Investing in real estate can be a great way to diversify an investment portfolio and benefit from the economic performance of real estate. However, there are some potential downsides to consider before investing. Recurring income after rent has been collected and all bills have been paid is one of the biggest benefits of investing in real estate. Historically, real estate is appreciated when held as a buy-and-hold investment.
According to the Federal Reserve, the median sales price of homes sold in the U. S. has increased by more than 238% in the last 20 years. Owners of investment real estate can use a Section 103.1 exchange to defer payment of capital gains tax when a property is sold for profit.
Each time an investment property is sold and replaced by another within a specified period of time, the capital gains tax liability can be deferred over and over again.Investing in real estate requires immobilizing large amounts of money for an extended period of time. To get the best interest rates and conditions when financing a rental property, and to keep debt serviced, investors typically make down payments of 25% or more. Real estate is a long-term investment that can't be sold quickly and easily. Even in a strong seller's market, it can take 30 days or more to list a home, negotiate a deal, and close the escrow.Therefore, before investing in real estate, it is important to pay off the debt with high interest rates and establish an emergency fund for personal expenses.
REITs offer investors a fully passive opportunity to benefit from the economic performance of real estate. However, REIT shares do not offer all the benefits of directly owned real estate, such as tax deductions and the ability to defer paying capital gains tax with a 1031 exchange.Lending institutions are very careful about who they lend to, and often require a down payment of 20 percent or more. Sometimes finding a loan for an investment property represents a formidable task. Although Fannie Mae and Freddie Mac often offer generous loans to eligible investors, not all investors meet the eligibility requirements.You may find that obtaining financing for an investment property is next to impossible.
Real estate investments require a lot of money. Some expenses to consider include a down payment on a property, closing costs, mortgage, and ongoing maintenance charges. These costs could affect the value of a property.That's why entering the housing market means you're committed to making a long-term investment. The longer you keep a property, the better your returns.
While investing in real estate has numerous advantages, there are also potential downsides to consider.Real estate investments purchased with hard money or with a mortgage can be structured in a way that is quite safe and affordable, so that large purchases can be made with a relatively small initial investment. Since it's considered less risky compared to other investments, acquiring real estate can be a great addition to your investment portfolio.Keep in mind that there are many ways to invest in real estate without owning, financing, and operating physical properties. A REIT is a company that owns and operates real estate, which may include single-family rentals (SFR), apartment buildings, commercial properties, special-purpose investments such as cold storage facilities, or a combination of property types.Like any investment, there are advantages and disadvantages to investing in real estate, in addition to the potential for significant profits. But real estate investments are relatively illiquid because properties can't be sold quickly and easily without a substantial loss of value.With real estate, you can be sure that the value of your investment will not drop to zero at any given time.
You can limit your risks by doing your due diligence and researching potential markets before investing.