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Real Estate Investing's Pros and Cons

Real Estate Investing's Pros and Cons

Buying real estate has many benefits and few drawbacks. We must be aware of those and the actions required to begin.

Master Investor
April 21, 2024

Summary:

Having the right mindset is essential to become wealthy; learn to question ourselves "how can we afford it? " rather than "One can't afford it."
Beginners may find investing intimidating, particularly when it comes to raising the necessary funds but with experience it gets easier.
There are various methods to raise money for our first rental property; here is a beginner's expert guide to find money where others do not.

Do we question if investing in real estate is the right move for us?

We must learn how to adore investing in real estate. We can always start small and grow to bigger deals. The important point is that we take the first step and continue until the assets that we are building or acquiring generate positive cash flow(passive income) and capital gains income.

When the time comes to move on to bigger properties, we will acquire a six-unit apartment complex and so on. Actually the bigger the easier in many instances to raise the capital for it and usually has higher returns on investment. We now own over a thousand apartment buildings. We began out tiny and grew with time, as we can see. We know of almost no successful real estate investor who didn't begin modestly. We will soon find out why.

To be clear, by "real estate," we mean rental properties that generate a positive cash flow; examples of this type of property include single-family homes, duplexes, triplexes, apartment buildings, office buildings, retail establishments, shopping centers, storage facilities, warehouses, mobile homes (more on those in a moment), and so forth. It's critical to understand that investing opportunities extend far beyond a conventional home. However, if the person has a home that is a liability in their financial statement, then, that person could turn it into an AIRBN. Then, the home can begin creating passive income. The mortgage, taxes and all expenses are being paid with the revenue of the business operation. Now that house is an asset because the debt has become good debt as is creating passive income and it is also the debt service is being paid by the business’ revenue and not us.

Ultimately, the house is an asset because is creating positive cash flow after all expenses are paid including debt service, etc. Then, we can accurately say that the house is printing money legally for us and it is freedom for us. A financial educated inside investor knows how to get everything for free legally by simply building and acquiring cash flowing assets that will take care of the cost for the liabilities and any other expenses.

Benefits of investing in real estate

Now let's explore the various benefits of real estate investing:

1- OPM (Other People's Money) Leverage

Do we believe that buying a property will need us to use our own funds or launch a GoFundMe campaign? Rethink that! In summary, the idea of OPM (other people’s money) is as follows: The remaining funds will be provided by a bank, lending organization, or private individual if we put down 10% to 30%. That implies that for only $10,000 to $30,000, we may own a $100,000 piece of real estate. Where else in life can we find such a bargain? Understanding OPM is one indication of financial intelligence, which is something we talk about a lot.

2- Positive cash flow

Our home can present excellent chances for a monthly profit if it is bought and maintained appropriately. We adore real estate because of this continuous stream of money we get from my investments, which is known as cash flow. When we purchase and lease real estate, we will get monthly rent payments and use those funds to cover costs (such the mortgage and any maintenance). Our profit is generated by positive cash flow if we maintained a renter, bought it at a good price, and collected more each month than we spent. It is lovely, isn't it?

3- Appreciation

We can make two different kinds of money from rental homes. The first is cash flow, which we have already covered. The second is appreciation.

Appreciation is the term used to describe our profit when we decide to sell our home after its value has increased. Remember, we should always have an exit strategy in place even though we aren't buying with the intention of selling to make a rapid profit (like the TV show flippers who patch up a house and quickly put it back on the market hoping for a large payday).

4- Fewer peaks and valleys

Every time we see the stock market ticker flash by, don't majority of traders get a little bit of a nervous roller coaster ride? Since cash-flowing properties are usually longer-term investments, they are not impacted by the daily fluctuations in the markets.

We know that then economy goes up, down and sideways. However, we focus on preparing for any type of economy because with financial education and strategic financial plan we will win in any type of market.

It may also come as a surprise to you that a down market for real estate can sometimes be the ideal moment to buy, putting us in the unusual position of being enthusiastic while everyone else around us is anxious and losing money. Believe me, this is an amazing situation to be in.

5- Benefits of taxes

Low-income housing, historical building rehabilitation, and some other real estate projects are eligible for tax incentives. Our tax liability is immediately reduced by a tax credit. Additionally, we receive an annual deduction for depreciation, which is usually expressed as a percentage of the property's value that we can deduct from our income.

Lastly, the profits from the sale of real estate may be deferred forever in many nations provided the money is used to purchase additional real estate. What a benefit!

6- Less demanding

There’s no reason to make a rush decision when it comes to real estate investing. Usually, we have enough time to conduct thorough research, examine data, draw comparisons, and ultimately choose the best investment. Thus, be patient and wait for the ideal chance. remember that then second most important words are due diligence, and the first most important words are cash flow.

