Is Renting Real Estate a Good Way to Make Money?
Earning renting property seems obvious at first – if you have enough money to buy and rent property with your money back, and then a little, why not? While it is true that investment property can be a good investment, it also carries many risks and requires a certain level of operational and financial knowledge that many people simply do not have. Here’s a look at the pros and cons of investing in real estate, as well as common mistakes to avoid if you do decide to make the leap.
pros
Permanent source of income
The S&P has averaged 9.8% annualized rate of return over the past twenty years, and by any measure, the real estate sector has done just as well . Unlike stocks, a property is a tangible asset that can passively earn money from tenants’ rent. Of course, the asset also depreciates, so the upkeep will always eat away at your earnings; it’s a delicate balance. But well-managed real estate can provide stable dividends that are not directly related to stock market uncertainty, and can be a good way to diversify your overall investment portfolio. It is also worth noting that you will be investing in an insured asset, which means that you will be protected to some extent in the event of a natural disaster.
Inflation protection
According to Forbes , one of the best ways to fight inflation is buying and holding real estate. As inflation rises, so does the value of your property, as well as the rent of your tenants. Since inflation is almost always flat or rising, in the long term, real estate may be a better option than a fixed income investment.
Tax incentives
Ownership of property is considered birthright by many Americans, and the tax system certainly reflects this given the amount of deductions you can make for it. These include common costs, improvement and depreciation costs, which means you can deduct interest on mortgages, insurance, and repairs, which will increase your return on investment.
Easy to finance
You can buy property for as little as 20% down payment , allowing you to use other people’s money to get started. Of course, this can lead to problems if the investment is poorly managed, but it is a good way to scale up quickly without investing a lot of money in advance.
Minuses
Depreciation
You will be in an endless war against renovations, big and small. While you can save a little money by doing the work yourself, it is a huge, constant investment of time (hiring professionals is the best option, but it also comes with a cost). Plus, it’s tricky to plan – even if you have a fully inspected property, there will almost always be unexpected expenses, even in new homes. For example, SoFi offers a long and daunting list of unexpected repairs that you might have to pay for.
Lack of liquidity
Unlike stocks, real estate is not a liquid asset . This means that if you are desperate for money, you will have to wait months, maybe even years, to sell your property, even if the market is in your favor.
Difficult tenants
The downside of being a homeowner is that you rely on other people’s income for your own cash flow, and people are unpredictable. Managing tenants is a stressful and overwhelming task, whether it’s chasing late or missing rent receipts, resolving disputes with other tenants, or dealing with unexpected vacancies. It will take some perseverance to protect your property, so you will have to deal with conflicts if you want to be a landlord. Of course, you can hire a property manager to take care of this, but this can be costly.
Know what you are getting yourself into
Before buying investment property, you need to make a plan for how it will generate profit for you. This means putting together an accurate budget that includes fixed and variable costs, contingency reserves, taxes, and multiple legal fees ( check out this list to get an idea of how many items you need to keep track of). You also need to be smart about real estate trends and choose properties with long-term growth potential that is not always easy to predict. For what counts as “passive income,” investment real estate is a lot of work and it can take years before it starts to pay off, so make sure you know what you’re getting into.