The Ups and Downs of Real Estate: Pros and Cons explored

The Ups And Downs of Real Estate: Pros and Cons Explored

Marcus Marion, CMA™ 7 months ago 0 16

Real estate has become a lucrative investment opportunity for many, especially long-haul investors. However, the industry has also proven highly treacherous for some. Indeed, the real estate market collapse in 2008 demonstrated just how fragile the property market can be.

Therefore, it’s imperative for any aspiring real estate investor to weigh the potential benefits and drawbacks of investing in this industry before taking the plunge.

This article highlights the top real estate pros and cons to equip you with the information you need to pursue a profitable venture in this sector.

Benefits of Investing In Real Estate

1. Real Estate Is a Worthy Long-term Investment

The biggest reason to purchase real estate is that it’s a solid long-term income-generating opportunity.

Undeniably, real estate buyers may wait for years to recoup their return on investment. But it’s all worth the wait, especially considering it as investing for posterity.

Real estate can serve as your retirement plan. The income generated from properties acquired decades earlier may help fund your lifestyle while also cushioning you from unforeseen financial emergencies in your post-retirement years.

2. Real Estate Can Guarantee Hefty Returns

real estate pros and cons

Setting up a real estate business typically requires significant startup capital. But that’s not always the case.

With extensive research and due diligence, it’s possible to find properties priced reasonably below the market rates. This is usually when a seller needs to dispose of their property quickly and doesn’t mind incurring some losses in the process.

Provided you have the required amount of cash, you can capitalize on these rare opportunities to acquire high-value properties at relatively lower prices. It won’t be long before your new investment begins to generate income.

Another circumstance where you might get your hands on real estate at fantastic rates is if it’s an older property. Just be sure the building is still structurally sound to save you from spending considerably more on renovations.

3. Real Estate Generates Steady Cash Flow

As a real estate investor, it may take you months, sometimes even years, to break even. But you’re guaranteed steady income once you recoup your return on investment.

Real estate properties will continually generate steady income as long as they’re rented out.

Besides, some properties may attract additional payments over and above rental fees. These include payments for parking, storage, laundry, etc.

4. Real Estate Income Gradually Increases

Not only does real estate guarantee steady cash flow. The income from renting out properties also increases gradually.

The gradual increase in real estate income is usually due to the ever-rising demand for housing and high inflation rates.

The clearest indication that real estate income is always on the rise is when a tenant moves out of an apartment, and the owner has to increase the rent slightly for the incoming occupant.

5. Real Estate Appreciates In Value

Value appreciation is one of the key factors to consider when evaluating the pros and cons of real estate.

Now, a $100 dollar bill in 1960 was worth about $1,030.77 in today’s dollars. The median home cost in 1960 was $11,900 against over $240,000 today.

pros and cons of real estate

Let’s put this illustration into a better perspective.

Someone who has held on to $1,030.77 in cash from 1960 can only purchase goods or services worth $100 today. On the contrary, someone who purchased a home for $11,900 during the same decade can now sell that property at well over $240,000.

6. Real Estate Is Immune to Numerous Economic Challenges

The real estate industry has borne the brunt of unprecedented economic meltdowns. A classic case was evidenced during the 2008 property market crash.

That said, real estate can weather many more storms than many businesses.

Even if your entire property is unoccupied (which is seldom the case unless something is fundamentally wrong), the associated maintenance costs are still too negligible to strain your finances.

7. Real Estate Mortgage Is Unaffected By Inflation

We’ve already mentioned how inflation rates may affect your real estate income. Higher inflation rates mean adjusting rental fees upwards and vice versa.

It’s even more reassuring to know that the fixed-rate mortgage you’re paying off doesn’t increase at the current inflation rate.

So, if you procured a fixed-rate mortgage to finance your real estate investment, you can match the rental fees to the current inflation rate without paying higher interest.

