Pros and Cons of Real Estate as Investment

When deciding how to invest your money, there are a few factors to consider, such as risk, potential gain, demands on you time, and liquidity of an asset. The other major asset we’re going to compare real estate to is stocks, which are a traditional go-to investment strategy for both beginning and advanced investors.

Risk

There is no investment strategy that offers no risk. That being said, the risks are different from one strategy to the next, and can be managed accordingly. The advantage that trading in stocks has over real estate is that an investor can dabble in much smaller sums, meaning that you’ll lose less if an investment turns out to be a disaster. Where real estate has an advantage is that you have some control over the investment and how it performs. On top of that, the real estate market is fairly predictable.

A publicly traded company can go belly up and never recover, but as long as there is an economy, there will always be a real estate market. It will fluctuate over time between a buyer and a seller’s market, and the current value of your investment property will fluctuate with it. But even in a less-than-ideal market, one can still get a worthwhile return on real estate.

Real estate offers several different investment strategies, and they all offer both residual income and the chance to build equity. With rental property, you use rent payments to pay down the mortgage and build equity. Improving the property will build equity, too --- if done appropriately. This means you can build equity on a home you live in, or by fixing up homes and flipping them.

Liquidity

Stocks can be quickly liquidated. Real estate takes time to cash out--- you have to market the home, find the right buyer, finalize the deal. Having your money tied up adds another element of risk to the deal. If you need money in a hurry --- say for an emergency or a sudden rare investment opportunity --- you can’t immediately extract it from real estate.

You do have the option of taking a mortgage out against the equity you’ve built in a property, but that stills takes much longer than liquidating stocks on the public market. And the lower liquidity of real estate indicates another key point: the amount of personal time you have to spend to work real estate deals.

Demands on your time

Stocks can be traded in minutes; buying or selling real estate will take hours and hours of your time, and time is money. Additionally, you have to maintain your rental properties, deal with tenants, fill vacancies, and spend time managing the cash flow --- collecting rent, paying the mortgage, paying the property tax. All of these things are worth it if you have the time. If you don’t have the time, you can always hire a property management company. It will cut into your profits, but you’re still building equity.

Either way, consider the time you’re willing to dedicate to your investments. And note that stocks will take up some of your time, too --- but probably much less.

Financing options

The ironic thing about investing in real estate is that it commonly involves acquiring debt in the form of a loan. The good thing about this is that you don’t have tie up a lot of your cold hard cash to make a nice lump sum on a good investment property.

Even better, in the world of real estate investment, there are creative ways to finance. Seller financing is when the buyer assumes ownership and agrees to buy the seller out in installments, rather than taking out a loan to immediately cash the seller out. OPM (Other People’s Money) is gathering investment money from other investors who are looking for low maintenance investment strategies. This can be done with a pool of investors, so nobody has to tie up too large a sum in one investment.

Intrinsic value

Stocks have even less intrinsic value than money, which can at least be used to buy things. Real estate is more practical in this sense because you control a physical asset. If the stock market crashes or shuts down, your ownership share is no more than an idea. Property, meanwhile, can be used in other ways, such as for recreation or storage of personal property. People always need a home, including yourself. So its a good idea to have at least one investment property --- the home you live in.

Although real estate is more of “high maintenance” investment than stocks, its the more practical one. With due diligence and financial savvy, there’s no reason that investment properties won’t lead to an appreciable return over time.

For help scouting and securing properties in the Puget Sound area, contact Better Properties by filling out our contact form here.