What are the pros and cons of Investing in real estate?

The state of the real estate market in 2020 looked bleak when the onset of COVID-19 took away most jobs, revenue, and possibilities of buying a new property. Many people foresighted that the housing prices would drastically fall post lockdown

Much to their surprise, the U.S. housing market remains undaunted by the recent economic slump. It’s true that it took almost five months for sellers to make a full return into the housing market, but it seems like everything is getting at its original pace slowly.

Home sales have risen to a 14-year high. Home value growth hasn’t ended yet — Zillow expects seasonally adjusted home values to rise by 2.9 percent between September and the end of 2020, and rise a total of 7 percent during the 12 months ending September 2021.

More people are getting on the bandwagon to buy the new property before the price starts rising dramatically post-COVID lockdown. Mortgage rates for housing are anticipated to stay at near 3% over the next 18 months which will make homes more affordable. This will definitely help to finance a new home.

The national median asking price on Realtor.com in September 2020 was $350,000, up 11.1% compared to last year. Experts predict that the prices could rise even further due to heavy buyer competition and a significant shortage of supply.

The increase in sales suggests that the real estate market is gradually booming post-COVID lockdown. However, many buyers are careful about investing in their dream home. Let’s see what are the possible advantages and disadvantages of investing in real estate at the moment.

Advantages of Investing in Real Estate

Here are five advantages to investing in real estate.

Real Estate Values Appreciate Over Time

Not every real estate property appreciates over time, but well-chosen real estate located in the right neighborhood can appreciate at a rate the far outpaces annual inflation. It starts with searching for a quality property. Next, you need to buy it at discount. Taking a mortgage to buy a new property is always an option. The whole idea of the real estate transaction is to “buy low and sell high.”

Real Estate has Unique Tax Benefits

Owning a piece of real estate comes with many tax benefits over the long course of time. If you consider renting your property, the rental income is not subject to self-employment tax. On the other hand, the government offers tax benefits to real estate investors. And depending on your income level and classification as an investor, your rental property will give you an overage of tax deductions you can use against your other income. If you’ve owned the property for over 10 years, you can apply for Homestead tax exemptions.

It provides a steady cash flow

You can rent your property for a steady cash flow, also called “passive income”. Along with your primary job, you can keep earning money from your property. However, the money that comes in your hand is the cash left after all the bills have been paid.

It provides you leverage

Owning a real estate property allows you to use the power of leverage to grow your real estate holdings and accelerate wealth-building results. Leverage is the use of borrowed capital to purchase and/or increase the potential return on investment.

It provides a hedge against inflation

Inflation plays a key role in determining the future value of your investment. The rising prices due to a decrease in the value of money also raise the price of your property. With the rising prices of rents, property values, and other expenses, the value of the property will also rise. Hence, you’ll get more for your property than it was 10 years ago.

Disadvantages of Investing in Real Estate

Here are five disadvantages of investing in real estate.

Real Estate requires a lot of upfront investment

You can’t certainly think about buying a property on credit. Although a mortgage allows you to pay for the property, you would still need to provide a lump-sum down payment. To get started with real estate, you’ll need cash that covers the down payment plus expenses to repair and update the property to maximize rental income, and other regular expenses like property taxes, insurance, mortgage payment, maintenance, etc.

It takes a lot of time

Along with investing a lot of time in learning and managing your real estate portfolio, you’ll have to wait longer to see a positive return on your investment. You can either lose or make a lot of money in real estate investment in the long run. Renting out the property is one of the best ways to earn income through investment. If you don’t rent it out, you’ll have to keep paying taxes and maintenance costs which will increase your expenses on top of the investment. The only way to gain a profit in the future is to sell it at a high cost.

Problems of Renting a Property

It’s unlikely that every tenant will be nicer. Many tenants can cause problems and cost you money in the long run. You’ll have to pay expenses on maintenance, to repair damages, and other expenses caused by your tenants. Most states are tenant-friendly where you must take them to court before you can seek possession of your property from them.

It has Low Liquidity

Many investments like stocks and mutual funds are highly liquid. You can easily sell them for a profit in a fraction of a second. But real estate investments are comparably illiquid because properties can’t be quickly and easily sold without a substantial loss in value.

You must be prepared to own a property for months and years before you can actually sell it off for a higher price. You must also be prepared to spend on taxes and maintenance expenses on your investment.

It comes with unique risks

Most real estate risks can be mitigated by prior planning. You should always consult with a tax professional with experience in real estate, a real estate attorney, and a realtor before investing in real estate.

Here are some of the significant risks of investing in real estate.

• Buying the wrong property at the wrong time

• Increased liability for accidents that may occur on your property

• Getting stuck with a “professional renter” who knows how to work the legal system at your expense

• Getting over leveraged. This is a pitfall that brings down many real estate investors. You need to be able to make monthly payments on your debt despite market dips, tenant problems, property vacancies, unexpected repairs, maintenance costs, and other expenses that are part of doing business when investing in real estate.

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Mark Grey Law PLC is the Best Attorney Law Firm in Ankeny. We run a small private firm with a few of the best real estate attorneys in Ankeny. Get in touch with us to learn more about the real estate market.