Every year, the Arizona real estate market lures new investors in droves with the promise of a quick and profitable return. Almost everyone knows a lucky investor or two who purchased the right Phoenix area property at the right time and made a killing doing so. But for every successful real estate investor, there are several others who jumped into the real estate market blindly and subsequently lost everything they had. Usually, unsuccessful real estate investors fixate on the large potential returns of the market without acknowledging the substantial risks inherent in real estate investing. Read on for further discussion of the pros and cons of Arizona real estate investing.
Advantages of Arizona Real Estate Investing
As long as the housing market works in your favor, real estate can yield some of the most consistent and lucrative profits of all investments. What’s more, buyers typically do not have to wait for extended periods of time to see a profit on their real estate investments. We’ve provided a summary of these and other pros of real estate investing below.
- Fairly reliable appreciation. Unless the country is in the midst of a housing crisis, property values appreciate fairly reliably every year in most large Arizona cities like Phoenix, Tucson, Scottsdale, etc. On average, American home values have appreciated by about 5% annually until the current mortgage crisis struck. In many markets, homes appreciate at double-digit rates every year, which means fast and profitable returns for real estate investors.
- Immediate gains. Another advantage of Arizona real estate investments is that they yield relatively immediate profits as long as housing values continue to rise. Unlike with the stock market where investors may have to wait decades to see real returns, real estate investments can produce substantial gains within one or two years. For instance, an investor might purchase a house for $200,000 and sell it for $300,000 two years later. Investors would be hard-pressed to find another venture that would yield a $50,000 per year return for such a minimal initial cash outlay.
- Flexibility. The Arizona real estate market offers an abundance of opportunities for investors to make money. For one, investors can purchase a foreclosure property in Scottsdale or another city for significantly below market value and sell it later for a large profit. Alternatively, investors can choose to flip properties. In other words, they invest in fixer-upper homes that they renovate and update themselves or through hired contractors and then sell the house shortly after for a profit. Lastly, investors can purchase a property with an interest-only loan, make minimal payments, and rent the property out to generate additional income.
Drawbacks of Arizona Real Estate Investing
Real estate investments may appear promising, but there are very real risks associated with these endeavors. Investors who fail to acknowledge these risks could experience massive losses in the real estate market. The cons of Arizona real estate investment are summarized below.
- No guarantees.Though property values have appreciated consistently in the U.S. for decades, the recent housing crisis is proof that investors have no guarantees. You may know or have heard about someone who made unbelievable profits in real estate, but that doesn’t mean that you will have the same success. Especially for novice real estate investors, the risks are prohibitive.
- The housing market controls everything. When you invest in real estate, you are forever at the whim of the housing market. Even the slightest drop in property values could result in hemorrhagic losses for real estate investors. The only option Phoenix area real estate investors have when the market takes a plunge is to wait out the slump or sell their property or properties for a substantial loss. If you need the cash you’ve invested in real estate at a time when the market is down, the investment will end up costing you money to liquidate.
- Time & effort. Sometimes, real estate can provide relatively quick and easy gains, but just as often, real estate profits take a considerable amount of time and effort on the investor’s behalf. For instance, if you decide to purchase a property in Flagstaff to rent out, you will need to attend to maintenance issues, draw up leases, deal with tenants, etc. Unless your investments are your only job, you may not have the time necessary to devote to your properties.
- Unanticipated costs. It’s rare for an Arizona investor to find a property that will not need some kind of work either now or a few years down the road. The properties on which investors stand to make the most money, such as foreclosure properties or fixer-uppers, often require considerable repairs and renovations to be suitable for resale. Even if the property you invest in is in good condition now, you have to acknowledge the possibility and costs of future repairs, such as remodeling, roof repairs, etc. Unless you can handle these repairs yourself, you will have to hire a contractor, which could seriously erode your investment profits.