Contrary to early forecast models, the U.S real estate sales and brokerage industry saw an average growth of 3.8% per year between 2017 and 2022. Statista expects this trend to continue - and expects the sector to grow by an average of 3.61% each year between 2022 and 2025.
Whether the drivers of this growth stem from remote working patterns or fear of inflation, one thing is clear. Real estate is a booming market that offers savvy investors a dependable asset class for portfolio diversification and risk reduction. With such a vast range of investment opportunities and avenues to entry, investing in real estate can be a very profitable venture when approached correctly.
As with everything else in life, real estate investing isn’t all roses and rainbows, as with everything else in life. Real estate investments have their pros and cons, as covered in the rest of this article:
- Real Estate Pros and Cons
- The Pros of Real Estate Investment
- The Cons of Real Estate Investment
- Why Work with a Real Estate Investor?
The Pros of Real Estate Investment
Savvy investors consider real estate a safe investment option for a number of reasons. Below are some of the most obvious pros of investing in real estate:
- Real Estate Assets Are Tangible
For investors that prefer assets that they can touch, feel, and ‘fix’, real estate offers more ‘tangibility’ than assets like stocks that can only be interacted with from behind a screen.
Tangible assets can offer the psychological benefit of physical interaction. For example, an investor might gain a sense of satisfaction from visiting a previously dilapidated apartment unit that now houses families and provides them with an attractive place to live.
- Investment Property is a Source of Passive Income and Cash Flow
Real estate investments are a dependable source of passive income. By purchasing a rental property and leasing it out through a specialized real estate investment and asset management firm like CURATED., investors can enjoy cash flow from monthly rent payments.
This is a great way to generate passive income without active involvement in the intricacies of property management.
- Real Estate Offers High ROI
Real estate investment has been historically considered one of the most reliable ways to generate wealth. One reason for this is that real estate offers a high return on investment (ROI).
The potential ROI achievable from investing in real estate can be significant if approached correctly. For example, fix-and-flip property investments can attract a selling price that is significantly higher than the combined cost of purchase and cost of renovation. Even leased properties can generate significant rent payments that add up over time.
- Real Estate is a Safer Hedge Against Inflation
Inflation is the inevitable increase in prices as money loses its value over time. Because inflation reduces the current value of future earnings on mainstream assets like stocks and bonds, it spells trouble for investors who primarily depend on these assets. For this reason, a growing number of investors prefer real estate as a safe hedge against inflation - because the value of real estate is relatively immune to the performance of stocks and bonds. In fact, increases in the prices of real estate appear to have historically coincided with rising inflation.
Image Source: BlackRock
A recent study by BlackRock, an asset manager, measured the average ROI in different premises over 20 years. The findings suggested that the total returns on privately-owned property assets outperformed those on main stock and bond indices when inflation was higher than 2.5%.
This means that while other investors panic over the potential battering that their assets could take during periods of inflation, real estate investors can enjoy the peace of mind from knowing that their investments would be worth more in the future.
- Investment Property Provides Tax Benefits
One of the biggest perks of investing in real estate is the special tax benefits that investors enjoy. Real estate investors can deduct property-related expenses incurred from the management and maintenance of the assets - property taxes, mortgage interest, management fees, building maintenance and repair costs, cost of travel to inspect properties, etc.
Income from rents is also exempt from self-employment tax. In addition to this, the government also provides attractive tax benefits that help real estate investors build wealth over time. Some of these benefits include reduced taxes on long-term profits and depreciation.
- Real Estate Provides the Power of Leverage
The use of borrowed capital to purchase a property (rather than self-funding) is called leverage. By using the power of leverage, investors can quickly grow their portfolios and build generational wealth in a relatively short time.
Leverage can be used to minimize risk while empowering investors to achieve significant gains from their investments. Investors can acquire assets worth more than their available funds or spread capital across multiple properties.
- Real Estate Assets Appreciate with Time
Unlike other forms of investment, the value of real estate tends to increase with time. This is due to a number of factors, including population growth, inflation, and the many uses that real estate can be put to (residential, commercial, industrial, etc.).
As such, real estate should be considered a long-term investment that empowers investors to reap the benefits of price appreciation over time. Additionally, this also makes real estate a great asset to pass down to future generations.
- Real Estate Helps to Build Equity
Another great benefit of investing in real estate lies in the assets’ potential to build equity as real estate appreciates. As the value of a property increases, so does the investors' financial stake in the property. Equity is the amount of money the investor is entitled to from the sale of the property, after paying the mortgage lender. In other words, it is the difference between a property’s market value and the outstanding mortgage balance.
As investors make regular mortgage payments, they also build equity in their properties. Over time, this equity can be used to secure more financing which can be put towards other investments.
