Investing in Real Estate: Advantages & Pitfalls
Investing in Real Estate is a proven method of building wealth with an attractive risk vs reward profile. That advantages include:
- Real Estate is traditionally a stable investment
- Great investment for long term value and returns
- Monthly rental income plus an increase in home value
- Can typically rent for more than your mortgage payment
- Take the difference and either pay down your mortgage faster or accumulate for another down payment
- You can use financing to maximize your “Cash on Cash” return
Why Real Estate may be more attractive as an investment:
- The historical low rates (near zero for many corporations) has led to an unprecedented surge in corporate debt. The US corporate debt is above 45% of GDP, a historical precursor to a recession. Much of the debt was used to buy back stock, which pushed stock values higher.
- Interest rates are increasing, creating pressure on corporations to deleverage.
- Maybe it’s time to take some profit off the table in the stock market?
Although investing in real estate is a great way to build wealth, there are MANY pitfalls you need to be aware of:
- You never make money by selling a property. You only make money when you buy it at a below market price/cost
- Don’t think about fixing and flipping unless you are very knowledgeable on real estate values and construction costs/requirements
- Don’t get in too much debt. If you don’t have reserves to float 3 months payments and have a “contingency” fund for emergency repairs……keep saving
- Focus on long term value: positive Cash Flow, steady appreciation, automatic “savings account”
- Be aware of the requirements to manage a property. Find a property manager if you are not suited for it
- You can get financing for as little as 15% down, but it is more cost effective to have 20% down
- If you are considering moving, you may want to consider keeping your current house and renting it out, if possible. Potentially keep a lower interest rate/payment, get better terms on primary residence financing, even with a lower down payment.