Real estate investments are among some of the riskiest investments, but they’re also one of few investments that yield higher returns. One of the things that makes real estate so risky is how often the market fluctuates, among other factors. However, if you know the market pretty well and have done your research, it’s very likely that you can become a successful real estate investor. Many people have become successful investors in this industry and have been able to earn a second source of income from it. Here are the advantages and disadvantages associated with investing in real estate.
The Risks That Come With Investing in Real Estate
The Cost
Probably the biggest downside to investing in real estate is the cost, especially for beginners. Properties in the United States can run as low as $120,000 and as high as hundreds of millions of dollars, but price shouldn’t be your main focus when looking for a property to invest in. For instance, the least expensive properties can be found in Iowa, Nebraska, Oklahoma, Arkansas, Mississippi, and West Virginia— places that don’t typically see a lot of economic growth— while the more expensive properties are typically found in larger cities, such as Los Angeles and New York City. The location of a property is more important than anything else because a good location attracts good tenants, and then you’ll see a return on your investment.
The Time
Time can refer to a lot of things in the real estate market: deciding when it’s the right time to buy a property, the time it takes to look for and get financing for a property, and the fact that real estate is a long-term investment. If this isn’t something that you want to put your energy into, then it’s not worth the investment. Only serious investors who want to add real estate to their portfolio should consider investing in real estate.
The Work
Your job isn’t done after you’ve purchased a property. The next thing you need to do is find tenants to rent your property so that you can generate income— and that’s only if the property doesn’t need any renovations first. If your property can house more than one tenant, then you have to consider vacancy rates because every spot unfilled is money lost. You also have to ensure that your property is properly maintained, meaning that any needed repairs and cleanings are your responsibility. Fortunately, there are property management companies that can do all of this for you so that you can focus on other tasks.
The Rewards That Come With Investing in Real Estate
You Can Earn a Steady Income
Once you’ve decided that this is the right investment for you, you’re able to finance a property in a great location, you’ve hired a property management company to help you maintain the property, you can enjoy all of the benefits that come with investing in real estate. One of the benefits is that real estate cash flow is how investors earn passive income, or income they don’t have to do much work for. If you’re worried about vacancy rates, you can invest in a single-family home, duplex, or small office building. This way you won’t have to worry about finding a large number of tenants to rent your available spaces.
You Have More Tax Benefits
Owning your own property and making money off of it is similar to running a small business. However, real estate investors aren’t required to pay taxes in the same way those who are self-employed are. Also, many of your expenses that come with managing a property are tax-deductible.
You Don’t Have to Buy Property
If you want to be a real estate investor but you aren’t ready to buy property, you can invest in real estate investment trusts, or REITs instead. REITs are similar to stocks and mutual funds, in that you’re buying into ownership of a property without actually buying the property itself. REITs are typically commercial properties, but can also be in the form of residential, industrial, and special-use properties.
Overall, real estate is a good investment if you’re willing to put in the effort. Once you’ve done all of the work, you’ll be able to sit back and enjoy your passive income.
