Considering today’s volatile markets and unpredictable political environment, many people are looking for other ways to invest their money besides traditional stocks, bonds, and 401(k)s. Real estate investing has jumped to the forefront as a way to not just save for the future but also generate cash flow and grow wealth. Like any investment, real estate has its pros and cons to be considered before jumping in. If you’re thinking of flipping houses or becoming a landlord, weigh the following before taking the plunge.
Direct Control – When investing in real estate, you have direct control over your asset. You select the property – value, size, neighborhood. You decide what repairs to make. You select your contractors. You choose to flip or choose suitable tenants. …. You get the picture? It’s in your hands to control and not up to the fickle markets or what some talking head or politician said in a news conference yesterday.
Insurance – You can insure your property. In fact, if you take out a mortgage, your lender will most likely require that you have property insurance. This easily mitigates potential losses from fire, theft, etc. Although the FDIC insures your money sitting in banks, there is no comparable insurance for monies invested in your employer’s 401(k) or other investment accounts. If your investment property goes up in flames, you’re covered. If the market and your 401(k) tank, your money is gone. You can even get insurance against loss of rents if you find yourself without a tenant for whatever reason.
No ups and downs – Traditional stocks are known to shoot up one day and plummet the next, leaving your nest egg empty and your nerves fried. And to the first point, you have no control over what will happen next. Real estate tends to be steadier and more predictable. As long as you’ve done your research, you will know what to expect in your market. Property values do not usually plummet overnight; you see it coming as the market slows and can change course as needed. If your market is slowing, you can speed up your current projects and start making lower offers on new properties you are reviewing. If your market is growing, you can ramp up purchases at higher prices knowing you’ll be able to sell or rent at higher prices as well.
Tax Deferral – When you sell a property, you have to pay taxes. However, using the 1031 Exchange program, you can sell one property and purchase another (of equal or greater value) and defer the tax liability. Think about the power in that! If all you can afford today is a small house that generates $100 per month cash flow, buy it. It will probably appreciate over time. Sell it for more than you bought it, and buy a nicer house that generates $200 per month cash flow. Repeat, repeat, repeat increasing your cash flow and equity as you go.
Rentals have some special pros to highlight, specifically dealing with your income and wealth.
• You can increase your monthly income. As long as your rent covers PITI (principal, interest, taxes, insurance) plus a little for maintenance, the rest goes into your pocket. Use it how you want, but I suggest investing in more rentals.
• Your wealth increases via equity build up / principal paydown. A portion of each rent check goes towards principal which increases the equity you have in the house. You don’t pay your mortgage; the tenant does.
• You can decrease your taxes. You can spend a little or a lot to repair a house. The losses (on paper) that you make while renovating a property can be used to reduce your tax liability. Check with an experienced accountant who is familiar with real estate to find out exactly how this can be done.
Time/Research – Unlike your 401(k) or the stock market, you can’t just review a brochure of curated investments and buy something today… and you shouldn’t. Not to say you can’t get started quickly, but real estate investing takes a little time and research to get up to speed. You don’t need to know it all, but you should think about where you want to purchase property, what are the values doing (going up or down), do you want to flip or rent, how big of a renovation are you willing to do? On the bright side, there are lots of books, blogs, and websites to peruse. An even better place to get started is your local real estate investing groups that can be found on-line. Just do a google search and go meet people who are already investing.
Contractors – The saying ‘herding cats’ is absolutely appropriate here. A fast, affordable, quality contractor can be difficult to find. Don’t get discouraged, but do prepare to go through several contractors before you find the right fit for you and your goals. Once you find them, be clear with what you want done, treat them well, pay them on time. You need them for your next job, too!
Not liquid – Real estate is, again, not like a 401(k) or stock. You can’t just click a button or sign a piece of paper to get your money out. You have to prepare it and then list it either for sale or rent… and wait. So, if you anticipate needing your money for something else at any given moment, real estate might not be for you.
To summarize, while real estate investing takes some work, the pros outweigh the cons. If you decide to dive in, do your homework, be patient, and watch your income and net worth grow. When you have questions or run into problems, network! Someone else has already been through it and can help you along.