8. Real Estate Defers Taxes

Tax deferral concerning real estate means that you’re not obligated to pay income tax on any increase in your property value until you sell the property. And the resale may not happen until years after recouping your capital investment.

Extending the tax deferral period is possible by rolling the gain over into a different real estate investment.

Still, on the tax benefits of investing in real estate, it’s great to know that many properties are subject to a depreciation tax shield. The depreciation period is 27 ½ and 39 years for residential and commercial buildings, respectively.

9. Real Estate Confers a Sense of Pride

Owning a fleet of high-end properties is not only a mark of wealth. It’s also a symbol of status.

Being a real estate investor can confer a unique prestige, allowing you to brush shoulders with the who’s who in the industry.

You may find yourself gracing several high-profile events because you are a successful realtor. That’s a feat you won’t earn simply because you have millions of cash stashed away in your bank account.

10. There Are Multiple Ways to Enter the Industry

Most people think of real estate as buying properties when their values are low and reselling them at some point in the future when their values increase. However, that’s just one way to invest in the real estate industry.

There’s also the option of becoming a mortgage broker. As a mortgage broker, your duties would be to link aspiring property owners with suitable lenders.

Other ways how to invest in real estate without buying property include becoming a real estate consultant, attorney, marketer, and administrator of real estate listing websites.

tax benefits of investing in real estate

Drawbacks to Investing In Real Estate

1. Real Estate Is Unideal for Short-term Investors

Real estate is a popular long-term investment strategy. While that may be a benefit on the one hand, it can also be a drawback on the other.

Not many investors are patient enough to wait years before recouping their investment returns.

That explains why some people would rather pursue other short-term investment vehicles, such as high-yield savings accounts (HYSAs), stocks, and bonds.

2. Real Estate Requires Ongoing Maintenance

Ongoing maintenance cost is a key aspect when comparing the pros and cons of investing in real estate.

Whether you own residential units or commercial complexes, you must have a robust maintenance plan to keep the properties attractive to potential tenants and buyers.

Common maintenance aspects include regular painting, roof & gutter inspection, stucco inspection, and repairing electrical and plumbing fixtures.

3. Real Estate Income Can Vary

It’s undeniably true that real estate generates steady income that increases gradually after a period of time. However, earnings from these investments can vary considerably.

For starters, your real estate income will depend on whether you purchased the properties directly from your savings or used a mortgage. If you funded the investment using the latter method but only made a small down payment, your initial earnings may be lower as you’d need to make larger mortgage payments.

It’s also worth noting that your property may not always register full occupancy unless it’s located within prime spots. Even commercial properties can often stay vacant when the businesses renting them relocate or close down.

4. Real Estate Income Is Subject To Taxation

Real estate income attracts federal income tax. These include taxation from ongoing rental income as well as capital gains tax.

Any tax levied on real estate properties, regardless of the amount, will eventually eat into your earnings.

Taxation in real estate is a significant issue because the amount levied varies depending on the property’s size and location.

5. Real Estate Income Is Subject To Rent Control

The idea of rent control may appeal to tenants. But it’s terrible news for ambitious real estate investors.

Your potential income will reduce significantly if you own residential units within states or municipalities that impose rent controls.

Therefore, be sure to keep this in mind when determining the best places to buy real estate property.

6. Real Estate Requires Hands-on Involvement

Another noteworthy drawback to investing in real estate is that it requires a significant time commitment.

You’ll spend time researching the ideal locations to invest in, staying current on the prevalent rental rates, and taking care of maintenance issues.

Fortunately, hiring a real estate agent for a fraction of your rental income is always available. Just be sure to understand the pros and cons of real estate agent before engaging one.

pros and cons of real estate agent

Summary

Investing in real estate has its benefits and drawbacks. As with any investment vehicle, it’s important to research extensively before taking the plunge.

Remember that it may take years to start earning meaningful income from real estate investments. So, you want to get it right from the get-go.

We hope this article serves as your handy guide to investing in real estate in 2023.

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