With so many investment options out there, people tend to have a hard time choosing which one can be more profitable but also suitable based on their situation, budget, and opportunities.
If you ask us, some options have been around for decades, and if people continue investing in them, then that means they must still work, but it doesn’t mean they could work for you.
We know; this doesn’t actually clear your doubts but rather brings many more if you were thinking of an “old” business option to feel safe about your investment.
As much as we would like to go over many and help you with your doubts in specific, we can only focus on one that we know you and many are wondering about: Real estate.
Real estate investors have been a thing for a very long time. If you have ever considered being one, there’s a lot more you need to consider besides the usual “sales” personality and having enough capital.
This takes us to the main question and why you are here: Is real estate investing worth it? We will answer it right here, but first, let’s leave a few concepts and elements clear.
What Is Real Estate?
Most people have a general concept of what it is, and as hard as it is to be wrong with it, there’s more to it than the usual “buying and selling properties” thing.
Thus, we found it crucial to go over a short but very necessary definition.
Real estate not only refers to the land but also any permanent improvements that are attached to it, either if they are natural or man-made.
Unlike many beliefs, these improvements don’t include the common walls and extra sections but elements like water, trees, buildings, fences, bridges, and minerals.
The reason behind the name “real estate” is that it is actually a form or type of real property, which is completely different from what most people know as personal property, which is anything that is not permanently attached to the ground, such as vehicles and boats, jewelry, furniture, and farm equipment.
Since real estate is based on land and elements attached to it, it is only natural to find categories in it, being the residential and commercial the most common ones everyone knows about.
However, we have other three that include industrial, raw land, and special use. To make them a bit clearer, this is the essential information:
- Raw land: It refers to the baseline where any type of real property can be built. The word “raw” clearly refers to any undeveloped property and vacant land for purchase or use.
- Residential: Houses, apartments, condominiums, townhouses, and anything that is considered a living arrangement for individuals regardless of the number enters this category.
- Commercial: It includes the land and buildings that are used for business purposes. Office buildings, shopping malls, stores, and anything similar are included here regardless of the niche.
- Industrial: Industrial businesses have different activities as commercial ones, which require different land and properties. Thus, they are included in this category.
- Special use: Usually, anything that is outside of the previous purposes or needs.
How Does Real Estate Investment Work?
Although real state is very simple to understand, it isn’t the same when it comes to the investment part.
If we’re honest, we quite didn’t understand it at first since it isn’t only about buying and selling as we previously mentioned. Therefore, our doubts grew when we were told this.
However, we want to make this simple and avoid all the complications, so this is what you need to remember (essentially).
Real estate investment refers to a financial strategy that involves the ownership, management, purchase, rental, or sale of real estate for profit.
This means you can focus on any of the previous actions regardless of the type of real estate you choose from the ones mentioned before.
Now, the complicated part is when you start working towards the investment.
Although there are many ways to invest in real property, they all depend on the same economic growth and factors to make a profit, so you need to be well-versed in the usual economics theme and work around how a market moves.
When investing in real estate, you need to make sure the property has a higher value than what you will invest.
Next, the property’s cost must not exceed its increase in value. What does this mean?
Usually, and regardless of what you do with the property, you will need to work around the remodeling or renovating process or anything required to make it more valuable.
This can lead to more expenses than what it is actually worth, and it is a big red flag when this happens.
With this clear, you must know there are many types of investment properties or more like methods to approach this investment project.
Good investors will usually choose by focusing on the type of profit and how much they can get from it.
These types are focused on what you are familiar with as short (quick) and long-term profit.
You will need to choose one based on what is most appealing to you and the money you can actually invest in this business option.
Learning about the types is quite simple as the short or quick way refers to investing in properties that you intend to sell quickly.
Long-term investing is buying property to rent out or lease for a long time and gaining both rent and increasing the property’s value over time.
Basically, you choose the type of profit you need and base your decision on what is more convenient for you as well since it isn’t the same to be just a real estate seller and investor compared to becoming a landlord.
Quick Investment vs. Long-Term Investment
We find it pertinent to focus more on this part as you are here to decide whether this business is a good option or not.