- Real Estate Offers More Control Over Assets
Real estate is a physical asset that investors can manipulate and add value to - unlike stocks or other intangible securities that can be harder to understand or manipulate.
For example, real estate investors can upgrade their assets through renovations, rent increases, and other strategies that increase the value of their assets. They also have the ability to handpick their tenants and negotiate lease agreements that fit their needs. This added control can be a great advantage over other investment options.
The Cons of Real Estate Investment
As with investments in other securities, investments in real estate do not come without risks. Here are some of the cons (or risks) that investors can expect when choosing to invest in real estate.
- Real Estate Assets are not Liquid
Liquid assets can be easily exchanged for cash, at short notice. The degree of liquidity an asset has depends on how easy it is to exchange it for cash (with cash representing the most liquid asset). By this definition, real estate assets are non-liquid as they can be challenging to exchange for cash.
The sale of properties can take months to complete, and this can be especially challenging during a market downturn when buyers are scarce. For this reason, investors are best served by a mindset of long-term gains, rather than that of quick rewards.
- Real Estate Investment Needs Significant Capital in the Beginning
Another downside of real estate investment is that the cost of acquiring a property can be quite substantial. Investors will need access to a significant chunk of capital to take advantage of the opportunity to secure exclusive assets. For example, real estate investing and asset management firms like CURATED. require a minimum starting capital of $100,000 to access investments in lucrative multifamily opportunities.
So property acquisitions require a significant amount of capital - but what about leasing? Leased properties still require repairs and maintenance. For this reason, investors should be prepared to set aside a significant amount of capital upfront at the beginning of a real estate investment venture. Fortunately, with the right investment strategy, investors can generate cash flow within a reasonable time frame and start offsetting their huge capital costs.
- Real Estate Investments Have a Potential High Risk
Especially for inexperienced investors going at it alone, real estate investment ventures can be quite risky. For one, the market for real estate can be cyclical, meaning that prices can go up and down unexpectedly. Inexperienced investors could risk returns by not having implemented strategies robust enough to weather cyclical market prices.
In addition, property values are subject to interest rates and other economic factors. Unfavorable economic conditions could lead to an inability to sell real estate assets at the desired time or at the desired price.
- Real Estate Requires a Time Investment
Investing in real estate requires a significant time investment. DIY investors intent on self-management will need to dedicate time for property viewings, negotiating lease agreements, finding suitable tenants, hiring maintenance contractors or even acquiring property maintenance skills.
Also, investors need a lot of patience as real estate investments can take a long time to pay off. Unlike stocks or mutual funds, which may give you a return in just a few months, real estate investments can take years to return significant profits.
- Real Estate Investment Requires A Lot of Research
Investing in real estate also requires a lot of research. Investors need research to understand the investment potential of each location, as well as the impact of regional infrastructure on neighborhood potential.
Apart from location suitability research, there’s also a need for property-level research. Property analysis includes assessing the size of the property as well as the allocated land area, age of the building, upgrades and modifications done (if any), etc. For investors going at it alone rather than with an experienced partner, portfolio performance can rest heavily on the quality of research carried out.
- Real Estate Investing can come with Management/Tenant Problems
Another downside of real estate investing is that it can come with management and tenant problems. For example, there might be a need to evict troublesome tenants that repeatedly vandalize property or break lease terms and conditions.
Also, depending on the strategy employed, real estate investments almost always need a system in place for repairs and maintenance. Whether property management tasks are carried out in-house or outsourced, they can be costly and time-consuming if not managed by competent partners.
- Real Estate Tax Benefits Might not Apply
Tax benefits from investing in real estate sometimes come with income restrictions, and may not apply to certain income brackets. It is important for investors to contact qualified, experienced property accountants for advice before venturing into a real estate investment.
Why Partner with a Real Estate Investor?
Given the pros and cons involved in investing in real estate, it is clear that making the right calls in real estate can help investors realistically build generational wealth. On the other hand, a number of the risks involved in this venture can be mitigated by joining forces with a seasoned partner with key resources and experience.
Investors might choose to work with a professional real estate investor if they lack the time to invest in market research, or the experience required to make wise decisions. Also, uncertainty over the level of risk involved might require a strategic partnership with a professional real estate investor to help investors tread wisely to realize passive income from their investments.
With the pros and cons of real estate investing sufficiently covered, the next steps are yours to take.
If you are ready to start building generational wealth by investing in real estate, a professional real estate investor and asset management firm like CURATED. can help you realize dreams of portfolio diversification with heavily mitigated risks.
And if you're not quite ready yet, that's okay too. Just keep doing your research and learning from case studies and industry successes until you're ready to take the leap into real estate investing.
Whatever you decide, make sure that you make an informed decision about whether or not this type of investment is right for you. Contact a professional real estate investor today to learn mor