While it is common to hear about people becoming rich through the stock market, there are also many savvy investors who have made a fortune through investing in real estate. Real estate is seen as one of the most stable investments due to its limited supply, but endlessly increasing demand. Investing in real estate does involve more complex transactions and requires capital, but the potential profits that can be made through real estate investing are also quite large.
Real estate investments can generate positive cash flow through renting out properties. Properties can also be improved and then sold for either short or long-term capital gains. The real estate investor potentially has more control over his or her investment than investing in stocks through improving the property and managing cash flow.
There are several advantages and disadvantages associated with investing in real estate. Here is a discussion of the major advantages and disadvantages.
- One of the biggest advantages of real estate investing is that you can use financial leverage, where property is purchased with borrowed funds obtained through a mortgage originator. The property secures the loan, making it possible to purchase the property with a low down payment. This leverage can be used to obtain a higher return on investment (ROI) than other investments where the investment must be paid for in full or with a much larger down payment.
- Tax Benefits. There are numerous tax advantages with real estate purchases such as no federal capital gains tax after two years of ownership and tax offsets from value depreciation. Interest costs are also usually tax deductible. Please note that there are limitation and restrictions to the tax codes depending on where you live.
- Inflation Resistance. Property values tend to go up when inflation rises. This can serve as a hedge against inflation.
- Real estate is a secure and tangible investment. Cash is much easier to steal than property!
- The biggest disadvantage to real estate investing is that real estate is illiquid, meaning it cannot be sold as quickly as stocks for cash.
- There are also substantial costs associated with maintaining and improving real estate, which can not be avoided for capital appreciation. Maintenance and repairs are not always predicable and cash may be needed at an inopportune time for the investor.
- The real estate market can often be hard to predict and change can be slow. There is no guarantee that property values will appreciate or that a property can be sold when cash is needed.
- Real estate investing tends to involve more hands-on involvement than other types of investments.