Is Real Estate a Good Investment? | BiggerPockets Blog

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When building wealth, there is no shortage of investment opportunities. Stocks, bonds, mutual funds, ETFs, precious metals, and more all play a role. However, many of the great fortunes in the world depend on real estate investing. Let’s examine why real estate is a good investment and how you can build significant wealth.

Reasons why real estate is a good investment

Cash flow, passive income, tax breaks – the list goes on. Here are some of the reasons why real estate is a good investment:

There is a steady cash flow

As a real estate investor, you can create a Steady cash flow If your investment property has tenants. Calculate your cash flow by deducting mortgage payments, property taxes, insurance, and maintenance expenses from the total rent.

It can have great returns

Long term investment in real estate can bring great returns. Strong appreciation over time means you can sell the property for a great profit. Of course, there is no guarantee that a single property will generate great returns but remember the real estate motto: location, location, location.

Long term security is an asset

The long term security of a property can make it a great investment. You don’t just wait for your real estate investment to appreciate. Instead, you rent the property and earn money each month.

There are significant tax advantages

One of the most important reasons why real estate is a good investment includes this tax advantages. according to tax authorityVarious real estate expenses are deducted, including:

• Mortgage interest
• Property Taxes
• Operating expenses
• repairs
• Consumption

Diversification means security

Real estate is an essential part of a diversified investment portfolio. Your real estate portfolio may still be relatively strong when the stock market crashes during an economic downturn. When investing in real estate, consider diversifying the portfolio in different types of real estate for added security during difficult times. Besides single-family residential properties, there are opportunities in commercial properties, apartment buildings, and other income-generating properties.

A reliable source of passive income

Real estate investment can create a reliable source of passive income. If you are hiring the services of a property manager, there is not much you need to do on a daily basis. Alternatively, you can enjoy passive income from your tenant’s monthly rent checks.

You have the ability to cash in

Rental property investors do not usually pay cash for properties. Instead, they use real estate leverage Most of the money is borrowed from banks or mortgage lenders.

Many investors purchase their first investment property by obtaining a Home Equity Line of Credit (HELOC) in their primary residence. Most lenders allow homeowners to borrow up to 80 percent of the value of their home.

There is protection against inflation

Real estate investment offers some protection against economic inflation. Inflation raises the prices of goods, but it also raises wages. Since wage growth is linked to rental rates, you can increase the rent on rental properties once your existing leases expire.

You have an opportunity to build capital

Owning real estate is a great capital building investment. When you sell properties that have increased in value, the cash is the capital you built up. The key to building capital in real estate is choosing properties that are likely to increase in value and waiting for your time to appreciate enough. It is key to building long-term wealth.

Fulfillment and control belong to you

Do you want to be your own boss and have more control over your own destiny? This is an attractive component of investing in real estate, although this fulfillment comes with greater responsibilities. As a landlord, you also play a vital role in your community.

Real estate investment risks

In general, real estate is a good investment over time. However, it does involve risks, and it is possible for you to lose money. By knowing these risks, you can take steps to avoid them.

There are some market risks

You expect to get rental income from your investment properties. This income also goes towards paying the mortgage and other property expenses. What happens if you encounter a long-term vacancy? Tenants break contracts and can leave you hanging. Are you willing to not receive rental income from a housing unit for a few months or more?

Remember that investment real estate is illiquid with the exception of REITs. If you need to get cash quickly, this is a problem.

property risks

Investment properties require upkeep and upkeep, and these are major expenses. You should budget for both regular and major repairs, such as replacing a roof or fixing HVAC or plumbing problems. The property is also vulnerable to fires, floods and natural disasters. Make sure you have adequate insurance in case such a disaster should occur.

management risks

As a landlord, the last thing you want is tenants who don’t pay their rent or cause problems. Mitigate some administrative risks by carefully screening potential tenants for your rental property. This includes doing a background check and obtaining a credit report and rental history.

Problems with interest rates

Investing in real estate investment is closely related to interest rates. These rates affect the value of the home, as lower rates lead to higher demand and higher interest rates dampening buyer enthusiasm. High prices are an inevitable problem for the real estate investor, but that doesn’t necessarily mean that you should avoid buying real estate in a high interest rate environment.

For example, look into adjustable rate mortgages when rates are rising so that you can make lower monthly payments during the period when the rate is in place. Another option is to opt for a long-term interest-only mortgage. The latter only works if you can refinance at a lower rate should rates drop. Although interest rates are now higher than in recent years, they are still historically low. Be prepared for it to remain relatively high in the near future.

If possible, take advantage of buying at a lower interest rate with cash.

Possible recession risks

The economic cycle consists of ups and downs, and recessions part of the latter. The Great Recession of 2008 certainly had a huge negative impact on real estate. However, the real estate market and home values ​​are finally back up. With real estate investing, you need to take a long-term perspective.

Housing prices are still high

Real estate prices for single-family homes are historically high. The risk here is that you can buy an income property at the top of the market and wait a long time for a great appreciation. Of course, when housing prices are historically high, fewer potential homeowners can buy it. This makes the demand for rentals higher.

How to reduce real estate risks and overcome challenges

Seasoned real estate investors know how to reduce their risks. Here are some tips on preventing some of the problems arising from real estate investing:

Do a thorough search

When it comes to real estate investments, conducting due diligence is imperative. You should know your costs and check the numbers to ensure the investment makes sense.

If the property already has tenants, find out the terms of the lease, its term and the rental list. Verify that all rental information is accurate. For example, you may discover that renters receive discounts on certain items, which means that the rent paid is less than expected.

Obtain a building account history from the landlord or property manager so you can make comparisons to similar properties and determine your own cash flow.

Before you buy a property, it should be professionally inspected. Visit the municipality’s buildings department and check for any work permits on the property. Does the description of the property match the reality of the property? If a home has two bathrooms but only one is listed, that’s a red flag. The owner may have added this second bathroom without permits. The town may require an illegal business to be uprooted.

Diversify your real estate portfolio

When investing, it is always wise to avoid putting all your eggs in one basket. Here comes the role of diversification. Putting money into different asset classes can protect you from some of the risks of real estate investing.

For example, if your real estate portfolio consists solely of residential properties, consider investing in commercial real estate or industrial sites for diversification. One of the easiest ways to diversify your real estate portfolio is through a real estate investment trust, or REIT.

Hire a qualified property manager

It is impossible to overestimate the importance of qualified employment property manager To supervise your real estate investments. You can probably handle most property management tasks if you are a handy person and have a rental property or two in your local area. Expand your investment properties outside your geographic area or purchase multi-family units; The DIY approach is rarely viable.

Stay informed about your local markets

The real estate market is not static. Change is constant. You want to know the good and not-so-good areas of cities for investment purposes but also look for opportunities in less-than-star areas that are ripe for expansion.

Follow local media to keep abreast of current conditions affecting the housing market. This may include regional labor market health, zoning changes, property taxes, and environmental problems. Track local crime rates and other issues affecting property values.

Produced by the National Association of Realtors Local market reports To help you understand the data. The latest information about foreclosures, home inventory, prices, and sales is essential for real estate investment and management.

How can real estate hedge against inflation?

As an asset class, real estate often appreciates with inflation. Historically, real estate has proven to be a good inflation hedge. Besides the ability to increase rents, investors can take advantage of a long-term fixed-rate mortgage. Your rental income increases, and your property value should increase over time, however you are not making higher monthly mortgage payments.

Note by BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.