Is Real Estate a Good Investment?

Is real estate a good investment? Well, that depends.

Whether real estate is a good investment will depend on several factors like your disposable income and investing goals.

You also need to consider what type of investment you’d be interested in.

Each type of investment has its own benefits and risks, and you should educate yourself as much as possible on those before you write the check.

Read our guide to learn more about buying and selling real estate and determine whether it’s right for you.

• Is Buying Real Estate a Good Investment? Potential Benefits
• Is Buying Real Estate a Good Investment? Potential Downsides
• Potential Risks & Benefits of Popular Real Estate Investments
• Should You Invest in Real Estate?

Is Buying Real Estate a Good Investment? Potential Benefits

Different types of investments have their own pros and cons, and real estate is no exception. While investing in real estate might not be right for everybody, there are some key potential benefits to consider. So, why is real estate a good investment for some people?

One of the benefits of real estate is the fact that it can generate cash flow. This cash flow often comes from renting out real estate that you’ve purchased, which means you could potentially receive regular income from real estate investing. Cash flow offers more potential flexibility, which is important to many investors.

Real estate investing also allows means you may be able to take advantage of tax breaks. You could potentially write off the mortgage interest you pay on a loan, maintenance expenses, and more. 

These tax breaks give investors the opportunity to get the most out of their investments.

Over time, real estate tends to increase in value, which means investors also typically earn money with real estate through appreciation. Simply keeping up with maintenance and owning a home for several years could potentially earn back a lot of money when the house is sold.

This is why many investors hold several properties.

Is real estate a good investment? It all depends on your financial situation, your risk tolerance, and your investment goals.

Is Buying Real Estate a Good Investment? Potential Downsides

While real estate can be a good investment for some investors, it’s not always ideal for others. There are potential downsides, including possible gaps in cash flow and a large amount of capital required to invest.

The first thing to remember is that earning off real estate investing isn’t guaranteed. Like any investment, you can’t predict whether real estate will appreciate or depreciate, and so many factors affect home prices. Just because you could earn money by investing in real estate doesn’t mean you’re going to, even with REITs.

Investing in real estate can also require significant capital. You have to make a downpayment on the home you’re investing in, plus you have to be able to pay your mortgage and other bills each month. If you don’t have good credit or a stable income, qualifying for a mortgage loan can be even more difficult and may require even more capital.

If you plan on managing your own rental property, plan on the possibility of needing to invest a lot of time. From learning all the real estate terms to keeping up with routine maintenance and making important decisions about renovations and upgrades, being a landlord is a busy job. While you can hire a property management company, that’s going to reduce your profits.

Finally, there’s no guarantee that you’ll find tenants to rent to, so you may experience gaps in cash flow. If you’re relying on the cash flow from your rental property to cover monthly mortgage payments, this can be a big problem.

So, is real estate a good investment? It all comes down to how these benefits and downsides of real estate investing may affect you.

Potential Risks & Benefits of Popular Real Estate Investments 

Below are details on a few of the more common real estate investment types.

Individual direct ownership

This category of real estate ownership covers buying properties on your own (maybe with a spouse) and handling everything related to operation—such as maintenance, leasing, and management of the property—yourself or hiring a property manager to do the job.

Benefits: You would make all decisions, earn all profits (if any), and directly control the asset.

Risks: You could face the possibility of bad tenants and other management hassles, making a poor financial choice, losing money on the sale of the property, and assuming full liability past insurance coverage.

Partnerships with close or well-known associates

You could also partner with a friend, a small group of like-minded investors, or family members.

Hopefully, you know your co-investors well and their financial position, motivation, work ethic, and desire to share in the management of the property.

Two things you may want to consider doing to help potentially mitigate risk include: 

1. Have a written agreement between the parties.
2. Make one party responsible for the management of the property (or managing a property manager).

This can help prevent disputes over who handles the problem if a major issue arises.

Benefits: You would share decision-making and profits, and all partners directly control the asset. Having partners can be a plus as long as all partners are on the same page.

Risks: You might choose partners who don’t have the financial wherewithal needed to handle the major issues, or partners whose strategies for renting, managing, and/or improving the property are not aligned.

Plus all the risks in the individual direct ownership category above.

General or limited partnerships

These investments—including tenant-in-common investments and private real estate investment trusts (REITs)—are pitched in newspapers, at real estate clubs, by some financial institutions, and by investment groups.

In these investments, you are trusting someone else, the “sponsor,” to handle a huge portion of your net wealth.

The biggest issue with these is that most investors don’t do even the most basic due diligence on the investment sponsor, and even if they want to it’s hard to do.

Few investors, for example, review a sponsor’s credit report, detailed investing history, and tax returns on past deals.

Nor do most investors contact banks, check criminal or civil litigation histories, or consult lawyers and others the sponsor has dealt with in past real estate deals.

Benefits: You could get a fair return on investment for the risk. You wouldn’t deal with management hassles, and the sponsor probably has more investment experience than you do.

Risks: You would have no control and potentially could face dealing with unscrupulous sponsors, personal guarantees and liability, low investment returns, and loss of your investment.

Publicly traded real estate investment trusts

These are really investments in a big company that is involved in the business of buying and generally owning property.

A REIT buyer is investing in the ability of management to make good decisions on the shareholders’ behalf.

There are many well-known publicly-traded REITs with long-term operating histories and audited financial statements.

So you’d want to look at a particular company’s results and dividends before making a decision on whether that company is a good investment for you.

Benefits: You’d have no management responsibility, no liability past your initial investment, experienced management investing your money, and liquidity in selling the shares.

Risks: You could lose your total investment. Shares and company value are subject to regional, national, and stock market influences and risks, which could diminish share value even if the company is relatively strong and well managed.

Should You Invest in Real Estate?

If you’re thinking about investing in real estate, there are several factors you should consider first:

• Requires an up-front investment.

Real estate investing may require considerable discretionary income. While REITs offer a low-capital alternative to simply buying property, more capital can allow you to earn more money. These larger returns typically come from commercial real estate and residential rental properties.

• Time and effort may be required.

If you decide to manage rental property, do your research before you invest. Being a landlord requires a lot of time and effort, and that includes the time you’ll need to spend learning how to be a good landlord.

• Steady income isn’t guaranteed.

Another thing to consider with rental property is that you may experience gaps in cash flow if you can’t find someone to rent to. If you are planning on investing in rental property, it’s important to prepare for potential gaps in cash flow.

At the end of the day, it’s up to you to decide whether you should invest in real estate or not. You can always consult a financial advisor for further advice.

Make Informed Real Estate Investment Decisions

Decision-making is an important part of investing, especially when it comes to real estate investing. You should consider your financial situation, your investment goals, and your risk tolerance before you decide to invest in real estate.

If you need help keeping tabs on your investments, Mint is an easy-to-use tool you might want to consider using. With Mint, you can track all your investments in one app, so you can see if you’re on track to meet your goals and whether you may want to make adjustments to your strategy.

If you want to make investing a little more convenient, try Mint today.

This is for informational purposes only and should not be construed as legal, investment, credit repair, debt management, or tax advice.  You should seek the assistance of a professional for tax and investment advice.

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