According to realtor.com, the cost of purchasing a home in Haddonfield, NJ has increased by 20% percent in the last year and 16.2% nationwide.1,2 Alongside a steady drop in mortgage rates since 1981, this could leave investors wondering whether real estate is a good investment.3
Of course, this decision will depend on your personal financial goals. But to help, we’ve compiled a list of advantages and disadvantages of real estate investing. This list should not be used in place of advice from a financial advisor and should only be used to provide clarification.
Types of Real Estate Investing
Several options exist to leverage real estate, offering different opportunities to investors. Below we’re focusing on the advantages and disadvantages of two common options:
- Buy To Rent: You purchase a property with the intent of renting to tenants. This can be the entire property or a portion of your property.
- Buy To Flip: This is a property purchased with the intent of improving it to be sold later at a higher price.
The Advantages of Real Estate Investing
Many individuals make money off of real estate by either improving the home and selling it or by renting the home to tenants. The latter option provides investors with a steady stream of passive income. Often this income is intended to cover the costs of owning the property, while also providing a small increase in income.
Though it does come with additional risks, real estate has the potential to be relatively stable compared to other investments. This is because rental properties can provide a consistent amount of income, where other investments fluctuate.
Real estate may provide several tax advantages to owners, including:
- Deducting your expenses
- Depreciation deductions
- Taking advantage of capital gains
- Deferring taxes altogether
- Be self-employed without the FICA Tax
Ease of Access
The process of purchasing a property is relatively familiar to many investors, especially if they already own a home. For this reason, real estate investment can be particularly attractive, as long as one can afford the property and find tenants.
Disadvantages of Real Estate Investing
Real estate is by no means a low-cost investment. The average cost of a home in Haddonfield, NJ in June of 2021 was $578,750 while nationally the median sales price was $374,900.1,2 This price alone gives real estate a high bar for entry. One must be able to afford both the purchase price and upkeep of a property to be able to utilize it as an investment.
As the famous real estate quote goes it is all about “Location, Location, Location.” The location of your property can and will influence its value. Often this is thought of as job opportunities, crime rates and schools. Changes in ordinances by local governments can also be a factor. Be sure to research the location of your potential real estate investment before putting any money down.
Owning a property and becoming a landlord is no simple task. There are several responsibilities one is legally obligated to follow, with many taking extra time out of your day. Some responsibilities of a landlord include:
- Collecting rent and returning the rental deposit after tenants leave.
- Providing rental receipts and a copy of the lease.
- Maintaining the property and ensuring that it complies with health and safety guidelines.
- Maintaining common areas, like driveways and yards.
This is not an exhaustive list of responsibilities, but it serves to show some of the things that can take extra time and effort to manage when compared to other investments. As an alternative, property owners can hire a company to manage many of these responsibilities. However, this can also increase the cost of owning the property.
Difficult To Pivot
Unlike other investments, it’s difficult to sell a property. And if it’s difficult to find tenants, or the market takes a turn for the worse, your investment could turn into a liability.
Even with rising prices in property, real estate may be an attractive investment option for certain individuals. But, like any other investment, real estate comes with risks. Weighing the advantages and disadvantages can help. Be sure to discuss your investment goals with a financial advisor before making a final decision on whether or not to utilize real estate as an investment strategy.
Andrew Mastro, CFA, CFP®, CAIA is the founder of Wrought Advisors a fee-only, comprehensive, financial planning, and investment firm specializing in high-income Generation X & Y professionals seeking financial freedom.
This content is developed from sources believed to be providing accurate information, and provided by Wrought Advisors. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.