Real Estate Investing Pros and Cons: The attraction of financial freedom and a reliable, hands-off income stream has led to many real estate investors considering real estate as a passive income generator.
The promise of glowing property values, cheap capital and slim rental inventories in most markets has made more than a few hopeful would-be profit-takers into property owners. However, the road to real estate passive profits – where one does nothing is fraught with both roses and ditches.
We will conduct a comprehensive examination of passive income through property investment in this multiple part series.
Real estate is one of the world-renowned ways of making a substantial fortune, but the obstacles to achieving a lifestyle of passive abundance are far from as insurmountable as one might think.
The Real Estate Path to Passive Income – The Real Estate Investing Pros and Cons
Real estate investment has long been a foundation for wealth-building strategies. Because of the ability to generate a steady financial return with little effort, passive income is often the goal of the ambitious as they seek to build an escape hatch from their local rat race.
In this extensive guide, I wanted to talk about it all. So this is what I’ve done for you, I created this real estate investing pros and cons list to help you determine whether this is the right avenue for your passive income aspirations. Let’s get started…
Pros of Investing in Real Estate for Passive Income
Steady Cash Flow Through Rental Income
Real estate offers a relatively stable investment opportunity that generates a monthly cash flow in the form of rental income.
While stock dividends are never guaranteed, property investments can generate returns each month when tenants are living in the building.
The continuous flow of money is not only beneficial for the investor, but it also provides a cushion for weathering economic crises.
Financial experts agree that this steady cash flow can act as a safety net and provide a solid foundation upon which to build a diversified investment portfolio.
Potential for Asset Appreciation
Apart from the predictable and steady revenue stream that is generated by rental properties, investors can also benefit from rising property values.
Over time, real estate tends to appreciate, when you consider current rates of inflation.2 With regular income from tenants, this net operating income, combined with appreciation, ultimately adds up to a significant overall return on investment.
Leveraging Tax Advantages
Real estate investors have the unique benefit of leveraging the tax code, which is highly favorable.
Deductions for mortgage interest, property depreciation, and operating expenses can allow an investor to claim a substantial amount of deductions.
As a result, a portion of the property’s income, and therefore a portion of the investor’s tax liability, is shielded from the IRS.
All of these tax incentives result in significantly reducing your income tax liability, which in turn increases the after-tax cash flow from the property.
A Hedge Against Inflation
Real estate has long been regarded as a hedge against inflation. As a result the cost of living increases, so does the rental income that the property produces.
If inflation pushes the cost of living (i.e., the cost of operating and maintaining the property) up, then this is passed along to the tenant in the form of higher rent, and accordingly higher income to the investor.
Of course, the value of the property itself typically increases with inflation, preserving and potentially increasing an investor’s wealth.
Cons of Investing in Real Estate for Passive Income
High Initial Investment and Ongoing Costs
One of the most significant barriers to entry in real estate investment is the high initial capital required to purchase property.
In addition to the purchase price, investors must cover closing costs, renovations, and other associated fees.
Ongoing expenses such as maintenance, property taxes, insurance, and vacancies further eat into your profits.
Property Management Challenges
The successful landlord can maintain a positive cash flow. This makes effective property management crucial.
Landlords need to navigate repairs, tenant disputes, and the day-to-day operations of their property.
Meanwhile, absentee investors can expect to add another expense to their ledgers in the form of a reliable property management company, further reducing their overall return on investment.
Market Volatility and Economic Cycles
Real estate markets tend to vary with the same cyclical patterns as other markets. That is, some downturns decrease property values, and rental rates, and increase vacancies.
And these fluctuations can have impacts on the expected cash flow, and make it challenging to maintain your passive income(s) as you predicted.
Illiquidity of Real Estate Investments
Unlike other tradable securities, real estate is illiquid. This means it takes time to sell, and in most cases it can take months before real estate property can be sold.
This can dictate a significant downside for investors, as having immediate access to capital is essential in some circumstances.
Tips for Successful Real Estate Investment
Thorough Research and Due Diligence
Investing in property anywhere requires a lot of research and incredible due diligence. This includes understanding the local market, what renters want, and understanding property appreciation.
Simply put: do your research and due diligence, and you’ve already won half the battle against a bad investment.
Diversification in Real Estate
Like any investment, diversification is often key to mitigating risk. Instead of placing all of your capital into one property, consider broadening your investments into different types of real estate, such as residential, commercial and industrial properties, as well as different geographical areas.
Seek Professional Real Estate and Financial Advice
Don’t Go it Alone, Get Professional Real Estate and Financial As soon as possible, bring real estate agents, property managers and financial advisors into the loop.
The insight and support these experts can deliver is priceless.
Adopt a Long-Term Investment Outlook
Think Long-term Real estate investment is a unique animal in that it is a long-term proposition.
If you buy a piece of real estate, the benefits can and often will compound over time. Not to say there won’t be short-term hiccoughs.
But in the grand scheme of the decades, they often shrink back to blips.
Conclusion: Weighing the Art of Real Estate for Passive Income
Real Estate Investing Pros and Cons for Passive Income: Investing in real estate can be a wonderful path to passive income.
On the other hand, it can waste capital and time with little return, and maintaining properties, along with the hands-on labor, is not for everyone.
Remember, for every passive income hopeful, there is an equally motivated contrarian, eager to rain on your parade, and eager to point out the endless list of cons when it comes to real estate.
That being the case, as with any great investment, real estate has its own set of pros and cons.
Newbies and experienced moguls, whether you aim to buy and rent or fix and flip, would be wise to weigh the following before jumping straight in.
While investing in real estate can be a full-time job, it doesn’t have to be. In fact, those who generate passive income effectively are able to do so without the pitfalls mentioned above.
While it may not be one of the best full-time passive income opportunities, real estate can serve as a great way to generate a steady stream of passive income when done properly.
When the income becomes passive enough that you can foster the growth in other aspects of life, or use it as you see fit, it is called a financial revolution.
The key to figuring out whether or not real estate will provide the capital you need to acquire your next passive income property lies in asking the right question before doing so.
While there is money involved in any investment, real estate can be a real roadblock for the unprepared.
If you are brand new to real estate(Read More), there will be a lot of relevant information you will need to pick up all at once.
Getting yourself informed and up to speed with the most current passive income opportunities out there can serve you well.
Whether your business is purely passive or there will be some involvement, it’s a good idea to take a step back, cast a fresh eye over your strategy and re-evaluate your whole position.
Taking the time to come up with the best investment for promoting long-term success, no matter how enticing it may sound, is fundamental.
To truly succeed, real estate investing requires research, wise decision-making, and an open mind to the long-term view.