If you read any articles that offer financial advice, or you know any financial advisors personally, you might have encountered repeated recommendations that you should get involved in real estate investing. Buying properties, renting them out (with the help of a property management company), and/or flipping of them can turn you from an average consumer to a self-made millionaire – at least, that’s the claim.

But could real estate investing be overrated? Or is it honestly the all-powerful investing strategy that can empower anyone to generate wealth?

The Overwhelming Options for Real Estate

First, you should understand that “real estate investing” is an incredibly broad term. There are many different ways to get involved in buying and managing real estate, and each has the potential to benefit you in different ways.

For example, consider:

  •         Property flipping. You could buy a cheap house in need of repair, oversee the repairs and maintenance, then sell it immediately, in the hope of a profit. This strategy isn’t always effective – in fact, it can cost you money if you don’t purchase the home for a fair price or you underestimate how much repairs need doing. But this can potentially yield massive returns.
  •         Renting property. Alternatively, you could buy an attractive property in a good area and rent it for more money than you have to pay on a monthly basis. This results in positive monthly cash flow – while the property increases in value.
  •         Long-term holdings. Some real estate investors specialize in long-term holdings: purchasing houses that are likely to increase in value over the course of many years. It’s an approach that requires patience and consistency, but it can pay off.
  •         Commercial vs. residential real estate. Depending on your goals, you could focus on commercial or residential real estate for any of the strategies listed above. Each has advantages and disadvantages.
  •         Strategic focus differences. Some people focus on real estate as their primary investment strategy. Others treat it more of a side bet that allows them to hedge their portfolio against the stock market and other “primary” investments.
  •         REITs and other indirect investments. You can invest in real estate in an indirect way with the help of real estate investment trusts (REITs). These are especially worthwhile if you have limited capital to work with.

To summarily declare that real estate investing is a perfect strategy, or to dismiss it out of hand as overrated, overlooks the versatility and variety of this investment pursuit.

The Potential of Real Estate

At its best, real estate investing is everything the optimists claim. If you flip the right property at the right time, you can double your money.

If you rent a property in the right neighborhood, you can make hundreds of dollars a month in consistent passive income with minimal requirements and responsibilities. And if you invest in real estate consistently over the course of many years, you can easily generate enough wealth to retire early.

The Caveats

Of course, there are caveats to be weighed. Not everyone can tap into the full potential of real estate investing. Here’s why:

  •         Experience. It makes sense that highly experienced real estate investors will make much more money than their novice counterparts. If you’re new to and unfamiliar with this investment strategy, you shouldn’t anticipate much of a return. But over time, you can build your experience and put yourself in a better position.
  •         Access to capital. If you want to buy an expensive property, you’ll need a lot of spare capital. Even if you obtain a loan, you’ll still need enough to fund a down payment. You can sometimes circumvent this by using other investors’ capital or by investing in REITs.
  •         Market timing. The real estate market ebbs and flows, with periods that are intermittently good for buyers and sellers. Bad market timing can wreck an otherwise solid investment decision.
  •         Strategic development. It’s essential to develop an investing strategy over time, in which you gradually tweak your approach and add new types of assets to your portfolio. If you focus too heavily on one thing, it might work against you.
  •         Luck. While it’s possible to get a consistent and predictable return from real estate, it’s impossible to deny that luck is an inevitable contributing factor in many people’s success or failure.

So is real estate investing overrated? Not necessarily. At its best, real estate investing is accessible to anyone who has even a bit of extra capital – and it’s capable of generating enormous returns.

But at its worst, real estate investing can cost you loads, and might generate nowhere near the return of other competing assets. No matter what your goals or strategy are, you should work to keep a diversified investment portfolio if you want to see the best and most consistent results.