Real estate is often considered a smart long-term investment. Save money for a down payment, buy a home, and grow your equity over the years until you are ready to sell. But is it right for you?
Paul Salley, director of business acquisition for REAL Trends, spoke with financial planners to create pros and cons lists of real estate as an investment.
Addressing Real Estate as an Investment
by Paul Salley, director of business acquisition
Real estate professionals have long been touting residential real estate as a safe and effective long-term investment. This principle was taught at the Ninja Leadership Installation I attended last summer. In that installation, Larry Kendall challenged us to have an investment property per child if possible. The thought is that each rental will pay for the child’s college expenses.
I sought out the expertise from Nielson Wealth Management, based in Denver, to discuss how brokerages and real estate professionals can educate both themselves and their potential buyers on how real estate can be a great investment.
Mike Nielson, a certified financial planner at Nielson Wealth Management, discussed the pros and cons of residential real estate as an investment. “I think the real question is: Is it right for you? I always like to [have investors] create a pros and cons list.”
The pros of real estate as an investment:
- Rental income. Whether you’re planning for retirement or in retirement, having that extra steady income can be useful.
- Income is flexible. Rental income increases over time; it’s not a fixed amount. Your rental income is going to be more 10 years from now than it is today, which is particularly helpful for retirees.
- Keeps pace with inflation. Sometimes, it exceeds it.
- Real estate appreciates with time. Not only do you get rental income, but the property is going to appreciate over time.
- Tax benefits. The special tax-free write offs and benefits are useful. But, note, when selling the property, the profit gets treated as capital gains.
- Leveraging the bank’s money. With a small down payment and a mortgage, you can buy a property. There are only a few investments that allow you to take out a loan to buy the investment.
The cons of owning real estate:
- Owning a home is not liquid. Normally it takes some time to sell a home, so you can’t decide to sell it and get your money in a week.
- You must have liquid money. Make sure that you have ample money outside of the real estate investment,
as you’ll have to spend money to maintain the home.
- Being a landlord is hard. You have to deal with renters, collect rent checks, perform inspections and more. It can be a lot of work.
- Real estate is expensive. Even using the bank’s money, you still have a lot of your money tied up in a single asset. Consider investing in smaller homes or condos. One of the keys of real estate is to make sure you have a balanced investment approach.
When discussing residential real estate as a long-term investment, Mike was sure to highlight the importance of not having all of your eggs in one basket.
This article originally appeared in the November 2017 issue of the REAL Trends Newsletter is reprinted with permission of REAL Trends, Inc. Copyright 2017.
If you are considering whether a real estate investment is right for you, seek advice from a local real estate professional. Your REALTOR can provide valuable insight on the local market, neighborhoods in Colorado, and housing market news and statistics. Combining real estate expertise with the financial pros and cons of real estate as an investment, you can determine if buying investment property is the right choice for you.