About 90 percent of millionaires earned their wealth from real estate investments. Many financial advisors believe that real estate remains a lucrative venture, even in this day and age.
Traditionally, many investors still rely on the stock market as the instinctive option to grow their money. But more and more people now realize that real estate can be a viable investment option with higher yields than stocks. Investing in real estate offers higher returns, lower risks, and more avenues for diversification.
Investing in Real Estate: An Overview
Real estate investment primarily involves the acquisition of physical property. Typically, investors in real estate acquire property to generate income from rent. Besides the stream of revenue collected from tenants, the investor likewise profits from the property appreciation. Additionally, tangible assets such as real estate might be leveraged, allowing further expansion of the investor’s holdings.
What’s appealing about real estate is that it is a controllable asset providing solid opportunities for diversification.
Investing in Real Estate: The Risks
The most critical risk to investing in real estate is venturing into it without ample research. It is not a business venture that one can undertake cursorily and expect high returns instantly. Successful investors realize that real estate is an illiquid asset that they cannot just cash in immediately.
As for those who invest in rental real estate and those who flip real estate properties, the primary risk lies in property management (maintenance, repairs, and renovations). In some cases, you will be shelling out more capital while only betting that renters will persist or that you can sell the property at an expected value.
Some investors hire contractors to oversee the renovations and repairs of properties. They flip or hire property managers to take point in the upkeep of rental properties. While doing so might cut into the investor’s bottom line, it does provide efficiency and convenience in managing their investments.
Investing in Real Estate: The Pros and Cons
In simple comparison, placing $25,000 into securities buys you securities worth $25,000. With real estate, a $25,000 investment can buy you a property with a value of about $125,000 with tax-deductible interest and mortgage factored in.
When investing in real estate property, you have access to more money through leveraging this owned property, allowing you to acquire more investment opportunities.
There are more avenues for diversification in real estate. Aside from merely buying and selling properties at a profit or managing rental properties, a real estate investor can expand the property management aspect into upscale remodeling or even full construction services. Furthermore, you can also dip into the lucrative world of construction. With additional investments on the right project managers, small to medium heavy construction equipment, and viable land, you can develop a real estate property in-house for higher profit margins. This aspect might also become an independent service offered to the right markets.
The long-term cash flow from real estate investments does make up for the disadvantage of having capital tied up for an extended period. Again, there’s a steady income stream from rent, profit from selling properties at higher price points than when they were acquired, and the appreciation of property value over time are the major aspects real estate investors generate profit from.
Because real estate is a tangible asset that you cannot easily liquidate, you cannot cash in quickly, should you need finances. However, it is an asset that can be leveraged and provide you with expansion opportunities even without cash on hand. Other drawbacks of investing in real estate involve the costs and resources required to manage properties.
Income generated from rent might already cover mortgages, insurance, maintenance, and property taxes. A property that’s managed well can be the source for supplemental income (such as from facilities usage fees, memberships, premium amenities, etc.).
If you develop rental properties, income generated from rent can go up alongside inflation. Furthermore, unlike traditional investments such as stocks, tax write-offs and deferred payments are possible in real estate. Typically, selling stocks requires payment of capital gains taxes. In real estate, you can defer the capital gains tax payment if you purchase another property after selling the first asset.
In summary, here are the pros and cons to investing in real estate:
- Passive, long-term income
- Tax breaks
- Hedge against inflation
- Can be leveraged
- Substantial capital required
- Not easily liquidated
- Significant transaction costs
- Appreciation and renter stream are unguaranteed
Successfully investing in real estate is a wealth management option that hinges on an individual’s financial situation, goals, investment style, and risk tolerance. Buying real estate property requires a substantial amount of money upfront. Real estate investments come with unique risks, such as illiquidity, unguaranteed returns, property management costs, etc. On the other hand, it has advantages in passive income, leveraging, diversification, and property appreciation. Weigh the pros and cons against your capabilities and commitment to the investment.