Real Estate Investments: Pros and Cons That Landlords Need to Know

If you're considering investing in real estate, it's important to weigh the pros and cons carefully before making a decision. On the one hand, real estate can be a very lucrative investment. On the other hand, there are significant risks involved that could leave you with substantial losses. At the same time, by using different landlord tools, you can save time and manage your real estate property effectively.

What Are the Pros of Investing in Real Estate? 

There are several key advantages to investing in real estate, including: 

Cash Flow 

One of the biggest reasons to invest in real estate is for the cash flow. When you buy an investment property while being a landlord, you can generate income every month by renting out your property to tenants who are looking for apartments for rent. This extra income can help you reach your financial goals more quickly. 

Appreciation 

Another big perk of investing in real estate is that over time your property is likely to increase in value (known as appreciation). Whether it's due to market conditions or simply the passage of time, appreciation can provide you with a sizable return on your investment when you eventually sell your property. 

Leverage 

When you invest in real estate, you have the opportunity to use leverage, which means you can control property worth much more than the amount of money you've invested. For example, if you purchase a $200,000 property with a 20% down payment of $40,000, your return on investment would be much higher than if you had just invested $40,000 directly into stocks or mutual funds. Of course, leverage also means that your losses could be amplified if the value of your property decreases. 

Tax Benefits 

Another advantage of investing in real estate is that there are several tax benefits available that can help offset your costs. For example, if you own an investment property and it generates rental income, you may be able to deduct certain expenses related to the property on your tax return (such as mortgage interest, insurance premiums, and repair costs). These deductions can help increase your overall rate of return on investment. 

What Are the Cons of Investing in Real Estate? 

Before diving headfirst into real estate investing, it's important to be aware of the potential downside as well: 

Management Responsibilities 

When you invest in rental properties, you become responsible for managing them effectively, which includes finding tenants who are looking for apartments for rent, tenant background checks, collecting rent, handling repairs and maintenance issues, paying bills and taxes, and so forth. If you're not prepared to take on these responsibilities (or hire someone to do it for you), owning rental properties may not be right for you. 

Vacancy Rates 

If your rental property sits vacant for extended periods of time between tenants, it will negatively impact your cash flow and consequently your bottom line as an investor. To mitigate this risk, many investors choose to purchase properties in areas with high demand among renters (such as urban areas with strong job growth). 

Regulatory Changes 

Just like any other type of investment, legalities pertaining to real estate can change at any time—sometimes without much notice at all. These changes could have a negative impact on landlords and investors alike (for example, new laws or regulations that make it more difficult or expensive to evict non-paying tenants). As an investor in rental properties, it's important to stay up to date on any changes that could affect your business so that you can plan accordingly. 

Maintenance Costs 

In addition to the ongoing management responsibilities we mentioned above (which often come with their own associated costs), owning rental properties also requires incurring periodic maintenance and repair costs—both large and small—to keep the property up to par (otherwise known as "deferred maintenance"). These costs can quickly add up and eat into your profits if they're not managed effectively. 

Conclusion