5 Major Drawbacks of Investing in Real Estate
Real estate is literally an investor’s paradise. It is a lucrative industry and because of its appreciation rate, experts say that the best thing to do with your money is to invest it in real estate. But at the same time, many people say the opposite too. They say if you want to lose your money then real estate investment is the place. Surprisingly both of these contradictory advices are true.
At a time when everything has gone digital and people are living in the era of social media, it’s hard not to get drawn into the hype and use the digital sphere to its full advantage. This is exactly what real estate agents have done too, by using the pandemic as an excuse and resorting to virtual real estate viewings. Through this, they have managed to reach out to a wider audience during one of the most crucial times – when isolation, quarantines, and remote work life have become the norm.
However, there are always two sides to a coin. While there are many advantages like the fact that real estate appreciates over time, has unique tax benefits, generates a steady cash flow, and can be financed and leveraged, it has its drawbacks too. Let’s take a look at what they are so that you make a balanced, informed decision when you consider investing in real estate.
Real Estate Requires Money
First things first – you need money to make money. While you can buy shares of stock with a minimal cash outlay, real estate investing requires money. To get started, you'll need a down payment plus closing costs and money to repair and update the property to maximize rental income. And once you own the property, there will be ongoing expenses like property taxes, insurance, mortgage payments, and property maintenance.
Real Estate Has Low Liquidity
Many investments are highly liquid and can be bought and sold for a profit in a fraction of a second, as with high-frequency stock trading. But real estate investments are comparably illiquid because properties can’t be quickly and easily sold without a substantial loss in value. Real estate investors must be prepared to own a property for months and years, especially if it will be leased out.
Investors often do not have the cash to pay outright for a property. Instead, they typically take out loans. That results in more debt for the investor. If you purchase a property for flipping and it does not sell, you are stuck with the debt and with paying on the debt until the property does sell. If you invest in rental property, it would also be a great detriment if the renter stopped paying his rent and you had to go through the courts to remove the renter. You would not only be stuck paying the payments on the debt, but more debt would be created by hiring an attorney to remove the renter.
Investing in real estate has the potential of being very confusing because it requires that you are fully aware of the laws in each jurisdiction that you own property. Some jurisdictions may even enforce land ceilings which can make the investment risky. The legal difficulties can become much more complex if the investor is investing in commercial real estate.
Real Estate Investment Has Unique Risks
Risks need to be understood and mitigated as much as possible. Following are a few of the significant risks of investing in real estate:
- Buying the wrong property at the wrong time
- Increased liability for accidents that may occur on your property
- Getting stuck with a ‘professional renter’ who knows how to work the legal system at your expense
- Getting overleveraged
Active real estate investing isn't for everyone because there are unique hurdles and risks. Real estate can be an incredibly powerful wealth creation strategy, but only if you work it right. You must learn to find, evaluate, and purchase good real estate deals. You need to build a team of go-to contractors, lenders, property managers, and other professionals who provide competent services at reasonable prices.
If you’re someone who’s considering investing in real estate, make sure you do your research well. One of the best options in that direction would be to go for virtual site visits and virtual open house sessions held by realtors. Doing that can give you an idea of the market and also about the kind of property you may be looking for.
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