Is Buying Real Estate A Good Investment? Here’s How To Tell
Dan Miller4-Minute Read
December 03, 2021
If you're looking to accumulate long-term wealth, there are few better opportunities available to the average investor than investing in real estate. There are many ways to invest in real estate, and the right type of investing for you depends on your unique situation. Fixer-uppers, flips, short-term rentals or being a landlord are all ways to make money in real estate. But before you close on your first investment property, here are a few things to keep in mind.
Is Buying Real Estate A Good Investment?
Buying real estate can be a good investment if you're looking to add to your overall portfolio. Real estate can often provide both short-term monthly income and long-term appreciation. Owning real estate diversifies your portfolio and acts as a hedge against inflation. There are tax breaks for investing in real estate and you can use leverage for even larger returns.
However, there are factors that you should consider before making a purchase. Depending on how you choose to invest in real estate, it can take a lot of your time. Being a landlord and dealing with tenants can take a lot of your time and energy. Hiring a property management company is one option, but that will cut into your overall profit margin.
Reasons Why Real Estate Is A Good Investment
Real estate can be a good investment for several different reasons and is one of the most common ways that ordinary people can acquire an extraordinary amount of wealth. Here are a few reasons why you should consider real estate as an investment.
- Leverage: Often, you don’t have to put down the entire cost of the property. You can put down a relatively small amount of money down, finance the rest and supercharge your returns
- Passive income: Many real estate properties can provide regular passive income. Passive income is the true key to building wealth
- Legacy: You can often pass down real estate to your heirs with tax advantages
- Tax breaks: There are tax breaks and write-offs like depreciation and maintenance expenses that you can use to offset other income that you earn
- Appreciation: In addition to ongoing income that you earn, real estate has typically appreciated over time. While there's no guarantee that your property will go up in value, it usually does, especially if you have a long-term investment horizon.
- Diversification: Real estate can be a nice way to diversify your overall investment portfolio, especially if most of your investments are in the stock market
- Hedge against inflation: Unlike investing in the stock market, real estate rental and sale prices can hedge your portfolio against inflation
Ways To Utilize An Investment House
There are several different ways to use an investment property, each with its own set of pros and cons.
One of the most common ways to make money off real estate is by having a rental property for long-term rentals. If you are able to buy your investment property for a low enough price, you can have a positive monthly cash flow with the rent coming in.
One big decision that you'll need to make is whether you're going to manage the property yourself or hire a property manager, especially if you are buying an investment property in an area where you don't live. Being a landlord can be a lot of work, so if you're looking for more passive income, you might want to consider a property management company.
Another way to make money off real estate is by using it for short-term rentals. Services like Airbnb or VRBO can make this process easier to manage. This can be a good option for people who would like to occasionally use their second home for vacation purposes. You can rent the home as a short-term rental on the weeks that you're not using it and make a bit of extra money.
Being the landlord of a short-term rental can be even more work than renting it out long-term, so you definitely want to consider a property management company. There are many companies out there that specialize in managing short-term rentals. They can help manage turnover, keep your property cleaned and stocked and communicate with guests.
Some investors flip houses in order to make a fast profit. Flipping a house is where you buy a distressed property for a relatively low price, fix it up and then sell it to a retail buyer. Flipping requires more money upfront for the initial renovations – many distressed homes won't qualify for bank financing so you may have to finance the entire purchase on your own.
Factors To Consider Before Buying An Investment Property
There are several factors that you should consider before buying real estate because they can impact your return on investment. Here are a few things to look at before you sign on the dotted line.
- The area the property is in: Like the old saying goes, the three most important things in a property are location, location and location.
- Crime rates: One of the most important factors in the location of any property is the neighborhood it's in and the crime rate of that neighborhood.
- Schools: The quality of the school district is another factor that will affect the value of any investment property.
- Taxes: Different states and localities assess different amounts of property taxes. This information can usually be determined from the government, but keep in mind that the assessed value will often update to the new purchase price.
- Property management: Do you plan on managing the investment property yourself or hiring a property manager? If you do plan on hiring a property manager, make sure that you account for that cost when running your numbers.
- Financial reserve: While owning real estate is a great way to get value long-term, it is not without possible short-term challenges. You'll want to have 6 – 12 months of reserves available to deal with things like unexpected repairs, vacancy or other issues.
The Bottom Line
Buying real estate is generally a good investment, but as with any financial decision, you should carefully consider your situation before making a purchase. Monthly cash flow and long-term appreciation can be great, but real estate investing can also be very time-consuming, even if you hire a property manager.
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