If you end up concluding it is, you will need this info, or maybe you already need it in order to make the decision in the first place.
Thus, take note of what you must consider when working around these two types of investment property:
- Quick Turn Investing.
Investors who are looking to make quick turns must have a good understanding of local property trends and local property values since they won’t keep them for long.
Quick turn investors should also be able and willing to take action quickly, but for it, good-decision making is clearly necessary.
The good part about choosing this investment option to gain profit is that you have two alternatives: You either go for wholesale or retail instead.
The wholesale option kind of follows what you know as brokers since your role will be pretty much like one of those.
You will need to find a good property and sign a contract to purchase it but without putting money in advance. Then find a buyer willing to pay more needs to be found.
The wholesale investor assigns the contract to the buyer they find and attaches a charge. This fee is what ends up being your profit.
Now, the retail option is what most people know about.
It works around buying a property listed at a low price, fix it up to make it marketable, then sell it to a new owner (usually works around residential properties) who will be using it and is willing to pay for what you have priced it.
The concept or action “flipping houses” is what is connected to this method.
- Long-Term Investing.
Long-term investors depend on steady growth in property values and rental income over time.
Although you don’t receive an immediate profit in terms of how much it is, it can be more profitable in, of course, the long run since the profit is bound to be more steady and almost safe.
But for it to work, you should be able to rent the building or house monthly to pay the mortgage or have your return of capital.
Investors usually increase the monthly rent by a small amount to cover repairs and maintenance and use this as a way to add a small profit.
The real benefit of long-term investing is the fact that the building pays its mortgage and maintains itself through rents charged to tenants.
The building is self-sufficient and, if an investor adds a buffer to the rent, it will also generate monthly cash flow.
Of course, it can be a bit complicated if the building or property loses its value in a few years due to market or specific situations or having to deal with all the required needs, like communication services, handling accommodation requests, basic materials, and continuously working in the property.
Finally, Answering the Question: Is It Worth It?
We apologize if all the information has made your brain go for a quick trip, but it was necessary to understand that every investment option comes with pros and cons.
It will be easy to evaluate them when you know what the investment involves overall and how you can adjust your situation and capital to them.
Now, we will start with a VERY biased answer to the question: It is worth it.
You see, real estate is something that won’t get old anytime soon because people are always purchasing properties and trying to find better options. Also, we think it is better when compared to initial public offering and having to deal with consumer discretionary stock in certain cases.
If you play it smart, you can make a lot of profit from it and even enjoy your life without having to work in anything else.
Besides, this isn’t the only benefit, and here’s when we start to list them:
- You can aim for passive income.
Part of being a real estate investor is forecasting cash flow and finding ways to increase revenue or reduce expenses.
Thus, this can lead you to know how to create passive income that will last for as long as the property is owned, and if you focus on the long-term investment, this benefit makes much more sense.
This can be possible if you rent your property at a reasonable price and raise it to keep up with inflation while also adding the right insurance for it.
- Real estate offers tax benefits. Yes, for real.
Many don’t know this, but you can deduct mortgage interests if you own a house or specific properties. This includes state and local property taxes as well.
Operating expenses and costs for investment properties can enter the list depending on your location,
Capital gain taxes are typically 15% to 20%, which are much lower than the personal ones you have to handle.
Finally, you can defer capital gains if you use money from the sale of one property to purchase another one, which is a huge part of this real estate investment and why many choose it as well.
Because the money was used to purchase another property, it is not subject to tax, but you need to report to the IRS for this.
- You can reduce your mortgage.
If you choose the long-term investment, it comes with the option of reducing the mortgage as it starts to pay itself with the payment from your tenants.
Most real estate investors working around this are able to rent the property within the first two months, which means they barely pay anything from the mortgage that comes from their own bank accounts.
- Too much money? That’s not the case.
You must have noticed something by now: You don’t really need to invest a lot of money in this business as you can work with mortgages regardless of your approach to real estate.
In many cases, you can put down as low as 8% to buy a property and then use the bank’s money for growth.
- Real estate’s value tends to increase.
