Lately, I’ve had a number of people ask me about the pros and cons of investing in real estate.
Many of my colleagues have either lost money or gained money, but the main thing is for you to be comfortable with the possibility of losing or gaining inside of the real estate game.
I have experienced both, but just to clarify, because of my due diligence I have gained more than I have lost.
So, as an experienced real estate investor, I want you to think about your goals, short term and long term.
Why did I do this rather than invest in stocks, bonds and mutual funds?
Well, in fact I have invested in stocks and mutual funds, but I wanted to diversify my portfolio and get into real estate.
As a young farm girl from rural Alberta, having land and expanding your holdings was well ingrained in me – no pun intended. I grew up in the business world watching my parents run a multi-million dollar family farm.
So when I decided to go into this type of investing, I did my own due diligence and now I want to share with you the pros and cons of investing in real estate.
I studied the experts such as Robert Kiyosaki, author of Rich Dad, Poor Dad. I interviewed friends who were investors and even joined local real estate investment associations to get more information.
“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
I knew entrepreneurship was my calling, and I even had my own franchise business when I was in my early 20s. Later on, after working in corporate for years, I decided to start my own home based business, which then provided me with additional capital to invest in real estate.
Here are the pros:
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, your mortgage will be reduced and building equity for you. This equity can be used by to purchase other properties, 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 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. This includes transportation costs, office space, equipment, property taxes, mortgage interest, maintenance and upgrade costs, and property management fees.
Here are the cons:
1. You become a landlord.
As a landlord, you have to find tenants and you have to deal with them. Plus, you need to know the landlord/tenants responsibilities for the area you live in, as well as, maintain the property. Depending on where you live, you may have to find a property manager. 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 with negative cashflow.
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’s risky.
Recessions can happen. Markets can bottom out. It can take time to get the return on your investment (roi). 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 must do a lot of homework and keep up to date on all the applicable regulations.
I have been a real estate investor for 17 years and I made sure to get real estate education so that I could make good decisions about my rental properties. 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
If you’re interested in learning more, click here to sign up for my free workshop on Feb 5th!