Real estate has long been an attractive investment option for many people. But is it still a good investment in today’s market?
This is a crucial question many investors—including aspiring investors—across the country are asking, and we’re here to help answer it for you.
In this article, we examine the possible benefits of purchasing real estate in 2023 as a long term investment. We outline the pros and cons real estate investors need to grapple with and provide free resources you can use to set yourself up for long-term success.
Table of Contents
We’ll begin by quickly addressing the two main ways you can be a real estate investor. We start here because one way may be an excellent option for you in 2023, whereas the other option may be less ideal.
What are the main ways to invest in real estate?
There are two primary ways you can invest in real estate:
Active Real Estate Investing: Active real estate investing is an approach where you actively contribute your time, effort, and capital to make material decisions about acquiring, renovating, managing, and selling properties. To be an active investor, you need to be proactive in seeking out investment opportunities, securing funding, and managing properties either independently or in collaboration with partners.
Passive Real Estate Investing: Passive real estate investing is an approach where you simply contribute your capital and let other professional investors put it to work for you via investment properties. Being a passive investor is a hands-off approach and requires you to invest money with professional investors who do all the work for you. Meanwhile, you sit back and collect the profits generated from your investment.
Depending on how much time you have or how hands-on you want to be in the day-to-day operations of investment property, it’s likely that one of these approaches sounds more appealing to you at this time than the other—and that’s okay! Real estate markets need both active and passive investors to thrive, so there’s no “better” or “worse” option. It’s simply a matter of how involved you want to be and how much time and energy you want to contribute.
It’s worth noting that it’s possible to participate as both an active investor and a passive investor, and you may go through different seasons of preferring one over the other. For example, you may spend a decade as a passive investor and then want to dive into active investing for a few years or vice versa. Similarly, you may want to primarily invest as a passive investor for larger commercial properties and then own a residential real estate investment or two on your own.
The reason we start by answering the question “Is Real Estate a Good Investment?” with this is that all investing is personal.
Depending on what you have going on in your life, this year may be an excellent year for you to be an active investor. Or, if your life is chaotic at the moment and you don’t have the proper time to dedicate to being an active investor, perhaps being a passive this year is better.
Take time to determine where you are in your life and investing journey right now, and then assess what allocation of active vs. passive investing is the best choice for you this year.
Now, let’s move to the second question to help determine if real estate is a good investment.
What are the Tradeoffs Associated with Real Estate Investing?
When considering real estate investing, it’s essential to understand the tradeoffs that naturally come along with this particular asset class.
There are two main tradeoffs you need to evaluate as you consider making a real estate investment of any kind.
First, you’ll have fewer dollars to allocate to other asset classes in your overall investment portfolio. For example, if you’re keen on investing in the stock market or precious metals, adding another asset class to your portfolio will give you fewer funds to invest in each.
This is typically okay because diversification is a famous—and often wise—consideration for any portfolio. Each asset class has unique risks and rewards, and a well-diversified portfolio typically includes a mix of different investments that can help reduce overall risk. However, you want to ensure you have proper funds to support each asset class you enter and that you’re not stretched too thin.
Second, real estate investors typically need to consider longer holding periods than other types of investors, and this can mean your capital is tied up for longer periods of time and less liquid during that time. If you’re an active investor, you may contribute some of your own funds to a deal and need to keep those funds in the deal until you sell or refinance the property, which could be anywhere from one to seven years. Similarly, if you’re a passive real estate investor, you may invest in a syndication where you may not receive your initial capital back for a few years.
That said, there are also more liquid investments in real estate, such as a real estate ETF or Real Estate Investment Trust (REIT), that are much easier and faster to enter and exit, so just be aware of what type of time frame you’re committing to when you select a real estate investment before you begin.
Now that you understand the two main tradeoffs that real estate investors manage let’s evaluate the specific pros and cons of investment real estate.
What are the pros and cons of Investing in Real Estate?
In this section, we explore the advantages and disadvantages of investing in real estate so you can decide whether it is right for you.
10 Pros of Investing In Real Estate
1. Excellent Returns
Arguably the biggest pro to investing in real estate is the opportunity to make an excellent return on your investment. This is because real estate—unlike many businesses—is almost always in demand in the best real estate markets and necessary for society to thrive.
Additionally, income properties generate returns through multiple avenues, including principal paydown, rental income, appreciation, and tax benefits. The combination of these wealth-building streams can make for great returns.
2. Hedge Against Inflation
Investment real estate (whether residential real estate or commercial real estate) can be a great safeguard against inflation.
As inflation drives up the cost of goods and services, real estate prices and rental rates also increase. Therefore, real estate appreciates with inflation, and property investments can generate cash flow that doesn’t lose value to inflation over time like other types of investments.
3. Reliable Cash Flow
Successful real estate investors know that one of the most beautiful real estate benefits is the generation of reliable cash flow. By renting property to tenants, you can create monthly cash flow that covers the monthly mortgage payments, utilities, insurance, property managers, and other costs while still generating a profit.
This means that savvy rental property investors make a profit every month while they pay down their loan(s) with other people’s money.
