Advantages And Disadvantages Of Real Estate Investing

Advantages And Disadvantages Of Real Estate Investing

Advantages And Disadvantages Of Real Estate Investing

Real estate investing is an investment strategy where an investor purchases property in order to earn a profit. In most cases, the investor will either rent out the property, or improve on it in order to resell it at a higher cost than it was purchase for. Real estate investing can be riskier than other investments since property cannot usually be sold quickly.

Advantages

Income Stream

If the property is easily convertible to rental units, the owner of the property can earn a steady income stream in the form of rent. Depending on the geographical location the property is located in, the earnings can be quite significant. For example, urban city centers or towns with colleges and universities tend to offer the highest income streams because the demand for rental units is always high.

Security

Owning property can offer the investor a sense of security because the value does not tend to fluctuate as much as other assets such as stocks and bonds. However, this does not mean that the investor will always break even or earn a profit on their investment. Although housing prices do not tend to fluctuate in the short term, they may increase or decrease in value in the longer term. Therefore, it is important for the investor to thoroughly research the area before making a purchase.

Self Occupation

Another reason why many investors are attracted to investing in real estate is because the property can be utilized by the investor. They can either live on the property while they fix it up, or they can be a live-in landlord and earn an income stream at the same time by renting out the other rooms.

Tax Shelter

Since tax laws on income properties vary depending on your jurisdiction, you should always be sure to thoroughly research it beforehand. However, it is very common for taxes on any gains to be deferred until you sell the property. For example, if a house appreciates in value from $250,000 to $300,000, the investor will not be required to pay the taxes on the extra $50,000 until the property is sold.
A model of a home sitting on top of money.

Disadvantages

Legal Difficulties

Investing in real estate has the potential of being very confusing because it requires that you are fully aware of the laws in each jurisdiction that you own property. Some jurisdictions may even enforce land ceilings which can make the investment risky. The legal difficulties can become much more complex if the investor is investing in commercial real estate.

Maintenance Cost

The cost of maintaining the property can cause the investor to lose money on the investment. In larger cities, property taxes can be so high that it will be very difficult to resell the house at a higher value.
If the owner of the property is renting out the units, maintenance costs can take large chunks out of the income stream. If the owner does not personally know the tenants before renting out the units, they run into the risk of renting the space out to someone who will not take care of the unit, causing the owner to put large sums of money into repairs. Furthermore, other costs such as electricity and heating will also add up.

Property Taxes

Before investing in real estate, the investor should always factor property taxes into their valuation of the property. In larger urban cities, property taxes can be significant and may cause the investor to lose a big chunk of their profit. Property taxes will vary depending on which city or state the property is purchased in. Therefore, the investor should always consult with city officials before investing in property.

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