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Investment advisors always advice people to diversify their investment portfolios to reduce investment risks. You can include real estate as an asset class in your real estate portfolio. There are two main ways you can do that; you can invest in Real Estate Investment Trusts (REITs) or buy and hold actual properties. The former is a passive way of investing in real estate, and the latter requires more time and effort and generally has more returns. Outlined below are some of the pros and cons of real estate investing.
Pros of real estate investment.
The ability to use leverage
When you want to buy bonds or stocks, you need to have the cash on hand. When purchasing property, you can be financed with long-term, fixed-rate mortgages. This means you can own several properties at a relatively low cost. If these properties produce income immediately, a positive return of investment can happen quickly and consistently.
You are leveraging other people’s money (i.e., the bank) to get a significant market stake and consequently, much more returns. This is because the full price of one house can be the down payment and closing price for several houses when financed by the bank. Another advantage is that your existing investments can finance their own improvements and upgrades, increasing the investment property’s value and potential.
Benefits from capital growth
Land is a limited resource. As the human population increases, so does the demand for land driving up the cost. This is one of the reasons real estate prices are generally increasing. Property values are also affected by inflation and improvements to the property. Not all improvements to property involve upgrading the actual property; sometimes, there can also be external improvements. Infrastructure developments are an example of external improvements. An area that builds schools, roads, and hospitals, among other necessary amenities, will attract more buyers leading to an appreciation of the property’s value.
Allows for passive income
When you invest in REITs, you earn from the dividends. When you invest in actual property, you earn from rent from tenants. Either way, your investment is making you money passively. When your properties are set up, your rentals can provide a monthly cash flow. Cash flow is money left after the bills are paid. Having cash flow allows you to spend time with your family, have time to build your business, and have enough money to reinvest in more real estate.
Builds equity
Equity refers to the how much you would receive from the sale of the property after paying off the mortgage. If you use leverage wisely, your tenants are inherently buying the property for you. If you buy a rental property on a mortgage and have the tenant’s rent pay off the mortgage, they are increasing your net worth. If, for example, you owe the bank $150,000, and in a year you owe $130,000, the tenant has made you $20,000 richer.
Real estate grants you control
You have no control over a company’s decisions that influence the value of the stock you own. With real estate, I can decide what rents to charge, what improvements to make the property to increase profit, and how to attract and evaluate tenants, all of which directly affect your returns.
Cons of real estate
It requires a lot of capital
You can buy stocks or bonds with a little money compared to how much you need to purchase a property. If you want to own the property entirely, you need to have the full amount for a house. If you’re going to be financed by the bank, you still need the down payment money, the closing costs, and the costs of repair and updating the property. Over time, you may need to pay property taxes, insurance, property payment fees, and mortgage if you owe it.
Property management is not easy
You need tenants to make rent. Some tenants can be challenging to deal with as they delay rents. Furthermore, if they do not take care of the property, they can negatively affect your cash flow by leaving you with expensive repairs. Not to mention the fact that sometimes you may have no tenants at all.
You cannot quickly liquidate
When you need quick cash, you can easily sell your stocks or bonds. Selling property, on the other hand, will take a longer time. This is besides the fact that selling property has higher transactional costs than stocks
You are easily affected by the property market
If the property market goes down, so does your investment. If interest rates rise, your returns will be affected too, putting a pinch on your disposable income.
If you are looking for property to invest in, first of all, do your homework. Determine places that seem to have the potential to increase in value in the future. Go to home listings like Movoto or use an agent to find a home. Have the house inspected, buy it, and start your journey as a real estate investor.
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