Introduction
Real estate investment refers to purchasing, owning, managing, selling or renting physical properties (real estate) such as commercial buildings, land etc. to achieve capital gain or to generate stable income. Investors can earn through rental income, flipping, capital appreciation etc. It has several advantages as well as some drawbacks which are described in this post.
Pros Of Real Estate Investment
The main benefits or advantages of real estate investing can be pointed out as follows:
1. Consistent Cash Flow
Rental property generates reliable and consistent rental income . Therefore, it may be a primary source of income for the investors.
2. Capital Appreciation
Another benefit of real estate investing is that the value of property rises in over the long term. It helps to build net worth.
3. Tax Advantage
Investors can enjoy tax benefits such as tax deductions, mortgage interest, maintenance, depreciation etc. that helps to lower the taxable income.
4. Hedge Against Inflation
It provides hedge against inflation because values of the property rises with inflation. So, it protects your purchasing power.
5. Tangibility And Diversification
Unlike digital assets (cryptocurrencies) and stocks or bonds it is physical or tangible asset (can be seen and touched) so it provides investors a sense of security. Investors can easily diversify their investment portfolio.
Cons Of Real Estate Investment
The main drawbacks or disadvantages of real estate investing can be highlighted as follows:
1. Illiquidity
One of the major drawbacks of real estate is that you can't sell it quickly because it is not a liquid asset. Selling real estate asset may take 30 -90 days because of the lengthy and complex process. So, it is not suitable if investors need cash quickly.
2. Huge Initial Investment
It requires huge amount of capital to purchase properties. Several costs such as down payment, stamp duty, property taxes etc. makes it more expensive than other forms of investment options.
3. Barrier To Entry
Because of high upfront costs and complex and lengthy process it may discourage new investors to enter the real estate business.
4. Legal And Regulatory Complication
Investors must follow government rules. laws, regulations and tax codes properly. Otherwise they may have to face serious legal actions and fines.
Key Advantages And Disadvantages Of Real Estate Investment In Brief
Advantages
- It provides stable income
- It increases the value of property over time
- It provides tax benefits to the investors
- It provides leverage opportunities
- It saves investors at the time of inflation
Disadvantages
- It requires significant amount of initial and upfront costs
- It is not suitable for small investors
- It lacks liquidity
- There is high barrier to entry
- There are several hidden costs and unexpected expenses
