For beginner real estate investors, there is one important choice to rule them all: are you going to invest in tangible real estate assets or in passive REITs and digital real estate platforms? The decision will determine a lot of the actions you’ll take as an investor.
Before you decide which path is right for you, there are a few things you should consider. This week, we’ll be exploring all the pros and cons of owning tangible real estate assets, and next week we’ll take a look at passive forms of investment (Hint: passive is the beginner’s friend!).
Investing in Real Estate Assets
When you buy a piece of real estate like a house, a condo or an apartment building, you make money through rental income, appreciation, and profits generated from any business activities that depend on your new property.
Pros of Investing in Real Estate Assets
One benefit of investing in physical properties is the potential to create substantial cash flow. As tenants pay monthly rent for your properties, the money you make from that rent has the potential to be many times higher than an investment in REITs. In general, there is no limit to the amount of money you can make with your personal investment, with some clever (and lucky!) investors making 100%+ returns.
You also have the ability to take advantage of special tax breaks to keep more of that money. For example, in the U.S. you can deduct the costs of managing, conserving, and maintaining your investment property from your tax bill.
There’s also appreciation. While the real estate market goes up and down over the years, property prices generally rise over time, so you can bet with confidence that you will be able to sell your investment later at a higher price.
Another perk: you have more control over investing decisions than you would with REITs. When you own your own real estate, you know exactly what your money is used for, and can select only the properties that match your preferences for location, property type and financing structure. You can also set your own rental prices, choose tenants, and decide how many properties to buy. When you invest passively, you get none of these advantages.
Cons of Investing in Real Estate Assets
One of the main disadvantages of investing in your own properties is that it requires a significant amount of time and energy to be successful. You have to deal with tenant issues, travel time to check on properties, complex taxes, unforeseen major home repairs, and vacancies that can suddenly reduce your cash flow to zero.
Finding the money you need to start investing is another major disadvantage. Most investors need to qualify for mortgages to pay for their properties and save up for a sizeable down payment and funds for needed repairs as well.
And even after you get your mortgage and pay for all the needed repairs, there is always the risk that you could default on the loan and lose your property to the bank if an emergency makes you fail to pay. This happened to many investors during the 2008 crash, causing a lot of foreclosures and destroying many dreams.
Another negative is that real estate is not a liquid asset. That means you probably won’t be able to sell it quickly if you need cash in an emergency.
The Bottom Line
Investing in tangible real estate assets can be a better choice if you want higher returns, better cash flow, tax breaks to offset your income, and great potential for appreciation. It’s also good if you feel more confident as an investor and want more control over where your money goes.
And what about REITs, real estate crowdfunding and fractional ownership? Our opinion is that these three options are a perfect beginner’s choice!
Join us next week to find out why.