What are the basic necessities to life? Food, check. Water, no problem. Shelter?
According to multiple recent studies, over a third of the US population rents their living space as opposed to owning it. After all, homeownership is expensive and ties you down—today’s adults have college debt and want flexibility. Thus, they rent. And the number of renters is only growing. This makes real estate the perfect recipe for a solid investment, right?
Not quite. As with any investment, there are many pros and cons you need to consider before signing the mortgage papers. If you fail to pay attention and don’t do your homework—well, just ask Lehman Brothers circa 2008 what might happen. So, here is a short list of pros and cons to help you get started.
Pro: Passive Income. What could be better than someone sending you a check every month without you actively working for it? Renting out space, when done right, is a great form of passive income. Provided everything is running smoothly and you have a good property manager, you barely have to lift a finger to reap the benefits.
Con: When Things Go Bad, They Go Bad. What if things are not running smoothly? Or your property manager is not so good (maybe you don’t have one at all)? Everything about real estate is expensive. Just one thing going wrong will hurt your pocket big time.
Unfortunately, the outside risks that will cost you money are plenty. Natural disasters, bad tenants, one person forgetting to turn off the stove as they leave the building. Even changes to the local economy can kill your investment. What do you do when the plant that employs the whole town moves? Good luck making profits in that exodus. Your property is inexorably tied to the heartbeat of the neighborhood and city it is in—this is a lesson Detroit homeowners are still recovering from.
Pro: A Stable, Long Term Investment. No matter what happens in the world, everyone needs a place to live. How does the Rolling Stones song go? “Oh, a storm is threat’ning my very life today. If I don’t get some shelter, Oh yeah, I’m gonna fade away.”
While demand varies depending on where you buy, real estate generally increases in value over time. So, you can relax in knowing your efforts are likely to pay off, though it may take a while. Keep in mind, real estate is the long game in the investing world. Like all good things, though, it is worth the wait.
Con: So Illiquid, It Might As Well Be Lead. Real estate is the opposite of liquid. Once you own it, it can take months of full-time effort and money to sell. Buying and selling is not a simple process, either. So, before you make the purchase, you need to be sure it is the right choice—you might be living with the decision for a long while.