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May 03, 2017

Pros and Cons of Investing in Real Estate

Lately, real-estate-investingI’ve had a number of people ask me about Real Estate investing, so I thought I’d give you my perspective on this type of investing.  

I have seen many of my colleagues lose money and I’ve seen a lot of them have very significant gains, but the main thing is you have to be comfortable losing money and you have to be comfortable with making good money.  

I have experienced both, but just to clarify, because of my due diligence I have gained more than I have lost, so I just want you to be aware that as an experienced real estate investor, with rental properties throughout Canada, you have to think about your goals and if it’s for the long term or the short term.

Why did I do this rather than simply invest in the stocks, bonds and mutual funds, with someone else managing my money?

“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” — Andrew Carnegie, Billionaire Industrialist

Well, in fact I have invested in stocks, bonds and mutual funds. But I wanted to diversify my portfolio and get into the real estate investment business.  As a young farm girl growing up in rural Alberta, having land and expanding your holdings was well ingrained in me – no pun intended.

“Buy land, they’re not making it any more.” – Mark Twain

So when I decided to go into real estate investing, I did my own due diligence. 

I studied the experts such as Robert Kiyosaki and read his book Rich Dad, Poor Dad.  I spoke with friends who were investors about it and even joined local real estate investment associations to find out more information.  I realized that there were pros and cons to doing this, but to me the pros far outweighed the cons.  I was hooked.

“Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cashflow and wealth.” – Robert Kiyosaki

Now at the same time I wanted a change in my lifestyle.  While working for other companies was fulfilling, I wanted to be in charge of my life and my schedule and have my own business.  I grew up in the business world watching my parents run a very thriving family farm.  I knew entrepreneurship was my calling, and I even had my own franchise business when I was younger.

I saw real estate investing as a means of re-establishing my own business opportunity. At the same time, I began to get involved in a network marketing business and as it turned out, this venture would provide me with additional capital to invest in real estate.

Now back to the pros and cons of real estate investing. 

When you are doing your due diligence, you have to do research and find out both what is good and bad about the idea.  Having been in real estate investing now for 17 years, I think I have a good idea of what the pros and cons are.

So lets talk about some of the pros first:

1.  You own physical property.

It is a tangible asset that you can touch and see, whether it is undeveloped land, farm land, single homes, multi-units, or corporate buildings.

2.   It has value. 

Real estate is one of our basic needs.  People need homes to live in, and businesses need places to conduct business.  This will always be the case and generally, real estate will increase in value if you bought at the right time.

3.  You are building equity. 

With rental properties, the mortgage is paid by the renters and over the years, not only will the property increase in value, but your mortgage will be reduced building equity for you.  This equity can be used by to purchase other properties, for example, or can increase your profit when you sell.

4.  Real estate is  market driven. 

What I mean is that there are many things that drive the real estate market in a certain area and timing is important. Great deals are possible due to the inefficiency of the real estate market which presents great opportunities the buyer.  A flooded market, lack of knowledge on the right price by the seller, desperation, estate sales and so on can lead to a bargain deal.

5.  It is a business. 

So you now have a business that requires your attention.  You have tenants, property to manage and maintain, monthly income and expenses.  As a result you pay less taxes by having in reality a business you run from your home.  Depreciation is a tex deduction available with investment properties.  Depending on where you live you can deduct certain business expenses including transportation costs, office space and equipment, property taxes, mortgage interest, maintenance and upgrade costs, and property management fees.

Okay, now lets look at the cons:

1.  You become a landlord. 

As a landlord, you have to find tenants and you have to deal with them.  You have to know landlord/tenants responsibilities for the area you live in.  You have to  maintain the property.  Depending on where you live, you may have to find a property manager.  All of this takes time and effort.  There may be months that you do not have a tenant and have to cover the mortgage yourself.   Or you may have to rent it at a loss.  So there are risks with owning rental property; it is not a risk adverse adventure.

2.  It’s not always easy to liquidate.

Real estate is not a liquid investment. This means it will take time to sell depending on market conditions.  It requires you to constantly monitor the real estate situation in the area and be prepared to sell when the conditions are right.  Selling also means additional costs in real estates fees, legal fees, damage repairs, and lost monthly income.

3. It is risky. 

Recessions can happen. Markets can bottom out.  It can take time to get get the return on your investment. Depending on the borrowing regulations in your country, financing the purchase may be difficult.  You may have to come up with a significant down payment to qualify for the purchase.  This can create a risk especially if you are not able to obtain the monthly income that you need to cover all your costs.  Understanding the rental market and what it will bear is key to making a decision that has minimal risk.

4.  You have liability. 

Unlike stocks and bonds, you have liability with any property you own and rent out. So you have to be aware of your rights and the have necessary insurance to cover any situation that you could be liable for. 

5.  You have to be knowledgeable about real estate. 

You have to be knowledgeable in many different ways, whether it be mortgages, market familiarity, landlord/tenant rights,  municipal and state/provincial regulations,  construction, negotiations, income potential, appreciation potential and so on.  You have to do a lot of homework, and you have to keep up to date on all the applicable regulations.

As I said I have been a real estate investor for 17 years and have never looked back.  I have rental properties all across the country.  I have never questioned my decision to get into real estate.  I started small and kept growing.   

To me, the pros far outweigh the cons. And it has proven to be true!

“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” -Franklin D. Roosevelt, U.S. President

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