If you’ve been asking yourself whether investing in real estate is good, you’re not alone. Real estate has proven a popular investment for decades — centuries, in fact — and has continued to hold solid over the years. Let’s explore why this is the case.
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Pros of Investing in Real Estate
There are many advantages to investing in real estate. These include:
- Competitive returns: The National Council of Real Estate Investment Fiduciaries found in August 2019 data that quarterly returns were up for all property types except retail. The group found slightly more than 1 year earlier that private market commercial real estate had average returns of about 9.9% over the past half-decade. While some expenses can soak up part of these returns, you can deduct them from your taxes. No, you’re not guaranteed constant sky-high returns, but real estate provides consistency and cash flow throughout the years to come.
- Portfolio diversification: Diversify your portfolio so that you don’t get slammed by losses in one or more industries. Real estate’s growing accessibility plus its long-term appreciation and lack of overlap with the stock market make it a perfect diversification tool. Since private market real estate is not traded in the same sphere as public stocks, it faces a different collection of influences and risks.
- Stable and passive income: While it may take some time and cash to get the property into your desired condition (then again, it may already be in prime condition when you purchase it) – once you have solid tenants, it’s time to start enjoying the stable and consistent income you’ll receive from monthly rental payments. In addition, passive income comes not only from rental payments, but the increase in property value over time. Passive income may not be as passive as the name indicates — after all, you do have to put in the upfront effort — but the results are a key part of wealth-building.
Cons of Investing in Real Estate
No endeavor is without its difficulties, including real estate investment in 2020. Here are a few things to watch out for when getting started with your real estate investing career.
- Learning curve: Figuring things out takes time. Time is money. That said, you have to invest to profit from your investment. It’s worth knowing that the learning curve on real estate investment can be fairly steep, so prepare to spend a while getting to know the industry and your role in it, as well as the particulars of your own property. Common mistakes include:
- Letting fear hold you back
- Choosing budget over quality
- Not outsourcing appropriate tasks
- Property management: You could file this under the learning curve, but it takes its own category as it is a huge factor in deciding whether real estate investment works for you. Learning how to manage not only your physical property but to act as a landlord can take some time and effort. Some landlords hire a specific property management firm to outsource this need; you’ll have to decide whether this meets your individual needs or budget. Related considerations include:
- Cost versus added value
- How to maximize your profitability
- A particular property management firm’s expertise in a market
- Liquidating assets: Real estate is not the easiest asset to liquidate or turn into cash since selling a property can take time. In addition, your return on investment may be lower than you think it should be. Some investors choose to avoid bankruptcy — one liquidation scenario — by choosing to go the short-sale route. This can also lead to accepting a sale price that is beneath your expectations. You may choose to liquidate your property by:
- Leasing it with an option to buy
- Volunteering to carry a new mortgage loan for a buyer
- Marking down the price to attract a wider selection of buyers
How to Invest in Real Estate Without Property?
If you’re wondering how to put your money in real estate without the worries of managing a physical property, you’re not alone. However, you don’t need to be scared off by that, especially with the rise of real estate platforms such as DiversyFund, a REIT. As we found in our review, there are many reasons to opt for DiversyFund itself:
- The improved vetting that helps hedge the risk of real estate investment, particularly for beginners
- Conscientious sponsoring and development
- A multifamily real estate investment trust — the DiversyFund Growth REIT — whose main goals are to increase resale value and cash flow
Investing in crowdfunding platforms such as DiversyFund is as easy as pooling your money with others to achieve a common goal. A few questions on evaluating crowdfunded real estate opportunities:
- Is the property type particularly cyclical, and if a recession hits, will it hit you hard?
- What is the risk associated with execution and return?
- Are you putting your money into a debt investment (where you’re basically issuing a mortgage) or preferred equity (a hybrid of guaranteed and performance-based return)?
Essentially, crowdfunding can offer you as a beginning real estate investor a means to learn more about the industry while continuing to get your feet wet — and reducing your level of risk.
Read our review about Streitwise– another real estate investing platform!
Why Real Estate is a Good Investment
Real estate continues to be a popular investment throughout the years — through up and down cycles, rewards and challenges, and the ins and out of the industry. The fact remains that real estate is an investment category that locks in returns for you with predictable cash flow and can be leveraged to increase those returns.
What’s more, real estate can be improved through physical work and good maintenance, making it attractive to strong tenants. It also holds a lower tax rate with deferrable gains — you can kick those tax payments down the road by purchasing a new property on the sale of the old one. In other words, it’s a worthy investment category today as well as tomorrow.