Real estate investing can offer financial freedom and prove to be a great investment, even for beginners in the real estate industry or investing as a whole. As with any investment, there are pros and cons, so when is real estate a good investment for your goals?
Key Thoughts:
- Real estate offers specific tax advantages
- Ensure you have solid financials before investing
- Understand rental markets and legal requirements before purchasing real estate
- Real estate is a good investment when well-researched
Depending on your goals as an investor, real estate investing can provide passive income or a lifelong career. There are many advantages to owning a rental property, and whether you want to buy one property or a handful, getting started will require you to carefully consider your current financial situation, the market you wish to purchase in, and your long-term goals.
While analyzing a deal is key, there are other personal and financial considerations. Whether you seek to self-manage your property or hire a property manager while you grow your portfolio, be sure you understand these are essential considerations before taking the leap.
Benefits of Real Estate Investment
With any investment opportunity, there are risks and rewards; real estate is no exception to the rule. However, real estate investing comes with its own unique set of pros and cons that can make real estate a good investment based on your financial goals.
Unlike all forms of investing, as with all forms of property ownership, an advantage of investing in real estate compared to investing in stocks or bonds is that you buy into equity. Investing in a rental property comes with its share of tax advantages and can even provide a place to call home if moving becomes necessary. Housing, compared to stocks and bonds, is a real, physical commodity — you can use it if you need it, and if you invest in it, you’re likely to experience positive cash flow compared to other investment opportunities.
Tax Advantages That Make Real Estate a Good Investment:
Savvy real estate investors have the opportunity to tax plan and take advantage of specific deductions and tax breaks.
These Tax Advantages Include:
- Real estate-specific tax write-offs such as property taxes, insurance, mortgage interest, and property management fees. Plus, self-managing investors can write off business expenses such as advertising and business equipment.
- Pass-through deductions, which allow you to deduct up to 20% of your qualified business income on your personal taxes.
- Depreciation, in which you can categorize your investment property as a net loss even if the property produces positive cash flow.
- 1031 exchanges, in which one real estate investment is swapped for another, saving you money on capital gains.
When is investing in a real estate property a good idea?
As with any investment decision, it is important to have a solid understanding of your current financial situation, your long-term financial goals, as well as the market where you would like to invest. If you’re hoping to buy your first rental property, there are key considerations you need to analyze before you commit.
You Plan With a Dedicated Savings:
Owning a rental property requires continual maintenance and investment, and it is legally imperative that you have the savings and means to make updates if something goes wrong or is in need of repair. You should absolutely plan to have an emergency fund that will cover unexpected expenses as well as general maintenance throughout the year.
Remember that whether you self-manage or you hire a professional to manage your property on your behalf, owners are responsible for the fees associated with keeping the property habitable. Unlike other investment opportunities, owning a rental property means that your renters will be directly affected by the state of your financial management in this regard, and you are legally responsible to keep the property in a safe and habitable condition.
In a podcast for BiggerPockets, Real Estate investor Brandon Turner suggests that investors should follow the 50% rule, advising that half of what you make in rental income rental rate for operating expenses, not counting the mortgage payment. This can vary depending on your property type and age, so be sure to do your due diligence and work with an inspector to understand the potential needs for a particular property before investing.
You’ve Studied the Market for a Good Investment Strategy:
Understanding the market as a whole, as well as your local rental and real estate market, is crucial to analyzing a potential deal and evaluating if real estate is a good investment in your current market. As with anything in real estate, “location, location, location” is emphasized for a reason, and investment properties are no exception.
Learn more: Is this Real Estate Investment a Good Deal? – Video
Your investment property’s location will have a big impact on the key areas that affect a deal. Beyond the metrics of a particular property deal itself, there are factors that will impact you as an investor on a broader scale. Be sure to evaluate these as well.
While not an exhaustive list, experts recommend looking at key metrics as you start your search for a rental property or investment property:
- Current Interest Rates: Especially if you’re new to investing, current interest rates can tip the scales when you’re evaluating whether real estate is a good investment or it may be helpful to wait to find a better deal based on your available financing options.
- Vacancy Rate: National and local vacancy rates both are helpful in understanding the current state of the rental market. If you plan to invest in your local area or are hoping to buy an investment property long-distance, be sure you understand the vacancy rate and rental market before making an offer.
- Local Landlord-Tenant Laws: Each state and municipality will have its own set of landlord-tenant laws, and they will play a big role in how a rental property can be managed. Evaluate if the area is landlord-friendly or renter-friendly, and be sure that you understand the general landlord-tenant laws before investing (even if you don’t plan to manage the property yourself).
You Have a Mentor or Network:
There is a lot to be said for experience and expertise, and when you are considering a real estate investment, having the backing of a mentor can be a boon. Whether this is your first foray into real estate or you are expanding your portfolio, finding like-minded individuals who have been in the industry can be vital resource. Networking can help you find a solid group of experts who may be willing to mentor or offer advice when you have specific questions. By networking, you can also share your experiences and seek advice while learning from others’ experiences, discover new markets, and potentially find off-market deals, along with a support system that can guide you when you have to navigate challenges. Attend real estate networking events, join online forums, and seek out your local rental association to form connections.
You Can House Hack:
Whenever you have the ability to eliminate barriers to entry, you may find real estate is a good investment opportunity. House hacking is an excellent example. While not for everyone, house hacking can be the tipping point for beginners who would otherwise struggle to find a good deal. House hacking allows you to generate rental income from your main home by purchasing a duplex, triplex, or fourplex and live in one unit while renting out the other(s). This means the ability to purchase an income-generating property through an FHA or VA loan, which can allow you to invest with little down.
Learn more: What Is House Hacking?
Final Thoughts:
Real estate can be a good investment for anyone hoping to meet their financial goals, but it doesn’t come without risk. Thankfully, for those willing to do a little extra legwork and research, a lot of the downsides can be mitigated with good planning and expert insight.
