are significantly profitable, but on the other hand, there are a few pitfalls potential investors should be aware of. Before investing in real estate, it is vital that you understand the pros and cons of such a venture.
Pros
A Source of Income
The most significant advantage of investing in real estate is that it can provide you with a source of income if you buy to let – this generates cash flow. Cash flow is the net income from the real estate investment after all the payments and expenses have been made. Cash flow builds up your equity and strengthens over time as you pay your mortgage. So, if you are interested in building up a portfolio of rental properties, look at websites, local papers or engage with realtors who have a range of Arizona homes for sale or property in Nevada, Utah, or a location of your choice.
Appreciates Over Time
Generally, the value of real estate property increases over time. Besides earning rental income from your property, you can make a handsome profit when you decide to sell your properties.
Regardless of factors such as location, inflation alone pushes the cost of properties upwards. Historically, home values have increased (along with inflation) over time. So unlike vehicles, which are depreciating assets, real estate is considered an appreciating asset. That said, appreciation potential will largely depend on where your rental property is located and that market’s potential for growth.
Real Estate Has Tax Benefits
The federal mortgage interest tax deduction is a great benefit because homeowners can reduce their taxable income by the amount they pay on mortgage interest. It reduces the tax burden for homeowners, saving them thousands of dollars per year.
Landlords can also benefit from various tax deductions, such as interest on goods and services used to maintain the rental property, depreciation of the property, repairs, capital expenditures, utilities, mortgage interest, insurance expenses, property management expenses, and appreciation taxes.
Low Risk
Historically, real estate has been considered a more stable investment than something such as stocks and shares as these can rise and fall in value. Trading in stocks and derivatives is a risky game and requires excellent skills to make money out of equities and leverage trades. However, buying a property is relatively simple and can be carried out by anyone who has the financial resources.
Inflation is On Your Side
The price of property tends to move in line with inflation, and for that reason, real estate is an excellent hedge against inflation. As inflation rates rise, so do property values, and so does the amount of money a landlord can charge for rent – thus accruing a higher rental income over time.
Cons
High Cost to Buy and Maintain Property
Buying property is not cheap. Even if you plan on getting a Buy to Let mortgage, you will still need a substantial amount of cash to put down as a deposit. The amount required for the down payment on real estate usually is 20% of the purchase price.
The purchase price or deposit is not the only bill that needs to be paid when purchasing a property. When buying a home in the US, invoices have to be paid for title searches and insurance, recording fees, and legal fees.
If the property needs repairs or renovations to make it habitable, further cash needs to be spent. Also, a buyer must take into account that there will be ongoing expenses, including insurance, mortgage payments, property taxes, and maintenance. For many investors, that may be too much money to put into a single investment.
Lack of Liquidity
The most significant disadvantage of investing in real estate may be its lack of liquidity compared to other types of investments. Depending on the type of property, its condition, and the property market’s state, it may take a considerable amount of time to sell a property. Should an investor need money quickly and have to sell a property, they might be forced to reduce the selling price in a down market should they need liquidity.
Maintenance
When you buy a property and rent it out, you as the landlord are liable for any repairs that need to be done to maintain the property’s condition. The actual cost of these expenses will be dependent upon the size, age, and state of the property when it was purchased. It is vital that you keep a good amount of money aside to deal with these problems if or when they arise.
Problem Tenants
As a landlord, you must find suitable tenants for your property. If it takes you a while to find good tenants, you will lose potential rental payments as the home lies empty, which can lead to stunted cash flow.
Quality tenants are the most valuable asset to a landlord. Once you find them, do everything you can to hold onto them. A good tenant will pay their rent on time and look after your property as if it were their own. However, such tenants are hard to come by. Generally, renting out your property can be time-consuming and sometimes stressful. When you are a landlord, you will be held responsible if anyone injures themselves on your property and must respond as soon as possible if something in the home malfunctions. Finding tenants can be time-consuming, as can responding to the demand of tenants and maintaining the building. It might be beneficial to hire a letting agent to do these tasks for you, so you are free to concentrate on expanding your portfolio by buying further properties. However, only hire a letting agent if it is cost-effective in the long term.