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  • May

Pros & Cons of Purchasing Investment Property

The pros and cons are different depending on the type of real estate investment that you make, but for today, we will focus on the pros and cons of investing in physical real estate.


house in the woods

Pros:

+ Consistent, slow growth: The past year, housing prices have definitely accelerated with double digit growth over last year. But with the rise in interest rates, housing predictions for 2022 and 2023 are still expected to grow, but not at the same rate as in 2020 and 2021 (see chart below).


housing prices year over year
Source: Fannie Mae's Economic & Housing Outlook

+ Flexibility in how you use the property: Whether you want to live in the property part-time and rent it out short term via Airbnb or find a long term renter, it's really up to you. You may want to rent it out long term first then move to short term if it's in a location you want to live in. Whatever it is, you have the choice to determine how to monetize the property to fit your current lifestyle.

+ Earn "passive" income on the side: Yes, it is technically passive income, however, I put passive in quotes as sometimes, it does require active management (more on that in the first point of the con section). When you purchase an investment property, one of the main things you look for is cash flow each month: does the rental income you are receiving cover all of the expenses associated with the property? This answer should be yes and it will allow you to pocket a few hundred dollars on the side.

+ Build equity to leverage in the future: One of the biggest benefits of investing in real estate is the ability to build equity. As you continue paying the down payment, you build equity in your property, which you can leverage later on to either buy more property, fix up your existing property and more.


Cons:

- Maintenance & repairs are either time-consuming or money-consuming: Have you ever had to deal with tenants complaining about stuff breaking? This can be a shock, especially for new owners. People always assume that once you have the house, you did the hardest part. But maintenance can be annoying as well, especially if you purchased an older building/house that needs constant upkeep. The roof may leak, the water heater is broken, etc. There are some costly repairs in homes that you need to make sure you are prepared for. If you decide to hire a management property, you are paying at least 10-15% of your rent as a fee to be completely hands off - that doesn't include the actual cost of the repairs itself, that is just to have someone else communicating with your tenant and hiring someone to do the job/fix.

- Having a bad tenant can cause issues: Nothing is worse than a bad tenant - one who pays rent late consistently (may be not at all) or one who complains about every little thing. It can be stressful at times and take a toll on your mental health. It may get to the point where you need to evict the tenant. While no landlord ever wants it to get to that point, you may find yourself in a similar situation at some point in time and you have to be able to handle it (more tips on this in an upcoming blog post).

- Need to do research on where to buy an investment property: People think it's easy to just buy a place and rent it out, but you really have to think about the location of the place, the potential future growth and calculate the costs associated with keeping up the property. There's a lot more work that goes into determining the right property and we have just the right spreadsheet that helps you with selecting the right investment property (stay tuned in the next week!).


If you're purchasing REITs and crowdfunding platforms, I'll talk more about this in a separate upcoming post!


Want to learn more about whether buying investment property is the right strategy for you? Book a 1 hr session with me to discuss!


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