As a doctor, you might think you don’t have to worry about real estate investing. You have a high enough income and don’t have to worry about it. But, anyone in any profession should diversify their income.
So why invest in real estate? If you’re thinking about real estate investing, here are the benefits of investing in real estate along with the downsides.
Investing in Real Estate Pros
- Generate Passive Income
- Control for Active Investments
- Costs of Ownership Deductions
- Depreciation vs Taxable Income
- Pass-Through Deductions
- Options Below Market Price
- Steady Returns
- Inflation Hedge
According to the IRS, real estate investing income is passive income. This means it’s not subject to withholding taxes like your W-2 earnings. Your tax liabilities are based on your tax brackets, but you can deduct business expenses to further lower your tax liability. Bring on the tax benefits!
If you invest directly in real estate properties, you are in control. You choose which properties to buy, how to manage them, whether you keep or sell them, and how much you charge. This differs from investing in stock shares or bonds of real estate companies. These indirect investments give the real estate companies all the control.
Real estate historically appreciates. This is one of the top real estate advantages. You don’t have to do anything for the property to appreciate. It’s based on the market values and the sales price of other homes in the area. However, owning real estate also allows you to renovate or improve the property, increasing its value even more.
The IRS allows real estate investors to deduct the cost of ownership for many rental properties. In addition, you may be eligible to deduct expenses, such as travel to and from properties, the cost of maintenance and repairs, mortgage interest, property taxes, insurance, and losses.
You can use depreciation to reduce your taxable income even further. The IRS allows investors to depreciate properties over 27.5 years. You divide the cost basis by 27.5 and can take this noncash deduction each year you own the home to reduce your taxable net income.
If you operate your real estate business as a sole proprietor, LLC, or S-corp, you can deduct 20% of your business profits from your income taxes.
One of the best strategies to earn a fast profit is to find properties selling below market price. This allows for instant equity in the home whether you buy and hold or fix and flip the property. With equity in the home, you have instant capital gains. You can increase your earnings with rental income or improve the property value even further, selling it for a profit.
On average, real estate has an average annual return of around 10% over the long term. Combining these returns with the rental income earned if you buy and hold real estate, you can enjoy higher cash flow and capital gains.
Real estate historically appreciates faster than inflation. This is the opposite of how most other investments perform during high inflationary periods. Therefore, a well-diversified portfolio during inflation is one of the best strategies to keep your net worth high.
Investing in Real Estate Cons
- Liability Risks
- Research and Time
- Upfront Capital Needed
- Maintenance and Upkeep for Rentals
- Troublesome Tenants
Owning real estate puts you at risk for a variety of liabilities, from the risk of someone getting hurt on the property to tenants vacating the property early and not paying their rent.
When you invest in real estate, you tie up your funds. Unless you’re fixing and flipping properties, you might tie up your cash for years, depending on how long you hold onto the property. If you need money in a pinch, it could be difficult to liquidate your funds as it can take months to sell a house, depending on the state of the real estate market.
Unlike investing in the stock market, you can’t just pick an asset class and invest. It takes time to research properties, look at them, decide you want to buy them, and make an offer. If you aren’t well-versed in the types of real estate investments, you may also need the help of a real estate professional to make the right real estate investing decisions.
Most residential real estate investments require a lot of capital upfront. Most lenders require a 20% – 30% down payment for most investment opportunities.
If you buy and hold properties, you’re in charge of the maintenance and repair for rentals. So even if you hire a property manager to handle the property for you, you’re still responsible for the cost of maintenance and repairs, which decreases your profits.
No matter how carefully you screen tenants, there’s always the chance of having troublesome tenants in your rental property. This can lead to financial issues and the physical and mental stress of dealing with unruly tenants.