4. Long-Term Security
Unlike cryptocurrency or stocks, real estate is a physical, tangible asset that is designed to stand the test of time.
If you hold a property in a strong market for multiple years, it is likely to appreciate while consistently providing cash flow. This type of long-term security can help provide substantial peace of mind.
5. Tax Advantages
Owning a commercial property or residential rental property can provide meaningful tax benefits.
As a property owner, you can lower your taxable income by deducting several expenses, including property taxes, mortgage interest, property management fees, property insurance, ongoing maintenance costs, repair expenses, and costs related to promoting the property to potential renters.
As a passive investor in commercial deals such as syndications for apartment buildings, you’ll receive a tax form that allows the active investors (or General Partners) to pass on some of the tax advantages from the property to you each year.
Additionally, when you sell a property for a price higher than what you initially bought, your profit will not be taxed as regular income. Instead, the profit is considered capital gains which are taxed at a lower percentage.
Finally, investing in opportunity zones can further reduce the amount of taxes you pay with special federal incentives.
As discussed above, including real estate holdings in your investment portfolio enhances your diversification. This can help safeguard your wealth during economic uncertainty. For example, in the case of an economic downturn, while some stocks might decline, the investment properties in your portfolio might still appreciate, serving as a buffer from the financial losses incurred in other investments.
7. Control Over Investment
Aside from the financial advantages, owning investment properties also offers non-financial benefits, such as having more control over the investment itself.
Being the owner or general partner of income producing properties means you have a strong voice in the decisions that are made regarding the property.
As a passive investor, you don’t have as much control over each property you invest in. However, depending on the level of involvement you want as a passive investor, you can create your own terms for lending your money to active investors, which is much more control than you would have over buying a company’s stock.
8. Passive Income
Investment properties can provide passive income, meaning earning money without regularly working for it. For instance, if you rent out units in a multifamily or residential property, the rent payments and monthly income you receive from rental property each month can be considered passive income.
If you are a passive investor, then passive rental income is truly passive (e.g., you earn money with little to no work). If you are an active investor, passive income can be achieved by hiring a property manager or working with a property management company to handle all of the day-to-day operations of the property.
9. Ability To Leverage Funds
If you plan to invest in real estate, chances are you won’t acquire properties without taking on some debt.
In general, debt has a bad reputation (mostly for good reasons). However, when it comes to owning investment property, debt can actually be a benefit.
By acquiring loans from banks, mortgage lenders, or credit unions, you can acquire properties for significantly more than the amount of cash you put into the deal. By doing this, you use what’s called leverage to increase your returns.
For example, let’s say you have $250,000 cash to invest in real estate, and property in your market organically appreciates at 3% per year. Let’s say you could pay all cash for a $250,000 property or use it as a 25% down payment on a $1,000,000 property. After one year, the $250,000 would be worth $257,500, whereas the $1M property would be worth $1,030,000.
That’s a difference of $22,500 in natural appreciation alone! This doesn’t even include the (likely) larger amount of cash flow, net income, debt paydown, and tax benefits that the larger property also earns.
This example highlights why utilizing debt service intelligently can help you build wealth faster, regardless if you’re focused on single family homes, residential units, or commercial space.
10. Material Reassurance
People try to build wealth in all kinds of different ways, from focusing on building equity in their primary residence or starting a business to investing in risky cryptocurrency or hoarding gold under their bed.
Many investments can feel elusive, though, which can be stressful for investors. For example, how do you feel if a stock or cryptocurrency plunges 35% in a single day and then takes years to recover without anything you can really do about it?
While commercial property and residential rental property aren’t immune to price fluctuations or market crashes, there’s something reassuring about owning or investing in a tangible asset that you can feasibly visit, touch, and renovate.
When life can be stressful enough, having material reassurance in an investment isn’t something to take for granted and can have a positive impact on your life.
5 Cons of Investing In Real Estate
Investing in real estate has the potential for a significant profit, but risks and challenges are also involved. Here are five cons associated with investment real estate.
1. Location is Critical
Location is arguably the most important factor that can make or break a real estate deal. The downside to this is that choosing a location where property prices are likely to rise can be tricky, and it may not be where you currently live. Conduct thorough research to find a promising market that you want to invest in, and then work with professionals who are local in that area who can help you achieve your goals.
Investing in real estate is usually less liquid than investing in stocks or bonds. If you invest in a property, you must sell or refinance to get your money back which can take many months or years. On the other hand, investments like stocks and bonds can be quickly sold to access your funds. If you want to invest in investment property and maintain high liquidity, consider investing in Real Estate Investment Trusts (REITs) or real estate ETFs.
3. Starting Capital
Acquiring rental property as an active investor often requires more money to start than other investments like mutual funds, CDs, and stocks. Despite utilizing leverage and debt service, you may still need to have enough cash for a 20% or 25% down payment.
4. Time Horizon
Rental property isn’t necessarily a get-rich-quick kind of investment. It’s more of a build long-term wealth kind of investment and thus takes time to see significant results. Always strive to make the best investments you can and maximize your ROI, but don’t fool yourself into thinking you’ll easily become a millionaire overnight.
