The Advantages and Disadvantages of Real Estate Investing
Real estate investing in a general sense involves the purchasing of real estate for profit. With real estate investments, profits are gradually accumulated by renting out properties in what's known as a cash flow method. Or, properties are improved and upgraded, then resold for a capital gain. Real estate investors may also wholesale properties as a way to make profits.
Advantages of Real Estate Investing
There are many entrepreneurs out there who argue that real estate investing is a win-win situation where you simply cannot lose money. Of course, this has to be false because there is no fail-safe way to invest in anything without some risk. Despite the risks, there are plenty of advantages to investing in real estate.
The first major advantage to investing in real estate is that you are purchasing an extremely expensive product. Therefore, each property you sell generates more profit potential.
Next advantage with real estate investing is leverage, or the ability to borrow based on the value of the property. It is much easier to finance real estate than any other investment product. Investing in other assets requires you to have the full purchase payment available to obtain that asset. However, when investing in real estate, you only need to have a fraction of the purchase price available (like a 5%, 10% or 20% down payment per say). As a result, real estate, although extremely expensive, is still easier to buy than say, a piece of industrial equipment of the same value.
Furthermore, local advantages in real estate investments is very rarely discussed, yet it stands to reason that you would know your city, town, and neighborhood better than any real estate investing expert from another part of the country or world. This is an advantage that the beginner real estate investor can capitalize on.
One way a beginner can get started in real estate investing with minimal personal risk is to bird dog. ‘Bird dogging' is when you search for good deals for another, more experienced investor. This way the beginner learns to find, recognize, and understand a good value.
It should also be noted that the bulk of the world's assets are in real estate.
Disadvantages of Real Estate Investing
The biggest disadvantage in real estate is that is is a non-liquid investment that requires maintenance and taxes to be paid. An optimal investment portfolio would have some liquid assets that can be quickly converted to cash in order to sustain real estate investments when their returns are not sufficient enough to pay recurring costs.
During a real estate boom, a lot of speculators were prone to making purchases without pre-calculating the purchasing costs and the ongoing costs involved. Then, of course, real estate started working against these investors, rather than for them, resulting in a loss at resale.
And another disadvantage is that there is no guarantee that home values will maintain themselves as the economy and society evolves and fluctuates.
- Article Word Count: 485
- Total Views: 17401