According to Newsweek, CNBC and other sources, billionaire industrialist Andrew Carnegie once said that 90% of millionaires got their wealth by investing in real estate. That alone should be enough for investors to at least consider real estate. But like any investment, real estate has both its pros and its cons.
You’ll certainly have to do your homework to be a real estate investor, as you’ll need to understand a wide range of financial, legal and general real estate terminology. But the rewards can be exceptional. Here’s a look at some pros and cons of real estate investing, as described by various professionals in the industry.
Pro: Passive Income
One of the prime reasons to invest in real estate is to generate passive income. People will always need a place to live, so well-located rental properties will always be able to generate income. With the right property in the right location, you may be able to generate enough passive income to cover your mortgage and even provide you with excess cash flow.
According to Bethenny Frankel, who has gone from reality TV star to real estate investor, as quoted by CNBC, “Investing in real estate is a great idea if you are in it for the long haul, not a quick return. Your best bet is investing in residential properties that produce rental income year-round.”
Con: Property Management
The downside of owning a rental property is that you’ll have to put in some effort to manage it. If you’re buying a short-term rental, you’ll need to manage check-ins and check-outs, cleaning and the nightly needs of your customers. For long-term rentals, you’ll have to screen for reliable tenants and respond to their ongoing maintenance requests. You’ll also typically generate less income with a long-term rental than a short-term rental in a hot area — although it may be more consistent with the right tenants. With the wrong tenants, you’ll also have to deal with late payments and possible damage to your property.
Pro: Capital Appreciation
Although you can certainly lose money in real estate, just as with any investment, over time, most real estate tends to appreciate. Land and property are always in demand, and supply in top areas always seems to be limited, which is why homebuilders have a thriving business. Your properties aren’t likely to double in value overnight, but over the long run, you can expect to make some good money if you buy at the right time in the right location.
As Robert Kiyosaki, famed author of the “Rich Dad, Poor Dad” series of books, has said, “Real estate investing, even on a very small scale, remains a tried-and-true means of building an individual’s cash flow and wealth.”
Probably the main drawback to all real estate investments is illiquidity. Unlike the stock market, where you can buy or sell shares in a fraction of a second, real estate transactions take time. In some cases, you won’t be able to unload a property you want to get out of for months. If you own in an undesirable location, selling may take years, unless you’re willing to accept a low price. However, Max Sharkansky, managing partner of Trion Properties, notes that on the upside, “Private investments (like illiquid real estate) are slower to respond to valuation shifts than public investments like stocks and bonds are.”
Pro: Deductions and Tax Benefits
As a real estate investor, you have access to a wide range of tax deductions and other breaks. All of the costs to run and maintain your property, for example, are tax deductible as an investor, as are any improvements you make. If you’re just investing in your own primary residence, you can deduct all of the mortgage interest you pay, which is usually the majority of your mortgage payments for a decade or more.
Holly Parker, multibillion-dollar broker and founder and CEO of The Holly Parker Team at Douglas Elliman, notes that “Real estate has incredible tax benefits. In certain situations, you don’t have to pay taxes on your gains from investment properties. You can also get a $250,000 tax break as an individual and $500,000 as a married couple.”
Con: Ongoing Expenses
Real estate is not a “set-it-and-forget-it” investment. If you buy a stock, you can put it in your account and never look at it again, and it won’t ever deteriorate or need any maintenance. Real estate, on the other hand, must be constantly maintained to keep its value. Whether it’s your own personal home, a long-term rental or a short-term resort unit, you’ll need to fix broken pipes, replace the carpet and repaint every so often, in addition to paying property taxes and insurance premiums. If you have a condo unit or a short-term rental in certain markets, you’ll also have to pay HOA fees and/or rental taxes.
As certified financial planner Mari Adam told the Wall Street Journal, “Even people who are very wealthy will buy real estate without understanding what it’s going to cost them.” Andrew Azoulay, a real estate broker at Douglas Elliman Real Estate, reminds investors to factor in the cost of maintaining a pool, tennis court and landscaping, if applicable. “You might think you’re buying a summer home so it costs you only in the summer. But it costs you year-round,” said Azoulay. All of these expenses come out of your cash flow, reducing the yield of your investment.
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