Investing in real estate can be an excellent way to grow your wealth over time and provide you with income today that can help offset your housing costs if you’re renting your residence or enable you to take on less debt if you’re financing the purchase of a primary home or investment property.
Like all financial decisions, there are both benefits and risks involved with investing in real estate—it’s important to consider both before taking the plunge into the world of real estate investing. Here are three major pros and cons of real estate investment to consider before making your decision.
Pros – Cashflow
The most obvious pro to investing in real estate is cashflow. As soon as you buy a property, you are generating passive income with no additional effort. In some cases, this can mean that your tenants cover your mortgage payments for you.
When they make rent payments, money goes into your bank account instead of out. Even when they don’t make rent payments, there are other ways to generate income from a rental property such as taking on boarders or using it for Airbnb accommodations.
Some landlords also make money by renting out storage units on their properties. On top of all these benefits, you get tax deductions for the depreciation of your buildings over time. You have built-in equity too because if rents rise, so does the value of your investment. And finally, if you happen to need extra cash at some point down the road, you can borrow against what you have earned so far and pay yourself back with interest.
Pros – Appreciation Potential
Appreciation potential is often considered to be one of the most appealing aspects of investing in real estate. If you buy a property for $100,000, it could be worth $150,000 within five years if markets are strong. In addition, in comparison with other investments, such as stocks and bonds, this appreciation has historically been more predictable.
If markets are weak or stagnant over time then the value will remain stagnant or decrease. Some investors worry that appreciating markets may lead to higher rents which in turn leads to higher prices. It can also lead to gentrification of poorer neighborhoods which can force people out who cannot afford the higher prices.
However, as long as property values keep increasing at least 3% per year (sometimes less), it may still be wise for an investor to purchase a piece of real estate since inflation can offset increases in rent which leads to increases in home values.
Pros – Higher LTV Ratios
Investors can purchase a home with a lower down payment, which often offers higher LTV ratios. Higher LTV ratios mean that you have more equity in your property than someone who put 20% down on their home. This means that if the housing market falls, you still have some equity to work with because you only have to come up with 80% of what it’s worth to sell your home.
It also allows investors to make mortgage payments with rental income instead of using personal funds. It is important to note that higher LTV ratios are not without risk: If the house does not appreciate at the same rate as you anticipate, there may be too little equity for a new mortgage loan or when an emergency situation arises.
The best way to know if you’re ready for a higher LTV ratio investment is by evaluating your ability to handle any potential financial problems should they arise. You should always do research before deciding to invest in anything.
Cons – Longer Holding Periods Section
Investing in real estate can be a lucrative way to diversify your portfolio, but it also comes with its fair share of risks. You need to be prepared for longer holding periods, unknown maintenance costs, and additional management tasks. If you’re looking for quick cash-flow and/or rental income, you may want to consider other investments.
It’s always smart to do some homework before investing in any type of property, especially when you’re working with long holding periods. The key is understanding what the benefits are worth relative to the risks and deciding if they are worth taking on.
For example: if the pros outweigh the cons and there is a good return on investment, then investing in property could make sense as an investment vehicle for you.
Cons – Additional Management Tasks
There are many more factors to take into account. For instance, how much time will you have available to manage the property? This should be the first question.
What kind of tenant is best suited for the property? How much money will you have available during construction and renovation periods? What kind of legal documents should be used? These questions all need answers before investing in anything; not just real estate! Consider the pros and cons of all types of investments, from stocks to bonds