Do Real Estate Investments Always Pay Off?

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Real estate investors and armchair experts tend to agree on one point: It’s always a good idea to invest in real estate. The argument, as they see it, is that prices of real estate have typically risen over the last several decades.

Though there are some unmistakably winning markets and losing ones, over the long haul and with a sufficiently diverse portfolio, anyone should be able to generate a decent return if they invest in the real estate market.

But is this notion justified? Do real estate investments actually, invariably, pay off?

The Potential and Promise of Real Estate

Let’s start by looking at the potential of the average real estate investment. One of the advantages of this type of revenue enhancement is that there are so many ways you can get involved in it.

A common option is to invest in rental properties. With these, you’ll look for acquisitions that are likely to be attractive to renters.

You pay for the upkeep on the property, and possibly a management fee, and your renters will pay rent on a monthly basis, preferably in a sum that exceeds all your expenses. With a good investment, you can be cash-flow positive, and still benefit from the long-term appreciation of the holding.

You can also purchase properties for their long-term appreciation value; you may flip houses that are in a less-than-sterling condition; or you can invest in real estate investment trusts (REITs), which allow exposure to the real estate market without your actually having to purchase any property.

Historical Trends (and a Deviating Future)

Historically speaking, real estate prices tend to rise. Across all markets, and given a long enough period of time, most investors see their investment rise in value.

There are some notable exceptions, which include tough economic periods that caused decline across many industries, and some geographic locales that don’t grow as swiftly or as reliably as others.

On the other hand, we also should acknowledge that just because something has happened for several decades in a row, that doesn’t mean it’s going to continue for decades into the future. A real estate pricing trend could eventually shift on its own, or change in response to currently unforeseeable factors.

Influential Factors in Real Estate

Of course, your individual success or failure in the business won’t be completely reliant on general trends. Instead, your success will come down to certain variables such as:

Supply and Demand

These patterns have a huge impact on real estate prices. If you’re living in an area that has a lot of active buyers but nobody’s willing to sell, you’ll encounter extremely high prices, which could keep you entirely out of the market.

Broader Economic Factors

Sudden shifts in the economy may also affect real estate prices, as well as your ability to make money from your current properties. If there’s a sudden economic recession, your holdings will lose value, and you might lose some tenants.

Neighborhood Quality

Different neighborhoods have their individual pros and cons. Investing in the wrong region could end up hurting you.

Purchase Prices

Just because a property is a good prospect doesn’t mean it’s necessarily going to yield a high return. If you spend too much on your initial purchase, you might not make it back.

Ongoing Expenses

Similarly, structures that have a lot of problems and properties that require substantial upkeep will increase your total expenses and jeopardize your ROI.

Income Potential

The best acquisitions tend to be the ones with high income potential; in other words, people are willing to pay significant cash to rent. This isn’t always guaranteed.

Local Changes

Big changes to local conditions, such as a spike in the crime rate or the shutdown of a large employer, can have a striking effect on your fortunes.

Making Real Estate Work

Even during the darkest economic recession, or in the most problematic neighborhood, there are ways to make real estate investing work. With a bit of luck and due diligence, you can sniff out a good deal and make it pay off.

And of course, if your current area isn’t experiencing a rise in real estate values, you should probably look somewhere else. Look somewhere else especially if you’re working with a property management firm.

The Bottom Line

The bottom line here is no, real estate investments don’t always pay off. If you make a bad play, if you don’t diversify your portfolio, or if larger events make you super unlucky, your real estate investments could end up hurting more than helping.

But these tend to be exceptions that involve people who didn’t perform appropriate due diligence or didn’t know what they were getting into. Every investment poses a risk. But, as any seasoned veteran of real estate investing can tell you, if you’re willing to put in the work, you do indeed have a high likelihood of succeeding.