If your personal finances are in a solid position and you’ve already taken advantage of the tax advantaged accounts that are available to you, it could make sense for you to become a real estate investor. There are many great benefits you can garner by buying long term rental properties, like generating higher returns on your investment, monthly cash flow, tax breaks, and other perks that we’ll dissect in this article. 

However, just because your neighbor seems to be a successful real estate investor doesn’t mean you should rush out and purchase your first rental property. There are a number of varying factors to consider prior to knocking on doors and making offers. 

Now, let’s discuss the benefits of investing in real estate and debunk or confirm some of the common excuses we hear to help you decide if you should start riding that real estate investing wave.

Pros and Cons of Real Estate Investing

Billionaire entrepreneur Andrew Carnegie once claimed that 90% of millionaires gained their wealth through real estate investing. That statement alone should at least make folks pause to consider this investment route.

However, real estate, like any other investment, offers both advantages and disadvantages.

pros and cons of real estate investing

Benefits of Real Estate Investing

Let’s start with all the positive things before bursting your bubble with the downsides. Here are some of the most compelling reasons to invest in real estate.

1. Great Potential ROI

Real estate typically increases in value over time. This is especially true if you buy property in a growing area or make improvements to the property that improve its value. By investing in real estate, you can generate equity that will grow meaningfully over the long run.

In some cases, real estate can provide a better ROI than investing in the stock market. There’s a saying in real estate that the money is made “when you purchase the house.” There’s a lot of truth to that. Local real estate markets are a lot more imperfect than the stock market, which allows savvy investors to score a deal. The ability to buy a single-family home or multi-family home at a below market rate because of specific local factors is one of the biggest pros of investing in real estate.

2. Cash Flow

Another benefit of owning a rental property is that it offers convenient cash flow every month. (That is, of course, if you buy a property that has incoming rent large enough to cover ALL of the expenses and still have a positive amount left over each month.)

Investing in the stock market is incredibly easy and convenient. However, money locked up in your workplace retirement account is less convenient to access before you reach retirement age. Owning rental properties can allow you to realize income from that investment from day one.

Cash flow also increases over time, the longer you own a property. You might buy a place that generates $200 a month in positive cash flow, but in 20 years time when the mortgage is paid off and rents have continued to rise it could generate upwards of $2,000 per month…or more. That cash flow can give you an incredible amount of flexibility in retirement.

3. Tax Benefits

Owning real estate allows for certain tax benefits. The main one is depreciating your property for a period of time (currently set by the IRS at 27.5 years for residential properties and 39 years for commercial properties).

Depreciating your property over time reduces your tax liability each year that your rental property is in use. So even if you are making money every month, which means you are cash flow positive, depreciation can make your real estate asset appear less lucrative when it comes to tax time.

Additionally, the mortgage interest deduction is another great tax benefit. However, it doesn’t apply to everyone. When the standard deduction increased substantially a few years back, far fewer folks now have their mortgage interest deducted. But if you itemize your deductions and own a rental property, this is another perk.

Related: Most common tax myths

4. It’s Tangible

They call it real estate because it’s real. Properties are tangible – you can see them, feel them, touch them, etc. Owning a physical house and keeping it in good condition feels like you are investing in your community. There’s something really cool about that!

On the flip side, investing in the stock market is intangible. It can often feel like just a bunch of numbers on a screen. Buying an actual home feels more real. While that isn’t a good enough reason on its own to plunge into real estate investing, it is something that many investors find rewarding. 

5. Diversification

Owning a rental property provides diversification, spreading your eggs across multiple investment baskets. This can help safeguard your retirement nest egg during economic downturns.

For example, let’s say we enter an economic slump and your stock portfolio is hit pretty hard. If you have high-performing rental properties, they may still be increasing in value (and providing cash flow), shielding you from the pain of losses in your other investments.

One thing to be aware of though…Real estate is only diverse if you actually own and invest in other assets. For many Americans, their primary (and sometimes only) investment is the home they live in. In this situation, their real estate holdings are *not* diverse at all. 

Related: Investing in volatile markets

6. Inflation Hedge

Over the years, your property value will rise and so will the price of rent. But your mortgage will stay roughly the same because you have the ability to lock in a fixed interest rate.

Owning real estate can be an amazing hedge against inflation. During times of high inflation, your rental properties can keep up with (or often outpace) inflation rates.

We’ve experienced this in a meaningful way over the last couple of years. Inflation has been running wild and property values have skyrocketed. Rents have gone up significantly, too! Landlords and property owners everywhere in the country are benefiting from high inflation.

