Real Estate can be a great choice for investors to diversify their portfolio and quickly grow holdings. When beginning to invest in real estate , it’s natural to have questions and look into the pros and cons of owning property before making an offer. Like any investment, real estate comes with risks and rewards. Let’s review the pros and cons of investing in real estate, so you can make a clear decision when planning your next investment.
What are the advantages of owning real estate?
Owning and investing in real estate can come with a host of advantages. Adding real estate to your investment portfolio can lead to financial and operational rewards.
Here are five pros of investing in real estate:
- Real estate can appreciate over time. A well-chosen property can have a higher value than the listing price and should appreciate over time, allowing you to sell it later at a higher price. Investors can buy a property at a discount and then make improvements to increase equity and eventually sell it for profit. Real estate always has intrinsic value. Although other investments, such as the stock market, can go down in value, a property is a tangible asset that will always have value. That value can be derived from both the raw land and the improvements an investor makes.
- Real estate can bring you tax incentives. Real estate investors can have unique tax benefits, such as depreciation value if your property value does fall and rise over time and lowers tax rates on long-term profits. Another added benefit is, depending on your income level and classification as an investor, your rental property might give you an overage of tax deductions to offset your other income. Rental real estate also has its perks. Since rental real estate is considered a business, it lets you count travel costs to check on your property as tax-deductible expenses. Rental income is also not subject to self-employment tax.
- Real estate can provide a mostly passive income. After bills and expenses have been paid, rental properties can provide a steady cash flow that is mostly passive. This can allow you to have a flexible schedule and spend time with family, building your business, or investing in other property.
- Real estate lets you use leverage and build equity. Leverage is the use of borrowing capital, typically in the form of a mortgage, to purchase and or increase the potential return on investment. When used wisely, leverage is a powerful tool and advantage of real estate investing because it can quickly grow your real estate holdings and accelerate your wealth-building results. When using leverage wisely in rental real estate, tenants are essentially buying the property for the investor. A tenant would be the one paying the mortgage payment, thus increasing your net worth each month.
- Real estate allows you to have direct control over your investment. You are in the driver’s seat when it comes to the decision-making process. You are also in control of your success or failure. By hustling, calculating strategic improvements, and employing those strategies, you can make sure they’re doing what is best for your business.
What are the disadvantages of owning real estate?
Although there are many advantages of owning real estate, smart investors will also ask the question, “What are the disadvantages of real estate investments?” As with any investment, there are a few disadvantages to be aware of and consider before purchasing real estate.
Here are four cons of investing in real estate:
- Real Estate requires money. Real estate requires money upfront. When purchasing a real estate investment, you’ll need enough savings to cover a down payment, closing costs, and any repairs or updates that need to be made on the property. Once the property is acquired, ongoing expenses include property taxes, insurance, mortgage payments, and property maintenance.
- Managing rental properties is time-consuming. Are you ready to be a landlord as well as an investor? Actively managing a rental property can be time-consuming, especially when it comes to short-term rentals. Investors will have to cross over the learning curve and spend time understanding how to manage their real estate investments and tenants. Although property management is also an option, paying a property manager could diminish your return on the investment.
- Real Estate is a long-term investment. Property is a tangible asset that cannot be quickly liquidated if you need emergency funds. Selling a property takes time and comes with transaction costs. Only invest in real estate with a long-term strategy in mind.
- Tenants can be problematic. Cash flow issues can arise when a tenant leaves and you’re left with vacancies. You also have to worry about tenants causing problems such as not paying or leaving the property in very poor condition when they move out. Depending on where you’re investing, local laws vary on how and when you can evict your tenant and whether or not you or the tenant have to put forth the money to repair any damages. Before investing in a rental property, it is always wise to research local laws and ordinances surrounding landlord and tenant rights.
Real estate investing in Indianapolis
At Delta Wealth Advisors, we’re proud to support our clients in all aspects of sound, unbiased financial planning and wealth management. If you are trying to get into real estate investing, we’d love to talk with you and share our decades of experience and insight. Let’s get you started on the right foot. Contact Delta Wealth Advisors today to start a conversation.