Is Real Estate a Good Investment?

Most investments carry a certain amount of risk, and real estate is no exception. But if you're looking to accumulate long-term wealth, real estate can present an excellent opportunity for the average investor.

There are many ways to invest in real estate, and the right type of investing for you depends on your unique situation. But before you close on your first investment property, there are several things you should keep in mind.

Why Invest In Real Estate In 2023?

Here are some notable real estate benefits:

• Leverage: Often, you can put down a relatively small amount of money and finance the rest when you purchase your investment.
• Passive income: Many real estate properties can provide regular passive income, which some say is the true key to building wealth.
• Legacy: You can pass real estate to your heirs, which can provide them with wealth while also bringing several tax advantages.
• Tax breaks: Tax breaks and write-offs like depreciation and maintenance expenses help you offset other income.
• Appreciation: Real estate typically appreciates over time. While there's no guarantee that your property will go up in value, it usually does — especially if you have a long-term investment horizon.
• Diversification: Real estate can be a nice way to diversify your overall investment portfolio.
• Hedge against inflation: Unlike investing in the stock market, real estate rental and sale prices can serve as a hedge against inflation.

But not everyone is cut out to invest in real estate. A real estate investor should have a solid understanding of the real estate market and the financial implications of investing in property. Additionally, a good real estate investor should have the financial means and stability to withstand potential market fluctuations while effectively managing their investments.

Also, there have been several dramatic fluctuations in housing market conditions over the years, values can vacillate and interest rates can rise and fall.

That said, the housing market has shown remarkable resilience and largely bounced back from the chaos of the pandemic. As the economy recovers and consumer confidence returns, demand for housing is expected to rise steadily. Real estate offers a tangible asset with the potential for long-term appreciation and the opportunity to generate passive income.

Benefits Of Investing In Real Estate

Real estate investing can bring pronounced, tangible economic benefits.

1. Tax Deductions

Real estate ownership provides tax breaks and write-offs, including depreciation and maintenance expenses, that you can use to offset other income that you earn. These deductions can significantly reduce taxable income, resulting in lower tax liabilities and potentially higher overall returns on investment. Additionally, real estate investors may qualify for deductions related to maintenance and repair costs, as well as expenses associated with property management and professional services.

2. Passive Income

Passive income is money earned with minimal involvement from the person who created the income stream. If you rent out your real estate, for instance, rental income can serve as a reliable source of passive cash flow. The passive nature of real estate income allows investors to have more flexibility and freedom in terms of their time and lifestyle, as they are largely not required to actively participate in day-to-day operations.

3. Cash Flow

Real estate investments can create a stable cash flow through monthly rent payments from tenants. Additionally, rental rates tend to increase over time, allowing investors to benefit from growing rental income. Moreover, in the long term, real estate investments have proven to be relatively resilient during economic downturns. This cash flow provides real estate investors with a reliable source of income, financial security and the potential for long-term wealth accumulation.

4. Equity

Home equity is the percentage of your home that you “own,” or the difference between what’s owed on a mortgage and the value of the home. As you make mortgage payments, a portion of each payment goes toward reducing the principal balance, which increases equity.

Investors can use equity to access additional funds, through refinancing, home equity loans or lines of credit.

5. Long-Term Appreciation

Real estate properties have the potential to appreciate in value over time, which is one of the significant benefits of investing in real estate. Several factors contribute to the appreciation of investment properties, including market demand.

But bigger picture, real estate values tend to increase over extended periods of time, which allows investors to benefit from the compounding effect of appreciation.

6. Protection Against Inflation

Real estate serves as a solid buttress against inflation as increased costs drive up the general price level, causing real estate values tend to rise in tandem. Also, rents from a rental property can be adjusted to keep pace with inflation, allowing investors to maintain a steady stream of cash flow. Real estate investments also provide a tangible asset that retains value and can serve as a source of wealth during inflationary periods.

7. Portfolio Diversification

Investing in real estate can help diversify your investment portfolio by adding a tangible asset that is distinct from traditional investments, such as stocks and bonds. Real estate typically does not move in tandem with the stock market or bond market, providing a hedge against volatility. In other words, the income generated from rental properties can offer a steady cash flow that is not reliant on market performance.

Potential Downsides Of Real Estate Investing

• Large upfront costs: Investing in real estate typically requires a high down payment, which requires a notable amount of cash upfront.
• Property values possibly decreasing over time: Although real estate values tend to rise over time, there are no sure things and the investment is not guaranteed to appreciate.
• Ongoing maintenance and repairs: Properties need regular maintenance, such as leaf raking and snow shoveling. There are also larger costs, ranging from wear-and-tear expenses (painting or roof repair) to emergency costs (floods or fires). 
• Non-liquid funds: Real estate is a long-term investment that cannot be sold overnight. Even in a strong seller’s market, it can take 30 days or more to list a home, negotiate a deal and close it.

Common Types Of Real Estate Investments

There are different types of real estate investments, and they bring different levels of value — and require different levels of involvement.

Residential Houses

Residential properties — such as single-family homes, townhouses, condominiums or apartment buildings — can generate income through rental payments or be purchased with the intention of selling for appreciation.

Commercial Properties

Investing in commercial properties involves purchasing office buildings, retail spaces, warehouses or industrial properties. Commercial real estate investing focuses on generating rental income from businesses leasing the space.

Real Estate Investment Trusts (REITs)

REITs are companies that own, operate or finance income-generating real estate. Investing in REITs allows individuals to own shares in a professionally managed real estate portfolio without directly owning properties.

Vacation Rentals

This type of investing involves owning properties, such as vacation homes or rental properties in popular tourist destinations, and generating income by renting them out on a short-term basis. Platforms like Airbnb have made vacation rentals more accessible to individual investors.

Real Estate Flipping

Flipping involves purchasing properties, renovating or improving them, then selling them quickly for a profit. Flippers aim to create appreciation by renovating our upgrading properties.

Is Real Estate Investing Right For You?

To determine if buying real estate is right for you, assess your short- and long-term investment goals. Keep in mind that real estate typically offers long-term appreciation potential, making it appropriate for people seeking stable, sustained growth as opposed to quick returns.

And ask yourself this question: Do you have the money to cover upfront real estate costs, including down payments, closing costs, property inspections and potential renovations? Because real estate isn’t a set-it-and-forget-it proposition.

Relatedly, real estate requires ongoing maintenance, tenant management and property-related responsibilities. If you don’t have the time for this type of work, real estate investing might not be for you.

Lastly, consider your risk tolerance. Real estate investments, like any other investment, come with risks. Market fluctuations, property vacancies and unforeseen expenses can affect returns.

The Bottom Line

Investing in real estate is complicated — you need time, money and an ability to withstand some risk. But if you're looking to accumulate long-term wealth, real estate is worth exploring. And keep in mind that there are different types of real estate investments, including commercial, residential, flipping and more. All of these come with different benefits and costs, so be careful and conduct a thorough examination to figure out what’s best for you.

If you do take the plunge into real estate, remember that the Rocket Money℠ mobile app allows you to monitor your investments. Download the Rocket Money app today!