Investing in Real Estate: Rewarding or Risky?

| February 3, 2013
Investing in Real Estate

Investing in Real Estate

It’s quite natural for those just venturing into the real estate industry to have their worries, considering the amount of money at stake and the research and time required to get good deals. However, the benefits of starting a real estate business are tremendous, and the current state of the economy where prices on homes are dropping allows for more opportunities even for novices.

In the end, it’s all about understanding the risks and rewards that come with entering the world of real estate.

Rewards

  1. Cash Flow

After you’ve bought a piece of property, you’ll have to pay certain expenses to keep it operational. The upside is that renting it out will earn you a steady source of money from all the tenants whether it’s commercial, residential or industrial property. You can still pursue your passions while having reliable extra income that you don’t have to work for too much.

  1. Tax Benefits/Incentives

Being a homeowner gives you two big tax benefits. First, you can get a mortgage interest deduction. Second, you don’t have to pay up to a certain amount of taxes when you sell the property. It only counts if you’ve lived in that property for at least two out of five years before you make the sale.

  1. Appreciation

On the other hand, you can work to make your property appreciate instead so that you can raise your rental fees. Make sure to fix any issues that come up such as leaking pipes and cracked walls, and spruce up the property if possible. If you and your tenants can sustain the growth, you’ll be making even more money.

  1. Leverage

Buying property with a good portion going to your down payment can give you great returns once it appreciates, compounding your income from its regular cash flow.

This might have been a big risk in the past when you could pay incredibly small down payments on properties while facing higher chances of depreciation. However, that’s not the case these days when you usually can’t have down payments lower than 20% or 25%, meaning you won’t have to contend with the property’s value depreciating that much.

Your cash flow will take care of paying off your mortgage, and you can see your total gains doubling for years even after you’re done with the payments.

  1. Inflation Resistance

If you are taking care of your property, it should be appreciating in its value. This doesn’t just help you increase your income, as it will also work as a sort of buffer against the inevitable problem of inflation. You can have it so your lease can be adjusted to inflation, so when your tenants’ contracts expire and they want to renew, they will have to follow the higher fees.

Risks

  1. Negative Cash Flow

Some properties are just giant money sinkholes where you won’t be able to make any money off them. However, there are other kinds of properties where you can turn around or at least simply maintain properly to earn income. If you don’t handle such properties with care and end up getting a negative cash flow, don’t expect to make appreciation transform your loss into profits.

  1. Depreciation

Although property usually experiences appreciation over time, it’s not uncommon that it could also face depreciation. Some factors like physical deterioration of the property can be controlled, but external issues like increasing crime within the neighborhood or environmental hazards can be difficult, if not impossible to predict. If you can’t take advantage of the tax deduction, you’ll be looking at a property that will only be negatively impacting your finances.

  1. Liquidity Risk

There are opportunities in the real estate industry that require you to sell your properties, but you can run into the problem of those being illiquid. In that case, valuation can be difficult leading to uncertain prices, which in turn could lead to less demand. The longer it stays on the market, the higher the chance it’ll depreciate.

  1. Legal Issues

Although most of the general concepts in real estate apply to how the industry is run throughout the country, there are certain local laws that need to be considered depending on the state where the property is located. You will then have to do your homework regarding the local market you’re dealing with. This is to ensure your investment plans don’t go awry because of some provision you overlooked.

  1. Cyclical Market

Real estate deals with two cycles – the leasing market and the investment market cycles. The leasing market cycle deals with the rise and fall of supply of available space and the demand for space from would-be tenants. The investment market deals with the rise and fall of supply of properties and the demand of investors looking for real estate to invest in.

If the leasing market is facing a decline, then rental fees start decreasing. It could follow that the investment market also falls, as investors will not be spending money on property where they won’t be getting as much returns as they planned. There is no set time or season for when this happens, so you’ll have to feel out the industry and have your ears to the ground for any changes in the market.

Once you’ve weighed both risks and rewards, you can start making informed decisions on whether or not you’ll venture into this type of investment, and on what, where, and when you’ll be investing your hard-earned cash with confidence. What do you think?

About the Author: has been working in the Real Estate business for almost a decade and has been awarded several accolades. He also owns http://www.calgaryrealestate.pro – his site offers great variety of tools to help you find your first home or upgrade to a new one. When he’s not busy helping clients buy or sell Calgary real estate, Carlos enjoys spending time with his family, travelling, writing, and expanding his real estate expertise

Investing in Real Estate: Rewarding or Risky?

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