The Pros and Cons of Real Estate Investing: What You Need to Know

The outlook for the stock market and much of the economy remains uncertain. However, many investors are looking for alternative spots to develop their portfolios. One of the top choices for a number of reasons is real estate. This exciting field offers both obvious and lesser-known benefits that make it a great bang for your buck. But it's not suitable for everyone. Read on for an explanation of the pros and cons of real estate investing.

Benefits of investing in real estate

Many people know some of the benefits of investing in real estate. But unless you take a closer look, you might be missing out on some lesser-known but equally valuable benefits.

Several ways to earn money

Real estate investments offer many ways to make money, whatever your strategy.

For example, owning a rental property doesn't just make you money through the cash flow you receive each month after paying the property's mortgage and bills. It also quietly earns money through appreciation as the property increases in value over time. At the same time, you accumulate additional money each month when you make the mortgage payment. This allows tenants to repay the principal of the loan.

Fiscal advantages

Not only will you be able to deduct the actual expenses necessary to operate and maintain the property, but you will also be able to write off depreciation.

This paper expense costs you nothing but can reduce your tax bill. When you sell the property in the future, you may also be able to take advantage of reduced capital gains tax rates. Alternatively, you can defer taxes entirely by purchasing a similar property in what's called a 1031 exchange.

Protects against inflation

Inflation has been a major talking point over the past few months as prices continue to rise across the economy. These conditions are ideal for holding a tangible asset such as an investment property.

As prices rise, the value of your property tends to rise as well, saving you a lot of the pain of inflation. At the same time, you'll pay off your loan in "cheaper" dollars, usually at a long-term fixed rate. As rents and other income increase over time, your mortgage payments will generally stay the same, improving your returns.

Diversify your portfolio

Too often, people invest all their nest egg in the stock market, bonds or similar financial instruments. This means that they have tied their long-term wealth entirely to these financial markets.

Real estate investments provide essential diversification, essential to any balanced portfolio. Few people can truly avoid economic downturns, but having diversified investments means you can soften the blow and come out the other side as strong as ever.

You don't need a lot of money to get started

Many people may ignore real estate, thinking they don't have the money to find a deal.

This is not necessarily the case. Besides common strategies like investing in rental real estate or house flipping, real estate investors can also engage in low or no down payment schemes like wholesale real estate.

Those who sell wholesale real estate do the work necessary to find good deals. They usually do this through aggressive and creative marketing to homeowners who may not even initially consider selling their home. Once they find a willing seller, they connect them with a previously identified buyer who has the money for an investment property but no time to hunt for bargains.

For his work, the wholesaler generally receives remuneration. They profit by selling the contract on the property to the end investor at a slightly higher price.

As you can see, it requires little initial investment from those interested in wholesale real estate, other than marketing costs and time spent networking with buyers and sellers potentials. This can be an ideal way for potential real estate investors to generate capital. They can do this while developing their relationships in the local market.

Beginning real estate investors can also use more passive means like REITs, which are essentially mutual funds that hold real estate investments. These are essentially hands-off investments, but generally generate the lowest returns with the fewest ancillary benefits.

Disadvantages of investing in real estate

Like any investment, real estate...