Main risks, obscurities and benefits of real estate investing

Like any other investment, real estate investment includes both risks and benefits. There are a number of reasons you may decide to invest in real estate.

Stable, less risky and more predictable income: compared to other types of investment, investing in real estate is far more predictable. Although the market value of your real estate may fluctuate over time, you are sitting on a less depreciable asset that can bring you stable rental income. Adding real estate to your portfolio means diversifying your portfolio while achieving higher returns and decreasing risk.

The tenant is actually the one who pays the mortgage: one of the benefits of investing in real estate is that you are increasing your net worth while your tenant pays the mortgage payment.

Appreciation: it is true that the value of your property may go down at times. However, most probably things will change over time. The value of your real estate is most likely to go up over years and your house will worth far more than you paid especially if you consider all the value that you may add in repair and improvement.

A hedge against inflation: inflation is something most people fear but for a rental property owner inflation is a paradise. When the value of money decreases and people pay more for food or services, the rental price of your house is more likely to go up as well.

Investing in real estate is not without risks, either. Here are some of the risks associated with real estate investment.

Costly to buy: when compared to other investment types, investment in real estate is far more costly.

Liquidity risks: there are also liquidity risks associated with real estate investment, i.e., whether and when the investment can be ”cashed out” in future. While you have the choice to wait until the value of your house goes up, it is not always sellable. You may need to wait for the good times to come. In other words, real estate market is ”cyclical”.

Need for maintenance: you need to maintain your property for day-to-day operation as well as for long-term market position of your property. Even when the maintenance is carried out by the owner, it requires time and resources.

Subjective business risks: one challenge with real estate is to keep the space leased and maintained to preserve the value of investment. The way you will manage your property will largely determine its value.

Financial risks: since debt must always be paid before equity holder, this might mean lessened or even negative return. Your debt service may increase with variable rate or a short-term loan, consequently decreasing the rate of return to the equity investors. Rising interest rate may also mean that subsequent buyers may be willing to pay lower price for your real estate.

 

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