Traditionally, the wealth of people was measured in tangible objects like gold and land. While this has changed somewhat in modern times, investing in property is still a way to save and prosper. The world is not becoming any less crowded, so the value of land and property is never going to go away, even in the worst of times. This makes this old investment a modern way to make money.
With the various ways of participating in property markets now available, not all the pros and cons of investing in property listed below are applicable to every investment, but they should be considered before investing in real estate.
The pros of investing in property
- Being a physical asset, property is generally more stable and less volatile than most other investments. Even when it does go down, it should recover over time. Property will never disappear in a bankruptcy like a company can.
- The interest on property loans is often tax deductable, and other tax benefits can be found in owning property with the right planning.
- It is possible to earn both rental income and gain capital growth over time. These gains can be very dramatic in good times.
- The income from rentals can cover, and sometimes exceed, the cost of the loan.
The cons of investing in property
- Sometimes renters cannot be found or the rent is too low even to cover the costs of the loan and other expenses that come with property. Worse yet, sometimes bad renters destroy property, do not pay and may be difficult to evict.
- Interest rates may jump and make the loan too costly. Many property investors do not take into account the cyclical nature of interest rates.
- Most real estate investing is not very liquid. Since property can certainly drop in value, people may end up owing more than the property is worth, or it may become necessary to sell it at a loss in bad times.
- In general, property is costly to get in and out of.
- The high cost of investing in property means that many who own it do not have diversified investments. In addition, these investments are usually in a limited geographic area making the investment more vulnerable to bad times and disasters.
- Managing property requires time and resources. Tenants need to be found and taken care of. Property requires maintenance, taxes and other potential expenses.
Choices when investing in property
There are a number of different options for investing in property that make it possible for investors to find a way that is most suitable for their situation and goals.
Taking out a loan and having others pay for it in the form of rent sounds very attractive, and it can be quite profitable when done correctly. The major drawback of this strategy, apart from potential changes in market condition or interest rates, is the problem of managing the properties. Tenants have to be found, and they can be tough to handle, even when they do pay the rent without incident.
One way to reduce some of the risk is with landlord insurance that covers damage and unpaid rent. While it is tax deductible, it will increase the cost of doing business.
Professional property management services will take care of most all the work of being a landlord for a fee. For those with limited time, these services can make buying rental properties a lot more attractive.
Things to look for when buying rental properties
- Make sure the property will be attractive to tenants. Look for features that will appeal to the most people to include garages, second bathrooms or whatever is useful to the largest number of demographic groups as possible.
- People also always want to be within range of shops, transportation and recreation facilities. One way to know if an area is likely to be attractive to renters is to look at the vacancy rates.
- Consider future developments that are planned for the area that might make it more or less attractive.
- Do not buy a property before researching sale prices of the locality to get a good idea of what it should cost.
- Never forget that what goes up often comes down and vice versa. This applies both the property values and interest rates. Neither the good nor bad times last forever.
- Never forget maintenance costs and remember that houses will require the most to keep in shape.
While real estate is a long-term investment for most, those who do property flipping have a very different outlook. When markets are hot of a property is being sold under its value for some reason, the experienced investor can buy and sell it at a profit over a short time.
Other flippers take a somewhat longer-term outlook in that they first make renovations and other improvements in the property before selling. This is an intensive investment, but it can pay off handsomely for those skilled at such tasks.
For those with the finances who are ready to take on the legal and other challenges that are often involved, developing a property for a market is potentially the most financially rewarding investment.
More hands-off ways to invest in property
For those who just want part of their portfolio in property without the hassles and risks (but fewer chances of a big reward), real estate investment trusts, or REITs, may be the way to go. Far from the hassles involved in real estate, REITs can be bought and sold like stocks and are very liquid. To keep their status as REITs and avoid paying corporate income tax, they must pay out 90% of their profits every year in dividends, so they offer a regular income to investors. Through REITs, investors can become a part of commercial real estate (office buildings, shopping centers, etc.), and it is possible to choose a REIT for the type of property one would like to invest in.
Some different types of REITs include equity REITs which own properties to profit primarily from rents, and mortgage REITs that loan money to others who own real estate and earn money from interest.
Real estate investment groups
These also offer investments that are generally liquid. Somewhat like mutual funds for rental properties, they buy or build properties and then sell them as rental properties to investors. Much like professional property management services, they handle all the landlord duties for a share of the rents. Investors can own single or multiple units.
Things to consider before investing in property
- Property is not the only game in town. For those interested in simply investing money, equities may be a better investment, since they traditionally pay more than real estate over time. Take a careful look at the whole picture to include total costs, possible tax advantages, diversity, tolerance of risk and what history says each type of investment is likely to pay in the long run before making any final decisions.
- Be it property or other investments; keep in mind that the capital gains are often not as impressive as they first may appear when inflation is taken into account. In addition, when capital gains are paid, investors are frequently paying taxes on what, in fact, has been lost to inflation.
- Borrowing always poses a risk. The more that is borrowed the greater this risk will be.
- Remember the agent and legal fees, advertising and capital gains taxes that will likely come when a property is sold.
- Insurance is a wise choice for investments of this size. Make sure any property purchased has adequate insurance.