Stocks go up and down, but real estate has historically been a more stable investment. There are two main ways to make money off real estate: buying and re-selling property for profit and buying real estate to rent it out. Both approaches have advantages and disadvantages, which can create profit or loss for the investor.
Real property is quite expensive and therefore, when the investor re-sells the property, there is great potential for profit. Since real estate values typically increase with inflation, property investments can serve as a hedge against inflation. In addition to being able to sell real estate, investors can make money renting it. Landlords typically get a steady net income from their rental property.
With the purchase of real estate, an investor attains financial leverage. The real estate owner can borrow money -- whether a second mortgage, home equity loan or personal loan -- using the real property as collateral. It also takes a smaller proportionate outlay to purchase real estate than other investments. The home buyer has to put down only a fraction of the purchase price, such as 20 percent, as a down payment.
The federal mortgage interest tax deduction is a great benefit because home owners reduce their taxable income by the amount they pay on mortgage interest. It reduces the tax burden for homeowners, saving them thousands of dollars per year. U.S. taxpayers who itemize their deductions can deduct interest on up to $1 million in mortgage debt on their primary and secondary dwellings. They can also deduct interest paid on up to $100,000 in home equity debt. Landlords also enjoy a variety of tax deductions, such as interest on goods and services used to maintain the rental property, depreciation of the property, repairs, and insurance expenses.
Non-Liquidity and Fluctuating Real Estate Market
Real estate is a very non-liquid asset. A property owner might not be able to sell his investment when he wants to, or for the price he needs to in order to make a profit, especially when the real estate market takes a dip. In the meantime, he is on the hook for monthly mortgage payments. Events in certain neighborhoods, such as a spike in crime or a major employer closing down, can decrease property values and make it harder to re-sell the investment property.
Expenses and Tenants
Maintaining real estate can be expensive. Real estate taxes must be paid, and the property must be kept up. Repairs must be done. In some cases, landlords may end up with tenants who damage the property or fail to pay rent, and it can be a long process to evict them.
The real estate investor must find tenants for rental property and respond to them whenever something malfunctions. They are also liable if someone gets injured on their property. Investors who buy real estate to flip for a quick profit must renovate the property, find a buyer, and deal with multiple parties, including lawyers, bankers, real estate brokers and prospective buyers. Investing in securities is far less time-consuming.
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