Here is a rundown of some of the advantages and disadvantages of investing in real estate.
Appreciation is the biggest advantage of investing in real estate, which is the increase in property value over time. You hear people say all the time that you should buy property and hold onto it until you have to sell it, regardless of what happens in the market.
2. Cash flow
Income property has made many people very very rich. Who wouldn't want to have a check come in every month? Get a quality tenant and it can be a goldmine.
Using somebody else's money to make money—what's the advantage? It's not your money! People will lend you more money when you have more real estate, as you have more collateral.
Equity is the difference between the current market value of the property and the amount the owner still owes on the mortgage.
Simply put, equity would be the money left over when a property is sold after you've paid off all your debts.
It is not a game for the novice. You have to research the market and financing before taking that step.
2. Long-term gains
Real estate is not very liquid. Stocks can be converted to cash quickly; real estate can't be. This is why real estate is a long-term investment. Your money is not very accessible if you place it in real estate.
Real estate may not be as big a risk as many other businesses, but there still is risk, as things can happen that you do not have control over.
Pyramiding is the process of borrowing against one property to invest in another.
Arbitrage is when you borrow money at one interest rate and lend it at a higher interest rate.
Syndication is a pooling of money for investment purposes. Syndications may be formed as common ownership , joint ownership, or corporations .
A security is joining with others for investment purposes, and profit is to be made from the efforts of others. Stocks and bonds are examples of securities . Usually somebody selling a security must be licensed.
A partnership is an association of two or more people as co-owners. A partnership can hold title to real estate. If the proper documents are filed, the partnership does not need to pay taxes, but each individual must pay taxes on the money distributed to her or him. In general, in a partnership, all partners must participate in management and are personally liable for all partnership activities. In a limited partnership, there is at least one general partner and the others are silent partners. In a limited partnership, the individuals are only liable to the degree of their investment and have no say in management.
A joint venture is the joining of two or more people in a business transaction. Joint ventures are characterized by their time limitation. Usually when people create a joint venture, there is not intention by the parties to enter into a continuing relationship.
In a real estate investment trust, there must be at least 100 investors who pool their money together and participate in large real estate projects. The investors are beneficiaries who transfer title to a trustee who manages the properties for them. A real estate investment trust avoids double taxation by allowing a pass-through of income if certain criteria are met. If at least 75% of the trust assets are in real estate and if the trust passes 95% or more of their annual income to the investors, the trust is exempt from paying corporate tax. The investors receive certificates of ownership as evidence of their investment. These certificates or shares are freely transferable.
A corporation is a legal entity created under state law. The law views a corporation as an artificial person. A corporation is characterized by its perpetual existence, meaning a corporation can not die but it can be legally dissolved. The advantages of a corporation are that it is a legal person created by law and it will continue even after the death of its officers. The stockholders can only lose the amount invested, and investors can freely transfer their shares of stock. The disadvantage of a corporation is that if a corporation makes a profit, the corporation must pay taxes. And investors must pay taxes on the profit distributed to them, so there is double taxation. Should the corporation suffer a loss, it cannot pass the loss on to the shareholders.