With mortgage interest rates at an all-time low, now is the time to invest in real estate. If you’re new to the topic, you likely have a myriad of questions: Why should I choose real estate over other investments? I’m not rich – can I still invest in real estate? Once I buy a home, should I flip it and sell it? Or, should I hold it as an asset and rent it out?
If you’re looking for answers to these questions, keep reading, and you’ll soon be on your way to becoming a smart and successful investor.
Why invest in real estate?
Investing in real estate is something often perceived as out of reach for “normal people.” But, with common sense and proper information, it is actually pretty accessible for many. Furthermore, it is a relatively safe and rewarding investment, in comparison to other opportunities, like stocks. Here are some reasons why you should invest in real estate.
High tangible asset value
Since everyone will always need a home, and there is only so much land available, both will remain valuable. This article by Entrepreneur compares the value of real estate to a new car, the latter of which decreases in value over time, making the former a much more sound investment.
In fact, real estate tends to appreciate in value over time. Even when past bubbles caused depreciating home prices, the housing market has always recovered.
Real estate investments are also a way to diversify your portfolio, thus lowering your overall risk. Homelight explains that you can predict the cash flow of real estate investments, which means you won’t be taking a huge gamble on whether or not you’ll have a return.
These types of investments give tax benefits that you don’t see elsewhere. You can often deduct operating expenses, mortgage interest, insurance, and property taxes.
Once you decide real estate investing is for you, it’s time to find and buy a home. Say you find a great deal; oftentimes this can be from a foreclosure sale or because the home needs updates. One strategy is to improve it, then sell it for a profit. In an article by Investopedia, they advise focusing on speed as opposed to maximum profit, because you’ll have to pay homeownership costs each day that passes. Below are some pros and cons of the flipping method.
Faster return on money
You will receive your initial investment plus (hopefully) profit as soon as you sell. These gains can be used to fund another flip or a buy and hold investment.
In comparison to buy and hold, flipped properties will not be affected by long-term real estate fluctuations; thus potentially offering a better return on investment.
Hassles you would avoid include dealing with tenants, long-term maintenance, and other carrying costs.
High investment costs
Unless you’re paying in cash, short-term investments can be expensive due to higher interest rates. Paying transactional costs can also add up.
A quick flip can create swings in income that can boost your tax bill. Additionally, if you own a property for less than a year, you’ll have to pay a higher capital gains tax rate based on your earned income.
Finding a profitable property to fix and flip is harder than it sounds. This is particularly true if you’re new to flipping and lack the experience and time.
Buy and hold
Another investment method is to buy a home, fix it up if it needs to be, then rent it out. These investments are longer-term and rely on monthly rental revenue, rather than a bigger, lump sum of profit. Bigger Pockets says that this method has historically helped investors amass great wealth and cash flow. Check out the pros and cons of buy and hold below.
Higher returns overtime
As mentioned above, your property will likely appreciate over time. When you do choose to sell, a large profit can be made.
Steady passive income
Once you find reliable renters, you’ll be receiving money each month. This can be used to make mortgage or maintenance payments, used towards other investments, or simply cash in your pocket.
Investment incomes are taxed at lower rates, and you can write off expenses associated with home ownership and renting. Remember that capital gains tax? Since you’ll likely own the home for more than a year, you’ll pay the lower long-term capital gains rate should you decide to sell.
Fluctuating market conditions
Although many aspects of buying and holding can be easily predicted, long-term market conditions cannot. An unfortunate situation would be buying in a market that has valuable properties right now but loses its value in the future.
Management and legal responsibilities
Managing a property or multiple properties is a time consuming and potentially stressful process if you’re new. You could always hire a property management company, but they’ll charge a hefty fee.
Lack of good tenants
Whether you’re listing your property on Craigslist or relying on word of mouth referrals, finding a good tenant may be difficult. It takes time and patience, and it may result in your property sitting vacant for periods of time.
Flipping is ideal if you have less money to invest and need the profit from a quick flip to fund more investments. Bigger Pockets recommends this method to beginners who are willing to put in the work to generate larger cash profits. Buy and hold, on the other hand, is ideal if you have more money to invest and less time to dedicate. Investopedia suggests this method to investors whose core portion of overall portfolios is in real estate.
Article by Megan Kong, REX Homes
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