Real estate can be a very profitable source of investment. Property values generally rise over time, giving owners equity and rental income at the same time. Owning an investment property is not without risks and challenges though. There are several factors to consider in deciding whether an investment property is right for you.
Pros
Investment properties can provide many financial benefits. They can produce a steady, fixed stream of income for you and plenty of equity should you decide to sell down the road.
In addition to increasing equity over time, rental properties can provide some protection against inflation. As prices for goods and services increase, so can rental prices.
There may also be tax advantages to owning investment properties. If your annual taxable income is below $157,500 if you are single or $315,000 if you are married, and your rental business operates via a pass-through entity, you could qualify for a 20% deduction on the rental property income. You may also be able to deduct things like mortgage interest, property taxes and repairs.
In terms of mortgage financing, rental property loans have relatively low interest rates that help owners save money. And once you gain significant equity in your investment properties, you may be able to tap that equity to obtain another mortgage for more rental properties, increasing your potential real estate earnings.
Cons
Investment properties require time and energy. They are not passive investments like stocks. Whether you hire a property management company or handle things yourself, it will require work and money to keep the property in good condition and to keep tenants in place continually.
And while interest rates are relatively low, mortgage loans for investment properties are typically more expensive (higher down payments, higher interest rates, more cash reserves required) than owner-occupied property mortgages.
Plus, there is always the possibility that your rental property may decrease in value during major economic downturns or if the surrounding neighborhood falls into disrepair.
Other Options
If you are interested in diversifying your investment portfolio but are not ready to take the plunge on rental property of your own, you could explore investing in REITs or Real Estate Investment Trusts. These are companies that buy up and manage lots of real estate. When you invest, you are buying into a small piece of all these properties and their profits. Investing in REITs can give you many of the financial benefits of real estate without much of the risk. However, with a REIT you are not an actual property owner and will not have a physical asset in your name. And you have no guarantees about the profits or stability of company.
While real estate investments are not for everyone, if you have sufficient cash reserves and a hands-on attitude, rental properties can help generate great cash flow and equity for your portfolio.
