If you want to build wealth, prepare for retirement, or otherwise improve your financial situation, you’ll need to invest your money. Investing gives you the potential to earn money on your existing capital in a volume that outpaces inflation, ultimately helping you multiply your capital over time.
One of the most common forms of investing is buying stocks and bonds—two types of reliable assets that are easy to buy, hold, and sell. However, stocks and bonds aren’t everything, and they may not be appropriate for all investors. Instead, you might consider real estate investing, which has several advantages over other forms of investment.
The Advantages of Real Estate Investing
Let’s take a look at some of the biggest advantages of real estate investing:
- Options. When investing in real estate, you’ll have many different options for how to proceed. If you want to optimize for cash flow, you can invest in rental properties. If you’d prefer something with a higher long-term return, you can invest in a neighborhood that has an attractive growth trajectory. You could invest in commercial properties or residential properties, depending on your goals, or you could even try to “flip” a property to turn a quick profit. No matter which of these angles you choose, you’ll have thousands of potential properties to consider for purchase—and if you can’t make up your mind, you can choose to invest in real estate investment trusts (REITs), which function almost like stocks or ETFs.
- Separation from the stock market. While the general state of the economy can influence both stock prices and real estate prices, the stock market and real estate market function somewhat independently. The stock market can take a massive hit, while the real estate market remains alive and healthy. Accordingly, real estate allows you a convenient way to diversify your portfolio, and get away from the wild fluctuations of the stock market.
- Financial leverage. Most people don’t buy new properties all in cash, even if they can; instead, they make a reasonable down payment, and use a loan to pay off the rest of the property. It’s true that too much debt can work against you, especially if the prices of your properties begin to fall. However, in most cases, these loans grant you the power of financial leverage; in other words, you’ll gain access to far more buying power than you could generate on your own, using a small initial investment from you.
- Cash flow. If you’re purchasing rental property, real estate investment gives you a fantastic opportunity to generate cash flow. Let’s say your mortgage payment, insurance, property taxes, and other expenses for a property total $1,200 per month. You’re able to rent this property to a tenant for $1,600 per month. This tenant will be covering all your expenses, and giving you a $400 per month profit. Of course, there are other factors to consider; for example, you’ll likely need to pay for occasional repairs and renovations, which can eat into your profit margins. However, this cash flow can serve to stabilize your finances, and potentially serve as your retirement income.
- Long-term appreciation. If you intend to retain ownership of your properties for a long time, you can benefit from long-term appreciation as well. If you choose the right neighborhood, and wait a couple of decades, your property can easily multiply in value. This is especially powerful when used with a property that also generates consistent cash flow; you’ll be able to make a steady profit every month, all while your property gets more and more valuable.
- “Real” assets. Real estate investing also means owning “real” assets. Purchasing stock grants you partial ownership of publicly traded companies, but this ownership is intangible; it can almost be considered imaginary. But owning a piece of property grants you access to something physical.
- Tax deductions. Depending on how you plan your finances, you may also be able to take advantages of tax deductions and other financial incentives when purchasing property. This can significantly mitigate your ongoing expenses, and help you retain a profit.
Are There Any Disadvantages to Real Estate Investing?
After reading about these advantages, you may consider whether there are any disadvantages to real estate investing. Of course there are, as there are with any type of investment, but the disadvantages of real estate investing are somewhat limited:
- The knowledge gap. Getting started in real estate investing can be challenging to the unacquainted. You’ll need to learn a lot about what makes a property valuable, what makes for a high-growth neighborhood, and even the landlord-tenant laws in your area.
- Demand for initial capital. Even if you’re borrowing the majority of the funds you’ll need for your purchase, you’ll still need to provide a significant amount of capital upfront—often tens of thousands of dollars. If you don’t have much cash to work with, this can be a difficult obstacle to navigate.
- Choosing the right property. Not all properties will be profitable, or a valuable addition to your portfolio. Even for experienced real estate investors, choosing the right property can be a difficult endeavor.
- Unforeseen developments. Both good and questionable properties can suffer from unforeseen developments, like a major repair that costs tens of thousands of dollars or a tenant who refuses to pay rent. If you aren’t careful, these catastrophes can compromise the value of your investment.
The Importance of Balancing Your Portfolio
No matter how you choose to get involved in real estate investing, it’s important to balance your portfolio. That means investing in a mix of different types of properties, preferably in different areas, and investing in other assets to balance your exposure to the real estate market.