7. You Are In Control

Buying properties puts you in the driver’s seat of the entire investment process. Want to force appreciation into that home? Go for it!

Buying the ugliest home on the block and fixing it up allows you to use sweat equity to increase the value of your investment. You can get higher returns largely through your own work ethic. More passive forms of investing, like investing in index funds, don’t factor your effort into the equation. 

It’s also important to mention that being in control is a double-edged sword. Owning real estate is like owning a business. You can’t shy away from responsibility and just hope things will run smoothly. Being successful means continuing to stay informed, making hard and fast decisions, and living with the consequences of whatever happens to the investment.

Downsides of Real Estate Investing 

Owning real estate can be a really fun ride, but you don’t want to bite off more than you can chew. There are a number of obstacles and risk factors that you really must consider before buying your first property.

Here are some of the major challenges and common excuses that dissuade folks from pursuing real estate investing in a meaningful way. 

1. It’s Highly Competitive

Over the past few years the housing market has never been hotter. In fact, the typical American home increased in value by 13% over the past year and some markets are even hotter than that. Austin, Texas, saw a 30% increase! As a result, a lot of folks are wondering if it makes sense to buy in this highly competitive market.

When prices are high it becomes harder to find a deal. Novice real estate investors could easily end up buying a home that doesn’t make financial sense because the numbers don’t work. This is a really bad idea because it puts all your other hard work and investments at risk.

In addition to skyrocketing prices, modern apps like Zillow and Redfin have empowered almost anyone with a smartphone to evaluate and purchase real estate. There’s more competition than ever, and everyone with an iPhone or Android is vying for the same opportunities.

2. Dealing With Tenants

“Tenants will make my life miserable,” is a common refrain you might hear. And it is a common drawback people cite when avoiding property investments. But screening potential tenants thoroughly is the easy answer to this common and overblown excuse.

If you follow our process of tenant screening, the likelihood that you’ll get tenants who make you wish you had never bought a rental is minimal. Those 3 a.m. toilet explosion calls just don’t happen like the naysayers claim.

Even still, you will need to set aside some time to search for tenants and for property maintenance. You could have the best, most thoughtful tenants in the world and that property will still require some of your time and energy. 

Passive income sounds nice – but owning a rental property isn’t completely passive. Hiring a property manager is one way to handle things. But not only does that come with a hefty cost, it also requires you to “manage the manager.”

3. Takes a Lot of Money

You need to be financially stable in order to invest in real estate. This includes having a solid emergency fund and no high-interest debt. You should also be taking advantage of other investing methods, like a 401(k) with an employer match. After you’ve checked all those boxes, you’ll need an additional cash pile saved for the down payment and to make any potential property repairs needed upon purchase.

Houses are often the most expensive things you’ll buy. Saving that downpayment can take years, sometimes decades.

That being said, it’s still possible to find great rental properties in the $100K-$120K range in some parts of the country. Saving for a down payment on a more affordable property won’t be nearly as difficult, plus there are ways to accelerate that savings process, like renting out a room in your current home. 

House hacking is one of the best ways for real estate investors to get their start.

4. Always On Call

Another issue commonly cited as a drawback to owning rental properties is the notion of being a landlord and “always being on call.”

We’re fans of self-managing, especially if you are buying a home in your immediate vicinity, but it’s also OK to hire a professional to manage that property for you. Just know that while it will be easier from a mental standpoint to hire a property manager, it’ll be harder to make the numbers work if you aren’t willing to take on some of that work yourself.

Landlording is a service-oriented business. It’s crucial for landlords to take care of their property and their tenants if they want to build a successful business over the long term.

5. You Have To Be Handy

It’s true that being incredibly handy is a tremendous asset when managing rental properties. You’ll definitely need to be willing to put in some elbow grease to be a good landlord.

If you do not desire to do some of the most basic maintenance-related tasks, then real estate investing might not be for you. Painting walls and fixing toilets are some of the easier tasks you should be willing to perform, especially in the beginning.

You don’t have to be able to rewire the whole house in order to be a good real estate investor. You can get by being minimally handy. Still, it’s a good idea to be willing to fix the small stuff you know how to repair and to turn to YouTube for the fixes you don’t understand.

Related: Should I DIY or hire a Pro?

Is Real Estate Investing Right For You?

So…do you have the desire and the temperament to invest in real estate? Here are a few crucial things to consider. 

