October 19, 2021
INVESTING IN REAL ESTATE HAS ITS ADVANTAGES AND DISADVANTAGES. DECIDE FOR YOURSELF
You want to invest in real estate, but don’t know where to start? It is best to start by learning what are the advantages and disadvantages of this form of capital investment. Investing in real estate is one of the most popular forms of investing funds in the world. However, this does not mean that it is risk-free.
Buying and owning property is connected with a large investment, therefore the decision should be taken very carefully. Like any form of investment, it also involves risk. Well, as they say – no risk, no fun. If you analyse all the pros and cons, you definitely increase your chances of success. If you don’t want to or can’t invest in real estate directly, but are still attracted by the benefits you can achieve, instead of direct involvement you can invest in real estate through real estate companies or funds. Unfortunately the returns in this case may be less (although not always), plus you have no control over how and where your own money is invested.
There may be people among our readers who have not yet considered entering the real estate market or those who are willing to do so, but need to be sure that it is for them. So let’s start with the advantages of investing directly in real estate, because there are many.
Advantages of investing in real estate:
- A relatively safe way to invest capital
A property is a physical object that actually exists and in itself becomes your capital. You don’t have to worry about its value falling rapidly to zero, for example.
- The return on investment is stable and quite predictable
This is because rents provide a secure and passive cash flow.
- Favourable relationship between return on investment and risk
Property does not carry the same risks as, for example, shares, yet it generates a higher return than safer forms of investment such as bonds.
- Relatively easy start
It is relatively easy to get to grips with property, calculate the benefits and understand what the potential earnings are from. Investing in complex financial instruments is difficult for most people to understand and they have to rely on the knowledge of others.
- Protection against inflation
If inflation is on the rise, real estate is a good protection because rents increase as prices rise.
Investing in property is a long-term and relatively stable investment.
- Prospects of increasing value
In a situation where there is a permanent shortage of offers, for example as a result of a shrinking supply of land and therefore less and less supply, investments in real estate can be viewed in a positive light and can be seen to increase in value.
As the American writer Erskine Caldwell said, “to live in this world, you must learn to look at life realistically”. The advantages must not obscure the risks, so let’s find out what are the disadvantages of real estate investing.
Disadvantages of investing in real estate:
- Need to have adequate knowledge and continuous learning
The need to familiarise yourself with various legal, financial and commercial concepts. If you have no experience in the real estate industry, it will be necessary to start learning.
- High capital required
This problem can be solved by taking out a mortgage, but this involves paying it back over a long period of time.
- Property management costs and time involved
If you have never been a landlord, you will need to develop a knowledge of property maintenance. You will also need to learn about the building regulations associated with this.
- Rental management costs
If you plan to rent out properties and this is not your main occupation, hiring a tenancy management company will be a sensible option.
- Low liquidity
Remember that the costs of owning an investment property are not limited to the monthly mortgage payment. Insurance, property taxes, management and maintenance all add up and affect your bottom line. If you run into financial problems, it may take longer to recover your investment. Real estate usually takes a long time to sell.
Traditional investment instruments such as the stock market are characterised by significant volatility, investing in real estate provides a more stable return on investment. Short-term stability is provided by renting, while long-term stability is provided by choosing well-maintained and growing housing markets.
There is no doubt that property can be an extremely rewarding investment opportunity, both short-term and long-term. As with any investment, however, you must approach it with an awareness of your personal risk tolerance and a willingness to learn.
On the picture is a villa in Andalusia Spain, offered by Vilea Property Boutique. Vilea Property Boutique’s experienced advisors will be happy to assist you in finding, renting or selling your property. Just get in touch.