Few industries globally are as lucrative as real estate, with revenues in the sector surpassing $4.24 trillion in 2020. And with the skyrocketing demand for both commercial and residential space on the rise, these revenues will only keep soaring in the future.
With the continued prosperity of the real estate sector, it’s no wonder the industry continues to attract so many investors. Currently, an estimated 35% of Americans say real estate is their preferred long-term investment.
But investing in real estate isn’t all sunshine and rainbows. There are certain real estate risks involved as well. To be a successful investor in the industry, it’s important to fully understand not just the strengths of this amazing sector but the risks as well.
So, exactly what are the risks and benefits of real estate? Read on to find out.
Top Real Estate Benefits
As an aspiring real estate investor, one of the top questions in your mind is probably, “Is real estate worth it?” The simple answer is yes. Here are five reasons why.
You Get to Create Regular Income
For investors looking for a source of consistent, reliable income, rental real estate is a great option. Both residential and commercial rental properties are ideal for this purpose.
When starting out, you can opt to keep your 9-to-5 job while rental properties supply additional income. But once you’ve built out your portfolio, your rental properties can equal a new full-time career.
Even if rental real estate isn’t your thing, you can still make regular income buying and selling homes. In particular, you can opt to sell your homes to house cash buyers only as this presents a quick, hassle-free way to close real estate deals and make fast money.
You Don’t Have to Worry About Inflation
Real estate is highly effective in offering a hedge against inflation. As prices go up, the cash flow from your property increases as well. For instance, with the recent rise in home prices throughout America, rent prices have also gone up, meaning investors have kept pace with inflation.
Diversifying Your Portfolio Is Easy
Many investors interested in real estate already have investments in bonds, stocks, gold, and other securities. Real estate serves as an avenue to diversify their existing portfolio and mitigate risks.
The importance of portfolio diversification is clear. When you spread your money across several different vehicles, it becomes easier to offset losses when they finally occur.
You Get to Enjoy Valuable Tax Advantages
Investing in real estate gives you the opportunity to enjoy many tax benefits. Some of your costs automatically become deductible business costs.
For instance, you’re allowed to write off your mortgage interest. Based on how you run your real estate business, you may even avoid paying self-employment income tax on the rental income you earn from your properties. Real estate investors can also enjoy depreciation recapture.
Common Real Estate Risks
Now that you’ve seen some of the benefits of real estate, you may be wondering, is real estate risky? The truth is there are certain important drawbacks that come with the venture. Here are some of them.
You Need Much Upfront Capital
Purchasing an investment property can set you back hundreds of thousands, if not more. That means you need to have a lot of money saved or take out a sizable mortgage. But even if you do use a home loan, you still need a significant amount of money for a down payment, closing costs, and so on.
Where you’re looking to rent the property out or flip it, you need to have enough money to fix the place up, as well as to market it. Not having this money can make it incredibly difficult to get started in the sector.
The Market Is Highly Localized
In real estate, your returns strictly depend on the specific market you opt to buy, sell, or rent out your property in. One of the biggest risks of real estate is that you could end up incurring colossal losses if you choose the wrong market. Lots of research is necessary to take the guesswork out of the game.
Regular Maintenance and Upkeep Is Essential
You can’t hope to make good money out of real estate unless you have the funds to keep your properties afloat. You’ll need to do prompt repairs every time something goes wrong, and these repairs can sometimes be expensive. A considerable amount of fixing up may also be necessary between tenants.
Real Estate Involves Extra Liability
As the owner of rental property, you’re constantly faced with a significant amount of liability. For instance, if an accident occurs in one of your properties, you could be held liable. In addition, you could find yourself in trouble with the law if you fail to adhere to rental laws in your locality.
For solo landlords, the fact that you’re not operating as an LLC puts your personal assets at risk. In case something goes wrong with your investments, you could lose everything you own.
The best way to minimize your liabilities is to consult with a seasoned real estate lawyer on every deal you make.
Get the Most Out of Your Real Estate Investment
Success in the real estate sector is possible, but only if you know the strengths of the sector and take full advantage of them. In addition, you need to stay aware of potential real estate risks and take proper action to mitigate them.
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