The (Many) Pros and (Few) Cons of Real Estate Investing
Written by Kim Kiyosaki | Thursday, November 9, 2017
Wondering if real estate is right for you? See for yourself.
Donald Trump made his name and fortune in real estate. He once said, “It’s tangible, it’s solid, it’s beautiful and it’s artistic, from my standpoint. I just love real estate.” Regardless of how you feel about his politics, you have to hand it to the man—he certainly knows real estate.
I also know and love real estate. Robert and I began investing in small, single-family homes in the late 1980s. Once we were ready to graduate to larger properties, we purchased a six-unit apartment building. Today, we own more than 1,000 apartment units. As you can see, we started small and grew with time. Nearly every successful real estate investor I know started small, too. You’ll learn why shortly.
To be clear, when I speak of real estate, I’m talking about rental real estate that produces a positive cash flow—things like single-family houses, a duplex, a triplex, an apartment building, an office building, retail stores, shopping centers, storage facilities, warehouse, etc.
Pros of Real Estate Investing
Let’s dive into the many reasons to invest in real estate:
Leverage of OPM (Other People’s Money). Here’s the concept in a nutshell: If you pay 10%-30% as a down payment, a bank, lending institution or private party will provide the rest of your funding. That means you can own a $100,000 piece of property for just $10,000 to $30,000. Where else in life can you get a deal like that? I talk a lot about financial intelligence, and understanding OPM is one sign of it.
Cash flow. If purchased and managed properly, your property can offer tremendous opportunities for a monthly profit. This is called cash flow, and this ongoing stream of income I receive from an investment is the reason I love real estate.
Appreciation. If the value of your property has gone up and you decide to sell, your profit is called appreciation. Cash flow and appreciation are two forms of revenue from rental properties. Remember, even though you aren’t buying in hopes of selling to earn a quick profit, you should always have an exit strategy in place.
Fewer highs and lows. A cash-flowing property is not subject to the daily ups and downs of the markets. It is typically a longer-term play. As you may know, a down real estate market can actually be the best time to buy.
Tax advantages. Tax credits are available for low-income housing, the rehabilitation of historical buildings, and certain other real estate investments. A tax credit is deducted directly from the tax you owe. You also get an annual deduction for depreciation, which is typically a percentage of the value of the property that you can write off as an expense against revenues. Finally, in some countries, the gains from the sale of real estate can be postponed indefinitely as long as the proceeds are reinvested in other real estate. What a bonus!
Less hectic. You usually have time to do your due diligence, analyze numbers, make comparisons and then make the best investment decision possible.
Cons of Real Estate Investing
I would be remiss if I didn’t mention a few disadvantages when it comes to real estate investments.
Time lag. Offers, counters, appraisals, inspections, financing—they all take time. This is why patience is a virtue. After you’ve been through it once, you’ll know what to expect on future opportunities.
Not liquid. You simply cannot jump in and out of real estate very quickly, making it difficult to convert the asset into cash in a hurry. Remember number six above, where I said time is on your side? Well, not if you need to sell quickly.
Difficult and/or time-consuming. Of the four asset classes, real estate is the second most difficult (after business). Properties must be managed on a daily basis, including vacancies and bad tenants. This is also why I suggest starting small, where it’s a lot less expensive to make mistakes while you’re still learning.
And there you have it: If you can rise up to overcome those few cons (which takes experience and education), you will become a financially free woman who made her name and fortune in real estate.
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