Right now, real estate investing in either commercial or residential property is one of the most popular ways to make extra money on the side. Some have found it so successful that they’ve made it a full-time profession.
Investors can see upwards of $100k in annual revenue if they’re successful. Though the profits of a flourishing realty investment are tempting, it’s just as instructive to look at the low end of an investor’s profit margins.
Those who see profits may generate as little as $25k in a given year, which isn’t bad for residual income, but it’s not enough for a full-time career. In addition, all investments entail some form of loss.
According to CNN Money, 70 percent of investors lost money on their investments in 2015, no matter how diversified their portfolio was. So there can be incredible benefits to running a real estate investment scheme, but there are also substantial risks.
You must weigh both carefully if you’re thinking of entering the business. Here are some of the biggest pluses and minuses of investing in real estate.
Pro: Real estate investing gives you more control over your investment
When you invest in a stock or purchase shares of a company, you’re usually just one of many people who are being controlled by a larger system. Unless you own the majority of the shares, you won’t have much say over the outcome of the stock.
Investing in real estate is different. You’re in charge of all the significant decisions and the processes to be followed for the purchase and sale, and/or the rental of the property.
There will, of course, be some things you won’t be able to control with regard to your investment. Inflation, taxes, market fluctuations, and other unpredictable factors can have an impact.
There’s nothing you can do about those, but you can use real estate investing in general as a way to take a little more control of your physical assets.
Con: The market could go up or down without any notice
In general, the real estate market is fairly predictable, and you can use that record and assurance to protect your investment better. However, in certain situations, the market could shift drastically, as happened in the crash in 2008.
At the time, the housing bubble was the biggest it had been in decades. When it burst, millions of Americans were devastated in more ways than one. It took years for investors to feel comfortable pouring their money into real estate again.
The good news is that the crash prepared us for the future in ways we couldn’t have imagined back then. Market analysts have examined the issues that arose a few years ago, and they’re closely monitoring the market for signs of those issues to avoid a crash of similar proportions.
Fluctuations will always be a factor in the real estate market, and they can definitely affect your profits, but the risks of repeating the 2008 recession are pretty slim now.
Pro: Your investment comes with insurance
When you buy a home, you also buy homeowner’s insurance, which is intended to cover incidentals on the home. As a result, the property won’t suffer devaluation because of a sudden accident. Market values may shift, but you’ll know that your equity isn’t going anywhere.
If you decide to go the route of renting a property, you also have the option of getting landlord’s insurance. If your policy dictates, you can receive compensation for a certain amount of time during vacancies.
That way, when a tenant moves out and you’re still looking for another one, you’re not losing on profits that are necessary to cover the mortgage and other expenses. This kind of insurance mitigates a lot of risk.
Con: It’s challenging to secure financing for this type of investment
Real estate is very expensive. Getting a loan is the only way most people can afford it, especially when they’re starting out. Although banks are more willing to lend money now than they were a few years ago, there are a lot of variables that go into obtaining a successful loan.
First, a great credit score with a long history of successful loan repayment is necessary. You’ll also need a hefty sum for a down payment on a home.
To get the best possible return on investment, a 20 percent down payment is recommended. That means when you purchase a $200k house, you’ll need to have $40,000 up front. That kind of cash is not easy for many people to come by.
You can finance a property in various ways with very little money down, however. This involves a greater financial risk, but it can be a good option for people who are confident they can make a profitable investment.
Pro: You have flexible hours
There are many advantages to working in real estate investment, and one of the best is the ability to set your own hours. This is very useful for those who are just starting out and need to keep their day job in order to fund their venture.
When things start to take off and you can make it a full-time commitment, you get to choose when and how long you work. That kind of freedom is coveted by workers all over the world.
Con: Unexpected challenges could arise at any moment and sap your profits
As mentioned above, you’ll have property insurance that covers any disasters or unexpected damage to the home, but those are hardly the only challenges you’ll face in real estate. The most common blow would be vacancies, which reduce your total monthly rents. Landlord’s insurance might cover this problem, but that fix is only temporary.
There’s also a certain amount of risk in owning a property because some homes are simply money pits and require general repairs and ongoing problems your insurance won’t cover. Plumbing issues, roofing problems, electrical messes, foundation worries, and other challenges often surface in older and poorly constructed homes, and you’re responsible for covering the deficit.
Pro: The income potential is often more secure than other forms of investment
Though home equity is not going to be as liquid as some of your other investments, it’s a fairly solid source of income. Risks are inherent in market fluctuations, but with the real estate market being the way it is, the revenue stream is fairly secure.
Losses are also reduced with a property. Even if you can’t make a profit and you lose a little in the sale, you’ll still gain back the majority of the money spent when you sell. This does not resemble other investments in which you pour money into the market, and it gets lost when the market turns bear.
See More Pros than Cons with the Help of Green Residential
Any investor who wants to see the benefits of real estate investing should rely on a professional’s expertise. Green Residential’s real estate team can help you locate, buy, or sell properties in the Katy and Houston areas at a great price.
We can also cover the property management side of your investment if you decide to go the route of renting instead of buying and selling. For more information about the varied services we offer, contact us today!