Real Estate Investing – Is It For You?
Diversification of your investments is always a good idea. However, with uncertainty in so many arenas, from the political climate to the the impact of tariffs, to uncertain interest rates and stock market fluctuations, more and more investors are looking for ways to bring diversification to their portfolios to augment more traditional investments like stocks, bonds, and mutual funds. Real estate investing has always been a strong investment for building wealth and creating positive cash flow, but interest among mainstream investors has been surging. With volatile markets putting retirement assets in crosshairs, many are looking to real estate for stability and recession-proof growth.
All investments have risks. While it’s unlikely that the value of real estate would fall to zero, like a stock or bond could, there are still pros and cons that should be considered when evaluating real estate as a potential investment. If you own a home, you are already a real estate investor. However, if you decide it’s right for you, you can purchase property with the intent to resell for a profit (flipping), or become a landlord to collect the cash flow and the value appreciation of your real estate asset.
Here are some things to consider.
Insurance Protection – when you own real estate, you should ALWAYS have homeowners insurance. Insurance protects the property and will pay for replacement or repairs in the event of natural and some man-made disasters, thereby protecting the value of the property. Traditional investments, which are subject to fluctuations in value as variable as the wind blows, do not have such protection. Bank assets have FDIC insurance to protect deposits against bank failure, and SIPC insurance protects you from losing cash and assets if a brokerage firm fails, but the value of the assets themselves have no protection from market forces.
Tax Advantages – When you buy and sell stock, you are subject to taxes on the gains (unless you are transacting in a tax deferred retirement account, like an IRA). Typically, the sale of real estate would also be subject to taxes on the gains, but investors can take advantage of the 1031 Exchange program, which allows the sale of a property, and a purchase of another property of equal or greater value, while deferring the tax liability. You can also give yourself added tax protection by titling your property as an IRA investment. When you sell, the cash goes into your IRA and receives the tax deferral until you are ready to reinvest it. You may also be able to write off some of the expenses of repairing/updating the property, which can further reduce your taxes. Consult a financial advisor or tax advisor for more on these benefits.
Less Market Volatility – investing in the stock market is often described as a roller coaster ride – way up one day, and crashing down the next day (or sometimes in the same day!). Real estate investments are subject to market forces, too, but real estate will almost never completely lose value. Even a complete demolition will still have value as a building lot. Values almost always appreciate, but the growth of that appreciation may slow. Values can decrease based on condition and market affects, but you are not likely to lose your entire investment. When the values do decline, it’s usually not a sudden move, and you will have time to make adjustments if necessary.
You Are in Control – when you invest in stocks and bonds, you often feel like you are at the mercy of fickle winds. An unfortunately news story, a chart formation, a decision to divest by a far off entity can impact the value of YOUR investment. When you invest directly in real estate, you are in the driver’s seat. While you may not control things like interest rates and monetary policy, YOU control who you rent to, who you hire to work on the house, the condition you keep it in. You decide where to buy, which house to buy, when to sell. If your home decreases in value because repairs were neglected, or you choose a bad tenant that trashes the place, you are in control. If you keep the property in good shape and up-to-date, and make good decisions, then you will likely gain value.
Cash Flow and Appreciation – if you choose to rent out your investment property, you benefit from any cash flow above and beyond the what’s needed to cover the mortgage, insurance, and general upkeep. That’s money in your pocket, which you can use to purchase more property, to pay down the mortgage faster, or to invest in other investments. As you make mortgage payments, your equity increases; your equity also increases as the property appreciates in value.
You Have to Do Your Homework – Investing in real estate isn’t quite as easy as allocating your 401k from a list approved mutual funds. And mistakes aren’t as easily or quickly undone. It takes time and a good amount of research to determine where you want to purchase, finding good deals, and then preparing the property for flipping or renting. You aren’t alone, though, as there are many people embarking on this journey with you. Read everything you can online or in the library, talk to other investors, join a group. You can also talk to Keystone Realtors and Keystone Commercial Brokerage. We are ready to help you!
Dealing with Contractors – Don’t expect to DIY a flip or rental home. There are some things you may be able to do yourself, if you are handy, but time is money. The longer it takes to get the house flipped, the more you lose in interest on the loan and risk movements in the market. The longer you take to get a tenant in place, the more you lose by not having income to offset mortgage payments on the property. Having a contractor you can trust to take care of issues quickly, at a reasonable price, and to your specifications, can make or break a real estate investor. But it takes time, and you will go through a lot of candidates before you find the right one. When you do find someone that you work well with, keep them happy so that they want to keep doing work for you!
Liquidity – If you are in a position where you need access to ready cash at a moment’s notice, then real estate might not be the right investment vehicle for you, unless you have other sources to tap. Getting the cash out of a real estate investment requires time, usually months, so list and close on a sale. It can also take a few weeks or months to start seeing positive cash flow from a new renter. There is no immediate gratification with real estate investing, so if you need access to your funds, then there are a lot of liquid options out there.
Let my team at Keystone Realtors® meet all your real estate needs. We can help you find the perfect investment property to get started, and provide advice on your investing journey. Paul Phangureh has over 16 years of experience in buying and selling in the Santa Clara and San Mateo County areas, specializing in the high-end, luxury market, as well as commercial and multi-use real estate. We can help you navigate the process of getting started with real estate investment. Visit our website at Keystonesv.com for listings and information. You can contact Paul at 650-924-2544, or email at [email protected].