This can be considered a volatile business, but in fact, real estate has much more tendency to increase than the opposite, which is why it is kind of “safe” in this matter.
For example, a building itself will likely increase in value, and the land on which it is built will usually appreciate over time.
It is not unusual for land to be more valuable than the house it stands on in some markets. Or for the land’s value to keep rising even if it doesn’t have a house.
- Real estate can be passed to your heirs.
Real estate can be a great way to leave a lasting legacy for your family or loved ones as they will either be able to live with the money they get or even take it to the next level and make a fortune from it.
You will not only give your heirs an income-producing property but also an asset that appreciates. So, it is only logical that this legacy can be better than the amount of money you can probably leave them.
When doing this, they can choose to keep the property and allow the legacy to continue, or they can sell it and make profits based on what is better for them and the situation.
- Build your curriculum.
Even if you work in another niche, you can focus on real estate as well.
Usually, many people appreciate the fact that you are knowledgeable in the market. They consider real estate investors to be savvy, have web experience based on today’s world, and are often very into trends and economics. Thus, you get more curriculum without noticing it as well.
Is Everything Pink in Real Estate Investment?
With the pros and reasons we gave you to support our personal opinion, we also have to enter the face where we need to be objective: Real estate isn’t perfect.
As stated paragraphs ago, every business option has its perks but also disadvantages, which must be considered if you want to come up with a decision you won’t regret.
Therefore, this is what you need to consider:
- You don’t have guarantees.
As we mentioned, real estate tends to increase in value or appreciation, but it isn’t 100% accurate.
This means there’s no guarantee you will actually make money in the long-term as everything is about predictions and the actual market and how it looks in a few months or years.
However, there’s always “something” that could happen and bring down your properties.
- Being a landlord might not be your thing.
To be a landlord, you must be a certain type of person or, at least, be patient and know the work can be tough in the long run.
You usually have to handle repairs, deal with any disputes and be usually available for your tenants as they require for most emergencies.
Of course, the solution of finding a manager for it is possible, but consider how good this can do for your property.
- It is not easy to get financing.
Suppose you have good credit and a steady income. In that case, it is usually easy to get financing for owner-occupied properties (those you will use for either commercial or residential purposes and not sell them).
But when it comes to real estate investment, lenders aren’t always happy to give the money as they don’t notice a huge profit from it with the interest rates that are always set.
Thus, most real estate investors have to rely on either their capital, central banks, and similar institutions, which means the portfolio of possible financing is reduced.
- Cash flow isn’t actually guaranteed either.
It is debatable, but if we have to be the most real, it isn’t always guaranteed you will have tenants or sell the property for the price you want.
First, if you are unable to pay your tenant’s rent, your mortgage and other expenses will be due. Even if you don’t receive rent, a mortgage means you have to continue paying it.
To be able to deal with any circumstance, you need a solid emergency fund, and your personal cash flow is the one affected when your quick turn investment doesn’t work.
The Verdict: Should You Go for It?
Leaving aside our biased opinion, we think it is a matter of your situation and possibilities.
If you don’t have a good credit score, it will be hard to find financing, and the idea of real estate will be quite hard to approach and carry out.
But if you aim to have tenants, come up with profits in no time, and have the budget or possibilities for it, why not?
Also, as volatile as it might sound, real estate investment is also a try and error. You will usually have to work on different properties before you are finally an expert on them.
Based on this, we consider real estate is actually worth it because it not only has more pros than cons focusing on the ones above. In general, it is an investment that has been proven to work.
Real estate investors are everywhere, and the good part is that it isn’t hard to make yourself a place in the industry despite this.
However, we would suggest you go over all the information again, take notes, and determine if you can handle the basics: Financing, common requirements, how much you can truly invest and afford, and what is the best type of investment for you.
When you have a clear idea, come up with the reasons why it is or not a good idea for you to work around this.
If you decide to start, we recommend just aiming for small properties and investments you can “practice” with and try to choose a market or area in the city that is actually profitable.
Can you take courses or some lessons? Yes, they exist. Then do it.
The more information and preparation you have, the bigger your opportunities for success will be, and we are confident you will feel happier with your informed decisions in the short and long run.
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