Investing for the future and building long-term wealth is a very important responsibility that all people share. While many people focus their investment strategies on simply investing in the stock market, there are other types of investments that can also provide consistent and strong returns.
One type of investment to consider is investing in real estate. While real estate and provide someone with a good return on investment, it does have different risks and require certain levels of effort that other investments do not. Prior to deciding whether or not you should invest in real estate it is important to consider all of the pros and cons of real estate investments.
Pro – Appreciating Asset and Access to Leverage
Another advantage of investing in real estate is that real estate investments tend to appreciate in value over time. While the real estate market over the past 10 years has been somewhat volatile, real estate tends to appreciate in the long-term at a fairly steady pace. Furthermore, you are able to typically leverage your real estate purchases with mortgages and other types of debt that come with low interest rates. This allows you to earn a strong long-term return on your initial funded capital.
Pro – Earn Cash Flow
The first advantage of investing in real estate is that it can earn you current cash flow. When you invest in an investment property, the ultimate goal will be to lease out the real estate to a tenant. In many situations, the rental income that you will receive will exceed both your operating expenses and your mortgage payment. This can provide you with excess cash flow that can either be saved or used for any other purpose you wish.
Pro – Tax Advantages
The third advantage of investing in real estate is that it can come with incredible tax advantages. When you invest in real estate, one of the main goals will be to earn current cash flow. While current cash so it would normally be taxed at normal income levels, real estate Investments allow you to depreciate the asset over a 27.5 year period. In many cases, the depreciation will excess the amount of cash flow that you have incurred. This means that you will not have to pay any taxes on the yearly income. Furthermore, other estate and tax laws allow you to further delay tax payments if you choose to sell or pass the property on to an heir.
Con – Capital Intensive
While there are clear advantages to investing in real estate, there are some disadvantages as well that all people need to be aware of. The first disadvantage is that it can be a very capital-intensive investment. In order to purchase a property, you often needed to be able to come up with a down payment of at least 20% of the total purchase price. You also will need to be able to pay for repairs, Renovations, and other expenses that arise as a result of owning real estate.
Con – Not Always Passive
The second disadvantage of owning real estate is that it is not always a passive investment. When investing in the stock market, there is nothing for you to do other than monitor your Investments. When you invest in real estate, there is constantly additional work that may need to be done. This can include making repairs, marketing the unit for rent, or simply attempting to tenant needs. While much of this work can be done by someone else if you hire a property manager, property management fees tend to be equal to 5 to 10% of your total income.
Con – Economic Risk
The third risk of investing in real estate is that there is General economic risk that comes with this form of investment. There have been recent time periods in which Real Estate has dropped drastically in value. If you try to sell during one of these down periods, you could be left with an underwater mortgage and have to come out of pocket even more. Furthermore, if you choose to invest in an area that suddenly starts to struggle economically, it could lead to a big deterioration in your property value.