Are you a first-time real estate investor, or are you thinking about expanding your investment portfolio but still determining which real estate would be the best for you? Let us help you out. We’ll outline the pros and cons of the three most popular real estate types so you can recognize the potential for your financial growth by owning one.
Rental Properties
For a real estate investor, owning a rental property is the most popular type of real estate. There are many advantages, mainly related to the steady and passive outcome you would get as a property owner. Let’s have a look at the pros and cons.
Pros of buying rental property
As previously said, owning rental property allows you to establish a passive monthly cash flow that will be especially valuable if you want to retire. The value of real estate increases over time, and its price will increase as well; therefore, if you sell the property in the future, it will provide a profit.
Another great advantage of buying a rental property is the tax benefits. Namely, investors can lower their taxable income by making various deductions like mortgage interest, property taxes, and depreciation. They can also claim expenses for repairs and maintenance on their investment properties, which further reduces tax liability.
Cons of buying rental property
Some cons of buying rental property are taking on ongoing maintenance responsibilities and serving as a landlord for your tenants. As a landlord, you must handle issues like repairs, answer tenants’ requests, be available 24/7 for urgent situations, and screen tenant applicants while ensuring all your operations are law-compliant. In addition, dealing with difficult tenants can be a huge problem that might take up lots of your time and cause stress.
However, property management companies can take over managing your rental property on your behalf for a percentage of the rental prices. Many rental property owners entrust property managers to run the whole rental property business while enjoying the passive monthly income.
Therefore, property managers will ensure the tenants pay their monthly rent on time, the maintenance and inspection of the property are scheduled and done on time, and they will screen tenants to choose the best fit while respecting the Fair Housing Law.
Flipping Property
Flipping involves buying a distressed home, renovating it, and upgrading it with new features. It is energy-efficient to quickly improve the property’s value, increase its price, and sell it to make a profit.
Pros of buying and flipping property
The profit potential is the most significant advantage this type of property has. Real estate investors can make huge ROI in a very short time.
Once you buy the distressed property, you have the right and control over how it will be renovated so that you can make strategic renovations, repairs, and upgrades, usually following market trends. You can maximize their visual appeal and value according to target buyers’ preferences.
There are also tax benefits, which, depending on local regulations and tax laws, can leverage some tax incentives or deductions related to property renovations and improvements.
Cons of buying and flipping property
Flipping properties can be a high-risk investment, especially if the timing needs to be corrected or the renovations don’t increase the value as expected. In such cases, this investment can result in a loss of money or a lower ROI than previously forecasted.
Another disadvantage is that the house-flipping process can be time-consuming and requires a certain level of dedication from the property owner. The process is challenging because the owner should find the right property, oversee the renovation, and deal with contractors and tradespeople.
Commercial Properties
Investing in commercial properties can bring you a lot of money. However, it is a far more expensive investment than residential investment and is a bit different regarding rules and regulations.
Pros of buying commercial property
Again, buying commercial property will give you a steady passive monthly income through rent payments. Also, commercial property has a history of appreciation over time, which means its value increases as time passes. Tax benefits are also here, and deductions for mortgage interest, property taxes, and depreciation will reduce the owner’s parallel tax liability.
But what happens if we compare buying residential versus commercial property? One of the significant benefits of owning commercial property is the potential for triple net rents. This is when the tenant is responsible for paying all property-related costs, such as taxes, insurance, maintenance, and rental rates.
Cons of buying commercial property
Suppose you own a commercial property and do not provide the tenants a triple, double, or single net lease. In that case, the responsibility and maintenance costs fall on your shoulders. This could be expensive.
Also, dealing with difficult occupants can be a severe problem, as handling disputes over rent and eviction scenarios can be stressful.
Finally, obtaining money to buy commercial property can be very difficult because it takes higher capital requirements, larger down payments, and higher credit scores so borrowers can lend you the money to mitigate the risk.
Conclusion
This article outlines the pros and cons of buying three types of properties: rental, house-flipping, and commercial. If you are a first-time property investor or want to expand your real estate investment portfolio, make sure you know the ins and outs of every type of investment to make an informed decision. Also, follow the trends in the market and evaluate your financial situation. To start, you can go over the three types discussed here. Good luck!
Matthew is a seasoned researcher and writer with over five years of experience creating engaging SEO content. He is passionate about exploring new ideas and sharing his knowledge through writing. Matthew has a keen eye for detail and takes pride in producing content that is not only informative but also visually appealing. He constantly expands his skill set and stays up-to-date with the latest SEO trends to ensure that his content always performs well in search rankings. Matthew can be found reading, surfing, or experimenting with new recipes in the kitchen when he’s not writing.