5. Risk of Losing Money
No investment comes without the risk of losing money. It’s possible to lose a lot of money if you make unwise decisions or get caught in a bad situation. While utilizing leverage can be powerful, it can also come back to hurt you if you’re not careful. Always consult a trustworthy real estate agent and other experts in your area when you make an investment.
How Does Real Estate Compare to Other Investments?
Now that you’re familiar with the main advantages and disadvantages of real estate let’s quickly examine how it stacks up against other popular investment options.
Real Estate Vs. CDs
Investing in CDs is extremely secure compared to investing in real estate. The chances of losing money with CDs is minimal, however, the returns are usually substantially lower than those gained from investing in real estate.
Real Estate Vs. Bonds
Investing in bonds is relatively safe as you are not very likely to lose money. That said, you won’t make much money either. Conversely, investing in real estate offers the potential for higher returns, but the risk of losing money is also higher.
Real Estate Vs. Stocks
Both real estate and stocks can generate great returns. However, real estate investments can be more stable investments compared to stocks, which can have faster fluctuations in value. Another key difference is that your funds will be more liquid and accessible in stocks than in real estate.
Real Estate Vs. Mutual Funds
Similar to stocks, mutual funds can generate great returns and arguably be more stable, given the diversification of the funds. Real estate mutual funds, REITs, or ETFs may be a great option for you if you like the liquidity of stocks but want to have exposure to the real estate market without being an active investor.
Is 2023 a Good Time to Invest in Real Estate?
We’ve now arrived at the big questions!
It is important to realize that whether real estate is a good investment for you is a personal decision that only you can make.
If so, you’re also the only person who can determine which method of real estate investing is best for you.
That said, if you think real estate will support your personal investment goals, then 2023 is likely a good time to invest in real estate. Here’s why:
It’s impossible to time the market.
No matter what is happening in the market, you never know what will happen one month or ten months from now. You could buy tomorrow, and the market could crash five days later. Or, you could hold out until the market is better, only to see prices skyrocket and make it more challenging for you to enter.
Because of this, there’s a common saying in real estate: “Don’t wait to buy real estate. Buy real estate, and then wait.”
The core principle here is that if you acquire a real estate investment and hold on to it for a more extended hold period than a few months, you don’t need to worry about timing the market. If you’re financially stable and your initial investment is in a good location with conservative numbers that work, and you plan to hold for a number of years, then you’re likely setting yourself up for success regardless of what the market does in the short term.
Real Estate Investing Resources For Beginners
If you’re new to real estate investing, here are a few free resources you can use to get started:
- Explore our Complete Guide to Real Estate Investing for Beginners
- Learn the Top 125 Real Estate Investing Definitions
- Learn the most common real estate calculations
- Listen to the Best Commercial Real Estate Podcasts for Investors
FAQs About Real Estate Investing
Is it reasonable to invest money in real estate?
Yes, investing money in real estate—whether commercial or residential properties—can be a great way to build wealth.
The potential for a rental property to generate positive cash flow from the rental income while simultaneously building equity and appreciating is a powerful combination.
When done right and with due diligence, it is possible to enjoy significant returns over time through real estate investments.
Is real estate better than stocks?
It depends on your financial goals and desired level of involvement, and an understanding of all the benefits and risks associated with each type of investment. Generally, real estate offers potential for appreciation (an increase in real estate values), regular cash flow from rental income, and better tax benefits compared to stocks. However, stocks may provide more diversity and access to global markets through the major stock exchanges while also having the potential for quicker returns than real estate.
Is real estate a good or bad investment?
Neither. Investment real estate is simply an asset class, and like any asset class, you can have good deals or bad deals. It’s your job as an investor to manage your risk and make wise decisions to increase the chances that you make good investments.
Are real estate investments a good idea?
Real estate investments can be a good idea for many investors, depending on their financial situation and goals.
What are the main risks of investing in real estate?
The principal risks of investing in real estate include the potential for a decrease in property value due to external factors such as changes in market conditions and the economy, unexpected repair costs, natural disasters, vacancies, and tenant issues. Additionally, there is also the risk of not being able to get financing when you need it and other types of legal liability, such as environmental risks or zoning issues for commercial properties.
Which property is best for investment?
The best property for investing in real estate depends on your individual goals and preferences and understanding the risks associated with each type of investment. It is vital to research the local market, analyze rental rates & vacancy rates, investigate potential tax laws that could influence property values, assess any equity position in the property, and monitor current economic trends. You should also consult a professional financial advisor specializing in real estate investments to help guide your decision-making process.
When contemplating real estate investments, it’s crucial to conduct comprehensive research and develop a comprehensive plan that considers your financial objectives and risk tolerance.
If you’re looking to get into active investing—whether acquiring turnkey rental properties as your first investment property or apartment buildings—consult with investor-friendly real estate agents and experts to help guide you.
With a solid strategy in place, investing in real estate can be a valuable asset to your investment portfolio and help you achieve your long-term financial goals.