Real Estate can be a great investment that can provide both short and long-term income and growth. It is one of the easiest things to get capital (a loan) for and has numerous tax advantages. So where is the downside? Just like with anything, there are pros and cons with any investment. Here a handful of things to think about when considering real estate as an investment. 

At the end of the day, all investments need to make financial sense. No matter how much you like a property, make sure the numbers work. If you are looking to flip a property, are you confident in what you can sell it for when you are done? Are you confident that the repairs won’t cost more time and money than you think? You will always want to have a healthy margin of safety between what you have into it and what you think you can sell it for. This way, when you learn you have to replace the roof as well, you still can make money. 

If you are looking to rent a property, you will want to look at the spread between your monthly expenses (mortgage, insurance, repairs, ect) and rent income. Is the spread wide enough to be worth your time? Does it provide enough income to make up for the times that you don’t have tenants or the hot water heater goes out? Do you want to manage the property yourself or hire a manager? A property manager generally costs right around 10% of rental income. Again, you will want a margin of safety so that you have some wiggle room on the deal.

A huge part of making the numbers work is buying the property at a good price. If you get a deal on a property, the odds of making money are so much higher. This way, even if you decide you don’t want to be involved in real estate any more, you can sell the property and at least get what you paid if not make a little money. Obviously, it is not always easy to know when you are getting a good deal. Make sure you are very familiar with the real estate prices and trends in your area. This will make it much easier to recognize a deal when you see one. 

Despite what you can read on the internet, real estate is not a passive investment. It takes tremendous effort and due diligence when finding good properties, not to mention all the work to maintain the property and find and keep good tenants. With any investment, there is a risk that the property values will go down and that you won’t be able to find good tenants. Real estate can become somewhat passive if you hire a property manager but you will probably want to be involved in the bigger decisions.

On the upside, real estate can provide larger returns than you can typically find elsewhere if you are good at it. Because you can often use a mortgage to finance a deal, it can amplify your returns. For example, let’s say you buy a property for $90,000 with cash. You put $10,000 into it to fix it up and you sell it for $120,000. You just made $20,000 on your $100,000 which is a 20% return. Now let’s use the same deal but say you only put $20,000 down and financed the other $70,000. You still use $10,000 to fix it up and sell it for $120,000. Now you just made $20,000 on the $30,000 you invested which is a 66% return. The use of debt allows people to do more deals and make more off the money they invest. The downside of using debt is that you are on the hook to pay it back no matter how well the deal plays out for you. For all these reasons, real estate can be an attractive option if someone is willing to put the time and energy into becoming an expert in their local market. Real estate is unique in the fact that varies dramatically by location. The Sierra Vista market is going to vary dramatically from other places and sometimes even within neighborhoods. This gives local real estate investors an advantage because they can become more familiar with the local nuances of the market. 

Real estate as an investment is not better or worse than other investments. But there are unique...