Robert Shumake || Benefits and Drawbacks of a Real Estate Investment

Real estate is one of the most popular investment choices among investors - from amateur to season. Investing in real estate offers numerous benefits, some of which we will cover below. With any asset class, there are pros and cons, however, real estate continues to be one of the most attractive investment options to add and diversify your portfolio. 

Benefits of Investing in Real Estate

 

Some of the benefits of investing in real estate include -

• Safer Investment: Real estate is a safer investment option when compared to stocks, which are volatile and are susceptible to extreme fluctuation in the short-term. In addition, leveraging debt in real estate can be structured in a safer way than using debt to buy stocks by trading on margin.

• Tax Benefits: Investing in real estate will also offer you more tax benefits as compared to other investments. Suppose you invest $50,000 in a business and $50,000 in real estate, you will soon find that you will earn more tax benefits from real estate than from the business venture. You will be required to pay less tax on long term profits for real estate as compared to your business operations. You will also gain exemptions for the rental income from your properties and will also benefit from applying depreciation to your real estate properties.

• Hedge against Inflation: Real estate has traditionally been a great hedge against inflation. This is because real estate values have a direct relationship with inflation. When inflation goes up, property values also tend to go up. As such, if you invest in real estate now, the value of your real estate will keep up with the inflation rate in the economy. If you have a rental property, then it will be a much better hedge against inflation than a non-rental property. This is because you not only derive income from a rental property, but you can increase the rental amount each year after taking into account the inflation for the year.

• Own at Lower Cost: With careful planning, it is possible that you can own a property without spending too much money on it. For example, suppose you have purchased a property by taking out a loan and you have a $1000 mortgage. If you rent the property for $800, you essentially will only have to spend $200 ($1000 mortgage amount - $800 rental income) out of pocket for the monthly mortgage payment. When market conditions are in your favour and it's a seller's market, you have the option to offload your property for a profit.

As with all investments, there are pros and cons. Although real estate offers significant investment benefits, there are some factors to consider:

• As an investment, real estate offers less liquidity than other options like stocks, gold, etc. If you need some cash urgently, you can easily sell your stocks and raise cash very quickly. However, this is not possible with real estate since you will have to wait weeks or months to sell off the property you own.
• The transaction costs associated with real estate are significantly greater than those associated with other investments like stocks. These include closing costs, commissions, taxes, etc.
• The maintenance costs associated with real estate is also high. In the case of stocks, once you purchase them, there is no maintenance costs involved. However, this is not the case with real estate. If you purchase a property, then you will have to spend a good amount of money in maintaining it in perfect condition so that it can fetch a high value at the time of resale, or remain attractive to potential renters.