Your Financial Situation

As previously stated, it’s vital to be in a solid, stable financial position BEFORE you dive into real estate investing.

Here are some of the basics you’ll want covered before jumping into real estate:

  • Have a healthy emergency fund
  • Not owing any high-interest debts
  • Already taking advantage of investments like a 401(k) and IRA
  • Have proven good financial habits
  • Enough cash saved for down payment
  • Enough cash saved for repairs, maintenance, and emergencies.

Buying real estate without a solid foundation is like placing a heavy brick on top of a pile of jelly. It’ll add too much weight and squash everything in your life.

Check out our post on the 7 money gears. These serve as a kind of “order of operations” for personal finance. You don’t want to just jump into high gears without pedaling and getting some speed first.

Your Lifestyle

Your situation in life can determine what types of opportunities you can take on. Real estate doesn’t just take a lot of money; it takes a lot of time, head space, and energy. If you don’t have an abundance of all of those, taking on a large project likely isn’t a great idea right now.

Researching and finding properties can take months. Tenant screening and stabilization require a lot of meetings and planning. Monthly accounting takes time to budget, reconcile, and record keep. Repairs, inspections, disasters, etc., all demand your attention at odd times throughout each year of ownership.

Before jumping into real estate, be honest with yourself. Do you have the bandwidth to take on a large project and give it the attention it needs?

Overall Goals For Life and Investments

What are your larger life goals? Starting with the end in mind is helpful in determining if real estate investing is right for you. Do you want to be able to quit the corporate grind and have a more flexible schedule managing and working on properties? If that’s the case, then maybe real estate investing is for you. 

Are you looking for a way to get filthy rich quickly and easily without having to spend any time on it? If so, then real estate investing probably isn’t going to work out for you.

It’s OK to refine your goals over the years. But having a specific end game in mind is important before you start researching and buying properties. Your investing time horizon is a big part of the equation. Being a buy and hold investor is even more crucial in real estate because of the high transaction costs. So make sure you’ve taken the time to think carefully about your goals before you pounce.

Related: Setting SMARTER Money Goals

Starting Small in Real Estate

If you’re pumped to join the wide world of real estate investing, we encourage you to find a local investor’s club to be a part of. And be sure to check out all the tremendous resources at BiggerPockets as well. There are even great Facebook groups you can join for prospective real estate investors. These resources give you the opportunity to acquire invaluable knowledge while also making relevant connections. 

Don’t be afraid to start small by house hacking or just renting out a room. Your first foray into real estate investing doesn’t have to be the purchase of a quadplex. You can dip your toes into the water before making bigger moves.

Buying a smaller home and living in it for a few years before moving out and turning that house into a rental is also a great recipe for beginner investors to get going. You can put less money down and get a more favorable interest rate by living in the home you’re buying, which will eventually be an investment. 

And when you live in the home you’ll become familiar with the quirks that it has. It’ll also help because you can make the necessary updates along the way before you list it for rent.

The Bottom Line:

There are numerous advantages to investing in real estate that other investments may not provide. Such as the use of leverage to generate wealth or depreciation and cost segregation write-offs to lower taxable income. And historically, real estate investments have been less susceptible to significant market swings.

However, once you’ve decided to invest in real estate, you’ll need to choose which types of investments are appropriate for you. There are many distinctions between commercial and residential properties, and within those, there are several types of assets, each with its own set of advantages and disadvantages.

While investing in real estate brings the potential for a huge payday, you must also be aware of the challenges and risks. The question of whether real estate investing is right for you or not comes down to a lot of personal specifics. Just don’t let the common excuses you’ve heard over the years win out and make your decision for you.

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Beer tasting notes:

While talking about the pros and cons of real estate investing we enjoyed a Corn Grisette by Cruz Blanca Brewery. Big thanks to Dennis and our friends at the brewery for donating this one to the podcast! And please help us to spread the word by letting friends and family know about How to Money! Hit the share button, subscribe, or give us a quick review in Apple Podcasts. Help us change the conversation around personal finance and get more people doing smart things with their money!

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2 comments on “Real Estate Investing: Let’s Talk Pros and Cons

  1. Nice content and podcast that every investor can follow through it. And I totally agree that it’s best to invest in it.

  2. Jerry Willerson Aug 30, 2023

    Jason, good info. As a realtor, I put my investors on a search where they give me the criteria of what they are looking for and my webpage generates an email to them when property is listed that meets their criteria, or if that property has a price change.