Is real estate a good investment right now?
As the market changes and evolves, you’re probably evaluating where it makes the most sense to invest their money. While classically a good move, is real estate still a good investment for your portfolio right now? Let’s explore the pros and cons of this type of investment to find out if it’s the best option for you in 2021.
So you want to invest in real estate…
While many forms of investment have managed to move to easily-accessible online platforms, investing in real estate still usually means purchasing a physical property. That means your cash is tied up in an expensive asset that requires a lot of maintenance and upkeep to deliver the returns you want.
But real estate can be a lucrative investment for those willing to take the risk. Between rental income, property appreciation, and tax breaks, investing in real estate in 2021 could be the perfect way for you to diversify your portfolio.
We’re going to help you decide whether a real estate investment is a good or bad idea for you in the coming year.
Why do people invest in real estate?
Over time, real estate historically increases in value. The average sale price of real estate increased every year from 1963-2007 until the Great Recession. Even as the economy recovered, home prices have rebounded in the years since and reached new highs since the 2007 crash.
Along with overall appreciation, real estate investors can also benefit from passive income in the form of rent. An investment in real estate can also help to diversify investment portfolios, allowing you to hedge against major market changes and inflation.
Real Estate Investing Pros and Cons
Like with all investments, there are some both good and bad aspects of investing in real estate.
Pros of real estate:
- Property appreciation. When purchasing property, you can take out a mortgage to finance your investment. That way, you don’t need the upfront capital, but you still benefit from the long-term appreciation of the property.
- Rent payments. If you play your cards right, your tenants can essentially pay your mortgage for you via rent.
- Stability. Real estate is considered a very stable investment. However, as any real estate guru will tell you: “location, location, location”. Buying the wrong property can leave you stuck in a hole for decades.
- Tax advantages. When you purchase property, your money lost to mortgage interest and property taxes is all tax-deductible.
- Insured investment. Unlike financial investments like stocks, properties are insured. That way, if anything were to happen to your investment like a fire or theft, you have a safety net.
- A growing number of ways to invest. Real estate investing doesn’t have to be mortgaging a house anymore. These days there are many indirect ways to invest through fintech platforms that let you own fractional bits of property.
Cons of real estate:
- Property management. If you buy physical property to rent out, you’re responsible for its maintenance and upkeep along with handling tenant needs. Managing a property with even a few tenants can be time consuming and expensive.
- High carrying costs. Unlike traditional investments, it’s expensive to maintain a real estate investment. Things like property taxes, insurance, and maintenance all add up quickly and can minimize your returns over time.
- No guarantee of appreciation. Though property values have historically risen over time, that is not always the case. Events like the Great Recession or COVID-19 can impact short-term property value and rent income.
- Lack of liquidity. When investing in real estate, your money is tied up in the value of the home instead of being easily accessible like cash or stocks. Choose the wrong location and it may be difficult to find a buyer.
Types of real estate investments
When considering investing in real estate in 2021, here are a few different options for you to consider.
- Rental properties. You can purchase a multifamily property or apartment and become a landlord. While you’ll become responsible for the mortgages, taxes, insurance, and maintenance of the building. You also generate revenue from rent payments. You’ll also benefit from the property appreciating over time.
- Flipping properties. Instead of becoming a landlord, some people choose to buy properties and renovate them to sell for a profit, known as “flipping.” This can generate fast and impressive returns if you renovate strategically to increase the home’s value. However, it is a labor-intensive task that may require even more capital up front.
- REITs. Real estate investment trusts are assets that are bought and sold on major exchanges. This makes them easier to invest in than physical property, and they are also a more liquid investment option. Opting to invest in a REIT is very similar to investing in traditional stock.
A new alternative to real estate investment
Real estate is primarily sought after because it provides consistent returns and breaks you out of the pocketbook drain from rent payments.
But while real estate can deliver impressive returns, there are other alternatives to real estate investment that are equally lucrative. And they may be a better option for you than locking yourself into a 40-year mortgage.
Peer-to-peer (P2P) lending is another way to diversify your portfolio if you want steady returns on your money less correlated with the market. In P2P lending, you fund loans for borrowers online. You then get paid back the principal plus interest at the end of the term.
It’s a similar process to what a bank does with your savings already, but you get better control (and earnings). And it may be enough to get you the uncorrelated interest you want without all the hassle property brings.
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