Drawbacks of investing in real estate

There are a few drawbacks to real estate investing, and we would be negligent to ignore them. Ultimately, we want us to have the whole picture before we start:

1- Lag time

Everything takes time: offers, counters, inspections, appraisals, and financing. Patience is a virtue because of this. Once we have gone through it once, we will be prepared for similar possibilities in the future. Simply concentrate on each phase separately the first time around, and utilize the time in between to further our research to make sure we haven't missed anything crucial.

2- Not liquid

Real estate is just not something we can get into and out of very quickly, which makes it challenging to swiftly turn an asset into income.

Recall that we told us that time is on our side in number six above? That isn't the case, though, if we have to sell soon.

3- Challenging or time-consuming

Real estate is the second most challenging of the four asset types (after business). Daily property management is required, including dealing with vacancies and unsatisfactory renters. This is another reason we advise starting small: it will need less of our time, and making mistakes on a smaller scale will also be far less costly.

After learning the advantages and disadvantages, what comes next? Commencing and executing the initial, minor measures! Which of them strikes a chord with us?

Three popular approaches to begin real estate investment

1- Rental home for residential use

After we buy a home, we become the prospective tenants’ landlord and are in charge of paying the mortgage, taxes, and upkeep (plus maybe a property manager, if we want to avoid receiving calls at midnight about malfunctioning appliances). To turn a profit, we should ideally be able to charge more than our monthly expenses. This is the money we make from renting out the property to a good renter. For example, we didn't start there; start small and we work work our asset column and its companies to control thousands of apartments spread throughout the states. One single-family home could be our first sound asset. And we would recommend us to do the same and always invest tin financial education.

2- Real Estate Investment Trust (REIT)

When a corporation (or trust) employs investors' funds to buy and manage income properties (both residential and commercial), a real estate investment trust (REIT) is established. Like any other stock, REITs are bought and traded on the main exchanges. To maintain its position as a REIT, a company has to distribute 90% of its taxable revenues as dividends, according to Investopedia. By doing this, conventional companies would tax their profits and then have to determine whether to share their after-tax gains as dividends, but REITs avoid paying corporate income tax. REITs have been a well-liked option for income investors since the 1960s because of their consistent dividends and significant capital growth potential.

3- Investment groups for real estate

This can be the best choice for us if we want to own rental property but don't want to put in the work of becoming a landlord. A company will purchase or construct a series of apartment buildings or condos, similar to tiny mutual funds for rental properties, and then permit investors to purchase them through the company, thereby becoming a member of the group. In return for a portion of the monthly rent, the firm running the investment group maintains all of the units, advertises job openings, conducts tenant interviews, and oversees all unit management.

To succeed in real estate investing, start small

It's time to explain why every great real estate investor we know started very little, now that we know the advantages and disadvantages of real estate investment as well as some ways to get started. We are assuming that if we own or invest in real estate, we also started out modest.

Errors will occur because there is a lot to learn. Everything is a part of the process. In the beginning, it's much simpler to make mistakes with smaller properties and less money.

How little can we put our money down and yet turn a profit? Let’s use an investor as an example.

The investor lived with the Holiness the Dalai Lama as a Buddhist. The investor did not take a vow of poverty because it is not necessary, but the investor did lead a very frugal life.

The investor started the journey into money and investments after having an expensive medical crisis that made the investor understand that money does play a significant role in her life.

The investor’s inquiry turned up low income homes as a rather simple and affordable method to enter the real estate market. These homes are common in many cities throughout the world. These are manufactured or prefabricated homes that are theoretically transportable.

The investor after doing due diligence one ways to create passive income through Rela estate discovered that for roughly $3,000, the investor could purchase a used mobile home with a positive cash flow of almost $200 per month.

That's a really good return on the investment.

The investor also learned that a mobile house is considered a motor vehicle in certain states, where the investor currently resides. The investor skips the entire real estate procedure to obtain the title to this house as it is consider a motor vehicle.

The investor just picks up the title by going down to the Department of Motor Vehicles. For the investor, depending on the the investors sir lifestyle, this is a workable alternative as the investor started to increase the asset column. Therefore, the passive income is growing. That is what give us true wealth which translates to total freedom.

There we have it - the advantages and disadvantages of real estate investing are as obvious as day. We are wealthy entrepreneurs and inside investors who are establishing our fame and fortune in real estate as long as we can overcome the minor limitations listed above, which are definitely not insurmountable—they just require experience and financial education. Which we are doing both here. That sounds like the kind of legacy we want to leave behind, doesn't it? To have total freedom and excess of positive cash flow to fulfill our lifestyle and passions.