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Pros And Cons Of Buying An Investment Property

Pros And Cons Of Buying An Investment Property

So, if your income is $200,000, all your annual expenses totaled $155,000 and your initial cash investment on a property totaled around $175,000, the formula would look like this:

Your cash back percentage in this case would be approximately .26 or a 26% return. What constitutes a “good” return percentage is relative to the investor. It all depends on your personal financial goals and what you expect to make back.

Buying and selling or renting out property can be a potentially lucrative investment if done right. But like any investment, there are still pros and cons. Before sinking potentially thousands of dollars into real estate, lets consider some of the benefits and drawbacks of becoming a real estate investor.

Investment Property Advantages

  • You can take advantage of tax benefits. There are a number of real estate investor-specific tax benefits that you can take advantage of once youve purchased real estate. For example, you can deduct operational expenses like property insurance, mortgage interest and property management fees from your taxes.
  • Real estate appreciates in value. Unlike other investments that could fluctuate wildly in value, real estate tends to increase in value as time goes on. That means that if you give it time, you can likely sell a property for a profit just by letting it appreciate with value, which makes it a fairly safe investment in that regard.
  • You can earn consistent income on the side. If youre renting your investment property out to tenants, youll make consistent income from their rent payments which will not only help you pay back your investment but can also become a solid source of cash flow for you.

Investment Property Disadvantages

  • Its a lot of work and it isnt cheap. Investing in a property can be a huge financial burden and it also requires a lot of hands-on work. Whether youre managing a residential property or renting out a commercial one, there will likely be maintenance and upkeep tasks that will fall to you unless you hire someone else to take care of them.
  • You will have a responsibility to your tenants. If youre renting out a property, you have a responsibility to the tenants that are paying you. Its not enough to simply collect rent every month youll also need to manage these relations according to state law and make sure your tenants needs are taken care of.
  • There is considerable financial risk. While real estate might seem like a safe investment because its likely to increase in value over time, investing in property can still put you at risk of loss. If a development goes south or a tenant unexpectedly vacates a property, you could have a lot of problems on your hands that you may not be prepared to handle on short notice.

The Bottom Line: Learn The Steps On How To Invest In Property Before Getting Started

Investing in real estate is a great way to diversify your portfolio and potentially make a substantial amount of additional income for yourself. It isnt risk-free, however, and comes with a lot of work and responsibilities that you must be prepared to tackle if you want to invest.

Like any investment, you should consider your financial goals and future before sinking any money into it. Doing proper research can help you make a more informed investment that will better benefit you.

For more tips on getting started investing and getting into homeownership, read our guide to the steps to buying a house.

Land Real Estate

Cash on cash return measures how much of your investment youll earn back annually. Where ROI measures your total return on investment, cash back simply measures returns based on what you spent out of pocket on the investment. The formula for a cash return calculation is as follows:

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