The Benefits and Drawbacks of Real Estate Investing


This article was sent to us by: Bernard U. at 01122010

1 Real Estate » The Benefits and Drawbacks of Real Estate Investing
Bookmark and Share

For millions of people real estate investing represents the opportunity to be able to make significant profits and build their net worth. However, like all kinds of investing real estate has its own unique set of drawbacks. To avoid having the kind of situation like what has happened to so many investors over the years requires a thorough understanding of the risks and rewards. This will help you to effectively lay out a real estate strategy that will reduce your risks as much as possible, so that you can be able to maximize your profits.

Benefits of Investing in Real Estate


Real estate has been known to be one the best investments for generating wealth. This can be seen by looking no further than the Forbes richest 100 Americans, with nearly 30% of this list comprising of people made their fortunes in real estate. This is why real estate is so attractive to investors and has numerous benefits that it offers.

Flexibility

One of the biggest advantages of real estate investing is the overall amounts of flexibility that it gives you. What happens is when you are conducting various real estate deals, there are numerous financing options these would include: you can do a lease with the option to purchase, owner financing and traditional financing just to name a few. This is important because when you are looking at a particular piece of property you need to have numerous options that will allow you to effectively mange your cash, while providing you with the leverage necessary to build your net worth.


Inflation
One of the biggest problems with any kind of investing is finding an investment that can keep up with the cost of inflation. For some investors who are more risk adverse, this can eat away at their wealth over time by not go into those investments that have greater rewards with large amount of risks. When you are investing in real estate, you are able to reduce the risks in comparison to other areas; while, being able to have enough long term price appreciation that will keep up with the costs of inflation.

Taxes


Another advantage that real estate investing has to offer is numerous tax breaks. What happens is: real estate is treated different under the IRS Code. This means that you can be able to write off depreciation, interest and in some cases any capital gains taxes. Over the course of time, this will increase your overall profits by paying less in taxes.

Drawbacks of Investing In Real Estate


Real estate has its fair share of drawbacks, a good example of this can been seen over the past several years, as some of these issues have been brought to the forefront. To avoid costly mistakes, requires that you understand the unique drawbacks that that comes with this form of investing.

Leverage

Leverage is the biggest reason why so many real estate investors have problems. This is when the amount that is owed on the property is so severe, that the property owner could not possibly keep up with the mortgage payments. For example, a property owner who owns a rental house that is making $500.00 per month off of decides to refinance the property into variable interest rate mortgage, and take the equity out of the property. The original mortgage payment was $300.00, with the adjustable mortgage payment the amount increased to $600.00. What this shows is that the property owner used his leverage to increase his mortgage payment more than what actually being made. This means, that at some point down the road if interest rates start to rise the property owner could have trouble making the new mortgage payments, especially when you consider the fact that this owner is losing $100.00 per month because of the change in leverage.

Liquidity

Real estate is considered to be very illiquid, this means that if you are purchasing a property and expecting to sell it within six months, you more than likely will be disappointed. Historically, to sell any kind of commercial or residential property means that it must sit on the market at least nine months. When someone needs the money short term this can be a major drawback as they are forced to sell the property for pennies on the dollar, to gain access to the funds that they need.

Clearly, investing in real estate has many different benefits and drawbacks that it can offer you. A few of the benefits that it offers would include: flexibility, protection from inflation and numerous tax advantages. Some of the different drawbacks that it has includes: leverage and liquidity. It is through understanding the differences between the various benefits and drawbacks that will help you determine if investing in real estate is right for you. This is important so that you can avoid the same common mistakes that many have made in the past when investing in real estate.

Legal Disclaimer

Webworldarticles.com is not responsible for the information contained by this article as well for any and all copyright infringements by authors and writers. Webworldarticles.com is a free information resource. If you suspect this article for any copyright infringement, please read the terms of service and contact us to investigate the problem.

Related Articles

1. Real Estate Investing is the Most Secure Investment During Insecure Times
Real estate investing is honestly one of the wisest investments a person can make, for the production, and sustenance, of a consistent, and reasonable financial income. There have been many instances throughout history where the stock market has crashed, and people have lost a whole nest eggs of money. These investors, are still subconsciously looking for a new investment, and a return on that investment. But after a stock market drop, or severe crash, it is hard for an investor to come back out of his protecti...

2. Practical answers to questions issued by real estate agents
Five things the real estate agent asks that one should never answer Remember, your agent, while he wants to do his best for you, is fundamentally incentivized to make sure the business gets closed, any business. Most agents have learned that part of their job is managing their client to help them complete the business. I recommend that you never tell your agent anything you wouldn't want him to convey to the other side of the negotiation. While your agent would never intentionally tell the other side con...

3. The language of real estate and the seven contract rules
The language of real estate you have to learn While you don't have to become a real estate attorney or even a title company nerd, it is important that you understand the language of real estate so that you can intelligently move through the world of real estate safely and profitably. It's been said that the language of science is math. Well, the language of real estate is the language of contracts and industry-specific jargon. It's terms like deeds and mortgages and encumbrances and conveyances. Don't let any of this in...

4. How to make use of your time efficiently when doing real estate business
Leveraging Your Time as an Investor for Maximum Profit The key to leveraging your time as a person who invests is to focus with absolute clarity on the areas of your business that give you the highest return for your investment of time and energy. Constantly ask yourself, "What's the best and highest use of my time right now?" If you find yourself doing tasks that you could pay someone else USD10 or USD20 per hour to do, how in the world are you going to earn USD100 or USD200 per hour, let alone USD1,000 or USD2,000 per...

5. Making sure that you receive your monthly rent payment
How to Make Sure You Get Paid Your Rent Each Month-On Time! The key is to make it easy for your tenants and tenant purchasers to pay you rent each month. The easier it is for them, the more certain you are of getting your rent. Here are four ways to make it easier for you to get paid your rent each month. 1. Payroll Deduction/Direct Deposit. Why wait for your tenants to get their funds, deposit their paycheck, and then pay you? Cut out the middle man! If your tenant works for a company that will allow it, s...

6. Under the United Nations Environment Programme
Site-and-Service Programmes In addition to the above constraints which were identified during evaluation missions, a number of landmark trends came to light during the mid-1970s to mid-1980s. Perhaps the most critical was the recognition that the economic ‘trickle down’ effect was not turning around the lives of the majority even in prosperous countries such as the US and UK or in some fairly rich Latin American countries like Argentina and Brazil. Development policies thereafter began to focus on growth w...

7. Recent Perspectives on Housing and Economic Development
Recent Perspectives on Housing and Economic Development Cognizant of the factors that inhibited the success of the above four major housing policies and programmes on the one hand, and the need to facilitate the implementation of the Habitat Agenda on the other, UNCHS in partnership with a number of development partners designed and launched novel housing strategies and programmes. The rethink became imperative given the central role of good governance as well as the need for a holistic and proactive approach to housi...