Historically, real estate has been one of the most reliable ways to get rich. And many of today’s millionaires say it’s still a smart investment, for a variety of reasons.
For one, investing in real estate offers a way to diversify one’s investments. “Don’t put all your eggs in one basket” is tried-and-true advice for a reason. There are many moving parts in the economy, and there’s always the possibility that one market will collapse while the others thrive. Exposure to several different markets will help you avoid risk.
Simply put, when you invest in real estate, the goal is to invest money today and grow it so you have more money in the future. The profit or return you make on your investments must be enough to cover the risk you take, the taxes you pay, and the other costs associated with owning the property, such as utilities, regular maintenance, and insurance.
Real estate investing for the beginner can really be as simple conceptually as playing Monopoly once you understand the basic factors of investing, economics, and risk. To win, buy properties, avoid bankruptcy, and generate rental income so you can buy more properties.
Note, however, that “simple” does not mean “easy.” If you make a mistake, the consequences can range from minor inconveniences to major disasters.
Tips for your first real estate investment
There are several ways to make your first real estate investment. When you buy a property, you can use debt by taking out a mortgage on a property. The use of debt is what attracts many real estate investors because it allows them to purchase properties that they could not otherwise afford.
Second, real estate gives you ownership of a tangible asset that can increase in value. While I enjoy logging into my portfolio and seeing my stock values go up, it’s all very abstract. There is something appealing about having a physical investment that you can actually see, visit and improve.
And since people will always need a place to live, real estate tends to hold its value as long as the property is well maintained and the neighborhood is attractive.
When you own property, you also have a good amount of flexibility. You can decide whether to rent out your property, sell it, subdivide it, repurpose it for another purpose, and so on. This way, you can respond to changes in the economy in a way that still makes sense for your investment.
However, there is also a great deal of caution to be exercised here. Real estate can be a big and expensive undertaking, and as the 2008 housing market collapse showed, it’s never a sure thing. Especially when it comes to real estate investing for beginners, it’s wise to proceed with caution. You don’t want to overstretch your finances before you’re ready and end up with debt that you’ll struggle to pay back.
Pros and Cons of Real Estate Investing
- Lower risk and volatility than the stock market
- Can be a good source of cash flow
- Many tax deductions
- Real estate provides a good return over the long term
- Not as much potential for aggressive returns
- May require a lot of cash
- Poor liquidity
- Dealing with tenants and building issues can be difficult