Benefits and Challenges of Real Estate Investing
Investing is an important topic to me because I have the most interest in it over all other real estate practice topics. I found the chapter on investing the most beneficial to me because it directly relates to my goals in the real estate field. I hope to invest in real estate in my future to have some additional income. The most common reason people invest in real estate is to make money. There are both benefits and challenges that come along with investing that all investors should know.
The benefits that come up the most when talking about investing are the tax breaks. The interest on both the real estate loans and property taxes paid on a rental income are tax deductible (Mckenzie 2007). Repairs, maintenance, and any other operating expense as well as depreciation are also tax deductible. In some situations it is possible for an investor to do what it called a “tax-deferred exchange”. This is when an investor can sell one investment property and buy another one without paying immediate income taxes on the first property (Mckenzie 2007). Refinancing can be very beneficial to an investor who wants to refinance an investment property to buy more investment properties. The cash that the investor receives from the investment property is tax-free. Along with the interest paid on the new debt being tax deductible, the investor is also adding a new property to their collection to add to their worth (Huber 2005). Another benefit of investing is the appreciation potential (Huber 2005). Over time prices are typically driven up, so by renting the property when the market is low a person gives him or herself the opportunity to sell it when the market is high and still make money in the waiting process. Investing can provide an additional income for investors as long as their cash flow is positive. Maintaining a positive cash flow means an investor is taking in more money than they are spending on the property (Huber 2005). Investing in property can also provide financial stability especially with long-term leases. These long-term leases often come from commercial properties. One of my goals in my real estate investing future is to own a shopping center. I hope I can profit from a few of these benefits of investing.
Investors also face many challenges. The first challenge that arises when a person decides to invest is the amount of money they must come up with to buy the properties. Sometimes it can take a very long time before profit is seen when buying investment properties. It also possible the person will never see a profit and suffer from a loss when taking on a big project to fix up an investment property (Huber 2005). Another major challenge that investors have to deal with is the lack of liquidity. Liquidity is the ease at which an asset can be converted into cash (Huber 2005). Real estate averages between two and nine month to sell and this could hurt someone who needs the money from the investment immediately. If someone is planning on owning an apartment complex with 16 units or more they must hire an on-site property manager (Huber 2005). This could incur extra costs on the investor that they were not prepared for or did not have the budget for. Other problems that could arise are problems with financing, such as short-term high interest loans, and the personal attachment an investor can create with their properties causing negative profitability problems (Huber 2005).
After looking at both the benefits and challenges of investing I believe that the benefits outweigh the challenges. I still hope to invest in my real estate future. The challenges did not scare me away, but made me feel more prepared for the unexpected. It was a surprise to me to see how many benefits there are to investing. I think if someone goes into investing educated about real estate investing they will have little trouble and visa versa. I hope to learn more about real estate investing in my courses to come and hopefully I can own that shopping center one day.
Huber, Walt, and Arlette Lyons. California Real Estate Practice. 5th ed. Covina, CA: Educational Textbook Company, 2005. 411-418.
McKenzie, Dennis J., Lowell Anderson, and Cecilia A. Hopkins. California Real Estate Principles. 8th ed. Mason, OH: Thomson South-Western, 2007. 377-380.