Like any other investment, there are many pros and cons in real estate investing, in addition to the potential for significant gains. As a result, attention is very important, whether you do everything yourself or use industry experts to help.
Here are some of the pros and cons of real estate investments, which the best investors use to their advantage to increase profits.
- Real Estate Investment is Easy to Understand
When you start investing in any other investment plan, it can be difficult to understand everything you need to know to make a profit. Many types of investments rely on complex algorithms and abstract concepts, which are very difficult to understand.
On the other hand, Real estate, involves the purchase of physical property and most of the people are familiar with the real estate to some extent. Investing in real estate can be much easier to understand than complex investments developed by mathematicians.
- Real Estate Is Improvable
After you buy a stock, you have to hold it for a period of time and hopefully sell it for a profit. The success of the stock depends on the company’s management and its corporate success, which is out of your control.
In contrast, real estate investments are under your control. Though you cannot control the demographic and economic changes or acts of God, you can control many things relating to the physical property and tenants. With good management of the overall real estate portfolio, you can tangibly improve the value of your investment and gain profits.
- Real Estate is protection Against Inflation
Real estate is one of the few assets that react proportionately to inflation. As inflation goes up, housing values and rents go up.
Though real estate, in general, is good protection against inflation, rental properties that are released every year are especially effective, since monthly rents can be adjusted upward in inflationary periods.
For this reason, real estate is one of the best ways to hedge an investment portfolio against inflation.
- Real Estate Properties Exist in an Inefficient Market
Unlike the stock market, the real estate market is full of inefficiencies. There is a lack of transparency related to personal property values and also the strength of different markets, which means that real estate investment, has the potential for high profits.
Great real estate deals can be found by real estate investors who do their research, especially with the help of industry experts.
- Real Estate Can Be Financed and Leveraged
Of course, you can technically buy stocks and other assets using debt, but it can be very risky because financing is not a difficult asset to buy. On the other hand, real estate is a market where products are usually bought with debt.
Real estate investments purchased with hard money or mortgages can be structured in ways that are safe and inexpensive so that large purchases can be made with relatively small initial investments. The result is a difficult property purchase that appreciates from year to year and paying for it primarily with other people’s money.
- Real Estate Has Higher Transaction Costs
When purchasing shares of a stock, the transaction cost for the trade is very low, just a few dollars. But when we purchase real estate, the transaction costs are considerably higher. Unlike other types of investments, real estate transaction costs can significantly affect the value of the investment and make it harder to turn a profit.
- Real Estate Has Low Liquidity
Many investments are highly liquid and can be bought and sold for a profit in a fraction of a second, as with high-frequency stock trading. But real estate investments are comparably illiquid because properties can’t be sold quickly and easily without a substantial loss in value.
Real estate investors must be prepared to own a property for years and months, especially if it will be leased out.
- Real Estate Requires Management and Maintenance
Once an investor purchases a property, it has to be rehabbed, maintained, and managed. Financing payments, real estate taxes, insurance, management fees, and maintenance costs can add up quickly, especially if the property remains empty for extended periods of time.
- Real Estate Markets Have Significant Inefficiencies
As we’ve already discussed above, the market’s inefficiency can be proved advantageous to investors. But here we want to also mention the disadvantages, which can be illustrated by investors purchasing sight unseen properties at auction.
The most aggressive investors purchase real estate based on less information and don’t know whether they have made a good deal until they pay for the property and then inspecting the property. Likewise, investors with residential property deal with fluctuating demographics and volatile economies, which can either add or take away from their bottom-line profits.
Real estate investing involves dealing with market inefficiencies, which can be mishandled to result in financial ruin.
- Real Estate Creates Liabilities
Real estate investing involves taking a great deal of financial and legal liability.
All of the above-mentioned disadvantages add to the liability of a real estate investor when purchasing, financing, and rehab, leasing, managing, and maintaining a property. Even though investment assets may be in a corporation, there is often a risk of losing personal guarantees associated with the business and the income and profits generated by the company.
Like all investments, real estate has certain advantages and disadvantages. The best real estate investors leverage both the advantages and disadvantages of increasing profits.